Tableof Contents

** **

 

** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

** **

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**FORM 10-Q**

 

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**(Mark One)**

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

 

**For the quarterly period ended September 30, 2008**

 

**or**

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

 

**For the transition period from               to               **

** **

**Commission File Number 001-33282**

 

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**XTENT,INC.**

(ExactName of Registrant as Specified in Its Charter)

 

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

 

**125 Constitution Drive**

**Menlo Park, California 94025-1118**

(Addressof principal executive offices, including Zip Code)

 

**(650) 475-9400**

(Registrant’stelephone number, including area code)

 

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Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.     YES   x     NO   o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (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 markwhether the registrant is a shell company (as defined by Rule 12b-2 of theExchange Act) Yes  o   No  x

 

As of November 5, 2008,there were 23,282,607 shares of XTENT, Inc. common stock outstanding.

 

 

 

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Tableof Contents

 

**XTENT, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 
| ** **     | ** **                                                                                  | ** ** | **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                                |       | 44       |
|           |                                                                                        |       |     |
| Item 3.   | Defaults Upon  Senior Securities                                                            |       | 45       |
|           |                                                                                        |       |     |
| Item 4.   | Submission of  Matters to a Vote of Security Holders                                        |       | 45       |
|           |                                                                                        |       |     |
| Item 5.   | Other Information                                                                           |       | 45       |
|           |                                                                                        |       |     |
| Item 6.   | Exhibits                                                                                    |       | 45       |
|           |                                                                                        |       |     |
| Signatures     |                                                                                        |       | 46       |
|           |                                                                                        |       |     |
| Certifications |                                                                                        |       |     |

 

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**PART I:FINANCIAL INFORMATION**

 

**ITEM 1.CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**

 

**XTENT, INC.**

**(a development stage company)**

**CONDENSED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                                                                                 | ** ** | **September 30,  2008** | ** ** | **December 31,  2007 (1)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                                 | ** ** | ** **                   | ** ** |
| **ASSETS**                                                                                                                                                                                                                                 |       |                         |       |                            |       |
| Current assets:                                                                                                                                                                                                                            |       |                         |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                                                                  |       | $                            | 13,601     |                            | $          | 13,366 |   |
| Short-term investments                                                                                                                                                                                                                     |       | 11,984                       |       | 44,394                          |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                  |       | 801                          |       | 905                             |       |
| Total current assets                                                                                                                                                                                                                       |       | 26,386                       |       | 58,665                          |       |
|                                                                                                                                                                                                                                       |       |                         |       |                            |       |
| Property and equipment, net                                                                                                                                                                                                                |       | 4,291                        |       | 3,601                           |       |
| Other non-current assets                                                                                                                                                                                                                   |       | 179                          |       | 149                             |       |
| Total assets                                                                                                                                                                                                                               |       | $                            | 30,856     |                            | $          | 62,415 |   |
|                                                                                                                                                                                                                                       |       |                         |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                              |       |                         |       |                            |       |
| Current liabilities:                                                                                                                                                                                                                       |       |                         |       |                            |       |
| Accounts payable                                                                                                                                                                                                                           |       | $                            | 1,133      |                            | $          | 1,960 |   |
| Accrued liabilities                                                                                                                                                                                                                        |       | 1,884                        |       | 2,124                           |       |
| Total current liabilities                                                                                                                                                                                                                  |       | 3,017                        |       | 4,084                           |       |
|                                                                                                                                                                                                                                       |       |                         |       |                            |       |
| Commitments and contingencies (note 6)                                                                                                                                                                                                     |       |                         |       |                            |       |
|                                                                                                                                                                                                                                       |       |                         |       |                            |       |
| Stockholders’ Equity:                                                                                                                                                                                                                 |       |                         |       |                            |       |
| Common stock: $0.001 par value;   100,000 shares authorized at September 30, 2008 and December 31,  2007;   23,283 and 23,015 shares issued and outstanding at September 30, 2008  and December 31, 2007, respectively |       | 23                           |       | 23                              |       |
| Additional paid-in capital                                                                                                                                                                                                                 |       | 154,779                      |       | 151,496                         |       |
| Deferred stock-based compensation                                                                                                                                                                                                          |       | (111                         | )          | (364                            | )          |
| Accumulated other comprehensive income                                                                                                                                                                                                     |       | 16                           |       | 36                              |       |
| Deficit accumulated during development  stage                                                                                                                                                                                              |       | (126,868                     | )          | (92,860                         | )          |
| Total stockholders’ equity                                                                                                                                                                                                            |       | 27,839                       |       | 58,331                          |       |
|                                                                                                                                                                                                                                       |       |                         |       |                            |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                            |       | $                            | 30,856     |                            | $          | 62,415 |   |

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(1)    The condensed balance sheet at December 31, 2007 has been derivedfrom the audited financial statements at that date, but does not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States for complete financial statements.

 

Theaccompanying notes are an integral part of these condensed financialstatements.

 

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**XTENT, INC.**

**(a development stage company)**

**CONDENSED STATEMENTS OF OPERATIONS**

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

 
| ** **                                                                                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | **Cumulative**              | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                                                                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | **Period from**        | ** ** |
| ** **                                                                                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | **June 13, 2002** | ** ** |
| ** **                                                                                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | **(Date of**           | ** ** |
| ** **                                                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** | **Inception) to  September 30,  2008** | ** ** |
| ** **                                                                                          | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008**                                         | ** ** | **2007**   | ** ** | ** **                  |
|                                                                                                |       |                                                 |       |                                                |       | ** **                                       |       |       |       |                        |       |
| Operating expenses:                                                                                 |       |                                                 |       |                                                |       | ** **                                       |       |       |       |                        |       |
| Research and development (1)                                                                        |       | $                                                    | 6,679      |                                                | $          | 7,767                                            |       | $          | 25,918     |                        | $          | 21,694 |   | $ | 100,332 |   |
| General and administrative (1)                                                                      |       | 2,179                                                |       | 2,632                                               |       | 8,952                                            |       | 7,894      |       | 32,495                      |       |
| Total operating expenses                                                                            |       | 8,858                                                |       | 10,399                                              |       | 34,870                                           |       | 29,588     |       | 132,827                     |       |
|                                                                                                |       |                                                 |       |                                                |       |                                             |       |       |       |                        |       |
| Loss from operations                                                                                |       | (8,858                                               | )          | (10,399                                             | )          | (34,870                                          | )          | (29,588    | )          | (132,827                    | )          |
|                                                                                                |       |                                                 |       |                                                |       |                                             |       |       |       |                        |       |
| Interest and other income, net                                                                      |       | 193                                                  |       | 860                                                 |       | 862                                              |       | 2,658      |       | 5,959                       |       |
|                                                                                                |       |                                                 |       |                                                |       |                                             |       |       |       |                        |       |
| Net loss                                                                                            |       | (8,665                                               | )          | (9,539                                              | )          | (34,008                                          | )          | (26,930    | )          | (126,868                    | )          |
|                                                                                                |       |                                                 |       |                                                |       |                                             |       |       |       |                        |       |
| Deemed dividend related to beneficial  conversion feature of redeemable convertible preferred stock |       | —                                               |       | —                                              |       | —                                           |       | —     |       | (13,095                     | )          |
|                                                                                                |       |                                                 |       |                                                |       |                                             |       |       |       |                        |       |
| Net loss attributable to common  stockholders                                                       |       | $                                                    | (8,665     | )                                                   | $          | (9,539                                           | )          | $          | (34,008    | )                           | $          | (26,930 | ) | $ | (139,963 | ) |
|                                                                                                |       |                                                 |       |                                                |       |                                             |       |       |       |                        |       |
| Net loss per share attributable to common stockholders  - basic and diluted                         |       | $                                                    | (0.37      | )                                                   | $          | (0.42                                            | )          | $          | (1.48      | )                           | $          | (1.35 | ) |   |   |
|                                                                                                |       |                                                 |       |                                                |       |                                             |       |       |       |                        |       |
| Weighted-average common shares outstanding  - basic and diluted                                     |       | 23,211                                               |       | 22,656                                              |       | 23,056                                           |       | 19,999     |       |                        |       |

 

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(1)   Includes the followingstock-based compensation charges:

 
| Research and development   |   | $ | 369 |   | $ | 294 |   | $ | 1,150 |   | $ | 1,030 |   | $ | 4,211 |   |
|----------------------------|--------|---|-----|--------|---|-----|--------|---|-------|--------|---|-------|--------|---|-------|--------|
| General and administrative |   | $ | 594 |   | $ | 490 |   | $ | 1,939 |   | $ | 1,322 |   | $ | 5,093 |   |

 

The accompanying notes are an integral part of these condensedfinancial statements.

 

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**XTENT, INC.**

**(a development stage company)**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(unaudited; in thousands)**

** **
| ** **                                                                                   | ** ** | ** **                                              | ** ** | ** **             | ** ** | **Cummulative**             | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                                                                   | ** ** | ** **                                              | ** ** | ** **             | ** ** | **Period from**        | ** ** |
| ** **                                                                                   | ** ** | ** **                                              | ** ** | ** **             | ** ** | **June 13, 2002** | ** ** |
| ** **                                                                                   | ** ** | ** **                                              | ** ** | ** **             | ** ** | **(Date of**           | ** ** |
| ** **                                                                                   | ** ** | ** **                                              | ** ** | ** **             | ** ** | **Inception) to**      | ** ** |
| ** **                                                                                   | ** ** | **Nine Months Ended September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                   | ** ** | **2008**                                                | ** ** | **2007**               | ** ** | **2008**                    | ** ** |
| ** **                                                                                   |       |                                                    |       |                   |       |                        |       |
| **Cash flows from operating activities:**                                                    |       |                                                    |       |                   |       |                        |       |
| Net loss                                                                                     |       | $                                                       | (34,008    | )                      | $          | (26,930                     | )          | $ | (126,868 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                 |       |                                                    |       |                   |       |                        |       |
| Depreciation and amortization                                                                |       | 987                                                     |       | 821                    |       | 3,704                       |       |
| Amortization of securities discount                                                          |       | (317                                                    | )          | (1,319                 | )          | (2,022                      | )          |
| Gain (loss) on sale of investments                                                           |       | (26                                                     | )          | 20                     |       | (6                          | )          |
| Loss on disposal of property and equipment                                                   |       | 26                                                      |       | 9                      |       | 189                         |       |
| Stock-based compensation expense                                                             |       | 3,089                                                   |       | 2,352                  |       | 9,304                       |       |
| Stock issued in exchange for services and  patents                                           |       | 150                                                     |       | —                 |       | 381                         |       |
| Changes in operating assets and  liabilities:                                                |       |                                                    |       |                   |       |                        |       |
| Prepaid expenses and other current assets                                                    |       | (257                                                    | )          | (98                    | )          | (939                        | )          |
| Accrued interest receivable on securities                                                    |       | 361                                                     |       | (142                   | )          | (11                         | )          |
| Accounts payable                                                                             |       | (827                                                    | )          | 926                    |       | 1,018                       |       |
| Accrued liabilities                                                                          |       | (180                                                    | )          | 626                    |       | 1,993                       |       |
| Net cash used in operating activities                                                        |       | (31,002                                                 | )          | (23,735                | )          | (113,257                    | )          |
|                                                                                         |       |                                                    |       |                   |       |                        |       |
| **Cash flows from investing activities:**                                                    |       |                                                    |       |                   |       |                        |       |
| Purchase of investments                                                                      |       | (18,360                                                 | )          | (92,073                | )          | (136,598                    | )          |
| Proceeds from maturities of investments                                                      |       | 41,130                                                  |       | 45,150                 |       | 112,709                     |       |
| Proceeds from sale of investments                                                            |       | 9,963                                                   |       | 3,986                  |       | 13,949                      |       |
| Restricted cash                                                                              |       | (30                                                     | )          | —                 |       | (30                         | )          |
| Purchase of property and equipment                                                           |       | (1,705                                                  | )          | (1,808                 | )          | (8,181                      | )          |
| Proceeds from sale of property and  equipment                                                |       | 2                                                       |       | —                 |       | 20                          |       |
| Net cash provided by (used in) investing  activities                                         |       | 31,000                                                  |       | (44,745                | )          | (18,131                     | )          |
|                                                                                         |       |                                                    |       |                   |       |                        |       |
| **Cash flows from financing activities:**                                                    |       |                                                    |       |                   |       |                        |       |
| Proceeds from issuance of redeemable  convertible preferred stock, net of issuance costs     |       | —                                                  |       | —                 |       | 75,592                      |       |
| Proceeds from initial public offering, net  of offering costs                                |       | —                                                  |       | 69,112                 |       | 68,237                      |       |
| Principal payments on capital lease  obligations                                             |       | —                                                  |       | —                 |       | (23                         | )          |
| Proceeds from issuance of common stock and  exercise of stock options                        |       | 237                                                     |       | 62                     |       | 1,183                       |       |
| Net cash provided by financing activities                                                    |       | 237                                                     |       | 69,174                 |       | 144,989                     |       |
|                                                                                         |       |                                                    |       |                   |       |                        |       |
| Net increase in cash and cash equivalents                                                    |       | 235                                                     |       | 694                    |       | 13,601                      |       |
| Cash and cash equivalents at beginning of  period                                            |       | 13,366                                                  |       | 23,105                 |       | —                      |       |
|                                                                                         |       |                                                    |       |                   |       |                        |       |
| Cash and cash equivalents at end of period                                                   |       | $                                                       | 13,601     |                   | $          | 23,799                      |       | $ | 13,601 |   |
|                                                                                         |       |                                                    |       |                   |       |                        |       |
| **Supplemental disclosure of noncash  investing and financing activities:**                  |       |                                                    |       |                   |       |                        |       |
| Deferred stock-based compensation                                                            |       | $                                                       | —     |                   | $          | —                      |       | $ | 1,272 |   |
| Reversal of deferred stock-based  compensation                                               |       | $                                                       | (65        | )                      | $          | (22                         | )          | $ | (160 | ) |
| 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                                     |       | $                                                       | 60         |                   | $          | 78                          |       | $ | 435 |   |
| Deferred initial public offering costs                                                       |       | $                                                       | —     |                   | $          | 875                         |       | $ | 875 |   |
| Changes in net unrealized gains on  investments                                              |       | $                                                       | (20        | )                      | $          | 60                          |       | $ | 16 |   |

