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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, 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
 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
    
    
    4-8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9-14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 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
 (Unaudited)
 March 31,
    
    
    December 31,2010
    
    
    2009CURRENT ASSETS:Cash and cash equivalents
    
    $
    67,304,962
    
    
    $
    76,689,279Accounts receivable
    
    
    474,983
    
    
    
    735,047Inventories
    
    
    3,380,736
    
    
    
    2,940,574Other current assets
    
    
    790,163
    
    
    
    374,657Total current assets
    
    
    71,950,844
    
    
    
    80,739,557PROPERTY AND EQUIPMENT Net
    
    
    6,082,410
    
    
    
    6,144,555INTANGIBLE ASSETS  Net of accumulated amortization
    
    
    1,533,056
    
    
    
    1,709,842OTHER ASSETS
    
    
    75,000
    
    
    
    75,000TOTAL
    
    $
    79,641,310
    
    
    $
    88,668,954CURRENT LIABILITIES:Accounts payable
    
    $
    2,242,621
    
    
    $
    2,509,405Accrued compensation
    
    
    632,112
    
    
    
    955,130Other current liabilities
    
    
    2,095,197
    
    
    
    2,303,631Long-term debt  current portion
    
    
    2,581,658
    
    
    
    3,818,790Total current liabilities
    
    
    7,551,588
    
    
    
    9,586,956COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.01 par value; 100,000,000 shares
authorized; 28,425,871 and 28,422,461 shares issued
and outstanding as of March 31, 2010 and December
31, 2009, respectively
    
    
    284,259
    
    
    
    284,225Preferred stock, $0.01 par value; 10,000,000 shares
authorized; no shares issued
    
    
    
    
    
    
    Additional paid-in capital
    
    
    314,219,149
    
    
    
    312,660,430Warrants to acquire common stock
    
    
    5,423,771
    
    
    
    5,423,771Accumulated deficit
    
    
    (247,837,457
    )
    
    
    (239,286,428
    )Total stockholders equity
    
    
    72,089,722
    
    
    
    79,081,998TOTAL
    
    $
    79,641,310
    
    
    $
    88,668,954
   1




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Nanosphere, Inc.
 
 Statements of Operations
 (Unaudited)
 Three Month Periods Ended March 31,2010
    
    
    2009REVENUE:Grant and contract revenue
    
    $
    380,285
    
    
    $
    Product sales
    
    
    445,542
    
    
    
    255,225Total revenue
    
    
    825,827
    
    
    
    255,225COSTS AND EXPENSES:Cost of sales
    
    
    725,198
    
    
    
    310,171Research and development
    
    
    4,412,949
    
    
    
    4,800,252Sales, general, and administrative
    
    
    4,104,004
    
    
    
    3,126,865Total costs and expenses
    
    
    9,242,151
    
    
    
    8,237,288Loss from operations
    
    
    (8,416,324
    )
    
    
    (7,982,063
    )OTHER INCOME (EXPENSE):Foreign exchange gain (loss)
    
    
    10,628
    
    
    
    (274
    )Interest expense
    
    
    (163,982
    )
    
    
    (398,922
    )Interest income
    
    
    18,649
    
    
    
    187,786Total other expense
    
    
    (134,705
    )
    
    
    (211,410
    )NET LOSS
    
    $
    (8,551,029
    )
    
    $
    (8,193,473
    )Net loss per common share  basic and diluted
    
    $
    (0.31
    )
    
    $
    (0.37
    )Weighted average number of common shares
outstanding  basic and diluted
    
    
    27,752,979
    
    
    
    22,228,696
   2




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Nanosphere, Inc.
 
 Statements of Cash Flows
 (Unaudited)
 Three Month Periods Ended March 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (8,551,029
    )
    
    $
    (8,193,473
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    951,099
    
    
    
    744,155Amortization of financing costs and accretion of debt discount
    
    
    70,324
    
    
    
    153,789Share-based compensation
    
    
    1,544,469
    
    
    
    604,571Changes in operating assets and liabilities:Accounts receivable
    
    
    260,064
    
    
    
    20,832Inventories
    
    
    (1,090,688
    )
    
    
    (175,201
    )Other current assets
    
    
    (423,689
    )
    
    
    (343,453
    )Accounts payable
    
    
    (61,107
    )
    
    
    (429,982
    )Accrued and other current liabilities
    
    
    (441,602
    )
    
    
    23,575Net cash used in operating activities
    
    
    (7,742,159
    )
    
    
    (7,595,187
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (267,319
    )
    
    
    (127,832
    )Investments in intangible assets
    
    
    (89,850
    )
    
    
    (100,000
    )Net cash used in investing activities
    
    
    (357,169
    )
    
    
    (227,832
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of long term debt
    
    
    (1,299,273
    )
    
    
    (1,149,998
    )Payments on capital lease obligation
    
    
    
    
    
    
    (21,434
    )Proceeds from stock option exercises
    
    
    14,284
    
    
    
    Other
    
    
    
    
    
    
    (35
    )Net cash used in financing activities
    
    
    (1,284,989
    )
    
    
    (1,171,467
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (9,384,317
    )
    
    
    (8,994,486
    )CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    76,689,279
    
    
    
    75,356,960CASH AND CASH EQUIVALENTS  End of period
    
    $
    67,304,962
    
    
    $
    66,362,474NONCASH INVESTING AND FINANCING ACTIVITIES:License costs capitalized and included in accrued liabilities
    
    $
    168,163
    
    
    $
    275,000Reclassification of inventory to property and equipment
    
    
    650,526
    
    
    
    
   3




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Nanosphere, Inc.
 
