##### 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, 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
 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
    
    
    4-9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10-16Item 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 6. Exhibits
    
    
    19Exhibit 10.1Exhibit 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 31,2009
    
    
    2008CURRENT ASSETS:Cash and cash equivalents
    
    $
    50,296,154
    
    
    $
    75,356,960Accounts receivable
    
    
    201,764
    
    
    
    385,908Inventories
    
    
    1,544,165
    
    
    
    1,727,518Other current assets
    
    
    1,515,200
    
    
    
    559,528Total current assets
    
    
    53,557,283
    
    
    
    78,029,914PROPERTY AND EQUIPMENT Net
    
    
    6,429,522
    
    
    
    7,294,224INTANGIBLE ASSETS  Net of accumulated amortization
    
    
    1,460,913
    
    
    
    1,443,582OTHER ASSETS
    
    
    103,641
    
    
    
    128,190TOTAL
    
    $
    61,551,359
    
    
    $
    86,895,910CURRENT LIABILITIES:Accounts payable
    
    $
    2,083,355
    
    
    $
    1,813,777Accrued compensation
    
    
    943,730
    
    
    
    829,292Other current liabilities
    
    
    1,902,134
    
    
    
    1,541,385Long-term debt  current portion
    
    
    4,993,122
    
    
    
    4,818,211Total current liabilities
    
    
    9,922,341
    
    
    
    9,002,665LONG-TERM LIABILITIES:Long-term debt  noncurrent portion
    
    
    
    
    
    
    3,352,137Total liabilities
    
    
    9,922,341
    
    
    
    12,354,802COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.01 par value; 100,000,000 shares
authorized; 22,238,921 and 22,228,696 shares
issued and outstanding as of September 30, 2009
and December 31, 2008, respectively
    
    
    222,389
    
    
    
    222,287Preferred stock, $0.01 par value; 10,000,000
shares authorized; no shares issued
    
    
    
    
    
    
    Additional paid-in capital
    
    
    276,140,610
    
    
    
    274,232,825Warrants to acquire common stock
    
    
    5,423,771
    
    
    
    5,423,771Accumulated deficit
    
    
    (230,157,752
    )
    
    
    (205,337,775
    )Total stockholders equity
    
    
    51,629,018
    
    
    
    74,541,108TOTAL
    
    $
    61,551,359
    
    
    $
    86,895,910
   1




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Nanosphere, Inc.
 
 Statements of Operations


(Unaudited)
 Three Month Periods Ended
    
    
    Nine Month Periods EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008REVENUE:Grant and contract revenue
    
    $
    422,300
    
    
    $
    73,459
    
    
    $
    581,797
    
    
    $
    346,071Product sales
    
    
    306,717
    
    
    
    209,772
    
    
    
    804,682
    
    
    
    707,891Total revenue
    
    
    729,017
    
    
    
    283,231
    
    
    
    1,386,479
    
    
    
    1,053,962COSTS AND EXPENSES:Cost of sales
    
    
    587,901
    
    
    
    246,128
    
    
    
    1,298,384
    
    
    
    821,733Research and development
    
    
    4,618,001
    
    
    
    5,683,346
    
    
    
    13,858,186
    
    
    
    17,631,003Sales, general, and administrative
    
    
    3,519,404
    
    
    
    3,376,807
    
    
    
    10,339,580
    
    
    
    10,563,212Total costs and expenses
    
    
    8,725,306
    
    
    
    9,306,281
    
    
    
    25,496,150
    
    
    
    29,015,948Loss from operations
    
    
    (7,996,289
    )
    
    
    (9,023,050
    )
    
    
    (24,109,671
    )
    
    
    (27,961,986
    )OTHER INCOME (EXPENSE):Foreign exchange gain (loss)
    
    
    (338
    )
    
    
    1,347
    
    
    
    (2,518
    )
    
    
    (23,298
    )Interest expense
    
    
    (287,185
    )
    
    
    (499,836
    )
    
    
    (1,030,263
    )
    
    
    (1,630,464
    )Interest income
    
    
    41,451
    
    
    
    495,067
    
    
    
    322,475
    
    
    
    1,973,984Total other income (expense)
    
    
    (246,072
    )
    
    
    (3,422
    )
    
    
    (710,306
    )
    
    
    320,222NET LOSS
    
    $
    (8,242,361
    )
    
    $
    (9,026,472
    )
    
    $
    (24,819,977
    )
    
    $
    (27,641,764
    )Net loss per common share  basic
and diluted
    
    $
    (0.37
    )
    
    $
    (0.41
    )
    
    $
    (1.12
    )
    
    $
    (1.24
    )Weighted average number of common
shares outstanding  basic and
diluted
    
    
    22,232,621
    
    
    
    22,228,539
    
    
    
    22,230,070
    
    
    
    22,207,843
   2




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Nanosphere, Inc.
 