 

The accompanying notes are an integral part of these condensedfinancial 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 September 30, 2008, the Company had anaccumulated deficit of $126.9 million. The Company has not achievedpositive cash flows from operations in any year since inception. In February 2007,the Company completed its initial public offering raising net proceeds of$68.2 million. In order to continue its operations, the Company mustachieve profitable operations, obtain additional debt financing or selladditional shares of its equity securities. The Company is exploring optionsfor seeking additional capital through the sale of its equity securities, andhas engaged third party consultants to assist in this effort.  The deterioration of the worldwidemacroeconomic environment coupled with the increased volatility of thefinancial markets may limit the availability and amount of capital available tothe Company.  There can be no assurancethat the Company will be able to obtain additional financing on termsacceptable to the Company, or at all.  Asa result, the Board is also considering other alternative strategies.

 

The failure of the Company to obtain sufficient fundson acceptable terms when needed will require the Company to reduce the scopeof, delay, or eliminate some or all of the planned clinical trials, research,development, pursuit of regulatory approvals in certain countries, andcommercialization activities, which could have a material adverse effect on theCompany’s business, results of operations and financial condition.

 

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

 

**Basis ofPresentation**

 

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

 

**NOTE 2 - Summary of SignificantAccounting Policies**

 

***Cash and Cash Equivalents***

 

The Company considers all highly liquid investmentspurchased with an original maturity of three months or less at the date ofpurchase to be cash equivalents. The Company deposits cash with high creditquality financial institutions. Cash equivalents consist primarily of liquidmoney market funds.

 

***Investments***

 

Investments with an original maturity of more thanthree months and less than one year at the date of purchase are considered tobe short-term. Investments consist primarily of fixed income securities. The Companyclassifies its investments as available-for-sale in accordance with Statementof Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities* and they are recorded at fair value. The fair value ofinvestments is based on quoted market prices. As of September 30, 2008 allof the Company’s investments were short-term in nature.

 

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

 

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

 

***RestrictedCash***

 

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

 

***Concentration of Credit Risk***

 

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

 

***Comprehensive Income (Loss)***

 

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

 

Total comprehensive loss during the three and ninemonths ended September 30, 2008 and 2007 consisted of:

 
| ** **                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                        | ** ** | ** **                                           | ** ** |
| ** **                                                        | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**                              | ** ** | **(in thousands)**                             | ** ** |
| ** **                                                        | ** ** | ** **                                           | ** ** | ** **                                          | ** ** |
| Net loss attributable to common stockholders                      |       | $                                                    | (8,665     | )                                                   | $          | (9,539 | ) | $ | (34,008 | ) | $ | (26,930 | ) |
| Change in unrealized gain (loss) on available-for-sale securities |       | (5                                                   | )          | 90                                                  |       | (20 | ) | 60 |   |
|                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Comprehensive loss                                                |       | $                                                    | (8,670     | )                                                   | $          | (9,449 | ) | $ | (34,028 | ) | $ | (26,870 | ) |

 

***Net Loss per Common Share***

 

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

 

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

 
| ** **                                                                                                | ** ** | **Three Months Ended September 30,**                | ** ** | **Nine Months Ended September 30,**                 | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2008**                                                                | ** ** | **2007**                                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                                | ** ** | **(in thousands, except per share   amounts)** | ** ** | **(in thousands, except per share   amounts)** | ** ** |
| ** **                                                                                                | ** ** | ** **                                                              | ** ** | ** **                                                              | ** ** |
| Numerator:                                                                                                | ** ** | ** **                                                              | ** ** | ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss attributable to common stockholders                                                              |       | $                                                                       | (8,665     | )                                                                       | $          | (9,539 | ) | $ | (34,008 | ) | $ | (26,930 | ) |
|                                                                                                      |       |                                                                    |       |                                                                    |       |   |   |   |   |
| Denominator:                                                                                              |       |                                                                    |       |                                                                    |       |   |   |   |   |
| Weighted-average common shares outstanding                                                                |       | 23,240                                                                  |       | 22,900                                                                  |       | 23,132 |   | 20,307 |   |
| Less: Weighted-average unvested common shares subject to repurchase                                       |       | (29                                                                     | )          | (244                                                                    | )          | (76 | ) | (308 | ) |
| Weighted-average common shares outstanding used in computing basic  and diluted net loss per common share |       | 23,211                                                                  |       | 22,656                                                                  |       | 23,056 |   | 19,999 |   |
|                                                                                                      |       |                                                                    |       |                                                                    |       |   |   |   |   |
| Net loss per share attributable to common stockholders - basic and  diluted                               |       | $                                                                       | (0.37      | )                                                                       | $          | (0.42 | ) | $ | (1.48 | ) | $ | (1.35 | ) |

 

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

 
| ** **                                         | ** ** | **Periods Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | ** **                                 |
| ** **                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **(in thousands)**                    | ** ** |
| ** **                                         | ** ** | ** **                                 | ** ** |
| Options to purchase common stock                   |       | 2,632                                      |       | 1,977 |   |
| Common stock subject to repurchase                 |       | 15                                         |       | 222 |   |
| Shares issuable under Employee Stock Purchase Plan |       | 47                                         |       | 50 |   |

 

***Recent and AdoptedAccounting Pronouncements***

 

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

 

On January 1, 2008, the Company adopted SFAS No. 157,*Fair Value Measurements*, (“SFAS 157”) asit relates to financial assets and financial liabilities. In February 2008,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)No. FAS 157-2, *Effective Date of FASBStatement No. 157,* which delayed the effective date of SFAS 157for all non-financial assets and non-financial liabilities, except those thatare recognized or disclosed at fair value in the financial statements on atleast an annual basis, until January 1, 2009 for calendar year-endentities. Also in February 2008, the FASB issued FSP No. FAS 157-1*, Application of FASB Statement No. 157 to FASB Statement No. 13and Other Accounting Pronouncements That Address Fair Value Measurements forPurposes of Lease Classification or Measurement under Statement 13,*which states that SFAS No. 13, *Accounting for Leases,*(“SFAS 13”) and other accounting pronouncements that address fair valuemeasurements for purposes oflease classification or measurement under SFAS 13 areexcluded from the provisions of SFAS 157, except for assets and liabilitiesrelated to leases assumed in a business combination that are required to bemeasured at fair value under SFAS No. 141, *BusinessCombinations,* (“SFAS 141”) or SFAS No. 141 (revised 2007) *Business Combinations,* (“SFAS 141(R)”). SFAS 157 definesfair value, establishes a 

 

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framework for measuring fair value in accountingprinciples generally accepted in the United States of America, and expandsdisclosures about fair value measurements. The provisions of this standardapply to other accounting pronouncements that require or permit fair valuemeasurements and are to be applied prospectively with limited exceptions. Theadoption of SFAS 157 did not have a material impact on the Company’s financialposition, operating results or cash flows. The Company has not yet determinedthe impact on its financial statements from the adoption of SFAS No. 157as it pertains to non-financial assets and non-financial liabilities.

 

**NOTE 3 - Investments**

 

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

 
| ** **                                       | ** ** | **Amortized  Cost**     | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|------------------------|------------|-----------------|------------|
| **As of September 30, 2008** | ** ** | ** **              | ** ** | ** **            | ** ** |
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| ** **                                       | ** ** | ** **              | ** ** |
| US government and agency securities              |       | $                       | 9,976      |                  | $          | 12                     |       | $               | —     |   | $ | 9,988 |   |
| Commercial paper                                 |       | 1,992                   |       | 4                     |       | —                 |       | 1,996           |       |
| Total                                            |       | $                       | 11,968     |                  | $          | 16                     |       | $               | —     |   | $ | 11,984 |   |

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

 

***Fair ValueMeasurements***

 

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

 

·  Level 1:      Observableinputs such as quoted prices (unadjusted) in active markets for identicalassets or liabilities.

 

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

 

·  Level 3:      Unobservableinputs that reflect the reporting entity’s own assumptions.

 

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The Company’s cash equivalents and short-terminvestments are classified within Level 1 or Level 2 of the fair valuehierarchy because they are valued using quoted market prices, broker or dealerquotations, or alternative pricing sources with reasonable levels of pricetransparency. The fair value hierarchy of the Company’s marketable securitiesat fair value in connection with the adoption of SFAS No. 157 consisted ofthe following as of September 30, 2008:

 
| ** **                          | ** ** | **Balance as of  September 30, 2008** | ** ** | **Significant Other  Observable Inputs  (Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                                | ** ** | ** **                                                              |
| ** **                          | ** ** | ** **                                                | ** ** | ** **                                                              |
|                                |       | **(in thousands)**                                   |       |
|                                |       | ** **                                                |       |
| Money market funds (1)              |       | $                                                         | 12,349     |                                                                    | $          | 12,349                                                             |       | $ | — |   |
| US government and agency securities |       | 9,988                                                     |       | —                                                                  |       | 9,988                                                              |       |
| Commercial paper                    |       | 1,996                                                     |       | —                                                                  |       | 1,996                                                              |       |
| Total                               |       | $                                                         | 24,333     |                                                                    | $          | 12,349                                                             |       | $ | 11,984 |   |

 

----

(1)          Money marketfunds are classified as part of cash equivalents on the condensed balancesheet.

