**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------|
|                                                                                                         |
| **For  the quarterly period ended September 30, 2007**                                                       |
|                                                                                                         |
| **OR**                                                                                                       |
|                                                                                                         |
| **o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from**                 to                 .

 

**CommissionFile Number 001-33484**

 

**HELICOS BIOSCIENCES CORPORATION**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                        | ** ** | **05-0587367**                        |
|---------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization)     |       | (I.R.S. Employer  Identification No.) |
|                                                                |       |                                  |
| **One  Kendall Square****Building 700****Cambridge, Massachusetts** | ** ** | **02139**                             |
| (Address of principal  executive offices)                           |       | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code:**(617) 264-1800**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period than theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes: x     No: o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer (as defined in Rule12b-2of the Exchange Act)    Large acceleratedfiler o    Accelerated filer o    Non-accelerated filer x

 

Indicate by check mark whether the registrant is a shell company (as definedin Rule 12b-2 of the Exchange Act) Yes:  o     No: x

 

The registrant had20,971,704 shares of common stock, $.001 par value per share, outstanding as ofOctober 31, 2007.

 

 

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**Table ofContents**

 

** HELICOS BIOSCIENCESCORPORATION (a development stage company)**

 

**Table of Contents**

 
| **Part I - Financial Information** | ** **                                                                                                                                                                                                        |
|------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                       | Consolidated Financial  Statements (unaudited)                                                                                                                                                                    | 3 |
|                               | Consolidated Balance Sheets  (unaudited) as of September 30, 2007 and December 31, 2006                                                                                                                           | 3 |
|                               | Consolidated  Statements of Operations (unaudited) for the three and nine months ended  September 30, 2007 and September 30, 2006 and the period from May 9, 2003  (date of inception) through September 30, 2007 | 4 |
|                               | Consolidated  Statements of Cash Flows (unaudited) for the nine months ended September 30,  2007 and 2006 and the period from May 9, 2003 (date of inception) through  September 30, 2007                         | 5 |
|                               | Notes to Consolidated  Financial Statements (unaudited)                                                                                                                                                           | 6 |
| Item 2.                       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                                                                                                       | 10 |
| Item 3.                       | Quantitative  and Qualitative Disclosures about Market Risk                                                                                                                                                       | 14 |
| Item 4.                       | Controls and  Procedures                                                                                                                                                                                          | 14 |
| **Part  II - Other Information**   | 15                                                                                                                                                                                                                |
| Item 1.                       | Legal Proceedings                                                                                                                                                                                                 | 15 |
| Item 1A.                      | Risk Factors                                                                                                                                                                                                      | 15 |
| Item 2.                       | Unregistered  Sale of Equity Securities and Use of Proceeds                                                                                                                                                       | 25 |
| Item 3.                       | Defaults  upon Senior Securities                                                                                                                                                                                  | 25 |
| Item 4.                       | Submission  of Matters to a Vote of Security Holders                                                                                                                                                              | 25 |
| Item 5.                       | Other Information                                                                                                                                                                                                 | 25 |
| Item 6.                       | Exhibits                                                                                                                                                                                                          | 25 |
| SIGNATURES                         | 26                                                                                                                                                                                                                |

 

2

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** **

**Part I - Financial Information**

 

**Item 1. Consolidated Financial Statements (unaudited)**

 

**HELICOS BIOSCIENCES CORPORATION (a development stage company)**

 

**CONSOLIDATED BALANCE SHEETS**

**(unaudited)**

 

**(in thousands, except share data)**

 

 
| ** **                                                                                                                                                                                                                                                                                                  | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                                  |       |                             |       |                            |       |
| ** **                                                                                                                                                                                                                                                                                                  | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Current assets                                                                                                                                                                                                                                                                                              |       |                             |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                  |       | $                                | 54,858     |                            | $          | 10,589 |   |
| Short-term  investments                                                                                                                                                                                                                                                                                     |       | —                           |       | 795                             |       |
| Unbilled  government grant receivable                                                                                                                                                                                                                                                                       |       | 230                              |       | 159                             |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                                                  |       | 525                              |       | 502                             |       |
| Total current  assets                                                                                                                                                                                                                                                                                       |       | 55,613                           |       | 12,045                          |       |
| Property and  equipment, net                                                                                                                                                                                                                                                                                |       | 3,011                            |       | 2,805                           |       |
| Restricted cash                                                                                                                                                                                                                                                                                             |       | 450                              |       | 450                             |       |
| Total assets                                                                                                                                                                                                                                                                                                |       | $                                | 59,074     |                            | $          | 15,300 |   |
|                                                                                                                                                                                                                                                                                                        |       |                             |       |                            |       |
| **LIABILITIES,  REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                                                                                            |       |                             |       |                            |       |
|                                                                                                                                                                                                                                                                                                        |       |                             |       |                            |       |
| Current  liabilities                                                                                                                                                                                                                                                                                        |       |                             |       |                            |       |
| Accounts payable                                                                                                                                                                                                                                                                                            |       | $                                | 1,569      |                            | $          | 1,469 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                                                                                                             |       | 2,324                            |       | 1,299                           |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                                                          |       | 915                              |       | 608                             |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                  |       | 4,808                            |       | 3,376                           |       |
| Long-term debt,  net of current portion                                                                                                                                                                                                                                                                     |       | 1,088                            |       | 1,843                           |       |
| Redeemable  convertible preferred stock warrants                                                                                                                                                                                                                                                            |       | —                           |       | 204                             |       |
| Other long-term  liabilities                                                                                                                                                                                                                                                                                |       | 336                              |       | 455                             |       |
| Total  liabilities                                                                                                                                                                                                                                                                                          |       | 6,232                            |       | 5,878                           |       |
| Redeemable  convertible preferred stock: par value $0.001 per share; 5,000,000 and  59,314,030 shares authorized at September 30, 2007 and December 31, 2006,  respectively; 0 and 43,686,122 shares issued and outstanding at September 30,  2007 and December 31, 2006, respectively                      |       | —                           |       | 46,761                          |       |
| Commitments and  contingencies (Notes 5 and 6)                                                                                                                                                                                                                                                              |       |                             |       |                            |       |
| Stockholders’  equity (deficit) common stock: par value $0.001 per share; 120,000,000 and  100,000,000 shares authorized at September 30, 2007 and December 31, 2006,  respectively; 20,970,581 and 2,051,269 shares issued and outstanding at September  30, 2007 and December 31, 2006, respectively |       | 21                               |       | 2                               |       |
| Subscription  receivable                                                                                                                                                                                                                                                                                    |       | —                           |       | (4                              | )          |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                 |       | 136,456                          |       | 1,772                           |       |
| Deficit  accumulated during the development stage                                                                                                                                                                                                                                                           |       | (83,635                          | )          | (39,109                         | )          |
| Total  stockholders’ equity (deficit)                                                                                                                                                                                                                                                                  |       | 52,842                           |       | (37,339                         | )          |
| Total  liabilities, redeemable convertible preferred stock and stockholders’ equity  (deficit)                                                                                                                                                                                                         |       | $                                | 59,074     |                            | $          | 15,300 |   |

 

Theaccompanying notes are an integral part of the interim consolidated financialstatements.

 

3

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**HELICOS BIOSCIENCES CORPORATION (a development stage company)**

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(unaudited)**

 

**(in thousands, except share and per share data)**

 
| ** **                                                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **                        | ** ** | ** ** | ** ** | **Period from**                          | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|------------|------------|-----------------------------------------------|------------|
| ** **                                                                                | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** | **May 9, 2003**         | ** ** |
| ** **                                                                                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** | **(date of inception)** | ** ** |
| ** **                                                                                | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007**                          | ** ** | **2006**   | ** ** | **through September 30, 2007** | ** ** |
| ** **                                                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **                        | ** ** | ** ** | ** ** | ** **                                    | ** ** |
| Grant revenue                                                                             |       | $                                | 230        |                            | $          | —                            |       | $          | 465        |                                          | $          | — |   | $ | 624 |   |
|                                                                                      |       |                             |       |                            |       |                              |       |       |       |                                          |       |
| Operating  expenses                                                                       |       |                             |       |                            |       |                              |       |       |       |                                          |       |
| Research and  development                                                                 |       | 7,242                            |       | 4,182                           |       | 17,925                            |       | 9,667      |       | 44,912                                        |       |
| General and  administrative                                                               |       | 3,615                            |       | 1,877                           |       | 10,176                            |       | 4,467      |       | 23,680                                        |       |
| Total operating  expenses                                                                 |       | 10,857                           |       | 6,059                           |       | 28,101                            |       | 14,134     |       | 68,592                                        |       |
| Operating loss                                                                            |       | (10,627                          | )          | (6,059                          | )          | (27,636                           | )          | (14,134    | )          | (67,968                                       | )          |
| Interest income                                                                           |       | 736                              |       | 224                             |       | 1,430                             |       | 598        |       | 2,859                                         |       |
| Interest expense                                                                          |       | (73                              | )          | (81                             | )          | (180                              | )          | (93        | )          | (386                                          | )          |
| Net loss                                                                                  |       | (9,964                           | )          | (5,916                          | )          | (26,386                           | )          | (13,629    | )          | (65,495                                       | )          |
|                                                                                      |       |                             |       |                            |       |                              |       |       |       |                                          |       |
| Beneficial  conversion feature related to Series B redeemable convertible preferred stock |       | —                           |       | —                          |       | (18,140                           | )          | —     |       | (18,140                                       | )          |
|                                                                                      |       |                             |       |                            |       |                              |       |       |       |                                          |       |
| Net loss  attributable to common stockholders                                             |       | $                                | (9,964     | )                               | $          | (5,916                            | )          | $          | (44,526    | )                                             | $          | (13,629 | ) | $ | (83,635 | ) |
| Net loss  attributable to common stockholders per share—basic and diluted            |       | $                                | (0.48      | )                               | $          | (4.42                             | )          | $          | (4.26      | )                                             | $          | (11.30 | ) |   |   |
| Weighted average  number of common shares used in computation—basic and diluted      |       | 20,573,636                       |       | 1,337,990                       |       | 10,449,355                        |       | 1,206,385  |       |                                          |       |

 

Theaccompanying notes are an integral part of the interim consolidated financialstatements.

