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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, 2011
 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
    
    
    9-15Item 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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PART I.
FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 Nanosphere, Inc.
 
 Balance Sheets
(dollars in thousands)
(Unaudited)
 March 31,
    
    
    December 31,2011
    
    
    2010CURRENT ASSETS:Cash and cash equivalents
    
    $
    30,001
    
    
    $
    39,628Accounts receivable
    
    
    322
    
    
    
    198Inventories
    
    
    2,570
    
    
    
    2,428Other current assets
    
    
    893
    
    
    
    673Total current assets
    
    
    33,786
    
    
    
    42,927PROPERTY AND EQUIPMENT Net
    
    
    4,850
    
    
    
    5,142INTANGIBLE ASSETS  Net of accumulated amortization
    
    
    3,202
    
    
    
    3,231OTHER ASSETS
    
    
    75
    
    
    
    75TOTAL
    
    $
    41,913
    
    
    $
    51,375CURRENT LIABILITIES:Accounts payable
    
    $
    1,787
    
    
    $
    3,352Accrued compensation
    
    
    677
    
    
    
    794Other current liabilities
    
    
    1,344
    
    
    
    1,355Total current liabilities
    
    
    3,808
    
    
    
    5,501LONG-TERM LIABILITIES:Other noncurrent liabilities
    
    
    1,350
    
    
    
    1,350Total liabilities
    
    
    5,158
    
    
    
    6,851COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.01 par value; 100,000,000 shares authorized; 28,437,506 and
28,408,506 shares issued and outstanding as of March 31, 2011 and December 31,
2010, respectively
    
    
    284
    
    
    
    284Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued
    
    
    
    
    
    
    Additional paid-in capital
    
    
    319,834
    
    
    
    318,714Warrants to acquire common stock
    
    
    5,424
    
    
    
    5,424Accumulated deficit
    
    
    (288,787
    )
    
    
    (279,898
    )Total stockholders equity
    
    
    36,755
    
    
    
    44,524TOTAL
    
    $
    41,913
    
    
    $
    51,375
   1




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Nanosphere, Inc.
 
 Statements of Operations
(dollars and shares in thousands except per share data)
(Unaudited)
 Three Month Periods Ended March 31,2011
    
    
    2010REVENUE:Grant and contract revenue
    
    $
    54
    
    
    $
    380Product sales
    
    
    586
    
    
    
    446Total revenue
    
    
    640
    
    
    
    826COSTS AND EXPENSES:Cost of sales
    
    
    491
    
    
    
    725Research and development
    
    
    4,695
    
    
    
    4,413Sales, general, and administrative
    
    
    4,350
    
    
    
    4,104Total costs and expenses
    
    
    9,536
    
    
    
    9,242Loss from operations
    
    
    (8,896
    )
    
    
    (8,416
    )OTHER INCOME (EXPENSE):Foreign exchange gain (loss)
    
    
    (4
    )
    
    
    10Interest expense
    
    
    
    
    
    
    (164
    )Interest income
    
    
    11
    
    
    
    19Total other income (expense)
    
    
    7
    
    
    
    (135
    )NET LOSS
    
    $
    (8,889
    )
    
    $
    (8,551
    )Net loss per common share  basic and diluted
    
    $
    (0.32
    )
    
    $
    (0.31
    )Weighted average number of common shares
outstanding  basic and diluted
    
    
    27,759
    
    
    
    27,753
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Nanosphere, Inc.
 
 Statements of Cash Flows
 (dollars in thousands)
(Unaudited)
 Three Month Periods EndedMarch 31,2011
    
    
    2010CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (8,889
    )
    
    $
    (8,551
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    653
    
    
    
    951Amortization of financing costs and accretion of debt discount
    
    
    
    
    
    
    70Share-based compensation
    
    
    1,120
    
    
    
    1,545Changes in operating assets and liabilities:Accounts receivable
    
    
    (124
    )
    
    
    260Inventories
    
    
    (380
    )
    
    
    (1,091
    )Other current assets
    
    
    (220
    )
    
    
    (424
    )Accounts payable
    
    
    (1,554
    )
    