 

 **NOTE 4 -Common Stock**

 

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

 

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

 

***Restricted common stock***

 

Certain common stock option holders have the right toexercise unvested options, subject to a repurchase right held by the Company torepurchase the stock, at the original exercise price, in the event of voluntaryor involuntary termination of employment of the stockholder. In accordance withEmerging Issues Task Force Issue No. 00-23, *Issues Related to the Accounting for Stock Compensation*under APB 25 and FASB Interpretation No. 44, *Accounting for Certain Transactions Involving StockCompensation*, the Company accounts for the cash received inconsideration for the early exercised options as a liability. As of September 30,2008 and December 31, 2007, there were approximately 15,000 and 164,000shares of common stock, respectively, subject to repurchase, and a relatedliability of $6,000 and $66,000, respectively.

 

**NOTE 5 - Stock Option Plans**

 

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

 

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

 
| ** **               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Stock Options:**       | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected volatility      |       | 63%                                                      |       | 51%                                                     |       | 60%  - 63% |   | 51%  - 54% |   |
| Risk free rate           |       | 3.21%  - 3.25%                                           |       | 4.03%  - 5.10%                                          |       | 2.45%  - 3.25% |   | 4.03%  - 5.10% |   |
| Dividend yield           |       | 0%                                                       |       | 0%                                                      |       | 0% |   | 0% |   |
| Expected term (in years) |       | 4.65                                                     |       | 4.65                                                    |       | 4.65 |   | 4.65 |   |
|                     |       |                                                     |       |                                                    |       |   |   |   |   |
| **ESPP:**                | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected volatility      |       | 100%                                                     |       | 42%  - 50%                                              |       | 42%  - 100% |   | 42%  - 50% |   |
| Risk free rate           |       | 1.90%                                                    |       | 4.91%  - 5.13%                                          |       | 1.9%  - 3.56% |   | 4.91%  - 5.13% |   |
| Dividend yield           |       | 0%                                                       |       | 0%                                                      |       | 0% |   | 0% |   |
| Expected term (in years) |       | 0.5                                                      |       | 0.50  to 0.79                                           |       | 0.5 |   | 0.50  to 0.79 |   |

 

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

 

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

 

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

 

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

 

Stock option activity for the nine months ended September 30,2008 was as follows:

 
| ** **                                | ** ** | ** **                                                                               | ** ** | **Options Outstanding** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | ** **                                                                               | ** ** | ** **                   | ** ** | **Weighted  Average****Exercise  Price** | ** ** |
| ** **                                | ** ** | **Shares****Available  for Grant**                                                       | ** ** | **Number****of  Shares**     | ** ** | ** ** |
| ** **                                | ** ** | ** **                                                                               | ** ** | ** **                   |
| ** **                                | ** ** | ** **                                                                               | ** ** | ** **                   |
| ** **                                | ** ** | **(in thousands, except weighted average exercise price)** | ** ** |
| ** **                                |       |                                                                                     |       |                         |       |   |   |   |
| **Balance as of December 31, 2007**  |       | 67                                                                                       |       | 2,167                        |       | $ | 5.12 |   |
|                                      |       |                                                                                     |       |                         |       |   |   |
| Additional shares reserved                |       | 1,821                                                                                    |       | —                       |       | — |   |
| Options granted                           |       | (1,073                                                                                   | )          | 1,073                        |       | 6.07 |   |
| Options exercised                         |       | —                                                                                   |       | (175                         | )          | 0.61 |   |
| Options canceled                          |       | 433                                                                                      |       | (433                         | )          | 6.99 |   |
|                                      |       |                                                                                     |       |                         |       |   |   |
| **Balance as of September 30, 2008** |       | 1,248                                                                                    |       | 2,632                        |       | $ | 5.50 |   |

 

***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.

 

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

 
| ** **                            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Expected volatility                   |       | 60%                                                      |       | 56%                                                     |       | 56%  - 60% |   | 56%  - 57% |   |
| Risk free rate                        |       | 2.99%  to 3.47%                                          |       | 4.32%  to 4.48%                                         |       | 2.71%  to 4.25% |   | 4.32%  to 5.0% |   |
| Dividend yield                        |       | 0%                                                       |       | 0%                                                      |       | 0% |   | 0% |   |
| Contractual remaining term (in years) |       | 6  to 10                                                 |       | 7  to 10                                                |       | 6  to 10 |   | 7  to 10 |   |

 

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Stock-based compensation expense will fluctuate as thefair value of the common stock fluctuates. In connection with the grant ofstock and stock options to non-employees, the Company recorded stock-basedcompensation charges of approximately $0.8 million for the period from June 13,2002 (inception) to September 30, 2008. For the nine months ended September 30,2008 and 2007, the Company recorded stock-based compensation charges fornon-employees of approximately $21,000 and $136,000, respectively.

 

**NOTE 6 - Commitments andContingencies**

 

***Operating Lease***

 

In May 2007, the Company entered into anamendment to the lease agreement pursuant to which it leases its offices andmanufacturing facilities. The lease amendment extends the term of the leasethrough May 31, 2012. The Company may terminate the lease for any reasonon or after May 1, 2009 with 180 days of notice, and the landlord mayterminate the lease with 180 days of notice on or after that date provided ithas obtained certain redevelopment rights with respect to the leased premises.In September 2008, the Company entered into another amendment to the leaseagreement which extended the lease termination option to May 1, 2010.

 

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

 
| ** **                | ** ** | ** **              | ** ** | **Remainder of** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                | ** ** | **Total**               | ** ** | **2008**              | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** |
| ** **                | ** ** | **(in thousands)** | ** ** | ** **            | ** ** |
| ** **                |       |                    |       |                  |       |
| Minimum lease commitments |       | $                       | 1,811      |                  | $          | 117        |       | $          | 479        |       | $          | 493        |       | $ | 508 |   | $ | 214 |   |
|                           |            |                         |            |                       |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

***Royalty and Milestone Obligations***

 

The Company has entered into royalty agreements withBiosensors and SurModics for proprietary materials that are critical to thesuccess of the Company’s products. The terms of the agreements call formilestone payments prior to achieving sales, and quarterly royalty paymentsbased on the greater of specified minimums or a percentage of net sales. As of December 31, 2007 and September 30, 2008, future minimumroyalty payments for these suppliers were approximately $2.1 and$2.0 million, respectively. During the year ended December 31, 2007and nine months ended September 30, 2008, the Company made minimum royaltypayments of $40,000 and $60,000, respectively, for each of the periods.

 

***License Agreements***

 

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

 

The Company also has contingent milestone payments of$20,000 that are payable to another licensor upon achievement ofmilestones.  No milestone payments weremade on this license agreement during the year ended December 31, 2007 andthe nine months ended September 30, 2008.

 

***Purchase Commitments***

 

In April 2007, the Company entered into a supplyagreement with Fortimedix B.V., under which Fortimedix B.V. agreed tomanufacture and deliver stents for use in the Company’s products. The terms ofthe agreement require minimum purchases over two years at contractual pricesset in Euros. As of September 30, 2008, there were no outstanding purchaseorder commitments for stents. Under the terms of the supply agreement, anyfurther annual purchase commitments have been delayed until the Companyreceives approval from the FDA to begin clinical trials in the United States.

 

In December 2007, the Company entered into theAmended and Restated License Agreement with Biosensors InternationalGroup, Ltd., under which the Company purchases the drug and polymercomponents used on its stents under purchase commitments which totaledapproximately $171,000 as of September 30, 2008. In addition, the Companywill also pay royalties to Biosensors under the license agreement when revenuesare generated from product sales.

 

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

 

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

 

On April 7, 2008, the Company entered into anagreement with Vascotube GMBH under which the Company has committed to purchaseminimum quantities of material over the subsequent twelve month period.  As of September 30, 2008, the Companyhas a remaining commitment in the amount of approximately $459,000 remainingunder this agreement.

 

***Contingencies***

 

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

 

***Indemnifications***

 

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

 

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

 

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

 

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

 

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

 

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

 

**NOTE 8** –**Reduction inForce**

 

On July 10, 2008 theCompany announced an initiative to reduce employee headcount by eliminating 46regular jobs and 26 temporary positions. This reduction represented approximately 34% of the total workforce andwas completed in July 2008.  Thetotal cash payments and expenses incurred in connection with this reduction inworkforce was approximately $210,000, including approximately $7,000 ofnon-cash expenses.  All expenses werepaid during the quarter ended September 30, 2008.

 

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

 

**INTRODUCTION**

 

The following discussion should be read in conjunctionwith the financial statements and the related notes included in this Form 10-Q,in our Form 10-K for the year ended December 31, 2007 and in ourother filings with the Securities and Exchange Commission, 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 companyfocused on developing and commercializing our proprietary Custom NX drugeluting stent, or DES, systems to treat coronary artery disease, or CAD. Sinceinception we have devoted substantially all of our resources to start-upactivities, raising capital and 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.

 

We are conducting clinical trials to evaluate ourCustom NX stent and stent delivery systems. In October 2008, the one year datafrom our CUSTOM III clinical trial, the two year data from our CUSTOM IIclinical trial and the three year data from our CUSTOM I clinical trial werepresented at the 2008 Transcatheter Cardiovascular Therapeutics conference inWashington D.C. We believe the data from these clinical trials providespreliminary evidence of safety and efficacy and supports further development ofour in-situ customization approach.

 

*CUSTOM I.*  Our CUSTOM I clinical trial was designedto evaluate the preliminary safety and efficacy of in-situ customization usingour proprietary stent technology and drug coating, consisting of a 36mm stentto treat diseased coronary artery lesions in 2.6mm to 3.1mm diameter arteries.Enrollment of 30 patients was completed in July 2005 at three cardiologycenters in Europe. Patients were reassessed at 30 days, four months, eightmonths and 12 months.

 

*CUSTOM II.*  Our CUSTOM II clinical trial is designedto evaluate the safety of in-situ customization for long lesions and multiplelesions using our Custom NX 60 DES Catheter System. The Custom NX60 was used totreat patients with long lesions or lesions in multiple diseased coronaryarteries ranging from 2.5 to 3.0mm in diameter and up to two lesions.Enrollment of 100 patients was completed in October 2006 at ten cardiologycenters in Europe. Of the 100 patients enrolled in CUSTOM II, 69 patientswere enrolled in the long lesion cohort which consisted of patients withlesions greater than 20mm in length. The remaining 31 patients were enrolled inthe two-lesion cohort. Patients were reassessed at 30 days, six months and12 months. Follow up is scheduled to occur annually for five years.

 

*CUSTOM III.*  Our CUSTOM III clinical trial wasdesigned to evaluate in-situ customization for long lesions and multiplelesions using an enhanced version of our Custom NX DES Systems. The enhancedversion included a number of changes to the handle improving ease-of-use forphysician. The primary endpoint of the study was safety with secondaryendpoints. The enrollment in the CUSTOM III trial began in September 2006,but was delayed in November 2006 following a sterilization validationproblem with the devices to be used in the trial. Enrollment was reinitiated onApril 2, 2007 and was completed in August 2007.

 

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The table below provides a summary of the results to date for ourCUSTOM I, CUSTOM II and CUSTOM III clinical trials.  The results from our CUSTOM I, IIand III clinical trials do not necessarily predict the outcome of a large-scaleclinical trial, which will be required for obtaining FDA approval for ourproducts in the United States.

