##### 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 March 31, 2009
 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
 Yes o No 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
    
    
    4-9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10-15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    16Item 1A. Risk Factors
    
    
    16Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 6. Exhibits
    
    
    16Exhibit 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)
 March 31,
    
    
    December 31,2009
    
    
    2008CURRENT ASSETS:Cash and cash equivalents
    
    $
    66,362,474
    
    
    $
    75,356,960Accounts receivable
    
    
    365,076
    
    
    
    385,908Inventories
    
    
    1,870,522
    
    
    
    1,727,518Other current assets
    
    
    902,981
    
    
    
    559,528Total current assets
    
    
    69,501,053
    
    
    
    78,029,914PROPERTY AND EQUIPMENT Net
    
    
    6,798,948
    
    
    
    7,294,224INTANGIBLE ASSETS  Net of accumulated amortization
    
    
    1,510,693
    
    
    
    1,443,582OTHER ASSETS
    
    
    120,007
    
    
    
    128,190TOTAL
    
    $
    77,930,701
    
    
    $
    86,895,910CURRENT LIABILITIES:Accounts payable
    
    $
    1,389,756
    
    
    $
    1,813,777Accrued compensation
    
    
    487,446
    
    
    
    829,292Other current liabilities
    
    
    1,935,372
    
    
    
    1,541,385Long-term debt  current portion
    
    
    4,967,486
    
    
    
    4,818,211Total current liabilities
    
    
    8,780,060
    
    
    
    9,002,665LONG-TERM LIABILITIES:Long-term debt  noncurrent portion
    
    
    2,198,470
    
    
    
    3,352,137Total liabilities
    
    
    10,978,530
    
    
    
    12,354,802COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.01 par value; 100,000,000 shares
authorized; 22,228,696 shares issued and
outstanding as of March 31, 2009 and December 31,
2008
    
    
    222,287
    
    
    
    222,287Preferred stock, $0.01 par value; 10,000,000
shares authorized; no shares issued
    
    
    
    
    
    
    Additional paid-in capital
    
    
    274,837,361
    
    
    
    274,232,825Warrants to acquire common stock
    
    
    5,423,771
    
    
    
    5,423,771Accumulated deficit
    
    
    (213,531,248
    )
    
    
    (205,337,775
    )Total stockholders equity
    
    
    66,952,171
    
    
    
    74,541,108TOTAL
    
    $
    77,930,701
    
    
    $
    86,895,910
   1




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Nanosphere, Inc.
 
 Statements of Operations
(Unaudited)
 Three Month Periods Ended March 31,2009
    
    
    2008As Adjusted(Note 1)REVENUE:Grant and contract revenue
    
    $
    
    
    
    $
    272,612Product sales
    
    
    255,225
    
    
    
    303,404Total revenue
    
    
    255,225
    
    
    
    576,016COSTS AND EXPENSES:Cost of product sales
    
    
    310,171
    
    
    
    349,429Research and development
    
    
    4,800,252
    
    
    
    5,923,829Sales, general, and administrative
    
    
    3,126,865
    
    
    
    3,408,898Total costs and expenses
    
    
    8,237,288
    
    
    
    9,682,156Loss from operations
    
    
    (7,982,063
    )
    
    
    (9,106,140
    )OTHER INCOME (EXPENSE):Foreign exchange loss
    
    
    (274
    )
    
    
    (24,410
    )Interest expense
    
    
    (398,922
    )
    
    
    (585,037
    )Interest income
    
    
    187,786
    
    
    
    932,219Total other income (expense)
    
    
    (211,410
    )
    
    
    322,772NET LOSS
    
    $
    (8,193,473
    )
    
    $
    (8,783,368
    )Net loss per common share  basic and diluted
    
    $
    (0.37
    )
    
    $
    (0.40
    )Weighted average number of common shares
outstanding  basic and diluted
    
    
    22,228,696
    
    
    
    22,192,170
   2




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Nanosphere, Inc.
 
 Statements of Cash Flows
(Unaudited)
 Three Month Periods EndedMarch 31,2009
    
    
    2008As Adjusted(Note 1)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (8,193,473
    )
    
    $
    (8,783,368
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    744,155
    
    
    
    606,908Amortization of financing costs and accretion of debt discount
    
    
    153,789
    
    
    
    208,313Loss from disposal of fixed assets
    
    
    
    
    
    
    326,291Share-based compensation
    
    
    604,571
    
    
    
    529,712Changes in operating assets and liabilities:Accounts receivable
    
    
    20,832
    
    
    
    (387,909
    )Inventories
    
    
    (175,201
    )
    
    
    (76,692
    )Other current assets
    
    
    (343,453
    )
    
    
    (129,113
    )Accounts payable
    
    
    (429,982
    )
    