 Statements of Cash Flows

(Unaudited)
 Nine Month Periods EndedSeptember 30,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (24,819,977
    )
    
    $
    (27,641,764
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,220,847
    
    
    
    2,142,214Amortization of financing costs and accretion of debt discount
    
    
    405,305
    
    
    
    592,040Loss from write off-of intangible assets
    
    
    
    
    
    
    245,134Loss from disposal of fixed assets
    
    
    2,758
    
    
    
    326,291Share-based compensation
    
    
    1,861,910
    
    
    
    1,649,151Changes in operating assets and liabilities:Accounts receivable
    
    
    184,144
    
    
    
    (375,886
    )Inventories
    
    
    42,199
    
    
    
    (269,612
    )Other current assets
    
    
    (955,672
    )
    
    
    306,643Accounts payable
    
    
    198,968
    
    
    
    (484,303
    )Accrued and other current liabilities
    
    
    646,621
    
    
    
    (629,438
    )Net cash used in operating activities
    
    
    (20,212,897
    )
    
    
    (24,139,530
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (974,470
    )
    
    
    (2,904,855
    )Investments in intangible assets
    
    
    (340,000
    )
    
    
    (400,732
    )Net cash used in investing activities
    
    
    (1,314,470
    )
    
    
    (3,305,587
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of long term debt
    
    
    (3,557,982
    )
    
    
    (2,482,383
    )Payments on capital lease obligation
    
    
    (21,434
    )
    
    
    (30,545
    )Proceeds from the issuance of common stock, net of offering expenses
    
    
    
    
    
    
    (778,731
    )Proceeds from warrant redemptions
    
    
    
    
    
    
    2,189Proceeds from stock option exercises
    
    
    46,012
    
    
    
    164,210Other
    
    
    (35
    )
    
    
    Net cash used in financing activities
    
    
    (3,533,439
    )
    
    
    (3,125,260
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (25,060,806
    )
    
    
    (30,570,377
    )CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    75,356,960
    
    
    
    114,312,573CASH AND CASH EQUIVALENTS  End of period
    
    $
    50,296,154
    
    
    $
    83,742,196NONCASH INVESTING AND FINANCING ACTIVITIES:Capital expenditures included in accounts payable
    
    $
    99,299
    
    
    $
    117,534License costs capitalized and included in accrued liabilities
    
    
    75,000
    
    
    
    225,000
   3




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Nanosphere, Inc.
 
 Notes to Financial Statements
As of September 30, 2009 and December 31, 2008, and
For the Three and Nine Month Periods Ended September 30, 2009 and 2008
(Unaudited)
 1. Description of Business
  Basis of Presentation
  Use of Estimates
  2. Net Loss Per Common Share
  
 Three and Nine Months EndedSeptember 302009
    
    
    2008Stock options
    
    
    3,588,405
    
    
    
    3,368,062Common stock warrants
    
    
    1,300,119
    
    
    
    1,300,1194,888,524
    
    
    
    4,668,181
 3. Intangible Assets
  September 30, 2009
    
    
    December 31, 2008Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Net
    
    
    Cost
    
    
    Amortization
    
    
    NetIntellectual property  licenses
    
    $
    2,067,043
    
    
    $
    (606,130
    )
    
    $
    1,460,913
    
    
    $
    1,877,043
    
    
    $
    (433,461
    )
    
    $
    1,443,582
  4




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Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
  Years Ending December 312009 (Period from October 1 to December 31)
    
    $
    39,7632010
    
    
    159,0532011
    
    
    150,7192012
    
    
    139,8102013
    
    
    136,174Thereafter
    
    
    583,394
  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.
  5




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Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
 5. Equity Incentive Plan
   2009Expected dividend yield
    