 

**CUSTOM I, II and III Summary of Clinical Trial Results**

 
| **Clinical Outcomes**                | ** ** | **CI + CII + CIII** | ** ** | **CI + CII + CIII** | ** ** | **CI + CII** | ** ** | **C-I** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|------------------------|------------|---------|------------|
|                                      |       |                                    |       |                                    |       |                   |       |    |       |
|                                      |       | N = 220                                 |       | N  = 220                                |       | N  = 130               |       | N=30    |       |
|                                      |       | 6M                                      |       | 12M                                     |       | 24M                    |       | 36M     |       |
| Cardiac Death [n]                         |       | 1                                       |       | 1                                       |       | 1                      |       | 1       |       |
| MI [n]                                    |       | 8                                       |       | 8                                       |       | 10                     |       | 2       |       |
| Q-Wave                                    |       | 2                                       |       | 2                                       |       | 3                      |       |    |       |
| Non Q-Wave                                |       | 6                                       |       | 6                                       |       | 6                      |       | 2       |       |
| TLR [n]                                   |       | 10                                      |       | 13                                      |       | 7                      |       | 1       |       |
| Total MACE [%]                            |       | 8.6%                                    |       | 10%                                     |       | 14.6%                  |       | 13.3%   |       |
| Early Stent Thrombosis (30 days or less)  |       | 2                                       |       | 2                                       |       | 2                      |       | 0       |       |
| Late Stent Thrombosis (more than 30 days) |       | 0                                       |       | 0                                       |       | 1                      |       | 0       |       |

 

Asused in the table above, the term “TLR,” or Target Lesion Revascularization,means the number of patients at follow-up who required another coronaryintervention, such as balloon angioplasty or bypass surgery to treat the samelesion in the artery, within the stent or within 5mm of either side of thestent.  The term “MI” means MyocardialInfarction.  The term “MACE” means MajorAdverse Cardiac Event.

 

We will need CE Mark in the European Union in order tocommercialize our products in the European Union and certain other countriesthat recognize CE Mark. In December 2007, we submitted an application forCE Mark to our European Notified Body using the data from our CUSTOM I, IIand III clinical trials.  In July 2008,our Notified Body forwarded to us a response from the Medicines EvaluationBoard, or MEB, which reviews the drug portion of our CE Mark application.  The response indicates that the MEB mayrequire additional clinical data, including a randomized trial, before providingus with CE Mark.  In September 2008,we met with staff from the MEB to obtain clarification regarding their responseto our CE Mark application.  We arecurrently preparing our response to the MEB’s questions which we expect to fileby the end of 2008.

 

We will need premarket approval, or PMA, from the U.S.Food and Drug Administration, or FDA, before we can market our products in theUnited States, which we expect will require data from large clinical trialswith up to 2,000 patients implanted with our products. To initiate our CUSTOMIV trial in the United States, we must first obtain clearance for aninvestigational device exemption, or IDE, from the FDA. In September 2007,we applied for our IDE and in October 2007 we received questions back fromthe FDA regarding our IDE application.  Since then, we have established anagreed upon timeline of deliverables, and we now expect to commence our pivotaltrial in the U.S. in 2009.

 

In July 2008 we completed an initiative to reduceemployee headcount by 46 regular jobs and 26 temporary positions.  This reduction represented 34% of the totalworkforce.  The total expense incurred inconnection with this reduction in workforce was approximately $210,000,including approximately $7,000 of non-cash expenses.  We anticipate that this workforce reductioninitiative combined with other cost saving initiatives will result in averagemonthly expense reductions of approximately $1.3 million.

 

To date, we have not generated any revenue from ourdevelopment activities and will not be able to generate revenue until one ofour products is approved, if ever. We have incurred net losses in each yearsince our inception in June 2002. Through September 30, 2008, we hadan accumulated deficit of $126.9 million. We expect our losses to continueto increase as we expand our clinical trial activities and initiatecommercialization activities. Since inception we have financed our operationsprimarily through the sale of our equity securities. On February 1, 2007we completed the initial public offering of our common stock which raised netproceeds of $68.2 million. We are exploring options for seeking additionalcapital through the sale of our equity securities, and have engaged third partyconsultants to assist us in this effort. The deterioration of the worldwide macroeconomic environment coupledwith the increased volatility of the financial markets may limit theavailability and amount of capital available to us.  There can be no assurance that we will beable to obtain additional financing on terms acceptable to us, or at all.  As a result, our Board is also consideringother strategic alternatives.  We believeour cash balance of $25.6 million as of the end of the third quarter issufficient to fund our current scope of activities at least through the secondquarter of 2009.

 

In May 2004, we entered into a license agreementwith Biosensors. Pursuant to the agreement, we obtained worldwide non-exclusiverights to use Biosensors’ drug coating on our products, and agreed to payspecified minimum royalties and royalties based on net sales of our products.In December 2007, we entered into an amended and restated licenseagreement with Biosensors. Pursuant to the original agreement, Biosensorsformulated the drug coating and we purchased the drug coating from them. Underthe restated agreement, we have the right to purchase the drug and polymercomponents separately and formulate the coating ourselves. We have completedthe work necessary to perform the formulation ourselves but we will continue topurchase the drug coating formulated by Biosensors until we obtain certainregulatory approvals necessary in order to perform our own formulation forcommercial use outside the United States.

 

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**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

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

 

**FINANCIALOPERATIONS**

 

***Revenue***

 

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

 

***Research and Development***

 

Since inception, we have devoted a significant amountof resources to develop our Custom NX DES Systems. We expect our research anddevelopment expenditures to increase as we continue to devote significantresources to developing our products, in particular, completing the clinicaltrials necessary to support regulatory approval. From our inception through September 30,2008, we incurred $100.3 million in research and development expenses.

 

***General and Administrative***

 

General and administrative expenses consist primarilyof compensation for executive, finance, marketing and administrative personnelincluding stock-based compensation. Other significant expenses includeprofessional fees for accounting and legal services associated with our effortsto obtain and maintain protection for intellectual property related to ourCustom NX DES Systems. From our inception through September 30, 2008, we incurred$32.5 million in general and administrative expenses.

 

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**RESULTS OF OPERATIONS**

 

**COMPARISON OF THREE MONTHS ENDEDSEPTEMBER 30, 2008 AND 2007**

 

***Revenue***

 

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

 

***Research andDevelopment***

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Dollar** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **2008**                                             | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                        | ** ** | **(in thousands)**                              | ** ** | ** ** | ** ** |
|                              |       |                                                 |       |       |       |   |   |   |   |   |
| Research and development expenses |       | $                                                    | 6,679      |       | $          | 7,767 |   | $ | (1,088 | ) |

 

The $1.1 million decrease in research and developmentexpenses for the three months ended September 30, 2008, compared to thethree months ended September 30, 2007, was primarily attributable to:

 

·             A decrease of $1.2 million for prototypeparts, supplies, and outside services related to product development for ourCustom NX DES systems;

 

·             A decrease of $0.2 million in expensesrelated to the support of our clinical research studies in 2008 as compared tothe higher expense related to support of our CUSTOM III clinical trial in thethird quarter of 2007;

 

·             A decrease of $0.2 million in personnelcosts offset by a $0.2 million increase related to the reduction in forcecompleted in July 2008; partially offset by

 

·             An increase of $0.2 million related tothe license agreement with Millimed; and

 

·             An increase of $0.1 million instock-based compensation expense.

 

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

 

***General andAdministrative***

 
| ** **                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Dollar** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2008**                                             | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                          | ** ** | **(in thousands)**                              | ** ** | ** ** | ** ** |
|                                |       |                                                 |       |       |       |   |   |   |   |   |
| General and administrative expenses |       | $                                                    | 2,179      |       | $          | 2,632 |   | $ | (453 | ) |

 

The $0.5 million decrease in general andadministrative expenses for the three months ended September 30, 2008,compared to the three months ended September 30, 2007, was primarilyattributable to:

 

·             A decrease of $0.3 million in consultingand other administrative services as we implement cost saving measuresassociated with the reduction in force in July 2008;

 

·             A decrease of $0.1 million in legal andaccounting spending;

 

·             A decrease of$0.1 million in personnel costs offset by an increase of approximately $37,000related to the reduction in force in July 2008;

 

·             A decrease of $0.1 million due tospending for trade shows, travel and marketing materials; partially offset by

 

·             An increase of $0.1 million in employeestock-based compensation expense.

 

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

 

***Interest and OtherIncome, Net***

 
| ** **                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Dollar** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                             | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                     | ** ** | **(in thousands)**                              | ** ** | ** ** | ** ** |
|                           |       |                                                 |       |       |       |   |   |   |   |   |
| Interest and other income, net |       | $                                                    | 193        |       | $          | 860 |   | $ | (667 | ) |

 

The $0.7 million decrease in interest and otherincome, net, for the three months ended September 30, 2008, compared tothe three months ended September 30, 2007, was primarily attributable to adecrease in the levels of cash, cash equivalents and short-term investments, aswell as lower average interest rates.

 

 **COMPARISON OFNINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**

 

***Revenue***

 

We did not generate anyrevenue during the nine months ended September 30, 2008 or 2007.

 

***Research andDevelopment***

 
| ** **                        | ** ** | **Nine Months Ended  September 30,** | ** ** | **Dollar** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                        | ** ** | **(in thousands)**                             | ** ** | ** ** | ** ** |
|                              |       |                                                |       |       |       |   |   |   |   |   |
| Research and development expenses |       | $                                                   | 25,918     |       | $          | 21,694 |   | $ | 4,224 |   |

 

The $4.2 million increase in research and developmentexpenses for the nine months ended September 30, 2008, compared to thenine months ended September 30, 2007, was primarily attributable to:

 

·             An increase of $2.5 million in personnelcosts related to the hiring of additional employees in our research anddevelopment and manufacturing departments;

 

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

 

·             A increase of $0.7 million in rent,depreciation on equipment and facilities costs as we expanded our manufacturingcapacity;

 

·             An increase of $0.3 million instock-based compensation expense related to headcount increases earlier in theyear;

 

·             An increase of $0.2 million related tothe license agreement with Millimed; partially offset by

 

·             A decrease of $0.3 million in expensesrelated to the support of our clinical research studies in 2008 as compared tothe higher expense related to support of our CUSTOM III clinical trial during2007.

 

***General andAdministrative***

 
| ** **                          | ** ** | **Nine Months Ended  September 30,** | ** ** | **Dollar** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                          | ** ** | **(in thousands)**                             | ** ** | ** ** | ** ** |
|                                |       |                                                |       |       |       |   |   |   |   |   |
| General and administrative expenses |       | $                                                   | 8,952      |       | $          | 7,894 |   | $ | 1,058 |   |

 

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The $1.1 million increase in general andadministrative expenses for the nine months ended September 30, 2008,compared to the nine months ended September 30, 2007, was primarilyattributable to:

 

·             An increase of $0.9 million in personnelcosts related to the hiring of additional employees in our administrationdepartments including approximately $37,000 related to the reduction in forcecompleted in July 2008;

 

·             Anincrease of $0.2 million in insurance, legal, accounting and otheradministrative expenses;

 

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

 

·           A decrease of $0.3 million in consulting and otheradministrative services as we implement cost saving measures associated withthe reduction in force in July 2008.