    
    (61
    )Accrued and other current liabilities
    
    
    (128
    )
    
    
    (441
    )Net cash used in operating activities
    
    
    (9,522
    )
    
    
    (7,742
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (105
    )
    
    
    (267
    )Investments in intangible assets
    
    
    
    
    
    
    (90
    )Net cash used in investing activities
    
    
    (105
    )
    
    
    (357
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of long term debt
    
    
    
    
    
    
    (1,299
    )Proceeds from stock option exercises
    
    
    
    
    
    
    14Net cash used in financing activities
    
    
    
    
    
    
    (1,285
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (9,627
    )
    
    
    (9,384
    )CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    39,628
    
    
    
    76,689CASH AND CASH EQUIVALENTS  End of period
    
    $
    30,001
    
    
    $
    67,305NONCASH INVESTING AND FINANCING ACTIVITIES:License costs capitalized and included in other current liabilities
    
    $
    350
    
    
    $
    168License costs capitalized and included in other noncurrent liabilities
    
    
    1,350
    
    
    
    Reclassification of inventory to property and equipment
    
    
    238
    
    
    
    651
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Nanosphere, Inc.
 
 Notes to Financial Statements
As of March 31, 2011 and
For the Three Month Periods Ended March 31, 2011 and 2010
(Unaudited)
 1. Description of Business
  Basis of Presentation
  Use of Estimates
 2. Liquidity and Capital Resources
  3. Net Loss Per Common Share
   
 Three Month Periods Ended March 31,2011
    
    
    2010Restricted stock
    
    
    679,000
    
    
    
    672,500Stock options
    
    
    4,187,355
    
    
    
    4,264,130Common stock warrants
    
    
    1,300,119
    
    
    
    1,300,1196,166,474
    
    
    
    6,236,749
  4




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Nanosphere, Inc.   Notes to Financial Statements  (Continued)
(Unaudited)
 4. Intangible Assets
  March 31, 2011
    
    
    December 31, 2010Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Net
    
    
    Cost
    
    
    Amortization
    
    
    NetIntellectual property  licenses
    
    $
    4,036
    
    
    $
    (1,258
    )
    
    $
    2,778
    
    
    $
    4,036
    
    
    $
    (1,241
    )
    
    $
    2,795Patents
    
    
    455
    
    
    
    (31
    )
    
    $
    424
    
    
    
    455
    
    
    
    (19
    )
    
    $
    436$
    4,491
    
    
    $
    (1,289
    )
    
    $
    3,202
    
    
    $
    4,491
    
    
    $
    (1,260
    )
    
    $
    3,231
  Years Ending December 312011 (Period from April 1 to December 31)
    
    $
    1312012
    
    
    1762013
    
    
    1762014
    
    
    1762015
    
    
    171Thereafter
    
    
    522
  5. Related Party Transactions
  6. Equity Incentive Plan
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Nanosphere, Inc.   Notes to Financial Statements  (Continued)
(Unaudited)
  Expected dividend yield
    
    
    0
    %Expected volatility
    
    
    94
    %Risk free interest rate
    
    
    2.50
    %Weighted-average expected option life
    
    6.1 yearsEstimated weighted-average fair value on the date of grant based on the above assumptions
    
    $
    2.76Estimated forfeiture rate for unvested options
    
    
    2.8
    %
    WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value of OptionsOutstanding  January 1, 2011
    
    
    4,208,830
    
    
    $
    5.60Granted
    
    
    72,000
    
    
    $
    4.50Expired
    
    
    (8,480
    )
    
    $
    11.28Forfeited
    
    
    (84,995
    )
    
    $
    5.10Outstanding  March 31, 2011
    
    
    4,187,355
    
    
    $
    5.58
    
    
    
    6.80
    
    
    $
    280Exercisable  March 31, 2011
    
    
    2,163,030
    
    
    $
    5.69
    
    
    
    6.21
    
    
    $
    105Vested and Expected to Vest  March 31, 2011
    
    
    4,094,236
    
    
    $
    5.58
    
    
    
