##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 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 001-33775
 Nanosphere, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    36-4339870(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)4088 Commercial Avenue
    
    Northbrook, Illinois 60062(Address of principal executive offices)
    
    (Zip Code)
 (847) 400-9000
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o
 o þ




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##### 



NANOSPHERE, INC.
 INDEX
 Part I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Balance Sheets
    
    
    1Statements of Operations
    
    
    2Statements of Cash Flows
    
    
    3Notes to Financial Statements
    
    
    4-8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9-16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    17Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 4. (Removed and Reserved)
    
    
    18Item 6. Exhibits
    
    
    18Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Nanosphere, Inc.
 
 Balance Sheets
(Unaudited)
 September 30,
    
    
    December 31,2010
    
    
    2009CURRENT ASSETS:Cash and cash equivalents
    
    $
    45,637,143
    
    
    $
    76,689,279Accounts receivable
    
    
    199,292
    
    
    
    735,047Inventories
    
    
    2,661,826
    
    
    
    2,940,574Other current assets
    
    
    735,937
    
    
    
    374,657Total current assets
    
    
    49,234,198
    
    
    
    80,739,557PROPERTY AND EQUIPMENT Net
    
    
    5,210,941
    
    
    
    6,144,555INTANGIBLE ASSETS  Net of accumulated amortization
    
    
    3,543,609
    
    
    
    1,709,842OTHER ASSETS
    
    
    75,000
    
    
    
    75,000TOTAL
    
    $
    58,063,748
    
    
    $
    88,668,954CURRENT LIABILITIES:Accounts payable
    
    $
    1,877,374
    
    
    $
    2,509,405Accrued compensation
    
    
    1,136,569
    
    
    
    955,130Other current liabilities
    
    
    3,414,193
    
    
    
    2,303,631Long-term debt  current portion
    
    
    
    
    
    
    3,818,790Total current liabilities
    
    
    6,428,136
    
    
    
    9,586,956LONG-TERM LIABILITIES:Other noncurrent liabilities
    
    
    1,350,000
    
    
    
    Total liabilities
    
    
    7,778,136
    
    
    
    9,586,956COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.01 par value; 100,000,000 shares authorized; 28,406,266 and
28,422,461 shares issued and outstanding as of September 30, 2010 and December
31, 2009, respectively
    
    
    284,063
    
    
    
    284,225Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued
    
    
    
    
    
    
    Additional paid-in capital
    
    
    317,092,867
    
    
    
    312,660,430Warrants to acquire common stock
    
    
    5,423,771
    
    
    
    5,423,771Accumulated deficit
    
    
    (272,515,089
    )
    
    
    (239,286,428
    )Total stockholders equity
    
    
    50,285,612
    
    
    
    79,081,998TOTAL
    
    $
    58,063,748
    
    
    $
    88,668,954
   1




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Nanosphere, Inc.
 
 Statements of Operations
(Unaudited)
 Three Month Periods Ended
    
    
    Nine Month Periods EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009REVENUE:Grant and contract revenue
    
    $
    31,890
    
    
    $
    422,300
    
    
    $
    609,961
    
    
    $
    581,797Product sales
    
    
    341,547
    
    
    
    306,717
    
    
    
    1,106,106
    
    
    
    804,682Total revenue
    
    
    373,437
    
    
    
    729,017
    
    
    
    1,716,067
    
    
    
    1,386,479COSTS AND EXPENSES:Cost of sales
    
    
    1,074,023
    
    
    
    587,901
    
    
    
    2,237,970
    
    
    
    1,298,384Research and development
    
    
    4,939,558
    
    
    
    4,618,001
    
    
    
    13,986,317
    
    
    
    13,858,186Sales, general, and administrative
    
    
    5,279,859
    
    
    
    3,519,404
    
    
    
    18,517,102
    
    
    
    10,339,580Total costs and expenses
    
    
    11,293,440
    
    
    
    8,725,306
    
    
    
    34,741,389
    
    
    
    25,496,150Loss from operations
    
    
    (10,920,003
    )
    
    
    (7,996,289
    )
    
    
    (33,025,322
    )
    
    
    (24,109,671
    )OTHER INCOME (EXPENSE):Foreign exchange gain (loss)
    
    
    (12,030
    )
    
    
    (338
    )
    
    
    6,487
    
    
    
    (2,518
    )Interest expense
    
    
    (12,623
    )
    
    
    (287,185
    )
    
    
    (274,024
    )
    
    
    (1,030,263
    )Interest income
    
    
    25,693
    
    
    