 

***Interest and OtherIncome, Net***

 
| ** **                     | ** ** | **Nine Months Ended  September30,** | ** ** | **Dollar** | ** ** |
|--------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                      | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                     | ** ** | **(in thousands)**                       | ** ** | ** ** | ** ** |
|                           |       |                                          |       |       |       |   |   |   |   |   |
| Interest and other income, net |       | $                                             | 862        |       | $          | 2,658 |   | $ | (1,796 | ) |

 

The $1.8 million decrease in interest and otherincome, net, for the nine months ended September 30, 2008, compared to thenine months ended September 30, 2007, was primarily attributable to adecrease in the levels of cash, cash equivalents and short-term investments, aswell as lower average interest rates.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash and cash equivalents, and short-terminvestments balances as of September 30, 2008 and December 31, 2007are summarized as follows:

 
| ** **                                                 | ** ** | **As of   September 30,   2008** | ** ** | **As of  December 31,  2007** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                 | ** ** | **(in thousands)**                              | ** ** |
|                                                       |       |                                                 |       |                                    |       |   |   |
| Cash and cash equivalents                                  |       | $                                                    | 13,601     |                                    | $          | 13,366 |   |
| Short-term investments                                     |       | 11,984                                               |       | 44,394                                  |       |
|                                                       |       |                                                 |       |                                    |       |
| Total cash and cash equivalents and short-term investments |       | $                                                    | 25,585     |                                    | $          | 57,760 |   |

 

***Sources of Liquidity***

 

We are in the development stage and have incurredlosses since our inception in June 2002. As of September 30, 2008, wehad an accumulated deficit of $126.9 million. Prior to our Initial PublicOffering, we funded our operations from the private placements of ourconvertible preferred stock resulting in aggregate net proceeds of $75.6million through December 31, 2006. On February 1, 2007, we completedour Initial Public Offering, raising $68.2 million in net proceeds. We areexploring options for seeking additional capital through the sale of our equitysecurities, and have engaged third party consultants to assist us in thiseffort.  The deterioration of theworldwide macroeconomic environment coupled with the increased volatility ofthe financial markets may limit the availability and amount of capitalavailable to us.  There can be noassurance that we will be able to obtain additional financing on termsacceptable to us, or at all. The failure of the Company to obtain sufficientfunds on acceptable terms when needed could require the Company to reduce thescope of, delay, or eliminate some or all of the planned clinical trials,research and development, pursuit of regulatory approvals in certain countries,and commercialization activities, which could have a material adverse effect onthe Company’s business, results of operations and financial condition.

 

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

 

As of September 30, 2008, we did not have anyoutstanding or available debt financing arrangements, we had working capital of$23.4 million, and our primary source of liquidity was $25.6 million in cash andcash equivalents and short-term investments.

 

***Cash Flows***

 

Our operating, investing and financing activities forthe nine months ended September 30, 2008 and September 30, 2007 aresummarized as follows:

 

| ** **                                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                             | ** ** |
|                                                |       |                                                |       |   |   |   |   |
| Net cash used in operating activities               |       | $                                                   | (31,002    | ) | $ | (23,735 | ) |
| Net cash provided by (used in) investing activities |       | 31,000                                              |       | (44,745 | ) |
| Net cash provided by financing activities           |       | 237                                                 |       | 69,174 |   |
|                                                |       |                                                |       |   |   |
| Net increase in cash and cash equivalents           |       | $                                                   | 235        |   | $ | 694 |   |

 

***OperatingActivities***

 

Net cash used in operating activities was$31.0 million for the nine months ended September 30, 2008, comparedto $23.7 million for the nine months ended September 30, 2007. The netcash used in operating activities for the nine months ended September 30,2008 and 2007 primarily reflects expenses related to product development andclinical trials.  These expenses were partially offset by depreciation andamortization, amortization of securities discounts, gain on sale ofinvestments, non-cash stock-based compensation and non-cash changes inoperating assets and liabilities.

 

***InvestingActivities***

 

Net cash provided by investing activities was$31.0 million for the nine months ended September 30, 2008, comparedto net cash used in investing activities of $44.7 million for the nine monthsended September 30, 2007. Net cash provided by investing activities forthe nine months ended September 30, 2008 was attributable to the proceedsfrom the sales of investments of $10.0 million and the proceeds from thematurities of investments of $41.1 million, which were partially offset by thepurchase of short-term investments of $18.4 million and the purchase ofproperty and equipment of $1.7 million. Net cash used in investing activitiesfor the nine months ended September 30, 2007 was primarily attributable tothe purchase of short-term investments of $92.1 million and the purchase ofproperty and equipment of $1.8 million, which was partially offset by the maturitiesand sale of short-term investments of $45.2 million and $4.0 million,respectively.

 

***FinancingActivities***

 

Net cash provided by financing activities for the ninemonths ended September 30, 2008 was $237,000, compared to $69.2 millionfor the nine months ended September 30, 2007. Net cash provided byfinancing activities for the nine months ended September 30, 2008 wasattributable to the proceeds from the exercise of stock options and thepurchase of stock through the Employee Stock Purchase Plan. Net cash providedby financing activities for the nine months ended September 30, 2007 wasprimarily attributable to our Initial Public Offering in February 2007.

 

***Operating Capitaland Capital Expenditure Requirements***

 

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

 

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We believe our cash balanceof $25 million as of the end of the third quarter is sufficient to fund ourcurrent scope of activities at least through the second quarter of 2009. We areexploring options for seeking additional capital through the sale of our equitysecurities, and have engaged third party consultants to assist in thiseffort.  The deterioration of theworldwide macroeconomic environment coupled with the increased volatility ofthe financial markets may limit the availability and amount of capital.  There can be no assurance that we will beable to obtain additional financing on terms acceptable to us, or at all. Thesale of additional equity and debt securities may result in additional dilutionto our stockholders. If we raise additional funds through the issuance of debtsecurities, these securities could have rights senior to those of our commonstock and could contain covenants that would restrict our operations. We willalso require additional capital beyond our current cash balance. For example,we will need to raise additional funds in order to build our sales force andcommercialize our products. Any such required additional capital may not be availableon reasonable terms, if at all. If we are unable to obtain additionalfinancing, we may be required to reduce the scope of, delay, or eliminate someor all of, our planned clinical trials, research, development andcommercialization activities, which could materially harm our business.We anticipate spending approximately$45.0 million to complete our CUSTOM IV and V clinical trials. Inaddition, we will spend additional funds for regulatory approvals and foractivities to commercialize our Custom NX DES Systems, if approved. Thedevelopment of any new applications of our custom length stent technology andnew products will also require the expenditure of significant financialresources and take several years to complete.

 

Our forecasts for the periodof time through which our financial resources will be adequate to support ouroperations and the costs to complete development of products areforward-looking statements and involve risks and uncertainties, and actualresults could vary materially and negatively as a result of a number offactors, including the factors discussed in the “Risk Factors” contained inItem 1A of Part II of this report. We have based these estimates onassumptions that may prove to be wrong, and we could utilize our available capitalresources sooner than we currently expect.

 

Because of the numerousrisks and uncertainties associated with the development of medical devices,such as our Custom NX DES Systems, we are unable to estimate the exact amountsof capital outlays and operating expenditures necessary to complete ongoingclinical trials and successfully deliver a commercial product to market. Ourfuture funding requirements will depend on many factors, including but notlimited to:

 

·                  thescope, rate of progress and cost of our clinical trials and other research anddevelopment activities;

 

·                  thecost of filing and prosecuting patent applications and defending and enforcingour patent and other intellectual property rights;

 

·                  thecost of defending, in litigation or otherwise, any claims that we infringethird-party patent or other intellectual property rights;

 

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

 

·                  thecost and timing of regulatoryapprovals;

 

·                  thecost and timing of establishingsales, marketing and distribution capabilities;

 

·                  thecost of establishing clinicaland commercial supplies of our products and any products that we may develop;

 

·                  theeffect of competing technologicaland market developments; and

 

·                  licensing technologies for future development.

 

Future capital requirementswill also depend on the extent to which we acquire or invest in businesses,products and technologies, although we currently have no commitments oragreements relating to any of these types of transactions.

 

***Contractual Obligations***

 

Our principal commitments asof September 30, 2008 consist of obligations under operating leases andpurchase obligations that we enter into through the normal course of business.See Note 6 of our Notes to Condensed Financial Statements for more detailedinformation.

 

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***Off-Balance Sheet Arrangements***

 

Sinceinception, we have not engaged in any off-balance sheet activities as definedin Regulation S-K Item 303(a)(4).

 

***Recent and Adopted Accounting Pronouncements***

 

In May 2008, the FASBissued SFAS No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles*. SFAS No. 162 identifies the sources of accounting principles andthe framework for selecting the principles used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principles (the GAAP hierarchy).  SFAS No. 162 will become effective 60days following the SEC’s approval of the Public Company Accounting OversightBoard amendments to AU Section 411, *The Meaning of PresentFairly in Conformity With Generally Accepted Accounting Principles*.  We do not expect the adoption of SFAS No. 162to have a material effect on our financial position, operating results or cashflows.

 

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

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**Interestrate risk**

 

The primary objective of ourinvestment activities is to preserve our capital for the purpose of fundingoperations while at the same time maximizing the income we receive from ourinvestments without significantly increasing risk. To achieve these objectives,our investment policy allows us to maintain a portfolio of cash equivalents andinvestments in a variety of marketable securities, including commercial paper,money market funds and U.S. government and agency securities. Our cash and cashequivalents as of September 30, 2008 consist primarily of liquid moneymarket funds. Our short-term investments as of September 30, 2008 consistof U.S. government and agency securities and commercial paper. Due to theshort-term nature of our investments, we believe that there is no materialexposure to interest rate risk.

 

**Exchangerate risk**

 

Under our Supply Agreementwith Fortimedix B.V., we have market risk exposure to adverse changes inforeign exchange rates. The cost of the stents we purchase from Fortimedixrequires payment in euros. Fluctuations in the euro to U.S. dollar exchangerate therefore impacts the cost of our product. To date, we have notexperienced any significant negative foreign exchange transaction losses. Weexpect higher product costs if there is a decline in the exchange rate betweenthe U.S. dollar and the euro. Based upon the supply agreement, any furtherannual purchase commitments have been delayed until we receive approval fromthe FDA to begin clinical trials in the United States. As a policy, we do notengage in speculative or leveraged transactions, nor do we hold financialinstruments for trading purposes.

 

If we expand our overseasoperations, our operating results may become subject to more significantfluctuations based on changes in exchange rates of foreign currencies inrelation to the U.S. dollar. We will periodically analyze our exposure tocurrency fluctuations and may adjust our policies to address any futurepotential exchange rate risk.

 

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**ITEM 4.CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized, and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

We carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act). Based upon this evaluation, our Chief Executive Officer andChief Financial Officer concluded that our disclosure controls and procedureswere effective as of September 30, 2008.

 

**Changes inInternal Control Over Financial Reporting**

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the three months ended September 30,2008 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II: OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

None

 

**ITEM 1A.RISK FACTORS**

 

**Risks Related to Our Business**

 

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

 

We have incurred net lossessince our inception in June 2002. For the years ended December 31,2007, 2006, and 2005, we had net losses of $38.8 million,$25.0 million and $14.0 million, respectively. As of September 30,2008, we had an accumulated deficit of $126.9 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. Since we have not received CE Mark orapproval from the U.S. Food and Drug Administration, or FDA, or any otherregulatory authority for our products, we are unable to market our currentproducts and have not generated any revenue since our inception. We expect ourresearch and development expenses to increase significantly in connection withour clinical trials and other product development activities. If we receive CEMark or FDA approval of our Custom NX DES Systems, we expect to incursignificant sales and marketing expenses and manufacturing expenses as wecommercialize our products. As a result, we expect to continue to incursignificant and increasing operating losses for the foreseeable future. Theselosses will continue to have an adverse effect on our stockholders’ equity.

 

**We willneed substantial additional funding and may be unable to raise capital when needed,which would force us to delay, reduce or eliminate our product developmentprograms or commercialization efforts.**

 

We are exploring options forseeking additional capital through the sale of our equity securities, and haveengaged third party consultants to assist in this effort.  The deterioration of the worldwidemacroeconomic environment coupled with the increased volatility of thefinancial markets may limit the availability and amount of capital available tous.  There can be no assurance that wewill be able to obtain additional financing on terms acceptable to us, or atall. As a result, our Board is also considering other alternative strategies.We will need to raise substantial additional capital to:

 

· fund our operations and clinical trials;

 

· continue our research and development;

 

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· 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 orintellectual property.