 

4

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**HELICOS BIOSCIENCES CORPORATION (a development stage company)**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(unaudited)**

 

**(in thousands)**

 
| ** **                                                                                | ** ** | ** **                      | ** ** | ** **                        | ** ** | **Period from**                          | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                | ** ** | **Nine months ended** | ** ** | **May 9, 2003**         | ** ** |
| ** **                                                                                | ** ** | **September 30,**          | ** ** | **(date of inception)** | ** ** |
| ** **                                                                                | ** ** | **2007**                        | ** ** | **2006**                          | ** ** | **through September 30, 2007** | ** ** |
|                                                                                      |       |                            |       |                              |       |                                          |       |
| **Cash  flows from operating activities:**                                                |       |                            |       |                              |       |                                          |       |
| Net loss                                                                                  |       | $                               | (26,386    | )                                 | $          | (13,629                                       | )          | $ | (65,495 | ) |
| Adjustments to  reconcile net loss to cash used in operating activities:                  |       |                            |       |                              |       |                                          |       |
| Depreciation and  amortization                                                            |       | 1,143                           |       | 651                               |       | 2,758                                         |       |
| Amortization of  lease incentive                                                          |       | (58                             | )          | (32                               | )          | (128                                          | )          |
| Common stock  issued for licenses                                                         |       | —                          |       | 127                               |       | 147                                           |       |
| Stock-based  compensation expense                                                         |       | 2,395                           |       | 951                               |       | 3,890                                         |       |
| Interest expense  recorded on warrants                                                    |       | (1                              | )          | 63                                |       | 136                                           |       |
| Changes in  operating assets and liabilities:                                             |       |                            |       |                              |       |                                          |       |
| Unbilled  government grant receivable                                                     |       | (71                             | )          | —                            |       | (230                                          | )          |
| Prepaid expenses  and other current assets                                                |       | (147                            | )          | (186                              | )          | (515                                          | )          |
| Accounts payable                                                                          |       | 100                             |       | (16                               | )          | 1,569                                         |       |
| Accrued expenses  and other current liabilities                                           |       | 1,121                           |       | 189                               |       | 2,271                                         |       |
| Other long-term  liabilities                                                              |       | (34                             | )          | 411                               |       | 377                                           |       |
|                                                                                      |       |                            |       |                              |       |                                          |       |
| Net cash used in  operating activities                                                    |       | (21,938                         | )          | (11,471                           | )          | (55,220                                       | )          |
|                                                                                      |       |                            |       |                              |       |                                          |       |
| **Cash  flows from investing activities:**                                                |       |                            |       |                              |       |                                          |       |
| Purchases of  property and equipment                                                      |       | (1,349                          | )          | (2,149                            | )          | (5,769                                        | )          |
| Increase in  restricted cash                                                              |       | —                          |       | (450                              | )          | (450                                          | )          |
| Purchases of  short-term investments                                                      |       | —                          |       | (7,478                            | )          | (34,709                                       | )          |
| Maturities of  short-term investments                                                     |       | 795                             |       | 3,205                             |       | 34,709                                        |       |
|                                                                                      |       |                            |       |                              |       |                                          |       |
| Net cash used in  investing activities                                                    |       | (554                            | )          | (6,872                            | )          | (6,219                                        | )          |
|                                                                                      |       |                            |       |                              |       |                                          |       |
| **Cash  flows from financing activities:**                                                |       |                            |       |                              |       |                                          |       |
| Proceeds from  debt issuances                                                             |       | —                          |       | 1,029                             |       | 2,473                                         |       |
| Payments on debt                                                                          |       | (454                            | )          | —                            |       | (454                                          | )          |
| Deferred initial  public offering costs                                                   |       | (1,742                          | )          | —                            |       | (1,831                                        | )          |
| Proceeds from  issuance of redeemable convertible preferred stock, net of issuance costs  |       | 19,994                          |       | 19,892                            |       | 66,405                                        |       |
| Proceeds from  bridge loan                                                                |       | —                          |       | —                            |       | 350                                           |       |
| Proceeds from  issuance of common stock                                                   |       | —                          |       | 26                                |       | 26                                            |       |
| Proceeds from  issuance of restricted common stock                                        |       | 4                               |       | 232                               |       | 339                                           |       |
| Payments to  employees for cancelled restricted common stock                              |       | (57                             | )          | —                            |       | (57                                           | )          |
| Proceeds from  exercise of stock options                                                  |       | 5                               |       | 13                                |       | 35                                            |       |
| Proceeds from  initial public offering                                                    |       | 49,011                          |       | —                            |       | 49,011                                        |       |
|                                                                                      |       |                            |       |                              |       |                                          |       |
| Net cash provided  by financing activities                                                |       | 66,761                          |       | 21,192                            |       | 116,297                                       |       |
|                                                                                      |       |                            |       |                              |       |                                          |       |
| Net increase in  cash and cash equivalents                                                |       | 44,269                          |       | 2,849                             |       | 54,858                                        |       |
| Cash and cash  equivalents, beginning of period                                           |       | 10,589                          |       | 8,566                             |       | —                                        |       |
| Cash and cash  equivalents, end of period                                                 |       | $                               | 54,858     |                              | $          | 11,415                                        |       | $ | 54,858 |   |
|                                                                                      |       |                            |       |                              |       |                                          |       |
| **Supplemental  disclosure of cash flow information**                                     |       |                            |       |                              |       |                                          |       |
| Cash paid during  the year for:                                                           |       |                            |       |                              |       |                                          |       |
| Interest                                                                                  |       | $                               | 181        |                              | $          | 21                                            |       | $ | 250 |   |
|                                                                                      |       |                            |       |                              |       |                                          |       |
| Noncash  financing activities:                                                            |       |                            |       |                              |       |                                          |       |
| Issuance of  redeemable convertible preferred stock warrants                              |       | $                               | —     |                              | $          | 88                                            |       | $ | — |   |
| Conversion of  bridge loan to equity                                                      |       | $                               | —     |                              | $          | —                                        |       | $ | — |   |
| Beneficial  conversion feature related to Series B redeemable convertible preferred stock |       | $                               | 18,140     |                              | $          | —                                        |       | $ | 18,140 |   |
| Conversion of  preferred stock to common stock                                            |       | $                               | 66,755     |                              | $          | —                                        |       | $ | 66,755 |   |
| Conversion of  preferred stock warrants to common stock warrants                          |       | $                               | 162        |                              | $          | —                                        |       | $ | 162 |   |

 

Theaccompanying notes are an integral part of the interim consolidated financialstatements.

 

5

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**HELICOS BIOSCIENCES CORPORATION (a development stage company)**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

 

**1. Nature ofthe Business and Basis of Presentation**

 

HelicosBioSciences Corporation (“Helicos” or the “Company”) is a life sciences companyfocused on innovative genetic analysis technologies for the research, drugdiscovery and clinical diagnostics markets. Helicos has developed a proprietarytechnology to enable the rapid analysis of large volumes of genetic material bydirectly sequencing single molecules of DNA or single DNA copies of RNA.Helicos is a Delaware corporation and was incorporated on May 9, 2003.

 

TheCompany has had limited operations to date and its activities have consistedprimarily of raising capital, conducting research and development andrecruiting personnel. Accordingly, the Company is considered to be in thedevelopment stage at September 30, 2007, as defined by the Financial AccountingStandards Board (“FASB”) in Statement of Financial Accounting Standards (“SFAS”)No. 7, “Accounting and Reporting by Development Stage Enterprises.” TheCompany’s fiscal year ends on December 31. The Company operates as onereportable segment.

 

Since inception, the Company has incurredlosses and has not generated positive cash flows from operations. The Companyexpects such losses to continue into the foreseeable future as it continues todevelop and commercialize its products. If required, the Company would seek toraise additional funds through public or private equity or debt financings,collaborative or other arrangements with corporate sources, or through othersources of financing. However, additional financing may not be available on atimely basis on terms acceptable to the Company, or at all. The Company’sfailure to raise capital as and when needed could have a negative impact on itsfinancial condition and its ability to pursue its business strategies. Ifadequate funds are not available, the Company may have to delay, reduce oreliminate development and commercialization efforts, and may have to obtainfunds through arrangements with collaborators or others on terms unfavorable tothe Company or pursue merger or acquisition strategies.

 

The accompanying unaudited interimconsolidated financial statements have been prepared in accordance with theinstructions to Form 10-Q and do not include all of the information and notedisclosures required by generally accepted accounting principles (“GAAP”) inthe United States of America. The consolidated financial statements include theaccounts of the Company and its wholly-owned subsidiary. All intercompanyaccounts and transactions have been eliminated.

 

The preparation of financial statements inconformity with GAAP requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent liabilities at the dates of the financialstatements. Actual amounts may differ from these estimates, differentassumptions or conditions.

 

It is management’s opinion that theaccompanying interim consolidated financial statements reflect all adjustments(which are normal and recurring) that are necessary for a fair statement of theresults for the interim periods. The interim consolidated financial statementsshould be read in conjunction with the consolidated financial statements forthe year ended December 31, 2006 included in the Company’s RegistrationStatement on Form S-1, as amended, which was declared effective by the Securitiesand Exchange Commission (“SEC”) on May 24, 2007.

 

**2. InitialPublic Offering**

 

OnMay 24, 2007, the Company completed its initial public offering (“IPO”) of5,400,000 shares of common stock at an initial public offering price of $9.00per share. Net proceeds were approximately $43.9 million after deductingunderwriting discounts and commissions and offering expenses paid by theCompany. Total fees and expenses paid by the Company, excluding underwritingdiscounts and commissions were approximately $1.8 million which includes legal,accounting and printing costs and various other fees associated withregistration and listing of the Company’s common stock.

 

OnMay 24, 2007, upon completion of the Company’s IPO, all of the Company’s59,189,998 shares of redeemable convertible preferred stock outstanding on thatdate were automatically converted into 13,153,293 shares of common stock. Inaddition, the outstanding warrants to purchase 81,184 shares of Series Bredeemable convertible preferred stock were converted into warrants to purchase18,040 shares of common stock. During the period January 1, 2007 through thedate of the Company’s IPO, the estimated fair value of the warrants to purchase81,184 shares of Series B redeemable convertible preferred stock decreased by$42,000 to $162,000. Upon conversion on the date of the Company’s IPO, thewarrants to purchase 18,040 shares of the Company’s common stock werereclassified to additional paid-in capital.