    41,451
    
    
    
    64,198
    
    
    
    322,475Total other income (expense)
    
    
    1,040
    
    
    
    (246,072
    )
    
    
    (203,339
    )
    
    
    (710,306
    )NET LOSS
    
    $
    (10,918,963
    )
    
    $
    (8,242,361
    )
    
    $
    (33,228,661
    )
    
    $
    (24,819,977
    )Net loss per common share  basic and diluted
    
    $
    (0.39
    )
    
    $
    (0.37
    )
    
    $
    (1.20
    )
    
    $
    (1.12
    )Weighted average number of common
shares outstanding  basic and
diluted
    
    
    27,756,086
    
    
    
    22,232,621
    
    
    
    27,754,851
    
    
    
    22,230,070
   2




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Nanosphere, Inc.
 
 Statements of Cash Flows
(Unaudited)
 Nine Month Periods EndedSeptember 30,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (33,228,661
    )
    
    $
    (24,819,977
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,695,553
    
    
    
    2,220,847Amortization of financing costs and accretion of debt discount
    
    
    118,961
    
    
    
    405,305Loss from disposal of fixed assets
    
    
    20,699
    
    
    
    2,758Share-based compensation
    
    
    4,406,025
    
    
    
    1,861,910Changes in operating assets and liabilities:Accounts receivable
    
    
    535,755
    
    
    
    184,144Inventories
    
    
    (816,337
    )
    
    
    42,199Other current assets
    
    
    (381,738
    )
    
    
    (955,672
    )Accounts payable
    
    
    (426,354
    )
    
    
    198,968Accrued and other current liabilities
    
    
    1,202,470
    
    
    
    646,621Net cash used in operating activities
    
    
    (25,873,627
    )
    
    
    (20,212,897
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (444,997
    )
    
    
    (974,470
    )Investments in intangible assets
    
    
    (865,469
    )
    
    
    (340,000
    )Other
    
    
    23,000
    
    
    
    Net cash used in investing activities
    
    
    (1,287,466
    )
    
    
    (1,314,470
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of long term debt
    
    
    (3,917,293
    )
    
    
    (3,557,982
    )Payments on capital lease obligation
    
    
    
    
    
    
    (21,434
    )Proceeds from stock option exercises
    
    
    26,250
    
    
    
    46,012Other
    
    
    
    
    
    
    (35
    )Net cash used in financing activities
    
    
    (3,891,043
    )
    
    
    (3,533,439
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (31,052,136
    )
    
    
    (25,060,806
    )CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    76,689,279
    
    
    
    75,356,960CASH AND CASH EQUIVALENTS  End of period
    
    $
    45,637,143
    
    
    $
    50,296,154NONCASH INVESTING AND FINANCING ACTIVITIES:Capital expenditures included in accounts payable
    
    $
    
    
    
    $
    99,299License costs capitalized and included in accrued liabilities
    
    
    1,700,000
    
    
    
    75,000Reclassification of inventory to property and equipment
    
    
    1,095,085
    
    
    
    
   3




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Nanosphere, Inc.
 
 Notes to Financial Statements
As of September 30, 2010 and December 31, 2009, and
For the Three and Nine month Periods Ended September 30, 2010 and 2009
(Unaudited)
 1. Description of Business
  Basis of Presentation
  Use of Estimates
 2. Net Loss Per Common Share
    September 30, 2010
    
    
    September 30, 2009Restricted stock
    
    
    650,000
    
    
    
    Stock options
    
    
    4,200,790
    
    
    
    3,588,405Common stock warrants
    
    
    1,300,119
    
    
    
    1,300,1196,150,909
    
    
    
    4,888,524
  4




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Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
 3. Intangible Assets
  September 30, 2010
    
    
    December 31, 2009Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Net
    
    
    Cost
    
    
    Amortization
    
    
    NetIntellectual property  licenses
    
    $
    4,288,218
    
    
    $
    (1,195,720
    )
    
    $
    3,092,498
    
    
    $
    2,438,218
    
    
    $
    (728,376
    )
    
    $
    1,709,842Patents
    
    
    455,000
    
    
    
    (3,889
    )
    
    $
    451,111
    
    
    
    
    
    
    
    
    
    
    
    $
    4,743,218
    
    
    $
    (1,199,609
    )
    
    $
    3,543,609
    
    
    $
    2,438,218
    
    
    $
    (728,376
    )
    
    $
    1,709,842
    Years Ending December 312010 (Period from October 1 to December 31)
    