 

We believe our cash balanceof $25.6 million as of the end of the third quarter is sufficient to fund thecurrent scope of activities at least through the second quarter of 2009.However, our future funding requirements will depend on many factors,including:

 

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

 

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

 

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

 

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

 

· the cost and timing of regulatory approvals;

 

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

 

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

 

· the effect of competing technological andmarket developments;

 

· licensing technologies for futuredevelopment; and

 

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

 

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

 

We will require additionalcapital beyond our current cash balance. For example, we will need to raiseadditional funds in order to build our sales force and commercialize ourproducts. Any such required additional capital may not be available onreasonable terms, if at all. We anticipate spending approximately $45.0 millionto complete our CUSTOM IV and V clinical trials. In addition, we will spendadditional funds for regulatory approvals and for activities to commercializeour Custom NX DES systems, if approved. The development of any new applicationsof our custom length stent technology and new products will also require theexpenditure of significant financial resources and take several years tocomplete.

 

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.

 

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**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 our clinical trials orprevent or delay commercialization of our Custom NX DES Systems.**

 

In May 2004, we enteredinto a license agreement with Biosensors. In December 2007, we enteredinto an amended and restated license agreement with Biosensors which supersededthe prior agreement. Pursuant to the agreement, we obtained non-exclusiverights to use Biosensors’ drug coating on our stent platform. The drug coatingconsists of Biolimus A9 ® , ananti-inflammatory drug that is a derivative of rapamycin, and PolyLactic Acid,orPLA, 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 any otherjurisdiction.

 

To date, Biosensors has madeonly limited public disclosures regarding filings it has made with the FDA inconnection with the Drug Master File, or MAF, for its BioMatrix drug elutingstent. In order to obtain CE Mark and IDE approval for our Custom NX DESSystems, we require Biosensors, acting on our behalf, to submit MAFs related toour drug coating to our Notified Body and the FDA. Although Biosensors receivedCE Mark for its Biomatrix stent, there can be no guarantee that any MAF thatBiosensors submits to a regulatory authority on our behalf will be acceptable.

 

We submitted our applicationfor CE Mark of our Custom NX DES systems in December 2007.  In July 2008, our Notified Bodyforwarded to us a response from the Medicines Evaluation Board, or MEB, whichreviews the drug portion of our CE Mark application.  The response indicates that the MEB mayrequire additional clinical data, including a randomized trial before providingus with CE Mark.  In September 2008,we met with staff from the MEB to obtain clarification regarding their responseto our CE Mark application.  We arecurrently preparing our response to the MEB’s questions which we expect to fileby the end of 2008. As part of our application for CE Mark, Biosensorssubmitted a MAF related to our drug coating to the designated Notified Body whoreviews our CE Mark application. We will have to obtain a favorable opinion onthis MAF from the MEB in the Netherlands before our designated Notified Bodycan provide us with CE Mark.

 

In July 2008,Biosensors received questions from the MEB regarding the MAF. Any delaysBiosensors experiences or problems it has in responding to these questions maysubstantially delay the commercialization of our Custom NX DES systems inEurope as well as certain non-European countries that recognize the EuropeanUnion’s CE 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 PMA allowing us to commercializeour Custom NX DES Systems in the United States, we need Biosensors to submitacceptable MAFs related to our drug coating to the FDA on our behalf. Anydelays Biosensors experiences or problems it has in developing these acceptableMAFs or responding to questions the FDA may have concerning the MAFs maysubstantially delay our currently planned clinical trials and the developmentof our products and we may be required to restart clinical programs with analternative drug coating.

 

In the event we experiencethese delays or need to restart clinical programs, our regulatory andcommercialization timelines will need to be extended and we may experience asignificant decline in our stock price.

 

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**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 development stagemedical device company with a limited history of operations and we currently donot have any products available for sale or other sources of revenue. Ourability to generate revenue depends entirely upon the successful clinicaldevelopment, regulatory approval and commercialization of our Custom NX DESSystems. Our products under development and any other products that we developwill require extensive additional clinical testing, regulatory approval andsignificant marketing efforts before they can be sold and generate any revenue.Our efforts to commercialize our products may not succeed for a number ofreasons including:

 

· our products may not demonstrate safety andefficacy 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;

 

· 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 our developmentprogram, including initiation and completion of our clinical trials;

 

· any products that are approved may not beaccepted in the marketplace by physicians and patients;

 

· physicians may not receive adequate coverageand reimbursement for procedures using our products;

 

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

 

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

 

· we may not have adequate financial or otherresources to complete the development and commercialization of our Custom NXDES 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 European Union until we receive CE Mark or in the United Statesuntil we receive PMA. If we are not successful in the initiation and completionof clinical trials for the development, approval and commercialization of our CustomNX DES Systems for the treatment of coronary artery disease, or CAD, we maynever generate any revenue and may be forced to cease operations.

 

**We have notreceived, and may never receive, FDA or other regulatory approvals to marketour 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 have thenecessary regulatory approvals to market our Custom NX DES Systems or any otherproducts in the United States or in any foreign market, including the EuropeanUnion. If we obtain the necessary regulatory approvals, we plan initially tolaunch our products in the European Union and later in the United States.Regulatory approval in the European Union for our products will require us tosuccessfully obtain CE Mark from our designated Notified Body. In March 2007,the European Medicines Agency proposed new guidelines for the approval of drugeluting stents. These new guidelines, which are more rigorous than the previousstandards, were finalized in May 2008 and will become effective in December 2008.

 

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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 investigational device exemption, or IDE, completing pre-clinical andclinical trials, and applying for and obtaining PMA from the FDA. The PMAprocess requires us to demonstrate the safety and efficacy of our products tothe FDA’s satisfaction. This process is expensive and uncertain and requiresdetailed and comprehensive scientific and human clinical data. While the FDAreview process generally takes one to three years after filing the PMAapplication, our PMA application review could take much longer and may neverresult in the FDA granting PMA. The FDA could delay, limit or deny approval ofour 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 studies andclinical trials may be insufficient to support approval;

 

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

 

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

 

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

 

We will also have to obtainsimilar, and in some cases more stringent, foreign regulatory approval in orderto commercialize our products outside of the United States. Even if approved,our Custom NX DES Systems may not be approved for the indications that arenecessary or desirable for successful commercialization. We may not obtain thenecessary regulatory approvals to market our products in the European Union,United States or in other markets. Any delay in, or failure to receive ormaintain, approval for our products could prevent us from generating revenue orachieving profitability.

 

**Preliminarythird-party data has raised concerns that drug eluting stents may cause anincrease in late-stent thrombosis. In response to these concerns, regulatoryauthorities in the United States and Europe have issued statements anddeveloped enhanced guidelines 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 theMarch 2006 American College of Cardiology Scientific Sessions in Atlanta,Georgia and at the September 2006 European Society of CardiologyAnnual Meeting/World Congress of Cardiology Meeting in Barcelona, Spain. Thisdata suggested a small but significant increase in the rate of death andmyocardial infarction, or heart attack, potentially due to late-stentthrombosis, in patients treated with drug eluting stents at 18 months tothree years after stent implantation. The FDA stated that, while these studieshave raised important questions regarding the safety and efficacy of drugeluting stents, it is not possible to fully characterize the mechanisms, risksand incidence rates of late-stent thrombosis following implantation of drugeluting stents based on currently available data. The FDA has not issued anynew position to date regarding the safety of drug eluting stents. Although morerecent studies have suggested that the safety of drug eluting stents iscomparable to that of bare metal stents, the FDA and the European regulatoryagencies have issued new guidelines for the approval of drug eluting stentswhich require additional clinical data and may prolong the process for obtainingregulatory approval.

 

In March 2007, theEuropean Medicines Agency proposed new guidelines for the approval of drugeluting stents. These new guidelines, which are more rigorous than the previousstandards, were finalized in May 2008 and will become effective in December 2008.

 

In March 2008, the FDApublished draft guidance regarding non-clinical and clinical studies for drugeluting stents.  The draft guidance includes recommendations regarding thefollowing areas:

 

· Engineering testing,

 

· Biocompatibility testing,

 

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· 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, the FDAalso conducted a public workshop on the draft guidance documents and providedclarification on the above matters. Although the draft guidelines are currentlyconsidered non-binding recommendations, they have been published for publiccomment and it is expected that the FDA will conduct any application review fornew drug eluting stent catheter systems following the general principleshighlighted in the guidance.

 

Complying with the new andmore 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.

 

**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 entire supplyof the drug coating, PLA and BA9 for our stents from Biosensors and we areunaware of any alternative source for this drug coating. Under the amended andrestated 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 ofBiolimus A9. Currently, Biosensors relies on a sole-source, Nippon Kayaku, athird-party Japanese pharmaceutical company, to manufacture and supply themwith Biolimus A9, which Biosensors mixes with the PLA. We have norelationship with, control over, or contact with this pharmaceutical companyand cannot contract directly with it to obtain Biolimus A9 if we areunable to obtain Biolimus A9 from Biosensors. In addition, the pharmaceuticalcompany is subject to significant legal and regulatory requirements with regardto the production of Biolimus A9, including onerous current GoodManufacturing Practices regulations, or GMP, which are strictly enforced by theFDA, and the Ministry of Health, Labor, and Welfare in Japan and any failure onthe part of the pharmaceutical company to comply with these requirements mayinterrupt Biosensors’ supply of Biolimus A9 and ultimately, our supply of thedrug coating. Biosensors has also entered into, and may continue to enter into,agreements to supply the drug coating to other licensees. Our clinical trialsand the development and commercialization of our Custom NX DES Systems could beprevented or delayed if:

 

· the supplier of our drug coating is unableor refuses to meet our demand;

 

· our license agreement with Biosensorsterminates for any reason, including insolvency or our failure to obtain CEMark or commercialize within one year of the date upon which the MAF thatBiosensors submits in connection with our CE Mark application is approved bythe MEB; or

 

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

 

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To date, our drug coating requirements have beenlimited to small quantities that we need to conduct our development andpre-clinical and clinical trials. If we obtain market approval for ourproducts, we anticipate that we will require substantially larger quantities ofthe drug coating or the components of the drug coating. Biosensors may notprovide us with sufficient quantities of the drug coating or components andsuch supply may not meet our quality requirements or other specifications. Forexample, we have, in the past, experienced interruptions in the supply ofadequate quantities of acceptable drug coating. In addition, Biosensors hasinformed us that it plans to close its Newport Beach, California facility wherethe drug coating that it currently supplies to us is formulated.  In orderto use drug coating formulation prepared at another Biosensors facility, or atour own facility, for the manufacture of devices intended for commercial useoutside the United States, certain regulatory approvals need to beobtained.  If such regulatory approvals are not acquired before theclosure of the Newport Beach facility, we may experience an interruption in thesupply of drug coating suitable for commercial use outside the United States.  In the event we do not receive adequate supplies of acceptable drugcoating or components, we will likely be unable to locate an alternativesupplier, or any alternative drug, in a timely manner or on commerciallyreasonable terms, if at all. Any additional new source for Biolimus A9, the PLAor the drug coating will require the consent of Biosensors and prior FDAapproval, which will require significant time and effort to obtain and therecan be no assurance that we will obtain such regulatory approval. The inabilityto obtain sufficient quantities of the drug coating or components, or any delayin obtaining such supply could delay our clinical trials or affect thecommercialization of our Custom NX DES Systems, which could have a significantadverse affect on our future operations.

 

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

 

Certain tests related to the drug coating on our stentsmust be performed before the stents can be used in clinical trials or approvedfor commercial sale. We have agreed with Biosensors that we will be responsiblefor performing some of these tests. We have not developed the technology ormethods to perform all this testing in-house, and plan to rely on third partiesto conduct some of the testing. We have identified certain third parties who webelieve have the capability to conduct this testing using methods that do notviolate the proprietary rights of others. We can provide no assurance, however,that these testing methods will not violate such rights. If others assertrights to these testing methods, we may need to obtain a license giving us theright to use the testing methods or identify or develop other methods forperforming the required testing. We cannot assure you that a license will beavailable to us or that it will be available on terms that are agreeable to us.If we are unable to obtain a license, we cannot assure you that we will be ableto identify or develop alternate testing methods that meet our needs withoutdelaying our regulatory submissions or approvals. This may result in a delay inthe release of, or an inability to release, our stents for use in U.S. clinicaltrials or commercial products and our ability to generate revenue would beadversely affected as a result.