 

OnJune 27, 2007, the underwriters exercised their over-allotment option andpurchased an additional 397,000 shares of the Company’s common stock, and thenet proceeds after deducting underwriters’ discounts and commissions related tothe offering were approximately $3.3 million.

 

Asof December 31, 2006, the Company had 100,000,000 shares of common stockauthorized. In June 2007, the Company filed its Fourth Amended and RestatedCertificate of Incorporation which increased the number of authorized shares ofcommon stock to 120,000,000.

 

**3. RecentAccounting Pronouncements**

 

OnJanuary 1, 2007, the Company adopted the provisions of FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109”, (“FIN 48”). FIN 48 requires the Company torecognize in its financial statements the impact of a tax position if thatposition is more likely than not of being sustained upon examination, based onthe technical merits of the position. The adoption of FIN 48 did not havea material impact on the Company’s financial position, results of operations orcash flows. At the adoption date of January 1, 2007 and also at September 30,2007, the Company had no unrecognized tax benefits.

 

6

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InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS No. 157”). This Statement defines fair value as usedin numerous accounting pronouncements, establishes a framework for measuringfair value in GAAP and expands disclosure related to the use of fair valuemeasures in financial statements. SFAS No. 157 does not expand the use offair value measures in financial statements, but standardizes its definitionand guidance in GAAP. The Standard emphasizes that fair value is a market-basedmeasurement and not an entity-specific measurement based on an exchangetransaction in which the entity sells an asset or transfers a liability (exitprice). SFAS No. 157 establishes a fair value hierarchy from observablemarket data as the highest level to fair value based on an entity’s own fairvalue assumptions as the lowest level. SFAS No. 157 is effective for theCompany’s financial statements issued in 2008; however, earlier application isencouraged. The Company has not yet determined the impact that the adoption ofSFAS No. 157 will have on its financial position, results of operations orcash flows.

 

In March 2007, the Emerging Issues Task Force(“EITF”) issued EITF Abstract 07-3, “Accounting for Nonrefundable AdvancePayments for Goods or Services to Be Used in Future Research and DevelopmentActivities” (“EITF 07-3”). The pronouncement concluded that nonrefundabledeposits should be capitalized and expensed as the research and developmentactivity is performed. The Company is calculating the impact that EITF 07-3will have, if any, on its financial position, results of operations and cashflows for the first quarter of 2008.

 

**4. Net Lossper Share**

 

Basicnet loss per share is computed by dividing net loss by the weighted averagenumber of common shares outstanding for the period. The Company’s potentialdilutive shares, which include outstanding common stock options, unvestedrestricted stock, and common stock warrants, have not been included in thecomputation of diluted net loss per share for all periods as the result wouldhave been antidilutive. Such potentially dilutive shares are excluded when theeffect would be to reduce net loss per share. Because the Company reported anet loss for the three months and nine months ended September 30, 2007 and2006, all potential common shares have been excluded from the computation ofthe dilutive net loss per share for all periods presented because the effectwould have been antidilutive. Such potential common shares consist of thefollowing:

 
| ** **                              | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                              | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                    |       |                             |       |                            |       |   |   |   |   |
| Stock options                           |       | 1,787,428                        |       | 642,117                         |       | 1,399,009 |   | 491,383 |   |
| Unvested  restricted stock              |       | 407,609                          |       | 338,472                         |       | 474,678 |   | 466,605 |   |
| Warrants                                |       | 18,040                           |       | 17,324                          |       | 18,040 |   | 6,790 |   |
| Redeemable  convertible preferred stock |       | —                           |       | 9,708,026                       |       | 6,662,677 |   | 8,963,436 |   |

 

**5. Income Taxes**

 

Thereis no provision for income taxes because the Company has incurred operatinglosses since inception.

 

OnJanuary 1, 2007, the Company adopted the provisions of FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109”, (“FIN 48”). The Company has no amounts recordedfor any unrecognized tax benefits as of September 30, 2007 or January 1, 2007.In addition, the Company did not record any amount for the implementation ofFIN 48. The Company’s policy is to record estimated interest and penaltiesrelated to the underpayment of income taxes as a component of its income taxprovision. As of September 30, 2007 and January 1, 2007, the Company had noaccrued interest or tax penalties recorded. The Company’s income tax returnreporting periods since May 9, 2003 (date of inception) are open to incometax audit examination by the federal and state tax authorities.

 

Utilizationof net operating loss (“NOL”) and research and development credit carryforwardsmay be subject to a substantial annual limitation due to ownership changes thathave occurred previously or that could occur in the future provided bySection 382 of the Internal Revenue Code of 1986, as well as similar stateprovisions. These ownership changes may limit the amount of NOL and researchand development credit carryforwards that can be utilized annually to offsetfuture taxable income and tax, respectively. In general, an ownership change,as defined by Section 382, results from transactions increasing theownership of certain stockholders or public groups in the stock of acorporation by more than 50 percentage points over a three-year period.Since the Company’s formation, the Company has raised capital through theissuance of common stock and preferred stock, which, combined with thepurchasing stockholders’ subsequent disposition of those shares, may haveresulted in a change of control, as defined by Section 382, or couldresult in a change of control in the future upon subsequent disposition. TheCompany has not currently completed a study to assess whether a change ofcontrol has occurred or whether there have been multiple changes of controlsince the Company’s formation due to the significant complexity and costassociated with such study and that there could be additional changes incontrol in the future. If the Company experienced a change of control at anytime since its formation, utilization of NOL or research and development creditcarryforwards would be subject to an annual limitation under Section 382.Any limitation may result in expiration of a portion of the NOL or research anddevelopment credit carryforwards before utilization. Further, until a study iscompleted and any limitation known, no amounts are being presented as anuncertain tax position under FIN 48. The Company does not anticipate asignificant change to unrecognized tax benefits over the next twelve months.

 

**6. Commitments and Contingencies**

 

**License agreements and patents**

 

InApril 2007, the Company entered into an agreement with PerkinElmer LAS, Inc. (“PerkinElmer”),in which PerkinElmer granted the Company a worldwide, non-exclusive,non-transferable, non-sublicensable, royalty bearing license under specifiedpatents. The license from PerkinElmer grants the Company rights under certainpatents to produce and commercialize certain of the reagents used in someapplications on the HeliScope system, which contain chemicals purchased from PerkinElmer.In exchange for rights licensed from PerkinElmer, the Company is obligated topay PerkinElmer a portion of the Company’s net revenue from the sale ofreagents that contain chemicals covered by the patents licensed under thePerkinElmer agreement. The Company has the right to terminate the agreement atany time upon 90 days written notice to PerkinElmer. Each party has the rightto terminate the agreement upon breach by the other party subject to notice andan opportunity to cure. The agreement also terminates upon the occurrence ofspecified bankruptcy events. PerkinElmer has the sole right under the agreementto enforce the licensed patents.

 

7

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**7. Redeemable Convertible Preferred Stock**

 

Asof December 31, 2006, the Company had 59,314,030 authorized shares ofpreferred stock, of which 28,182,246 were designated as Series Aredeemable convertible preferred stock and 31,131,784 were designated asSeries B redeemable convertible preferred stock. As of September 30, 2007,the Company had 5,000,000 authorized shares of preferred stock with noneoutstanding.

 

Asof December 31, 2006, redeemable convertible preferred stock consists of:

 
| ** ** | ** ** | **Number of  shares  authorized** | ** ** | **Number of  shares issued  and outstanding** | ** ** | **Carrying value  (in thousands)** | ** ** | **Liquidation  preference per  share** | ** ** |
|------------|------------|----------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
|       |       |                                   |       |                                                         |       |                                         |       |                                        |       |
| Series A   |       | 28,182,246                             |       | 28,182,246                                                   |       | $                                            | 26,869     |                                        | $          | 0.9555 |   |
| Series B   |       | 31,131,784                             |       | 15,503,876                                                   |       | 19,892                                       |       | $                                           | 1.29       |   |
|       |       |                                   |       |                                                         |       |                                         |       |                                        |       |
|       |       | 59,314,030                             |       | 43,686,122                                                   |       | $                                            | 46,761     |                                        |       |   |

 

InMarch 2006, the Company sold 15,503,876 shares of Series B redeemableconvertible preferred stock, at a price of $1.29 per share, resulting in netproceeds of approximately $19.9 million, net of $108,000 of issuancecosts.

 

In January 2007, the Company sold anadditional 15,503,876 shares of Series B redeemable convertible preferredstock, at a price of $1.29 per share, resulting in proceeds of approximately$20.0 million. This issuance of Series B redeemable convertiblepreferred stock contained a beneficial conversion feature as the estimated fairvalue of the Company’s common stock on the date of issuance was in excess ofthe $1.29 per share conversion price. As the shares of Series B redeemableconvertible preferred stock can be immediately converted into shares of commonstock at the option of the holder, the beneficial conversion feature of$18.1 million is recorded as a deemed dividend to additional paid-incapital.

 

Asdiscussed at Note 2, on May 24, 2007, upon completion of the Company’s IPO,59,189,998 shares of redeemable convertible preferred stock were automaticallyconverted into 13,153,293 shares of common stock.

 

8

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**8.Stock-Based Compensation**

 

TheCompany’s 2007 Stock Option and Incentive Plan (“2007 Option Plan”) was adoptedby the Company’s Board of Directors in April 2007 and approved by theCompany’s stockholders in May 2007. The 2007 Option Plan permits theCompany to make grants of incentive stock options, non-qualified stock options,stock appreciation rights, deferred stock awards, restricted stock awards,unrestricted stock awards and dividend equivalent rights. The Company hasreserved 1,440,266 shares of the Company’s common stock for the issuance ofawards under the 2007 Option Plan. The 2007 Option Plan provides that thenumber of shares reserved and available for issuance under the plan will beautomatically increased each January 1, beginning in 2008, by 4.5% of theoutstanding number of shares of common stock on the immediately precedingDecember 31 or such lower number of shares of common stock as determinedby the Board of Directors. This number is subject to adjustment in the event ofa stock split, stock dividend or other change in the Company’s capitalization.Generally, shares that are forfeited or canceled from awards under the 2007Option Plan also will be available for future awards. In addition, availableshares under the Company’s 2003 Stock Option and Incentive Plan, including as aresult of the forfeiture, expiration, cancellation, termination or netissuances of awards, are automatically made available for issuance under the2007 Option Plan.