    6.78
    
    
    $
    272
  RV+ SP
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Nanosphere, Inc.   Notes to Financial Statements  (Continued)
(Unaudited)
 7. License Agreements
  8. 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
  9. Commitments and Contingencies
   OperatingYears Ending December 31
    
    Lease2011 (Period from April 1 to December 31)
    
    $
    3222012
    
    
    4392013
    
    
    4512014
    
    
    190Total minimum lease payments
    
    $
    1,402
 10. Long-Term Debt
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Nanosphere, Inc.   Notes to Financial Statements  (Continued)
(Unaudited)
 11. Supplemental Financial Information
 Inventories:
    
    March 31, 2011
    
    
    December 31, 2010(in thousands)Raw materials
    
    $
    947
    
    
    $
    760Work-in-process
    
    
    
    
    
    
    69Finished goods
    
    
    1,623
    
    
    
    1,599Total
    
    $
    2,570
    
    
    $
    2,428
 Property and Equipment   Net:
    
    March 31, 2011
    
    
    December 31, 2010(in thousands)Total property and equipment  at cost
    
    $
    18,064
    
    
    $
    17,759Less accumulated depreciation
    
    
    (13,214
    )
    
    
    (12,617
    )Property and equipment  net
    
    $
    4,850
    
    
    $
    5,142
 Other Current Liabilities:
    
    March 31, 2011
    
    
    December 31, 2010(in thousands)Accrued clinical trial expenses
    
    $
    447
    
    
    $
    603All other
    
    
    897
    
    
    
    752Total
    
    $
    1,344
    
    
    $
    1,355
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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, 2010 and elsewhere in this Quarterly Report on Form 10-Q .
 Business Overview
    1)
    
    the conversion of microbiology to molecular methods to more rapidly pinpoint infectious
diseases;2)
    
    point-of-care pharmacogenetics to ensure that appropriate therapies are prescribed; and3)
    
    earlier detection of life threatening disease through ultra-sensitive protein assays.
 SP SP, SP
  9




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Our Applications
  Assay
    
    FDA Status(1)
    
    CE IVD Mark Status(2)Infectious Disease AssaysRespiratory Virus
    
    510(k) clearedRespiratory Virus with Sub-Typing
    
    510(k) cleared
    
    CE IVD MarkedBlood Infection Panels
    
    In development
    
    In developmentHuman and Pharmacogenetic AssaysWarfarin Metabolism
    
    510(k) cleared(3)
    
    CE IVD MarkedHyper-Coagulation
    
    510(k) cleared(3)
    
    PendingPlavix® Metabolism (2C19)
    
    Premarket approval filing
submitted third quarter
2010
    
    CE IVD MarkedUltra-Sensitive Protein AssaysCardiac Troponin I
    
    In development
    
    In developmentProstate-Specific Antigen (PSA)
    
    Research use only
 (1)
    
    For further description of our FDA regulatory requirements, please refer to the section
Regulation by the United States Food and Drug Administrationbeginning on page 9 of our
Annual Report on Form 10-K for the year ended December 31, 2010.(2)
    
    For further description of our CE IVD Mark regulatory requirements, please refer to the
section Foreign Government Regulationbeginning on page 12 of our Annual Report on Form
10-K for the year ended December 31, 2010.

(3) Currently cleared only for use with the Original Processor. Infectious Disease Assays
 SP
  SP SP SP
  10




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C. difficile C.
difficile Enterobacteriaceae
 Human and Pharmacogenetic Assays
  ® SP
  SP
 Ultra-Sensitive Protein Assays
   11




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SP
  Financial Operations Overview
  Revenue
  Cost of Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
   12




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Interest Income
  Interest Expense
  Three month Period Ended March 31, 2011 Compared to the Three month Period Ended March 31, 2010
 Revenues
  Cost of Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
  Interest Expense
   13




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Liquidity and Capital Resources
         
    
    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;
  14




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
    
    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
  
 Item 4.
    
    Controls and Procedures
 (a)
    
    Evaluation of Disclosure Controls and Procedures
  (b)
    
    Changes in Internal Control over Financial Reporting
   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