    
    140,373Accrued and other current liabilities
    
    
    23,575
    
    
    
    (920,546
    )Net cash used in operating activities
    
    
    (7,595,187
    )
    
    
    (8,486,031
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (127,832
    )
    
    
    (462,564
    )Investments in intangible assets
    
    
    (100,000
    )
    
    
    (17,768
    )Net cash used in investing activities
    
    
    (227,832
    )
    
    
    (480,332
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of long term debt
    
    
    (1,149,998
    )
    
    
    (351,056
    )Payments on capital lease obligation
    
    
    (21,434
    )
    
    
    (11,846
    )Proceeds from the issuance of common stock, net of offering expenses
    
    
    
    
    
    
    (778,731
    )Proceeds from warrant redemptions
    
    
    
    
    
    
    2,189Other
    
    
    (35
    )
    
    
    Net cash used in financing activities
    
    
    (1,171,467
    )
    
    
    (1,139,444
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (8,994,486
    )
    
    
    (10,105,807
    )CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    75,356,960
    
    
    
    114,312,573CASH AND CASH EQUIVALENTS  End of period
    
    $
    66,362,474
    
    
    $
    104,206,766NONCASH INVESTING AND FINANCING ACTIVITIES:Capital expenditures included in accounts payable
    
    $
    
    
    
    $
    387,422License costs capitalized and included in accounts payable
    
    
    
    
    
    
    18,000License costs capitalized and included in accrued liabilities
    
    
    275,000
    
    
    
    351,000
   3




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Nanosphere, Inc.
 
 Notes to Financial Statements
 As of March 31, 2009 and December 31, 2008, and
 For the Three Month Periods Ended March 31, 2009 and 2008
 (Unaudited)
 1. Description of Business
  Basis of Presentation
  Use of Estimates
 Change in Method of Accounting for Patent Costs
    Three Month Period Ended March 31, 2008Statement of Operations
    
    As Originally Reported
    
    
    As Adjusted
    
    
    Effect of ChangeResearch and development
    
    $
    5,842,195
    
    
    $
    5,923,829
    
    
    $
    81,634Total costs and expenses
    
    $
    9,600,522
    
    
    $
    9,682,156
    
    
    $
    81,634Loss from operations
    
    $
    (9,024,506
    )
    
    $
    (9,106,140
    )
    
    $
    (81,634
    )Net loss
    
    $
    (8,701,734
    )
    
    $
    (8,783,368
    )
    
    $
    (81,634
    )Net loss per common share  basic and diluted
    
    $
    (0.39
    )
    
    $
    (0.40
    )
    
    $
    (0.01
    )
  4




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Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
 Three Month Period Ended March 31, 2008Statement of Cash Flows
    
    As Originally Reported
    
    
    As Adjusted
    
    
    Effect of ChangeCash Flows From Operating Activities:Net loss
    
    $
    (8,701,734
    )
    
    $
    (8,783,368
    )
    
    $
    (81,634
    )Depreciation and amortization
    
    $
    626,871
    
    
    $
    606,908
    
    
    $
    (19,963
    )Accounts payable
    
    $
    135,715
    
    
    $
    140,373
    
    
    $
    4,658Accrued and other current liabilities
    
    $
    (950,546
    )
    
    $
    (920,546
    )
    
    $
    30,000Net cash used in operating activities
    
    $
    (8,419,092
    )
    
    $
    (8,486,031
    )
    
    $
    (66,939
    )Cash Flows From Investing Activities:Investments in intangible assets
    
    $
    (84,707
    )
    
    $
    (17,768
    )
    
    $
    66,939Net cash used in investing activities
    
    $
    (547,271
    )
    
    $
    (480,332
    )
    
    $
    66,939Noncash Investing and Financing Activities:Patent and license costs capitalized and included in accounts payable
    
    $
    22,658
    
    
    $
    18,000
    
    
    $
    (4,658
    )Patent and license costs capitalized and included in accrued liabilities
    
    $
    381,000
    
    
    $
    351,000
    
    
    $
    (30,000
    )
 2. Net Loss Per Common Share
  
 Three month periods ended March 31,2009
    
    
    2008Stock options
    
    
    3,508,438
    
    
    
    3,405,640Common stock warrants
    
    
    1,300,119
    
    
    
    1,300,1194,808,557
    
    
    
    4,705,759
 3. Intangible Assets
  March 31, 2009
    
    
    December 31, 2008Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Net
    
    
    Cost
    
    
    Amortization
    
    
    NetIntellectual property  licenses
    
    $
    2,027,043
    
    
    $
    (516,350
    )
    
    $
    1,510,693
    
    
    $
    1,877,043
    
    
    $
    (433,461
    )
    
    $
    1,443,582
  Years Ending December 312009 (Period from April 1 to December 31)
    
    $
    108,6672010
    
    
    121,5562011
    
    
    121,5562012
    
    
    121,5562013
    
    
    121,556Thereafter
    
    
    476,302
   5




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Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
 4. Related Party Transactions
    
    
    Long-Form Registrations. Stockholders holding at least 20% of the then outstanding
 shares of the Companys common stock that are subject to the registration rights
agreement, which the Company refers to as registrable securities, have the right to
demand that the Company file a registration statement under the Securities Act on Form
S-1 or any similar long-form registration covering their registrable securities.
However, the Company is not obligated to file a long-form registration statement on
more than three occasions upon the request of the Companys stockholders.
 