 

TheCompany accounts for stock-based compensation issued to employees andnon-employees in accordance with SFAS No. 123(R) “Share Based Payment” andEITF No. 96-18, “Accounting for Equity Instruments that are Issued toOther Than Employees for Acquiring, or in Conjunction with, Selling Goods orServices.” The Company records the expense of such services based on theestimated fair value of the equity instrument using the Black-Scholes optionpricing model. The value of the equity instrument is charged to earnings overthe term of the service agreement.

 

The Company recognized stock-basedcompensation expense on all employee and non-employee awards as follows:

 
| ** **                              | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($in thousands)**                     | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                              |       |                             |       |                            |       |   |   |   |   |
| Research and  development               |       | $                                | 269        |                            | $          | 24 |   | $ | 741 |   | $ | 52 |   |
| General and  administrative             |       | 591                              |       | 439                             |       | 1,654 |   | 899 |   |
| Total  stock-based compensation expense |       | $                                | 860        |                            | $          | 463 |   | $ | 2,395 |   | $ | 951 |   |

 

For the nine months ended September 30,2007 and 2006, the fair value of stock options was estimated on the date ofgrant using the Black-Scholes option valuation model with the followingassumptions:

 
| ** **                                | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **September 30,**          | ** ** |
| ** **                                | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                      |       |                            |       |   |   |
| Expected  volatility                      |       | 74.2                            | %          | 75.7 | % |
| Expected option  life                     |       | 6.3 years                       |       | 7 years |   |
| Weighted average  risk-free interest rate |       | 4.7                             | %          | 4.8 | % |
| Expected annual  dividend yield           |       | none                            |       | none |   |

 

 

9

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**ForwardLooking Statements**

 

This quarterlyreport on Form 10-Q contains “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. In particular, statementscontained in this Form 10-Q, including but not limited to, statements regardingour future results of operations and financial position, business strategy andplan prospects, projected revenue or costs and objectives of management forfuture research, development or operations, are forward-looking statements. Thesestatements relate to our future plans, objectives, expectations and intentionsand may be identified by words such as “may,” “will,” “should,” “expects,” “plans,”“anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,”“goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readersare cautioned that these forward-looking statements are only predictions andare subject to risks, uncertainties, and assumptions that are difficult topredict, including those identified below, under “Part II, Item 1A. RiskFactors” and elsewhere herein. Therefore, actual results may differ materiallyand adversely from those expressed in any forward-looking statements. Weundertake no obligation to revise or update any forward-looking statements forany reason.

 

**BusinessOverview**

 

Weare a life sciences company focused on innovative genetic analysis technologiesfor the research, drug discovery and clinical diagnostics markets. We havedeveloped our true Single Molecule Sequencing technology (“tSMS”) to enable therapid analysis of large quantities of genetic material by directly sequencingsingle molecules of DNA or single DNA copies of RNA. By enabling directsequencing of single DNA molecules, we believe our technology represents afundamental breakthrough in genetic analysis.

 

Weplan to ship our first HeliScope system by the end of 2007 or soon thereafter. Itwill be comprised of an instrument, its associated reagents and disposablesupplies. We believe that we have incurred the substantial majority of thecosts related to the development of the initial version of our HeliScopesystem. We have designed, assembled and are testing multiple prototypes of ourHeliScope system, and we are purchasing the subassemblies and components forour first commercial shipments. To ship a commercial version of our product, weneed to complete the assembly, testing and performance validation of the system.In addition, we are taking other steps to prepare for the commercial scalemanufacture of the system, including the development of manufacturingdocumentation and the implementation of quality assurance and quality controlprocedures. We also are manufacturing the proprietary reagents and disposablesupplies that are part of the system.

 

Becauseof the dynamic nature of the market for genetic analysis instruments, we expectto expend significant amounts on an ongoing basis to improve our HeliScopesystem and tSMS technology. The goals of these improvements are to increase thethroughput of the HeliScope system and to achieve a further approximate 100-foldreduction in the cost per base of sequencing. We also plan to explore othermarkets for the HeliScope system in the longer term, such as diagnostics.

 

Althoughwe plan to ship our first HeliScope system by the end of 2007 or soonthereafter, the first shipments of this product will be subject to variouscustomer evaluation periods with acceptance criteria, and we expect thecustomer evaluation period to extend beyond the fiscal quarters in which commercialunits are shipped. We do not expect to recognize any revenue from productshipments in 2007 and future revenues from sales of proprietary reagents anddisposable supplies will depend on the timing of system placements, customers’use of the system and our ability to maintain our proprietary position on thereagents and disposable supplies. Because we have not yet commercialized ourHeliScope system, we do not have the experience to predict the percentage ofour revenues that we will derive from sales of proprietary reagents anddisposable supplies. However, over time we would expect the sales of thereagents and disposable supplies to increase as our installed base ofinstruments grows and usage of these instruments increases.

 

Wewere incorporated in May 2003, and our activities to date have consistedprimarily of conducting research and development. Accordingly, we areconsidered to be in the development stage at September 30, 2007, as defined bythe Financial Accounting Standards Board (“FASB”) in Statement of FinancialAccounting Standards (“SFAS”) No. 7, “Accounting and Reporting byDevelopment Stage Enterprises.” Our fiscal year ends on December 31, andwe operate as one reportable segment.

 

Weexpect to continue to incur operating losses for at least the next two years,and we may need additional financing to support our activities. If required, wewill seek to fund our operations through public or private equity or debtfinancings or other sources, such as collaborations. Adequate additional fundingmay not be available to us on acceptable terms, or at all. Our failure to raisecapital as and when needed could have a negative impact on our financialcondition and our ability to pursue business strategies. If adequate funds arenot available to us, we may be required to delay, reduce or eliminate researchand development programs, reduce or eliminate commercialization efforts, obtainfunds through arrangements with collaborators or others on terms unfavorable tous or pursue merger or acquisition strategies.

 

InMay 2007, we completed an initial public offering (“IPO”) of our common stockin which we sold and issued 5.4 million shares of our common stock at an issueprice of $9.00 per share. We raised a total of $48.6 million in gross proceedsfrom the IPO, or $43.9 million in net proceeds after deducting underwritingdiscounts and commissions of $2.9 million and other offering costs of $1.8million. In June 2007, we sold an additional 397,000 shares of our common stockat $9.00 per share resulting in net proceeds of $3.3 million after deductingunderwriting discounts and commissions of $250,000, pursuant to theover-allotment option granted by us to the underwriters of our IPO. Upon theclosing of our IPO, all outstanding shares of our preferred stock wereconverted into common stock.

 

**Financial Overview**

 

**Grant revenue**

 

InSeptember 2006, we were awarded a grant from the National Human GenomeResearch Institute, a branch of the National Institutes of Health, pursuant towhich we are eligible to receive reimbursement of our research expenses of upto $2.0 million through August 2009. We recognized revenue during thethree months and nine months ended September 30, 2007 of $230,000 and $465,000,respectively, in connection with this award. We will continue to recognizerevenue under this grant as the related expenses are incurred.

 

10

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**Research and development expenses**

 

Researchand development expenses consist of costs associated with scientific researchactivities, and engineering development efforts. Such costs primarily includesalaries, benefits and stock-based compensation; lab and engineering supplies;investment in equipment; consulting fees; and facility related costs, includingrent and depreciation.

 

Weare focused on preparing for the launch of the initial version of the HeliScopesystem and on further improvements to the HeliScope system. All research anddevelopment expenses since our inception have been in connection with thisproject. Even if we ship our first system by the end of 2007, we do not expectto receive cash inflows from shipments until 2008. We believe the developmentof the initial version of the HeliScope system will be completed shortly beforeits commercial launch. We believe that we have already incurred the substantialmajority of the costs necessary to complete the development of the initialversion of the HeliScope system.

 

Researchand development expenses for the three months ended September 30, 2007 and 2006were $7.2 million and $4.2 million, respectively. Research anddevelopment expenses for the nine months ended September 30, 2007 and 2006 were$17.9 million and $9.7 million respectively. From 2006 to 2007, expensesincreased as our research progressed and we built infrastructure and hiredadditional employees with the requisite expertise to execute the next steps inthe development process.

 

In2007, in addition to our ongoing research and development efforts, we haveincurred start-up manufacturing costs related to the assembly, testing andperformance validation of the HeliScope system. These costs are being accountedfor as research and development expenses in our pre-commercialization phase aswe prepare to launch the HeliScope system. Once the HeliScope system is readyfor commercial launch, going forward, we will record the cost of components forthe HeliScope system in inventory.

 

Thecompletion of our research and development projects is dependent upon achievingtechnical objectives, which are inherently uncertain. As a result of theseuncertainties, we are unable to predict to what extent we will receive cashinflows from the commercialization and sale of products. Our inability tocomplete our research and development projects in a timely manner couldsignificantly increase our capital requirements and could adversely impact ourliquidity. These uncertainties could force us to seek additional, externalsources of financing from time to time in order to continue with our strategy.Our inability to raise additional capital, or to do so on terms reasonablyacceptable to us, would jeopardize the future success of our business.

 

**General and administrative expenses**

 

Generaland administrative expenses consist principally of salaries, benefits and stock-basedcompensation, consulting and professional fees, including patent related costs,general corporate costs and facility costs not otherwise included in researchand development expenses.

 

Generaland administrative expenses for the three months ended September 30, 2007 and2006 were $3.6 million and $1.9 million, respectively. General andadministrative expenses for the nine months ended September 30, 2007 and 2006were $10.2 million and $4.5 million, respectively. We expect that theseexpenses will continue to increase significantly in 2007 and beyond as we hireour specialized sales, marketing and service personnel and increase our financeand administrative staff to support the requirements of being a public company.We also anticipate that we will incur increased expenses for the costsassociated with Sarbanes-Oxley compliance, ERP implementation, directors’ andofficers’ insurance, investor relations programs and directors’ fees.

 

**Overview ofResults of Operations**

 

**Three and nine months ended September 30, 2007 comparedto three and nine months ended September 30, 2006**

 

*Grant revenue.*We recognized $230,000 and $465,000 of grant revenue during the threeand nine months ended September 30, 2007, respectively, and no revenue duringthe three and nine months ended September 30, 2006. Grant revenue recognizedduring the three and nine months ended September 30, 2007 related to thereimbursement of expenses in connection with our government research grant.