    $
    97,7572011
    
    
    367,1382012
    
    
    356,2282013
    
    
    352,5922014
    
    
    348,047Thereafter
    
    
    1,769,848
  4. Related Party Transactions
   5




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Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
 5. Equity Incentive Plan
   Expected dividend yield
    
    
    0
    %Expected volatility
    
    
    101
    %Risk free interest rate
    
    
    2.62
    %Weighted-average expected option life
    
    
    6.0 yearsEstimated weighted-average fair value
on the date of grant based on the above assumptions
    
    $
    4.01Estimated forfeiture rate for unvested options
    
    
    7.5
    %
    WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value of OptionsOutstanding  January 1, 2010
    
    
    4,338,695
    
    
    $
    5.75Granted
    
    
    119,945
    
    
    $
    5.06Exercised
    
    
    (6,305
    )
    
    $
    4.16Expired
    
    
    (107,803
    )
    
    $
    9.86Forfeited
    
    
    (143,742
    )
    
    $
    6.43Outstanding  September 30, 2010
    
    
    4,200,790
    
    
    $
    5.61
    
    
    
    7.21
    
    
    $
    1,397,751Exercisable  September 30, 2010
    
    
    1,833,697
    
    
    $
    5.54
    
    
    
    6.28
    
    
    $
    846,984Vested and Expected to Vest  September 30, 2010
    
    
    4,091,904
    
    
    $
    5.61
    
    
    
    7.19
    
    
    $
    1,372,416
    6




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Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
  6. License Agreements
  7. Stockholders Equity
  Class of Stock for
    
    Number of
    
    
    Expirationwhich the Warrant is Exercisable
    
    Warrants
    
    
    DateCommon  exercise price of $17.50 per share
    
    
    1,135,194
    
    
    April 2011Common  exercise price of $8.75 per share
    
    
    164,925
    
    
    April 2013
  8. Commitments and Contingencies
    OperatingYears Ending December 31
    
    Lease2010 (Period from October 1 to December 31)
    
    $
    104,8702011
    
    
    426,6432012
    
    
    438,9212013
    
    
    451,1982014
    
    
    190,131Total minimum lease payments
    
    $
    1,611,763
   7




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
 9. Long-Term Debt
   10. Supplemental Financial Information
 Inventories:
    
    September 30, 2010
    
    
    December 31, 2009Work-in-process component parts
    
    $
    922,160
    
    
    $
    1,061,982Finished goods
    
    
    1,739,666
    
    
    
    1,878,592Total
    
    $
    2,661,826
    
    
    $
    2,940,574
 SP
 Property and Equipment  Net:
    
    September 30, 2010
    
    
    December 31, 2009Total property and equipment  at cost
    
    $
    17,200,815
    
    
    $
    16,029,532Less accumulated depreciation
    
    
    (11,989,874
    )
    
    
    (9,884,977
    )Property and equipment  net
    
    $
    5,210,941
    
    
    $
    6,144,555
 Other Current Liabilities:
    
    September 30, 2010
    
    
    December 31, 2009Accrued clinical trial expenses
    
    $
    634,194
    
    
    $
    939,509All other
    
    
    2,779,999
    
    
    
    1,364,122Total
    
    $
    3,414,193
    
    
    $
    2,303,631
  11. Subsequent Event
   8




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
about us and our industry that involve substantial risks and uncertainties. We intend such
forward-looking statements to be covered by the safe harbor provisions for forward-looking
statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of historical facts, included in this
Quarterly Report on Form 10-Q regarding our strategy, future operations, future financial position,
future net sales, projected expenses, prospects and plans and objectives of management are
forward-looking statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity, performance or achievement to
be materially different from those expressed or implied by the forward-looking statements.
 In some cases, you can identify forward-looking statements by terms such as anticipate,
believe, estimate, expect, intend, may, might, plan, project, will, would,
should, could, can, predict, potential, continue, objective, or the negative of these
terms, and similar expressions intended to identify forward-looking statements. However, not all
forward-looking statements contain these identifying words. These forward-looking statements
reflect our current views about future events and are based on assumptions and subject to risks and
uncertainties. Given these uncertainties, you should not place undue reliance on these
forward-looking statements. Actual events or results could differ materially from those expressed
or implied by these forward-looking statements as a result of various factors.
 These forward-looking statements represent our estimates and assumptions only as of the date
of this Quarterly Report on Form 10-Q . Unless required by U.S. federal securities laws, we do not
intend to update any of these forward-looking statements to reflect circumstances or events that
occur after any statement is made or to conform these statements to actual results. The following
discussion should be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this Quarterly Report on Form 10-Q . Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of various
factors, including those set forth under Item 1A.  Risk Factors in our Annual Report on Form
10-K for the year ended December 31, 2009 and elsewhere in this Quarterly Report on Form 10-Q .
 Business Overview
   1)
    
    the conversion of microbiology to molecular methods to more rapidly identify infectious
diseases,2)
    
    point-of-care pharmacogenetics to ensure that the appropriate therapy is prescribed, and3)
    
    earlier detection of disease through ultra-sensitive protein assays.
 SP SP SP SP
  9