    
    0
    %Expected volatility
    
    
    62
    %Risk free interest rate
    
    
    2.34
    %Weighted-average expected option life
    
    6.35 yearsEstimated
weighted-average fair value on the date of grant based on the above assumptions
    
    $
    3.05Estimated forfeiture rate for unvested options
    
    
    2.2
    %
    WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value of OptionsOutstanding  January 1, 2009
    
    
    3,362,721
    
    
    $
    5.68Granted
    
    
    274,899
    
    
    $
    5.35Exercised
    
    
    (10,225
    )
    
    $
    4.50Expired
    
    
    (3,387
    )
    
    $
    7.65Forfeited
    
    
    (35,603
    )
    
    $
    5.97Outstanding  September 30, 2009
    
    
    3,588,405
    
    
    $
    5.66
    
    
    
    7.38
    
    
    $
    8,011,920Exercisable  September 30, 2009
    
    
    1,285,340
    
    
    $
    5.96
    
    
    
    6.84
    
    
    $
    2,862,112Vested and Expected to Vest  September 30, 2009
    
    
    3,482,464
    
    
    $
    5.66
    
    
    
    7.37
    
    
    $
    7,775,029
  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 $15.32 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 October 1 to December 31)
    
    $
    130,5802010
    
    
    465,5952011
    
    
    426,6432012
    
    
    438,9212013
    
    
    451,198Thereafter
    
    
    190,131Total minimum lease payments
    
    $
    2,103,068
 9. Long-Term Debt
   7




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Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
   2009 (October 1 to December 31)
    
    $
    1,260,2292010
    
    
    3,917,293$
    5,177,522
 10. Supplemental Financial Information
 Inventories:
    
    September 30, 2009
    
    
    December 31, 2008Work-in-process component parts
    
    $
    847,675
    
    
    $
    1,068,840Finished goods
    
    
    696,490
    
    
    
    658,678Total
    
    $
    1,544,165
    
    
    $
    1,727,518
 Property and Equipment  Net:
    
    September 30, 2009
    
    
    December 31, 2008Total property and equipment  at cost
    
    $
    15,687,006
    
    
    $
    14,516,371Less accumulated depreciation
    
    
    (9,257,484
    )
    
    
    (7,222,147
    )Property and equipment  net
    
    $
    6,429.522
    
    
    $
    7,294,224
 Other Current Liabilities:
    
    September 30, 2009
    
    
    December 31, 2008Accrued clinical trial expenses
    
    $
    921,063
    
    
    $
    266,135All other
    
    
    981,071
    
    
    
    1,275,250Total
    
    $
    1,902,134
    
    
    $
    1,541,385
 11. New Accounting Standards
    8




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Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
(Unaudited)
     12. 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, 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 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
      11




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Financial Operations Overview
 Revenue
  Cost of Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
  Interest Income
  Interest Expense
  Three month Period Ended September 30, 2009 Compared to the Three month Period Ended September 30,
2008
 Revenues
   12




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Cost of Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
  Interest Expense
  Interest Income
  Nine month Period Ended September 30, 2009 Compared to the Nine month Period Ended September 30,
2008
 Revenues
   13




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Cost of Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
  Interest Expense
  Interest Income
  Liquidity and Capital Resources
    14




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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.
  15




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Contractual Obligations and Commitments
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  
 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
  Our 2007 Long-Term Incentive Plan includes an automatic share replenishment, or evergreen,
provision that, unless our board of directors takes action to the contrary, will automatically
increase the number of shares of our common stock reserved for issuance under this plan each year.
Issuances of awards under this evergreen provision would cause further dilution to existing
stockholders.
     
 Item 2.
    
    Unregistered Sales of Securities and Use of Proceeds
   18




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Item 6.
    
    Exhibits, Financial Statement Schedules
 Exhibit Number
    
    Exhibit Description10.1
    
    
    Second Amended and Restated Registration Rights Agreement *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  19




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SIGNATURES
  NANOSPHERE, INC.By:
    /s/ William P. MoffittWilliam P. MoffittPresident and Chief Executive OfficerDate: November 5, 2009By:
    /s/ Roger MoodyRoger MoodyChief Financial Officer and TreasurerDate: November 5, 2009




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EXHIBIT INDEX
 Exhibit Number
    
    Exhibit Description10.1
    
    
    Second Amended and Restated Registration Rights Agreement *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