 

*Research and development expenses.*Research and development expenses during thethree and nine months ended September 30, 2007 and 2006 were as follows:

 
| ** **                 | ** ** | **Three months ended** | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine months ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **September 30,**      | ** ** | ** ** | ** ** | ** ** | ** ** | **September 30,**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **($ in  thousands)** | ** ** | **2007**               | ** ** | **2006**   | ** ** | **Change** | ** ** | **2007**              | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and development   |       | $                      | 7,242      |       | $          | 4,182      |       | $                     | 3,060      |       | 73         | %          |       | $ | 17,925 |   | $ | 9,667 |   | $ | 8,258 |   | 85 | % |   |
|                            |            |                        |            |            |            |            |            |                       |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Research and development expensesincreased by $3.1 million from the three months ended September 30, 2006 to thethree months ended September 30, 2007. The increase was primarily due to a $2.1million increase in product development costs in support of pre-productionactivity, which included lab expenses, materials, supplies, temporary help andprototype expenses. Our salary and benefit expenses increased by $1.1 millionand our stock-based compensation expense increased by $245,000 due primarily tothe hiring of additional personnel to support the pre-production activity.

 

In comparing the ninemonths ended September 30, 2006 to the nine months ended September 30, 2007,research and development expenses increased $8.3 million. The increase wasagain primarily due to increased product development costs of $4.3 millionrelated to pre-production activity, which included lab expenses, materials,supplies, temporary help and prototype expenses. Our salary and benefitexpenses increased by $2.8 million and our stock-based compensation expenseincreased by $689,000 due primarily to the hiring of additional personnel tosupport the pre-production activity. Increased headcount and pre-productionactivity required additional space, raising occupancy costs by $678,000. Weexpect our research and development expenses to continue to increase as weexpand our start-up manufacturing efforts this year prior to commercializationand as we continue to invest in future versions of our system.

 

11

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*General and administrative expenses.*General and administrative expenses during thethree and nine months ended September 30, 2007 and 2006 were as follows:

 
| ** **                 | ** ** | **Three months ended** | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine months ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **September 30,**      | ** ** | ** ** | ** ** | ** ** | ** ** | **September 30,**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **($ in  thousands)** | ** ** | **2007**               | ** ** | **2006**   | ** ** | **Change** | ** ** | **2007**              | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative |       | $                      | 3,615      |       | $          | 1,877      |       | $                     | 1,738      |       | 93         | %          |       | $ | 10,176 |   | $ | 4,467 |   | $ | 5,709 |   | 128 | % |   |
|                            |            |                        |            |            |            |            |            |                       |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in generaland administrative expenses of $1.7 million from the three months endedSeptember 30, 2006 to the three months ended September 30, 2007 was primarilydue to an increase in our salary and benefit expenses of $1.0 million and anincrease in our stock-based compensation expense of $152,000. These increases wereprimarily due to the hiring of additional personnel. The increase also included$480,000 related to operating as a public company, including investor relationsexpenses and consulting fees and $180,000 related to initiating a marketingprogram.

 

In comparing the ninemonths ended September 30, 2006 to the nine months ended September 30, 2007,the increase in general and administrative expenses of $5.7 million wasprimarily due to an increase in our salary and benefit expenses of $2.3 millionand our stock-based compensation expense of $755,000 due to the hiring ofadditional personnel.  The increase alsoincluded $1.4 million related to becoming a public company, including legalexpenses, investor relations expenses, accounting fees, dues and fees and consultingfees; $818,000 related to initiating a marketing program; and $341,000 forpatent filings. We expect our general and administrative expenses to increaseas we expand our sales and marketing functions, and incur additionaladministrative costs associated with the requirements of being a publiccompany.

 

*Interest income.*Interest income for the three and nine months ended September 30, 2007and 2006 was as follows:

 
| ** **                 | ** ** | **Three months ended** | ** ** | ** ** | ** ** | ** ** | ** ** | **Nine months ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **September 30,**      | ** ** | ** ** | ** ** | ** ** | ** ** | **September 30,**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **($ in  thousands)** | ** ** | **2007**               | ** ** | **2006**   | ** ** | **Change** | ** ** | **2007**              | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income            |       | $                      | 736        |       | $          | 224        |       | $                     | 512        |       | 229        | %          |       | $ | 1,430 |   | $ | 598 |   | $ | 832 |   | 139 | % |   |
|                            |            |                        |            |            |            |            |            |                       |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theincrease in interest income from the three and nine months ended September 30, 2006compared to the three and nine months ended September 30, 2007 was dueprimarily to higher cash and cash equivalents during the three months and ninemonths ended September 30, 2007 in connection with the receipt of proceeds fromthe IPO.

 

*Interest expense.*Interest expense was $73,000 for the three months ended September 30, 2007 and$180,000 for the nine months ended September 30, 2007, compared to $81,000 and$93,000 during the three and nine months ended September 30, 2006,respectively. The interest expense was related to interest paid on a term loanunder a line of credit facility and security agreement entered into in June2006, and interest expense related to the Series B redeemable convertiblepreferred stock warrants that were issued in connection with the line of creditfacility.

 

**Liquidityand Capital Resources**

 

Wehave incurred losses since our inception in May 2003 and, as of September30, 2007 we had an accumulated deficit of $83.6 million. We have financedour operations to date principally through the sale of preferred stock andcommon stock, including our IPO, debt financing and interest earned oninvestments. Through September 30, 2007, we have received net proceeds of$66.8 million from the issuance of preferred stock, $47.5 million throughthe issuance of common stock, including our IPO, and $2.5 million in debtfinancing from a lender to finance equipment purchases. Working capital as ofSeptember 30, 2007 was $50.8 million, consisting of $55.6 million incurrent assets and $4.8 million in current liabilities. Working capital asof December 31, 2006 was $8.7 million, consisting of$12.0 million in current assets and $3.4 million in currentliabilities. Our cash, cash equivalents and short-term investment balances areheld in money market funds. Cash in excess of immediate requirements isinvested in accordance with our investment policy, primarily to achieveliquidity and capital preservation.

 

Thefollowing table summarizes our net increase in cash and cash equivalents forthe nine months ended September 30, 2007 and 2006:

 
| ** **                                 | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **September 30,**     | ** ** |
| **($ in  thousands)**                 | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net cash  provided by (used in):           |       |                  |       |   |   |
| Operating  activities                      |       | $                     | (21,938    | ) | $ | (11,471 | ) |
| Investing  activities                      |       | (554                  | )          | (6,872 | ) |
| Financing activities                       |       | 66,761                |       | 21,192 |   |
|                                       |       |                  |       |   |   |
| Net increase in  cash and cash equivalents |       | $                     | 44,269     |   | $ | 2,849 |   |

 

12

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Net cash used in operating activities was$21.9 million for the nine months ended September 30, 2007 compared to $11.5million for the nine months ended September 30, 2006. The $10.5 millionincrease was primarily due to an increase in the net loss of $12.8 million,partially offset by an increase in non-cash stock-based compensation expense of$1.4 million, an increase in the change in accrued expenses and other currentliabilities of $932,000, and an increase in non-cash depreciation andamortization expense of $466,000.

 

Net cash used in investing activities was$554,000 for the nine months ended September 30, 2007 compared to $6.9 millionfor the nine months ended September 30, 2006. The $6.3 million decrease wasprimarily due to a $7.5 million decrease in the cash used in the purchases ofshort-term investments and the increase in restricted cash of $450,000 duringthe nine months ended September 30, 2006, partially offset by a $2.4 milliondecrease in cash provided by maturities of short-term investments.

 

Net cash provided by financing activities was$66.8 million and $21.2 million for the nine months ended September 30, 2007and 2006, respectively. The $45.6 million increase was primarily due to $49.0million of cash proceeds from the initial public offering, partially offset by$1.7 million of IPO costs and a $1.0 million decrease in cash proceeds fromdebt issuances.

 

**Operating capital and capital expenditure requirements**

 

Todate, we have not shipped any products and have not achieved profitability. Weanticipate that we will continue to incur substantial net losses for the nextseveral years as we develop and prepare for the commercial launch of ourHeliScope system and develop the corporate infrastructure required tomanufacture and sell our products and operate as a publicly traded company.

 

Wedo not expect to generate product revenue until 2008. We believe that ourexisting cash, cash equivalents and investment balances, and interest income weearn on these balances will be sufficient through the end of 2008. It isdifficult to predict the actual rate of product sales as a result of the complexnature of the HeliScope system and its expected long sales cycle. If ouravailable cash, cash equivalents and investment balances and net proceeds fromthe initial public offering of our common stock, which we completed in May2007, are insufficient to satisfy our liquidity requirements, we may seek tosell additional equity or debt securities or enter into another creditfacility. The sale of additional equity and debt securities may result indilution to our stockholders. If we raise additional funds through the issuanceof debt securities, these securities could have rights senior to those of ourcommon stock and could contain covenants that would restrict our operations. Wemay require additional capital beyond our currently anticipated amounts. Any suchrequired additional capital may not be available on reasonable terms, if atall. If we are unable to obtain additional financing, we may be required toreduce the scope of, delay, or eliminate some or all of, our planned research,development and commercialization activities, which could materially harm ourbusiness.

 

Ourforecast of the period of time through which our financial resources will beadequate to support our operations, the costs to complete development ofproducts and the cost to commercialize our future products are forward-lookingstatements and involve risks and uncertainties, and actual results could varymaterially and negatively as a result of a number of factors, including thefactors discussed in the “Risk Factors” section of this report. We have basedthese estimates on assumptions that may prove to be wrong, and we could utilizeour available capital resources sooner than we currently expect.

 

Becauseof the numerous risks and uncertainties associated with the development of ourproduct, we are unable to estimate the exact amounts of capital outlays andoperating expenditures necessary to complete the development of our futureproducts and successfully deliver any such products to the market. Our futurecapital requirements will depend on many factors, including, but not limitedto, the following:

 

•                  the rate of progress andcost of our commercialization activities;

 

•                  the success of our researchand development efforts;

 

•                  the expenses we incur inmarketing and selling our products;

 

•                  the revenue generated byfuture sales of our products;

 

•                  the emergence of competingor complementary technological developments;

 

•                  the costs of filing,prosecuting, defending and enforcing any patent claims and other intellectualproperty rights;

 

•                  the terms and timing of anycollaborative, licensing or other arrangements that we may establish; and

 

•                  the acquisition ofbusinesses, products and technologies, although we currently have nocommitments or agreements relating to any of these types of transactions.