 

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

 

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

 

If, in our planned large-scale comparative pivotalclinical trial, we fail to demonstrate restenosis and reintervention rates, aswell as other clinical trial end-points and performance, comparable to otherdrug eluting and bare metal stents that have been approved by the FDA, ourability to successfully market our Custom NX DES Systems may be significantlylimited. If the long-term rates of restenosis and reintervention do not meetregulators’ or physicians’ expectations, our Custom NX DES Systems may notreceive regulatory approval or, if approved, may not become widely adopted andphysicians may recommend that patients receive alternative drug eluting stents,such as the Cypher ® stent, the Taxus ® Express2TM stent, the Taxus Liberte stent, theEndeavor ® stent, the XienceTM V stent and the PromusTM stent, the sixdrug eluting stents currently marketed in the United States. Another importantfactor upon which the safety and efficacy of our Custom NX DES Systems will bemeasured is the incidence of late-stent thrombosis following procedures usingour drug eluting stents. Some clinical data suggests a small but significantincrease in the rate of death and heart attack associated with drug eluting stentswhen compared to bare metal stents, possibly due to late-stent thrombosis. TheFDA convened a public meeting of its Circulatory System Devices Advisory Panelon December 7 and 8, 2006 with the intention of obtaining additionalinformation on the risks, timing and incidence rates of late-stent thrombosis.In March 2008, the FDA published draft guidance regarding non-

 

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clinical and clinical studies for drug eluting stentsSee “Preliminary third-party data has raised concerns that drug eluting stentsmay cause an increase in late-stent thrombosis.” We cannot assure you that ourlong-term data, once obtained, will be different than that suggested in therecent studies regarding late-stent thrombosis.

 

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

 

**If our pre-clinical studies orclinical trials do not meet safety or efficacy endpoints, or if we experiencesignificant delays in completing these studies or trials, our ability tocommercialize our Custom NX DES Systems or other products and our financialposition will be impaired.**

 

Before marketing and selling our Custom NX DES Systemsor any other products, we must successfully complete pre-clinical studies andclinical trials that demonstrate that our products are safe and effective. Wecurrently have a very limited amount of clinical data regarding the safety andefficacy of our Custom NX DES Systems, and no published data beyond two years.The results from our limited short-term clinical experience for our Custom NXDES Systems do not necessarily predict long-term clinical benefit and may notbe replicated in subsequent clinical trials. Furthermore, all of our existingdata has been produced in studies that involve relatively small patient groups,and the data may not be reproduced in wider patient populations. We plan toconduct additional large-scale clinical trials to determine whether ourproducts are safe and effective and to support our applications for regulatoryapproval in the United States. We expect that one or more of these additionalclinical studies will be a comparative study comparing the safety and efficacyof our stents to the Xience stent, the Promus stent, the Cypher stent, theTaxus Express2 stent, the Taxus Liberte stent or the Endeavor ® stent, the sixdrug eluting stents marketed in the United States, or to other stents that maybecome approved for marketing in the United States, and that these studies willinvolve large patient populations of approximately 2,000 patients implantedwith our device.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

· changes in governmental regulations or administrativeactions;

 

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

 

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

 

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

 

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

 

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

 

Clinical trials necessary to support a PMA applicationfor our Custom NX DES Systems will be expensive and will require the enrollmentof large numbers of patients, and suitable patients may be difficult toidentify and recruit. The clinical trials supporting the PMA applications forthe Cypher stent, the Taxus Express2 stent and the Endeavor stent, which areapproved by the FDA and currently marketed, involved patient populations ofapproximately 1,000, 1,300 and 1,100 respectively. We expect that we willprovide the FDA with data on approximately 2,000 patients implanted with ourdevice, with 12-month follow-up to support our PMA application. The FDA mayrequire us to submit data on a greater number of patients or a longer follow-upperiod. For example, at an FDA workshop held in April 2008, the FDA recommended18 month follow-up on at least 50% of patients. Patient enrollment in clinicaltrials and completion of patient follow-up depend on many factors, includingthe size of the patient population, the nature of the trial protocol, theproximity of patients to clinical sites and the eligibility criteria for theclinical trial and patient compliance. For example, patients may be discouragedfrom enrolling in our clinical trials if the trial protocol requires them toundergo extensive post-treatment procedures or follow-up to assess the safetyand efficacy of our products, or they may be persuaded to participate incontemporaneous clinical trials of competitive products. In addition, patientsparticipating in our clinical trials may die before completion of the trial orsuffer adverse medical events unrelated to our products. Delays in patientenrollment or failure of patients to continue to participate in a clinicaltrial may cause an increase in costs and delays or result in the failure of theclinical trial.

 

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

 

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

 

We cannot provide any assurance that the datacollected from our current and planned clinical trials will be sufficient todemonstrate that our Custom NX DES Systems are an attractive alternative toother drug eluting stent procedures. If we fail to demonstrate safety andefficacy that is at least comparable to other drug eluting or bare metal stentsthat have received regulatory approval and that are available on the market,our ability to successfully market our Custom NX DES Systems will be significantlylimited. Even if the data collected from clinical studies or clinicalexperience indicate positive results, each physician’s actual experience withour Custom NX DES Systems will vary. Clinical trials conducted with our CustomNX DES Systems have involved procedures performed by physicians who aretechnically proficient and are high-volume users of drug eluting stents.Consequently, both short- and long-term results reported in these clinicaltrials may be significantly more 

 

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favorable than typical results of practicingphysicians, which could negatively impact rates of adoption of our products. Inaddition to safety and efficacy, we believe that product characteristics suchas ease of use and consistency of performance are also important. If we are notable to meet physician expectations with respect to these characteristics,market acceptance and adoption of our products may be impacted. We also believethat published peer-reviewed journal articles and recommendations and supportby influential physicians regarding our Custom NX DES Systems will be importantfor market acceptance and adoption, and we cannot assure you that we willreceive these recommendations and support, or that supportive articles will bepublished.

 

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

 

We expect our pivotal clinical trial in the UnitedStates to compare the performance, including safety and efficacy, of ourproducts against that of a currently marketed drug eluting stent, or a drugeluting stent that becomes approved for marketing in the near future. Ourplanned pivotal clinical trial could be significantly delayed or harmed if thestent we use for the control group experiences problems. We may use one of thesix currently marketed drug eluting stents, the Xience V stent, the Promusstent, the Cypher stent, the Taxus Express2 stent, the Taxus Liberte stent orthe Endeavor stent, or a drug eluting stent that becomes approved for marketingin the near future, as the control stent in our planned pivotal clinical trial.In July 2004, Boston Scientific announced the recall of approximately85,000 Taxus stent systems and approximately 11,000 Express2 stent systems dueto characteristics in the delivery catheters that had the potential to impedeballoon deflation during a balloon angioplasty procedure. In August 2004,Boston Scientific announced that it would recall an additional 3,000 Taxusstents. If prior to or during the enrollment and treatment period for ourplanned pivotal clinical trial, there is a recall of the control stent or thecontrol stent is removed from the market, our trial would likely besubstantially delayed. The FDA could also require us to redesign the clinicaltrial based on an alternative control stent. Any significant delay or redesigncould impair our ability to commercialize our Custom NX DES Systems.

 

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

 

Drug eluting stents were introduced in the UnitedStates in 2003. To date, the FDA has approved only the Taxus Express2, theTaxus Liberte, the Cypher, the Endeavor, the Xience V and the Promus drugeluting stents for commercial sale. Because drug eluting stents are relatively newand long-term success measures have not been completely validated, regulatoryagencies, including the FDA, may take significantly more time in evaluatingproduct approval applications for those types of products. For example, thereare currently several methods of measuring restenosis and we do not know whichof these metrics, or combination of these metrics, will be consideredappropriate by the FDA for evaluating the clinical efficacy of stents.Treatments may exhibit a favorable measure using one of these metrics andan unfavorable measure using another metric. Any change in the accepted metricsmay result in reconfiguration of, and delays in, our clinical trials.Furthermore, the result of recent studies suggesting a correlation between drugeluting stents and incidents of late-stent thrombosis may further delay andcomplicate the regulatory pathway for our products. Additionally, we havelimited experience in filing and prosecuting the applications necessary to gainregulatory approvals, and we have limited personnel and resources to dedicateto the filing and prosecution of these applications. As a result, we mayexperience a long regulatory process in connection with obtaining regulatoryapprovals for our products.

 

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

 

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

 

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

 

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

 

· warning letters or untitled letters;

 

·fines and civil penalties;

 

· unanticipated expenditures;

 

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

 

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

 

· product recall or seizure;

 

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

 

· interruption of production;

 

· operating restrictions;

 

· injunctions; and

 

· criminal prosecution.

 

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

 

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

 

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

 

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In addition, we may be required to conduct costlypost-market testing and surveillance to monitor the safety or efficacy of ourproducts, and we will be required to report adverse events and malfunctionsrelated to our products. Later discovery of previously unknown problems withour products, including unanticipated adverse events or adverse events ofunanticipated severity or frequency, manufacturing problems, or failure tocomply with regulatory requirements such as QSR or GMP, may result inrestrictions on such products or manufacturing processes, withdrawal of theproducts from the market, voluntary or mandatory recalls, fines, suspension ofregulatory approvals, product seizures, injunctions or the imposition of civilor criminal penalties. For example, Boston Scientific has initiated significantrecalls of its stent products due to manufacturing and other quality issuesassociated with the products.

 

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

 

**Failure to obtain regulatory approvalin foreign jurisdictions will prevent us from marketing our products abroad.**

 

We intend to market our products in internationalmarkets. In order to market our products in the European Union and many otherforeign jurisdictions, we must obtain separate regulatory approvals, 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 market.

 

**RisksRelated to Our Intellectual Property**

 

**Third parties hold a large number ofpatents related to stents and we do not have rights to many of these patents.**

 

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

 

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

 

· use of rapamycin or its analogs to treat restenosis;

 

· stent structures and materials;

 

· catheters used to deliver stents; and

 

· stent manufacturing and coating processes.

 

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

 

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

 

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

 

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closed-loop elements. The “Fariabi” family of patents,formerly owned by Guidant, are directed to stents comprising cobalt- chromiumalloys. The “Israel” and “Pinchasik” families of patents, owned by Medinol, aredirected to stents with meandering strut patterns. A patent owned by Wall isdirected to a radially collapsible mesh sleeve.

 

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

 

While one of the Yock patents directed to rapid exchange angioplastycatheters was due to expire in October 2008, Abbott has filed an application for patent extension under the Hatch-Waxman Act andwas recently granted an interim extension of the patent term for a period ofone year by the US Patent and Trademark Office. Before October, 2009, the USPatent and Trademark Office will determine the total length of the extension towhich Abbott may be entitled under the Hatch-Waxman Act. This could result inan extension of the term of this patent even beyond October 2009.

 

The patents described above could be found to coverour technology and may materially and adversely affect our business. In addition,these patents are given only as examples and there may be other patents inaddition to those described above that may materially and adversely affect ourbusiness. Moreover, because patent applications can take many years to issueand remain confidential for the first 18 months after filing, there may becurrently pending applications, unknown to us, which may later result in issuedpatents that pose a material risk to us.