    
    Short-Form Registrations. Stockholders holding at least 10% of the then outstanding
registrable securities have the right to demand that the Company file a registration
statement on Form S-3 or any similar short-form registration covering their registrable
securities, provided that such short-form registration is then available to the Company
under applicable law. Such stockholders are entitled to request an unlimited number of
short-form registrations, but the Company is not obligated to effect more than 2
short-form registrations during any twelve month period.
 5. Equity Incentive Plan
   6




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Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
  2009Expected dividend yield
    
    
    0
    %Expected volatility
    
    
    62
    %Risk free interest rate
    
    
    2.04
    %Weighted-average expected option life
    
    6.55 yearsEstimated weighted-average fair value
on the date of grant based on the above assumptions
    
    $
    2.72Estimated forfeiture rate for unvested options
    
    
    4.6
    %
    WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value of OptionsOutstanding  January 1, 2009
    
    
    3,362,721
    
    
    $
    5.68Granted
    
    
    170,900
    
    
    $
    4.82Exercised
    
    
    Expired
    
    
    (1,520
    )
    
    $
    10.58Forfeited
    
    
    (23,663
    )
    
    $
    5.61Outstanding  March 31, 2009
    
    
    3,508,438
    
    
    $
    5.64
    
    
    
    7.81
    
    
    $
    1,401,862Exercisable  March 31, 2009
    
    
    852,601
    
    
    $
    6.61
    
    
    
    7.12
    
    
    $
    325,004Vested and Expected to Vest  March 31, 2009
    
    
    3,386,270
    
    
    $
    5.65
    
    
    
    7.80
    
    
    $
    1,352,326
    7




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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 $13.13 per share.
    
    
    1,135,194
    
    
    April 2011Common  exercise price of $8.75 per share
    
    
    164,925
    
    
    April 2013
  8. Leases
   OperatingYears Ending December 31
    
    Lease2009 (Period from April 1 to December 31)
    
    $
    391,7402010
    
    
    220,898Total minimum lease payments
    
    $
    612,638
 9. Long Term Debt
    2009 (April 1 to December 31)
    
    $
    3,668,2142010
    
    
    3,917,293$
    7,585,507
  8




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Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
 10. Inventory
  March 31,
    
    
    December 31,2009
    
    
    2008Work-in-process component parts
    
    $
    1,089,854
    
    
    $
    1,068,840Finished goods
    
    
    780,668
    
    
    
    658,678Total
    
    $
    1,870,522
    
    
    $
    1,727,518
 11. Property and Equipment
  March 31,
    
    
    December 31,Property and equipment  at cost:
    
    2009
    
    
    2008Total property and equipment  at cost
    
    $
    14,682,361
    
    
    $
    14,516,371Less accumulated depreciation
    
    
    (7,883,413
    )
    
    
    (7,222,147
    )Net property and equipment
    
    $
    6,798,948
    
    
    $
    7,294,224
 12. New Accounting Standards
  ,
 13. Subsequent Events
   9




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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 about us and our
industry that involve substantial risks and uncertainties. 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 Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2008 and elsewhere in this Quarterly Report on Form 10-Q .
 Business Overview
     10




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de novo
     Financial Operations Overview
 Change in Method of Accounting for Patent Costs
   11




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Revenue
  Cost of Product Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
  Interest Income
  Interest Expense
   12




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Three Month Period Ended March 31, 2009 Compared to the Three Month Period Ended March 31, 2008
 Revenues
  Cost of Product Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
  Interest Expense
  Interest Income
  Liquidity and Capital Resources
   13




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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.
   14




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Contractual Obligations and Commitments
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
      15




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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
  
 Item 6. Exhibits, Financial Statement Schedules
 Exhibit Number
    
    Exhibit Description31.1
    
    
    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  16




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SIGNATURES
  NANOSPHERE, INC.By:
    /s/ William P. MoffittWilliam P. MoffittPresident and Chief Executive Officer  By:
    /s/ Roger MoodyRoger MoodyChief Financial Officer and Treasurer




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EXHIBIT INDEX
 Exhibit Number
    
    Exhibit Description31.1
    
    
    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