 

Workingcapital as of September 30, 2007 was $50.8 million, consisting of$55.6 million in current assets and $4.8 million in current liabilities.Working capital as of December 31, 2006 was $8.7 million, consistingof $12.0 million in current assets and $3.4 million in currentliabilities.

 

**Contractual obligations**

 

A summary of our contractual obligations is includedin our Registration Statement on Form S-1, as amended, which was declaredeffective by the Securities and Exchange Commission on May 24, 2007. Wereviewed our contractual obligations as of September 30, 2007 and determinedthat there were no significant changes from the ones set forth in our Form S-1.

 

**License agreements and patents**

 

Wehave fixed annual costs associated with license agreements into which we haveentered. In addition, we may have to make contingent payments in the futureupon realization of certain milestones or royalties payable under theseagreements.

 

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**Line of credit facility and security agreement**

 

InJune 2006, we entered into a line of credit facility and securityagreement with General Electric Capital Corporation (“GE Capital”). The creditfacility provides that we may borrow up to $8.0 million at an interest ratebased on the Federal Reserve’s three year Treasury Constant Maturities Rate.The end of the advance period is December 31, 2007. The proceeds of thecredit facility may be used for the purchase of equipment and arecollateralized by specific equipment assets. Payments are required to be madeon a monthly basis. For the first six months interest-only payments arerequired. Thereafter, for the following 30 months, payments of principaland interest will be due for each advance. The outstanding balance is collateralizedby the equipment purchased with the proceeds from each equipment advance. As ofSeptember 30, 2007, advances on the credit facility were $2.5 million at aweighted-average interest rate of 10.1%.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

Duringthe nine months ended September 30, 2007 and 2006, we did not engage inany off-balance sheet arrangements.

 

**CriticalAccounting Policies and Estimates**

 

Inour Registration Statement on Form S-1, as amended, which was declared effective by the Securities andExchange Commission on May 24, 2007, our most critical accounting policies andestimates upon which our financial status depends were identified as thoserelating to stock-based compensation; revenue recognition; inventory; allowancefor doubtful accounts; and net operating losses and tax credit carryforwards. Wereviewed our policies and determined that those policies remain our mostcritical accounting policies for the nine months ended September 30, 2007. Wedid not make any changes in those policies during the nine months endedSeptember 30, 2007, except for the changes related to the adoption of FIN 48. FIN48 prescribes a new methodology by which a company must measure, report,present and disclose in its financial statements the effects of any uncertaintax return reporting positions that a company has taken or expects to take. SeeNote 5, Income Taxes, in the Notes to Consolidated Financial Statements foradditional information.

 

**Item 3. Quantitative and Qualitative Disclosures aboutMarket Risk**

 

Ourexposure to market risk is limited to our cash and cash equivalents which havematurities of less than one year. The goals of our investment policy arepreservation of capital, fulfillment of liquidity needs and fiduciary controlof cash and investments. We also seek to maximize income from our investmentswithout assuming significant risk. To achieve our goals, we maintain aportfolio of cash equivalents in a variety of securities of high creditquality. The securities in our investment portfolio are not leveraged, areclassified as available for sale and are, due to their very short-term nature,subject to minimal interest rate risk. We currently do not hedge interest rateexposure. Because of the short-term maturities of our investments, we do notbelieve that an increase in market rates would have any material negativeimpact on the value of our investment portfolio.

 

**Item 4. Controls and Procedures**

 

Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, has evaluated the effectiveness of our disclosure controlsand procedures (as defined in Rules 13a-15(e) or 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based on such evaluation, our chiefexecutive officer and chief financial officer have concluded that, as of theend of such period, our disclosure controls and procedures were effective inensuring that information required to be disclosed by Helicos in the reportsthat it files or submits under the Exchange Act is recorded, processed,summarized and reported, on a timely basis, and is accumulated and communicatedto our management, including our chief executive officer and chief financialofficer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

Nochange in our internal control over financial reporting (as defined in ExchangeAct Rules 13a-15(f) and 15d-15(f)) occurred during the period coveredby this quarterly report that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

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**Part II - Other Information**

 

**Item 1. Legal Proceedings**

 

Not applicable.

 

**Item 1A. Risk Factors**

 

The following important factors could cause our actual business andfinancial results to differ materially from those contained in forward-lookingstatements made in this Quarterly Report on Form 10-Q or elsewhere bymanagement from time to time.

 

**RISKS RELATED TO OUR BUSINESS**

 

**We are beginning to assemble and test our first commercialproduct, the HeliScope system, but have not yet sold any of these systems. Wemay not be able to successfully complete the manufacturing process and ship theHeliScope system, in which event our business would be materially harmed.**

 

Toship our HeliScope system, we need to complete the assembly, testing andperformance validation of the system. In order to initiate our commerciallaunch of the HeliScope system, we need to take other steps to prepare for thecommercial scale manufacture of the system, including the development ofmanufacturing documentation and the development and implementation of qualityassurance and quality control procedures. We also need to manufacture theproprietary reagents and disposable supplies that are part of the system orhave them manufactured for us by third parties. If we are unable tosuccessfully complete these tasks, we may not be able to ship our HeliScopesystem in a timely manner, or at all, which would materially harm our business.In addition, although we believe that we have already incurred the substantialmajority of the costs related to the development of the initial version of ourHeliScope system, if we experience unanticipated delays or problems, thesecosts could substantially increase, which would materially harm our business. Inaddition, any unanticipated delays or problems could impede our ability to shipthe HeliScope system by the end of 2007, or soon thereafter and may furtherdelay our ability to begin commercial launch.

 

**We have a history of operating losses, expect to continue toincur substantial losses, and might never achieve or maintain profitability.**

 

We are a development-stagecompany with limited operating history. We have incurred significant losses ineach fiscal year since our inception, including net losses of$10.9 million and $20.6 million in the years ended December 31,2005 and 2006, respectively. As of September 30, 2007, we had an accumulateddeficit of $83.6 million. These losses have resulted principally fromcosts incurred in our research and development programs and from our generaland administrative expenses. In 2006, we used cash in operating activities of$16.5 million and had capital expenditures totaling $2.8 million. Inthe first nine months of 2007, we used cash in operating activities of$21.9 million and had capital expenditures totaling $1.3 million. Weexpect our cash expenditures to increase significantly in the near term.

 

Accordingly,we will need to generate significant revenue to achieve profitability. While weexpect to begin shipment of the HeliScope system in the fourth quarter of 2007or soon thereafter, because our products will be subject to acceptance testingby our customers we do not expect to have any recognizable revenue from thesales of our instruments until at least 2008. We currently do not have anyorders for the HeliScope system. Moreover, even after we begin selling ourproducts, we expect our losses to continue as a result of ongoing research anddevelopment expenses, as well as increased manufacturing, sales and marketingexpenses. These losses, among other things, have had and will continue to havean adverse effect on our working capital, total assets and stockholders’equity. Because of the numerous risks and uncertainties associated with ourproduct development and commercialization efforts, we are unable to predictwhen we will become profitable, and we may never become profitable. Even if wedo achieve profitability, we may not be able to sustain or increaseprofitability on a quarterly or annual basis. If we are unable to achieve andthen maintain profitability, the market value of our common stock will decline.

 

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**If our technology fails to achieve and sustain sufficientmarket acceptance, we will not generate expected revenue.**

 

Oursuccess depends, in part, on our ability to develop products that displacecurrent technology, as well as expand the market for genetic analysis to includenew applications that are not practical with current technology. To accomplishthis, we must develop and successfully commercialize our HeliScope system foruse in a variety of life science applications. These markets are new andemerging and there can be no assurances that they will develop as quickly as weexpect or that they will reach their full potential. There is no guarantee,even if our technology is able to successfully reduce the cost and improve theperformance of genetic analysis relative to existing products, that we will beable to induce customers with installed bases of conventional genetic analysisinstruments to purchase our systems or to expand the market for geneticanalysis to include new applications. Even if we are able to successfullyimplement our technology, we may fail to achieve or sustain market acceptanceof our HeliScope system by academic and government research laboratories andpharmaceutical, biotechnology and agriculture companies, among others, acrossthe full range of our intended life science applications. Any such failurewould materially harm our future sales and revenue. The price of the HeliScopeinstrument is significantly greater than the instrument cost of current market-leadingsequencers, which may adversely affect our ability to penetrate or grow themarket for genetic analysis. In addition, if our products are only utilized asa replacement for existing DNA sequencing technology, we may face a muchsmaller market than we currently anticipate.

 

Weare aware of other companies that have developed, or are developing, emergingsequencing technologies. Even if our product demonstrates dramatic cost andthroughput improvements over current market-leading technologies, we may failto achieve market acceptance due to adoption of those emerging technologies byour potential customers, thereby reducing our market opportunity.

 

**We have no experience in selling and limited experience inmarketing and, as a result, may be unable to successfully commercialize ourHeliScope system.**

 

Wehave no sales experience and limited marketing experience. Our ability toachieve profitability depends on attracting customers for our HeliScope system.Although members of our sales and marketing team have considerable industryexperience and have engaged in pre-launch marketing activities for ourHeliScope system, we must expand our sales, marketing, distribution andcustomer support capabilities and develop a specialized sales, marketing andservice force with the appropriate technical expertise to market our system. Wecurrently have a limited number of sales representatives, however, andtherefore have limited sales and marketing infrastructure. We plan to initiallyestablish a specialized sales, marketing and service force of approximately20 people. To successfully perform sales, marketing, distribution andcustomer support functions ourselves, we will face a number of risks,including:

 

•                  our ability to attract andretain the specialized sales, marketing and service force necessary to commercializeand gain market acceptance for our technology;

 

•                  the time and cost ofestablishing a specialized sales, marketing and service force for a particularapplication, which might not be justifiable by the revenues generated by ourtechnology; and

 

•                  the ability of ourspecialized sales, marketing and service force to initiate and executesuccessful commercialization activities.