 

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

 

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

 

These companies have maintained their position in themarket by, among other things, establishing intellectual property rightsrelating to their products and enforcing these rights aggressively againsttheir competitors and new entrants into the market. All of the major companiesin the stent and related markets, including Abbott Vascular (which acquiredGuidant’s stent technology), Boston Scientific, Johnson & Johnson andMedtronic, have been repeatedly involved in patent litigation relating to stentssince at least 1997.  For example, in the past year BostonScientific, Medtronic, and Abbott Vascular have each been sued by Johnson &Johnson and/or Wyeth for infringement of the Morris, Wright, and/or Faloticopatents. The stentand related markets have experienced rapid technological change andobsolescence in the past, and our competitors have strong incentives to stop ordelay the introduction of new products and technologies. We may pose acompetitive threat to many of the companies in the stent and related markets.Accordingly, many of these companies will have a strong incentive to takesteps, through patent litigation or otherwise, to prevent us fromcommercializing our products.

 

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

 

In any infringement lawsuit, a third party could seekto enjoin, or prevent, us from commercializing our Custom NX DES Systems or anyfuture products, may seek damages from us and any such lawsuit would likely beexpensive for us to defend against. Our involvement in intellectual propertylitigation could result in significant expense. Some of our competitors, suchas Boston Scientific, Johnson & Johnson, Abbott Vascular andMedtronic, have considerable resources 

 

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available to them and a strong economic incentive toundertake substantial efforts to stop or delay us from bringing our Custom NXDES Systems to market and achieving market acceptance. We, on the other hand,are a development stage company with comparatively few resources available tous to engage in costly and protracted litigation. A court may determine thatpatents held by third parties are valid and infringed by us and we may berequired to:

 

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

 

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

 

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

 

· discontinue manufacturing or other processesincorporating infringing technology; or

 

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

 

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

 

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

 

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

 

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

 

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

 

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to us, and moreover, patents that have issued to us ormay issue in the future may not be valid or enforceable. Further, even if validand enforceable, our patents may not be sufficiently broad to prevent othersfrom marketing products like ours, despite our patent rights.

 

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

 

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

 

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

 

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

 

**RisksRelated to Commercialization**

 

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

 

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

 

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

 

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

 

· significantly greater name recognition;

 

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

 

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

 

· established distribution networks; and

 

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

 

For example, Johnson &Johnson, Boston Scientific, Medtronic and Abbott Laboratories, four companieswith far greater financial and marketing resources than we possess, have eachdeveloped, and are actively marketing, drug eluting stents that have beenapproved by the FDA. We may be unable to demonstrate that our Custom NX DESSystems offer any advantages over Johnson & Johnson’s Cypher stent,Boston Scientific’s Taxus Express2, Taxus Liberte or Promus stents, AbbottLaboratories’ Xience V stent or Medtronic’s Endeavor stent. Smaller orearly-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.

 

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

 

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

 

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

 

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

 

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

 

We currently have limited resources, facilities andexperience to commercially manufacture the device component of our products andapply the drug coating to the stents. In addition, pursuant to the terms of therestated license agreement with Biosensors, we plan to perform our own drugcoating formulation.. In order to produce our Custom NX DES Systems in thequantities that we anticipate will be required to meet anticipated marketdemand, we will need to increase, or scale-up, the production process by asignificant factor over our current level of production. There are technicalchallenges to scaling-up manufacturing capacity and developing commercial-scalemanufacturing facilities that will require the investment of substantialadditional funds and hiring and retaining additional management and technicalpersonnel who have the necessary manufacturing experience. We may not successfullycomplete any required scale-up in a timely manner or at all. If we are unableto do so, we may not be able to produce products in sufficient quantities tomeet the requirements for the launch of the product or to meet future demand,if at all. If we develop and obtain regulatory approval for our products andare unable to manufacture a sufficient supply of our products, our revenue,business and financial prospects would be adversely affected. In addition, ifthe scaled-up production process is not efficient or produces stents that donot meet quality and other standards, our future gross margins may decline.

 

We currently assemble our Custom NX DES Systems andapply the drug coating at our facilities in Menlo Park, California. Under theterms of our lease agreement for these facilities, our landlord may terminateour lease at any time on or after May 1, 2010 by giving us 180 days’notice, if it has obtained certain redevelopment rights with respect to theleased premises. Prior to the commercial launch of our product, our leasedpremises will have to be inspected and approved by the FDA, and will likelyrequire additional certifications by the State of California Department ofHealth Services, or CDHS. Our facility and quality systems are also required topass annual audits for purposes of International Standardisation Organization,or ISO, compliance. If audits and inspections of our facilities determine thatour facility does not meet applicable standards, or if there is a disruption toour existing manufacturing facility, or if our landlord elects to terminate ourlease on or after May 1, 2010, we will have no other means ofmanufacturing our products until we are able to restore the manufacturingcapability at our facility or lease alternative manufacturing facilities andobtain regulatory approval for these facilities. Because our Menlo Parkfacilities are located in a seismic zone, we face the risk that an earthquakemay damage our facilities and disrupt our operations. If we are unable toproduce sufficient quantities of our products for use in our current andplanned clinical trials, if we obtain regulatory approval of our products andare unable to produce sufficient quantities of our products to support ourplanned commercial activities or if our manufacturing process yieldssubstandard products, our development and commercialization efforts would bedelayed.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**We may not be successful in ourefforts to expand our portfolio of products and develop additionaltechnologies.**

 

One element of our strategy is to discover, developand commercialize a portfolio of new products in addition to our Custom NX DESSystems. As our resources permit, we plan to do so through our internal research programs and intend to explorestrategic collaborations for the development of new products utilizing our stenttechnology. Research programs to identify new disease targets, products anddelivery techniques require substantial technical, financial and humanresources, whether or not any products are ultimately identified. We maydetermine that one or more of our pre-clinical programs do not have sufficientpotential to warrant the allocation of resources, such as the development ofour stent technology for the treatment of peripheral artery disease, or PAD,which we suspended in late 2007 in order to focus our resources on thedevelopment of our CUSTOM NX systems. Our research programs may initially showpromise in identifying potential products, yet fail to yield products forclinical development for many reasons, including the following:

 

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

 

· competitors may develop alternatives that render ourproducts obsolete;

 

· our products may not be deployed safely oreffectively;

 

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

 

· our clinical trials may not be successful; and

 

· we may not receive regulatory approval.

 

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

 

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

 

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

 

**RisksRelated to Our Industry**

 

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

 

Our failure to receive adequate reimbursement orpricing approvals in the United States or internationally would negatively impactmarket acceptance of our products in the markets in which those approvals aresought. The efficacy, safety, performance and cost-effectiveness of ourproducts under development and of any competing products are some of thefactors that will determine the availability of coverage and level ofreimbursement. In the United States, a preliminary threshold for coverage andpayment of medical devices and drugs generally includes approvals or clearancesfrom the FDA. In addition, there is significant uncertainty concerningthird-party coverage and reimbursement of newly approved medical products anddrugs. Future legislation, regulation or coverage and reimbursement policies ofthird-party payors may adversely affect the demand for our products currentlyunder development and limit our ability to profitably sell our products.Third-party payors continually attempt to contain or reduce healthcare costs bychallenging the prices charged for healthcare products and services, resultingin a downward pressure of reimbursement rates generally. Under recentregulatory changes to the methodology for calculating payments for currentinpatient procedures in certain hospitals, Medicare payment rates for surgicaland cardiac procedures have been decreased, including approximately 10% to 14%reductions for those procedures using drug eluting stents. The reductions areto be transitioned over the three year period that began in fiscal year 2007.The Centers for Medicare and Medicaid Services, or CMS, responsible foradministering the Medicare program, also indicated it will begin to moveforward with developing revised reimbursement codes that better reflect theseverity of the patient’s condition in the hospital inpatient prospectivepayment system for fiscal year 2008. If coverage and reimbursement for ourproducts is unavailable, insufficient or limited in scope or amount, or ifpricing is set at unsatisfactory levels, market acceptance of our productswould be impaired and our future revenues, if any, would be adversely affected.

 

**Legislative or regulatory reform ofthe healthcare system may affect our ability to sell our products profitably.**

 

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

 

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**We face the risk of product liabilityclaims and may not be able to obtain insurance.**

 

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

 

We may be subject to claims against us even if theapparent injury is due to the actions of others. For example, we rely on theexpertise of physicians, nurses and other associated medical personnel toperform the medical procedure and related processes to implant our coronarystents into patients. If these medical personnel are not properly trained orare negligent, the therapeutic effect of our stents may be diminished or thepatient may suffer critical injury, which may subject us to liability. Inaddition, an injury that is caused by the activities of our suppliers, such asthose who provide us with cobalt chromium tubing for our stents, those thatlaser cut our stents or the supplier of our drug coating, may be the basis fora claim against us.  Pursuant to some ofthe written agreements that we have entered into with medical institutions andphysicians participating in our clinical trials, we have agreed to indemnifythose institutions and physicians from and against losses that result fromthird party 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 could prevent or interfere with ourproduct commercialization efforts. Defending a suit, regardless of merit, couldbe costly, could divert management’s attention from our business and mightresult in adverse publicity, which could result in the withdrawal of, orinability to recruit, clinical trial patient participants or result in reducedacceptance of our products in the market.

 

**RisksRelated to Our Operations**

 

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

 

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

 

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

 

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

 

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

 

**We expect that the price of ourcommon 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 relating to regulationor supply of the drug coating;

 

· the announcement of new products or service enhancementsby us or our competitors;

 

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

 

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

 

· the low trading volume of our common stock;

 

· developments in our industry, including changes inthird-party reimbursement; and

 

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

 

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

 

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

 

As of September 30, 2008, our officers, directorsand principal stockholders each holding more than 5% of our common stockcollectively will control approximately 65.1% of our outstanding common stock.As a result, these stockholders, if they act together, will be able to controlthe management and affairs of our company and most matters requiringstockholder approval, including the election of directors and approval ofsignificant corporate transactions. This concentration of ownership may havethe effect of delaying or preventing a change in control and might adverselyaffect the market price of our common stock. This concentration of ownershipmay not be in the best interests of our other stockholders.

 

**Volatility in the stock price ofother companies may contribute to volatility in our stock price.**

 

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

 

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

 

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

 

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

 

· elimination of cumulative voting in the election ofdirectors;

 

· procedures for advance notification of stockholdernominations and proposals;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

On February 1, 2007, we sold 4.7 millionshares at $16.00 per share in the initial public offering of our common stock.Net cash proceeds from the offering were $68.2 million, after deductingapproximately $7.0 million of underwriting discounts and commissions andother offering costs. We registered the Initial Public Offering of our commonstock, par value $0.001 per share, on a Registration Statement on Form S-1,as amended, (Registration No. 333-136371), which was declared effective onJanuary 31, 2007. Of the $68.2 million in net proceeds, all of whichhas been used as of September 30, 2008. We used $4.6 million for sales and marketing initiatives notincluding $0.4 million of stock compensation expense, $49.8 million forresearch and development activities not including $2.6 million of stockcompensation expense, $10.2 million for operating and general corporatepurposes not including $3.6 million of stock compensation expense and$3.6 million for property and equipment in order to expand our manufacturingcapability to conduct our CUSTOM III, IV and V clinical trials and preparefor commercialization outside the United States.  In addition, we invested the proceeds fromthe offering in short-term, investment grade, interest-bearing instruments.

 

On July 24, 2008, we issued 50,000 unregistered shares of our commonstock to an accredited investor for total consideration with a value of$150,000.  The investor delivered apayment of $150,000 to Millimed, A/S.  Inturn, Millimed assigned exclusive rights in certain patents and patentapplications to us.  The issuance wasmade in reliance on Section 4(2) of the Securities Act of 1933, asamended, and was made without general solicitation or advertising.  Therecipient was an accredited investor with access to all relevant informationnecessary to evaluate the investment, who represented to us that the shareswere being acquired for investment purposes.

 

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**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**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                |       | 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.

 

†                  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 signed onits behalf by the undersigned thereunto duly authorized.

 

 

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

 

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