 Notes to Financial Statements
 As of March 31, 2010 and
 For the Three Month Periods Ended March 31, 2010 and 2009
 (Unaudited)
 1. Description of Business
  Basis of Presentation
  Use of Estimates
 2. Net Loss Per Common Share
   
 Three Month Periods Ended March 31,2010
    
    
    2009Restricted stock
    
    
    672,500
    
    
    
    Stock options
    
    
    4,264,130
    
    
    
    3,508,438Common stock warrants
    
    
    1,300,119
    
    
    
    1,300,1196,236,749
    
    
    
    4,808,557
  4




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Nanosphere, Inc. 
Notes to Financial Statements  (Continued)
(Unaudited)
 3. Intangible Assets
  March 31, 2010
    
    
    December 31, 2009Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Net
    
    
    Cost
    
    
    Amortization
    
    
    NetIntellectual property  licenses
    
    $
    2,438,218
    
    
    $
    (905,162
    )
    
    $
    1,533,056
    
    
    $
    2,438,218
    
    
    $
    (728,376
    )
    
    $
    1,709,842
  Years Ending December 312010 (Period from April 1 to December 31)
    
    $
    295,1362011
    
    
    165,2262012
    
    
    154,3172013
    
    
    150,6812014
    
    
    146,135Thereafter
    
    
    369,561
  4. Related Party Transactions
  5. Equity Incentive Plan
   Expected dividend yield
    
    
    0
    %Expected volatility
    
    
    102
    %Risk free interest rate
    
    
    2.78
    %Weighted-average expected option life
    
    6.1 yearsEstimated weighted-average fair value
on the date of grant based on the above assumptions
    
    $
    3.49Estimated forfeiture rate for unvested options
    
    
    10.5
    %
  5




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Nanosphere, Inc. 
Notes to Financial Statements  (Continued)
(Unaudited)
    WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value of OptionsOutstanding  January 1, 2010
    
    
    4,338,695
    
    
    $
    5.75Granted
    
    
    33,000
    
    
    $
    4.50Exercised
    
    
    (3,410
    )
    
    $
    4.19Expired
    
    
    (74,130
    )
    
    $
    10.71Forfeited
    
    
    (30,025
    )
    
    $
    5.38Outstanding  March 31, 2010
    
    
    4,264,130
    
    
    $
    5.66
    
    
    
    7.68
    
    
    $
    780,300Exercisable  March 31, 2010
    
    
    1,518,566
    
    
    $
    5.76
    
    
    
    6.67
    
    
    $
    386,666Vested and Expected to Vest  March 31, 2010
    
    
    4,137,834
    
    
    $
    5.66
    
    
    
    7.67
    
    
    $
    762,193
    6. License Agreements
   6




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Nanosphere, Inc. 
Notes to Financial Statements  (Continued)
(Unaudited)
 7. Stockholders Equity
  Class of Stock for
    
    Number of
    
    
    Expirationwhich the Warrant is Exercisable
    
    Warrants
    
    
    DateCommon  exercise price of $15.32 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 April 1 to December 31)
    
    $
    333,9272011
    
    
    426,6432012
    
    
    438,9212013
    
    
    451,1982014
    
    
    190,131Total minimum lease payments
    
    $
    1,840,820
  9. Long-Term Debt
     7




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Nanosphere, Inc. 
Notes to Financial Statements  (Continued)
(Unaudited)
 10. Supplemental Financial Information
 Inventories:
    
    March 31, 2010
    
    
    December 31, 2009Work-in-process component parts
    
    $
    1,611,191
    
    
    $
    1,061,982Finished goods
    
    
    1,769,545
    
    
    
    1,878,592Total
    
    $
    3,380,736
    
    
    $
    2,940,574
 Property and Equipment  Net:
    
    March 31, 2010
    
    
    December 31, 2009Total property and equipment  at cost
    
    $
    16,658,033
    
    
    $
    16,029,532Less accumulated depreciation
    
    
    (10,575,623
    )
    
    
    (9,884,977
    )Property and equipment  net
    
    $
    6,082,410
    
    
    $
    6,144,555
 Other Current Liabilities:
    
    March 31, 2010
    
    
    December 31, 2009Accrued clinical trial expenses
    
    $
    879,893
    
    
    $
    939,509All other
    
    
    1,215,304
    
    
    
    1,364,122Total
    
    $
    2,095,197
    
    
    $
    2,303,631
  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
    ®
  9




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SP SP SP SP
  SP SP SP
 de novo HFE HFE de novo HFE SP SP
  ®
  10




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Financial Operations Overview
 Revenue
  Cost of Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
   11




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Interest Income
  Interest Expense
  Three month Period Ended March 31, 2010 Compared to the Three month Period Ended March 31, 2009
 Revenues
  Cost of Sales
  Research and Development Expenses
 SP SP
 Sales, General and Administrative Expenses
  Interest Expense
  Interest Income
   12




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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;
  13




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
    
    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
  Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   14




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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