 

Inaddition to the recruitment of our specialized sales, marketing and serviceforce, we may seek to enlist one or more third parties to assist with sales,distribution and customer support globally or in certain regions of the world.There is no guarantee, if we do seek to enter into such arrangements, that wewill be successful in attracting desirable sales and distribution partners, orthat we will be able to enter into such arrangements on favorable terms. If oursales and marketing efforts, or those of any third-party sales and distributionpartners, are not successful, our technologies and products may not gain marketacceptance, which could materially impact our business operations.

 

**If we are unable to timely establish manufacturing capacityby ourselves or with partners, commercialization of our products would bedelayed, which could result in lost revenues and harm our business.**

 

Tocommercialize our HeliScope system, we need to either build internalmanufacturing capacity or contract with one or more manufacturing partners, orboth. We currently intend to use a combination of outsourced and internalmanufacturing resources. We have not manufactured on a commercial scale anyinstruments, reagents or disposable supplies. We may encounter difficulties inmanufacturing our products and, due to the complexity of our technology and ourmanufacturing process, we cannot be sure we fully understand all of the factorsthat affect our manufacturing processes or product performance. There is noassurance that we will be able to continue to build manufacturing capacityinternally or find one or more suitable manufacturing partners, or both, tomeet the volume and quality requirements necessary to be successful in themarket. Manufacturing and product quality issues may arise as we increaseproduction rates of our HeliScope system and associated proprietary reagentsand disposable supplies. If our products do not consistently meet our customers’performance expectations, we may be unable to generate sufficient revenues tobecome profitable. Any delay in establishing or inability to expand ourmanufacturing capacity could delay our ability to develop or sell our products,which could result in lost revenue and seriously harm our business, financialcondition and results of operations.

 

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**Future product sales will depend, in part, on research anddevelopment spending levels of academic, clinical and governmental researchinstitutions and pharmaceutical, biotechnology and agriculture companies, andany reduction in such spending levels could limit our ability to sell ourproduct.**

 

Weexpect that our revenues in the foreseeable future will be derived primarilyfrom sales of instruments, reagents and disposable supplies to a relativelysmall number of academic, clinical, governmental and other researchinstitutions and pharmaceutical, biotechnology and agriculture companies thatconduct large-scale genetic analyses. Our success will depend upon their demandfor and use of our products. Accordingly, the spending policies of thesecustomers could have a significant effect on the demand for our technology.These policies are based on a wide variety of factors, including the resourcesavailable to make purchases, the spending priorities among various types ofequipment, policies regarding spending during recessionary periods and changesin the political climate. In addition, academic, governmental and otherresearch institutions that fund research and development activities may besubject to stringent budgetary constraints that could result in spendingreductions, reduced allocations or budget cutbacks, which could jeopardize theability of these customers to purchase our system. Our operating results mayfluctuate substantially due to reductions and delays in research anddevelopment expenditures by these customers. For example, reductions in capitalexpenditures by these customers may result in lower than expected instrumentsales and similarly, reductions in operating expenditures by these customerscould result in lower than expected sales of reagents and disposable supplies.These reductions and delays may result from factors that are not within ourcontrol, such as:

 

•                  changes in economicconditions;

 

•                  changes in governmentprograms that provide funding to research institutions and companies;

 

•                  changes in the regulatoryenvironment affecting life sciences companies and life sciences research;

 

•                  market-driven pressures oncompanies to consolidate and reduce costs; and

 

•                  other factors affectingresearch and development spending.

 

Anydecrease in our customers’ budgets or expenditures or in the size, scope orfrequency of capital or operating expenditures as a result of the foregoing orother factors could materially adversely affect our operations or financialcondition.

 

**If the suppliers we rely on fail to supply the materials weuse in the manufacturing of our products, we might be unable to satisfy productdemand, which would negatively affect our business.**

 

Somecomponents used in the manufacturing of our HeliScope system and certain rawmaterials used in the manufacturing of our reagents and disposable supplies areavailable from only a few suppliers. We acquire some of these components andraw materials on a purchase-order basis, which means that the supplier is notrequired to supply us with specified quantities of these components or rawmaterials over a certain period of time or to set aside part of its inventoryfor our anticipated requirements. If supplies from these vendors were delayedor interrupted for any reason, we may not be able to manufacture and sell ourHeliScope system and associated reagents and disposable supplies in a timelyfashion or in sufficient quantities or under acceptable terms. Additionally,for certain of these components and raw materials, we currently purchase fromsole-source suppliers and have not yet arranged for alternative suppliers. Itmight be difficult to find alternative suppliers in a timely manner and onterms acceptable to us. Consequently, as we begin our commercializationefforts, if we do not forecast properly, or if our suppliers are unable orunwilling to supply us in sufficient quantities or on commercially acceptableterms, we might not have access to sufficient quantities of these materials ona timely basis and might not be able to satisfy product demand. Moreover, ifany of these components and raw materials becomes unavailable in themarketplace, we will be forced to further develop our technologies toincorporate alternate components or raw materials.

 

**Our inability to continually enhance our product performance,including our planned improvements to the HeliScope system, to keep pace withrapidly changing technology and customer requirements could adversely affectour ability to compete effectively.**

 

Thesuccess of any products utilizing our tSMS technology will depend on ourability to continue to increase the performance and decrease the price ofsequencing using this technology. New technologies, techniques or productscould emerge which might allow the analysis of genomic information with similaror better price-performance than our HeliScope system and could exert pricingpressures on or take market share from our products. It is critical to oursuccess for us to anticipate changes in technology and customer requirementsand to successfully introduce new, enhanced and competitive technology to meetour customers’ and prospective customers’ needs on a timely basis. While wehave planned substantial improvements to the HeliScope system, includingenhancing the performance of the system’s reagents and disposable supplies andimage processing subsystem and reducing the consumption of reagents, we may notbe able to successfully implement these improvements. Even if we successfullyimplement some or all of these planned improvements, we could incur substantialdevelopment costs. We may not have adequate resources available to develop newtechnologies or be able to successfully introduce enhancements to our system.There can be no guarantee that we will be able to maintain technologicaladvantages over emerging technologies in the future, and we will need torespond to technological innovation in a rapidly changing industry. If we failto keep pace with emerging technologies, our system will become uncompetitive,our market share will decline and our business, revenue, financial conditionand operating results could suffer materially.

 

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**We operate in a highly competitive industry and if we are notable to compete effectively, our business and operating results will be harmed.**

 

Someof our current competitors, as well as many of our potential competitors, havegreater name recognition, more substantial intellectual property portfolios,longer operating histories, significantly greater resources to invest in newtechnologies and more substantial experience in new product development,regulatory expertise, manufacturing capabilities and the distribution channelsto deliver products to customers than we do. For example, companies such asAffymetrix, Inc., Agilent Technologies, the Applied Biosystems division ofApplera Corporation, GE Healthcare (through its Amersham Biosciences unit),Illumina, Inc., (through its Solexa unit) and Roche Diagnostics (throughits 454 Life Sciences unit) have products for genetic analysis which compete incertain segments of the market in which we plan to sell our HeliScope system.For example, Illumina recently introduced a next generation DNA sequencingsystem to the market, against which we expect our HeliScope system willdirectly compete. Pharmaceutical and biotechnology companies have significantneeds for genomic information and may also choose to develop or acquirecompeting technologies to meet these needs. In addition, a number of othercompanies and academic groups are in the process of developing novel techniquesfor genetic analysis, many of which have also received grants from the NationalHuman Genome Research Institute, a branch of the National Institutes of Health,for the development of technologies that can achieve substantially lower costs,referred to as a “$100,000 genome” or a “$1,000 genome.” These competitors maybe able to respond more quickly and effectively than we can to new or changingopportunities, technologies, standards or customer requirements. Further, inlight of these advantages, even if our technology is more effective than theproduct or service offerings of our competitors, current or potential customersmight accept competitive products and services in lieu of purchasing ourtechnology. We may not be able to compete effectively against these organizations.Increased competition is likely to result in pricing pressures, which couldharm our sales, profitability or market share. Our failure to competeeffectively could materially adversely affect our business, financial conditionor results of operations.

 

Inaddition, to the extent that, in the long term, we commercialize any productsutilizing our tSMS technology for use in future life science applications, suchas clinical diagnostic or protein analysis applications, we will faceadditional competition. In the event that we develop new technology andproducts that compete with existing technology and products of well establishedcompanies, the marketplace might not adopt our technology and products.

 

**Failure to manage our rapid growth effectively could harm ourbusiness.**

 

Wewill need to add a significant number of new personnel and expand ourcapabilities to successfully pursue our commercialization strategy for ourHeliScope system as well as our research and development efforts. To manage ouranticipated future growth effectively, we must enhance our manufacturingcapabilities and operations, information technology infrastructure, andfinancial and accounting systems and controls. For instance, certain aspects ofour operations, such as our manufacturing capabilities, must be scaled up toincrease the number of HeliScope systems we can manufacture per quarter. Wealso must attract, train and retain a significant number of qualified sales,marketing and service personnel, engineers, scientists and other technicalpersonnel and management personnel. Our failure to manage our rapid growtheffectively could have a material adverse effect on our business, operatingresults or financial condition. Organizational growth and scale-up ofoperations could strain our existing managerial, operational, financial andother resources. Our growth could require significant capital expenditures andmay divert financial resources from other projects, such as the development ofnew products or enhancements. If our management is unable to effectively manageour growth, our expenses may increase more than expected, our revenue couldgrow more slowly than expected and we may not be able to achieve our researchand development and commercialization goals.

 

**Our business could be harmed if we are not successful inentering into large contracts for the sale and installation of our HeliScopesystems.**

 

Ourbusiness may depend upon securing and maintaining large contracts for the saleand installation of our HeliScope systems to a limited number of customers eachyear. We expect the sales cycle for these large contracts to be longer than forother contracts because we will need to educate potential customers regardingthe benefits of our system to a variety of constituencies within such customerorganizations. Moreover, even after a purchase decision is made, thesecontracts may be delayed by factors outside our control, including financialand budget constraints of the customers purchasing our product. Accordingly, wemay expend substantial funds and management effort with no assurance that anagreement will be reached with a potential customer. Our business, results ofoperations and financial condition could be materially adversely affected if weare unable to obtain major contracts for the sale and installation of ourHeliScope systems, or if we experience delays in the performance of suchcontracts.