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FDA StatusAssay
    
    Verigene I
    
    Verigene SPInfectious Disease AssaysRespiratory Virus
    
    510(k) cleared
    
    510(k) clearedRespiratory Virus with Sub-Typing
    
    
    
    Filing submitted Q4 2010Blood Infection Panels
    
    
    
    In developmentHuman and Pharmacogenetic AssaysWarfarin Metabolism
    
    510(k) cleared
    
    Filing expected 2011Hyper-Coagulation
    
    510(k) cleared
    
    Filing expected 2011Cystic Fibrosis
    
    510(k) cleared
(launch pending
clearance on
Verigene SP)Plavix® Metabolism (2C19)
    
    
    
    Premarket approval filing
submitted Q3 2010Hemochromatosis (HFE)
    
    Pending
resubmission on the
Verigene SPUltra-Sensitive Protein AssaysCardiac Troponin I
    
    Pending
resubmission on the
Verigene SP
    
    Filing expected 2011Prostate-Specific Antigen (PSA)
    
    Research use only
 Infectious Disease Assays
 SP
  SP SP SP
  10




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C. difficile C. difficile C. difficile C. difficile Enterobacteriaceae
 Human and Pharmacogenetic Assays
  ® SP
  SP
 SP
 de novo HFE HFE de novo HFE SP
  11




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Ultra-Sensitive Protein Assays
  SP
  Financial Operations Overview
    Revenue
  Cost of Sales
   12




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Research and Development Expenses
  Sales, General and Administrative Expenses
  Interest Income
  Interest Expense
  Three month Period Ended September 30, 2010 Compared to the Three month Period Ended September 30,
2009
 Revenues
  Cost of Sales
 SP SP
 Research and Development Expenses
   13




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Sales, General and Administrative Expenses
  Interest Expense
  Interest Income
  Nine month Period Ended September 30, 2010 Compared to the Nine month Period Ended September 30,
2009
 Revenues
  Cost of Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
  Interest Expense
   14




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Interest Income
  Liquidity and Capital Resources
         15




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
    
    the level of research and development investment required to maintain and improve our
technology;
 
    
    the amount and growth rate of our revenues;
 
    
    changes in product development plans needed to address any difficulties in manufacturing
or commercializing the Verigene System and enhancements to our system;
 
    
    the costs of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights;
 
    
    competing technological and market developments;
 
    
    our need or decision to acquire or license complementary technologies or acquire
complementary businesses; and
 
    
    changes in regulatory policies or laws that affect our operations.
  Contractual Obligations and Commitments
  Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   16




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Item 4. Controls and Procedures
      17




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PART II.

OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Securities and Use of Proceeds
 (a)
    
    During the three month period ended September 30, 2010, there were no sales of
unregistered securities.(b)
    
    Not Applicable.(c)
    
    Not Applicable.
 
 
 Item 6. Exhibits, Financial Statement Schedules
 Exhibit Number
    
    Exhibit Description10.1
    
    
    License Agreement dated July 9, 2010 (filed as Exhibit 10.1
to the Companys Current Report on Form 8-K as filed with
the Securities and Exchange Commission on July 15, 2010 and
incorporated herein by reference).10.2
    
    
    Settlement Agreement and Intellectual Property Purchase
Agreement, dated August 18, 2010 (filed as Exhibit 10.1 to
the Companys Current Report on Form 8-K as filed with the
Securities and Exchange Commission on August 24, 2010 and
incorporated herein by reference).31.1
    
    
    Certification of Chief Executive Officer pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2
    
    
    Certification of Chief Financial Officer pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32.1
    
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 *32.2
    
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 *
 
 *
    
    Filed herewith  18




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SIGNATURES
  NANOSPHERE, INC.By:
    /s/ William P. MoffittWilliam P. MoffittPresident and Chief Executive Officer
(principle executive officer)  By:
    /s/ Roger MoodyRoger MoodyChief Financial Officer and Treasurer
(principle financial officer and principle accounting officer)   19