 

**We expect that our sales cycle will be lengthy andunpredictable, which will make it difficult for us to forecast revenue and increasethe magnitude of quarterly fluctuations in our operating results.**

 

Potentialcustomers for our HeliScope system typically commit significant resources toevaluate genetic analysis technologies. The complexity of our product willrequire us to spend substantial time and effort to assist potential customersin evaluating our HeliScope system and in benchmarking it against availabletechnologies. Because our HeliScope system requires a significant investment oftime and cost by our customers, we must target those senior managers within thecustomer’s organization who are able to make these decisions on behalf of suchorganizations. We may face difficulty identifying and establishing contact withsuch decision makers. Even after initial acceptance, the negotiation anddocumentation processes can be lengthy. We expect our sales cycle to typicallyrange between six and twelve months, but it may be longer. Any delay incompleting sales in a particular quarter could cause our operating results tofall below expectations.

 

**Our customers may purchase replacements for the reagents anddisposable supplies that are a part of our HeliScope system from third partiesor discover a method that allows them to use less than the expected amounts ofsuch products, which could materially and adversely affect our revenues.**

 

Thesuccess of our business depends, in part, on the recurring sales of theproprietary reagents and disposable supplies for our system. Because we havenot yet commercialized our HeliScope system, we do not have the experience topredict the percentage of our revenues that we will derive from sales ofproprietary reagents and disposable supplies. Nevertheless, we expect suchsales to represent a material source of our future revenues. Our customers orcompetitors could potentially produce reagents and disposable supplies that arecompatible with our HeliScope system at a lower cost, which could exert pricingpressures on, or take market share from, our reagents and disposable supplies.Similarly, our customers or competitors may discover a method of utilizingsmaller quantities of our proprietary reagents and disposable supplies whileachieving satisfactory results, which could reduce the amount of reagents andsupplies we are able to sell. In either case, there could be a material adverseeffect on our revenues and harm to our business, financial condition andresults of operations.

 

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**If we are unable to recruit and retain key executives andscientists, we may be unable to achieve our goals.**

 

Weare substantially dependent on the performance of our senior management and keyscientific and technical personnel, particularly Stanley N. Lapidus, ourChairman and Chief Executive Officer, J. William Efcavitch, PhD, our SeniorVice President of Product Research and Development and Stephen J.Lombardi, our President and Chief Operating Officer. We do not maintainemployment contracts with any of our employees. The loss of the services of anymember of our senior management or our scientific or technical staff maysignificantly delay or prevent the development of our products and otherbusiness objectives by diverting management’s attention to transition mattersand identification of suitable replacements, if any, and could have a materialadverse effect on our business, operating results and financial condition.

 

Inaddition, our product development and marketing efforts could be delayed orcurtailed if we are unable to attract, train and retain highly skilledemployees and scientific advisors, particularly our management team, seniorscientists and engineers and sales, marketing and service personnel. To expandour research, product development and sales efforts we need additional peopleskilled in areas such as bioinformatics, manufacturing, sales, marketing andtechnical support. Because of the complex and technical nature of our systemand the dynamic market in which we compete, any failure to attract and retain asufficient number of qualified employees could materially harm our ability todevelop and commercialize our technology. Competition for these people isintense. Further, our inability to attract, train and retain sales, marketingand service personnel could have a material adverse affect on our ability togenerate sales or successfully commercialize our technology. Each of ourexecutive officers and other key employees could terminate his or herrelationship with us at any time. These persons’ expertise would be difficultto replace and could have a material adverse effect on our ability to achieveour business goals. There can be no assurance that we will be successful inhiring or retaining qualified personnel and our failure to do so could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

**Ethical, legal and social concerns surrounding the use ofgenetic information could reduce demand for our technology.**

 

Oneof the potential uses for our product is genetic testing for predisposition tocertain conditions. Genetic testing has raised ethical, legal and social issuesregarding privacy and the appropriate uses of the resulting information.Governmental authorities could, for social or other purposes, call for limitson or regulation of the use of genetic testing or prohibit testing for geneticpredisposition to certain conditions, particularly for those that have no knowncure. Similarly, such concerns may lead individuals to refuse to use geneticstests even if permissible. These and other ethical, legal and social concernsabout genetic testing may limit market acceptance of our technology for certainapplications or reduce the potential markets for our technology, either ofwhich could have a material adverse effect on our business, financial conditionand results of operations.

 

**Our products could in the future be subject to regulation bythe U.S. Food and Drug Administration or other regulatory agencies, which couldincrease our costs and delay our commercialization efforts, thereby materiallyand adversely affecting our business and results of operations.**

 

Ourproducts are not currently subject to U.S. Food and Drug Administration (“FDA”)clearance or approval. However, in the future, certain of our products orrelated applications could be subject to FDA regulation; the FDA’s regulatoryjurisdiction could be expanded to include our products, or both. Even where aproduct is exempted from FDA clearance or approval, the FDA may imposerestrictions as to the types of customers to which we can market and sell ourproducts. Such regulation and restrictions may materially and adversely affectour business, financial condition and results of operations.

 

Lawsand regulations are also in effect in many countries that could affect ourproducts. The number and scope of these requirements are increasing. We may notbe able to obtain regulatory approvals in such countries or may incursignificant costs in obtaining or maintaining our foreign regulatory approvals.In addition, the export by us of certain of our products which have not yetbeen cleared for domestic commercial distribution may be subject to FDA orother export restrictions.

 

**Our products could have unknown defects or errors, which maygive rise to claims against us or divert application of our resources fromother purposes.**

 

Anyproduct utilizing our tSMS technology will be complex and may develop orcontain undetected defects or errors. We cannot assure you that a materialperformance problem will not arise. Despite testing, defects or errors mayarise in our system, which could result in a failure to achieve marketacceptance or expansion, diversion of development resources, injury to ourreputation and increased service and maintenance costs. Defects or errors inour products might also discourage customers from purchasing our system. Thecosts incurred in correcting any defects or errors may be substantial and couldadversely affect our operating margins. In addition, such defects or errorscould lead to the filing of product liability claims, which could be costly andtime-consuming to defend and result in substantial damages. Although we plan toobtain product liability insurance prior to the commercial launch of ourHeliScope system, any future product liability insurance that we procure maynot protect our assets from the financial impact of a product liability claim.Moreover, we may not be able to obtain adequate insurance coverage onacceptable terms. Any insurance that we do obtain will be subject todeductibles and coverage limits. A product liability claim could have a seriousadverse effect on our business, financial condition and results of operations.

 

**We will incur significant increased costs as a result ofoperating as a public company, and our management will be required to devotesubstantial time to new compliance initiatives.**

 

Wehave limited history operating as a public company. As a public company, wewill incur significant legal, accounting and other expenses that we did notincur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as wellas new rules subsequently implemented by the Securities and Exchange Commissionand the NASDAQ Global Market, have imposed various new requirements on publiccompanies, including requiring changes in corporate governance practices. Ourmanagement and other personnel will need to devote a substantial amount of timeto these new compliance initiatives. Moreover, these rules and regulations willincrease our legal and financial compliance costs and will make some activitiesmore time-consuming and costly. For example, we expect these new rules andregulations to make it more difficult and more expensive for us to obtaindirector and officer liability insurance and we may be required to incursubstantial costs to maintain the same or similar coverage.

 

Inaddition, the Sarbanes-Oxley Act requires, among other things, that we maintaineffective internal control over financial reporting and disclosure controls andprocedures. In particular, commencing in 2008, we must perform system andprocess evaluation and testing of our internal control over financial reportingto allow management and our independent registered public accounting firm toreport on the effectiveness of our internal control over financial reporting,as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or thesubsequent testing by our independent registered public accounting firm, mayreveal deficiencies in our internal control over financial reporting that aredeemed to be material weaknesses. Our compliance with Section 404 will requirethat we incur substantial accounting expense and expend significant managementtime on compliance-related issues. We currently do not have an internal auditgroup and we will evaluate the need to hire additional accounting and financialstaff with appropriate public company experience and technical accountingknowledge. Moreover, if we are not able to comply with the requirements ofSection 404 in a timely manner, or if we or our independent registeredpublic accounting firm identifies deficiencies in our internal control overfinancial reporting that are deemed to be material weaknesses, the market priceof our stock could decline and we could be subject to sanctions orinvestigations by the NASDAQ Global Market, the Securities and Exchange Commissionor other regulatory authorities, which would require additional financial andmanagement resources.

 

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**We may need to raise additional funding, which may not beavailable on favorable terms, if at all, or without dilution to ourstockholders. If we do not raise any necessary funds, we may need to cut backor terminate some or all aspects of our operations which could materiallyadversely affect our business prospects.**

 

Becauseour HeliScope system is complex and will be new to the market and involvesignificant capital expenditures by customers and a long sales cycle, it isvery difficult to predict the actual rate of product sales. We may needadditional financing to execute on our current or future business strategies.We expect capital outlays and operating expenditures to increase over the nextseveral years as we expand our infrastructure, commercialization, manufacturingand research and development activities. The amount of additional capital we mayneed to raise depends on many factors, including:

 

•                  the level of research anddevelopment investment required to maintain and improve our technologyposition;

 

•                  the amount and growth rateof our revenues;

 

•                  changes in productdevelopment plans needed to address any difficulties in manufacturing orcommercializing our HeliScope system and enhancements to our system;

 

•                  the costs of filing,prosecuting, defending and enforcing patent claims and other intellectualproperty rights;

 

•                  competing technological andmarket developments;

 

•                  our need or decision toacquire or license complementary technologies or acquire complementarybusinesses; and

 

•                  changes in regulatorypolicies or laws that affect our operations.

 

Wecannot be certain that additional capital will be available when and as neededor that our actual cash requirements will not be greater than anticipated. Ifwe require additional capital at a time when investment in biotechnology orlife sciences companies or in the marketplace in general is limited due to thethen prevailing market or other conditions, we may not be able to raise suchfunds at the time that we desire or any time thereafter. In addition, if weraise additional funds through the issuance of equity or convertible debtsecurities, the percentage ownership of our stockholders could be significantlydiluted, and these newly-issued securities may have rights, preferences orprivileges senior to those of existing stockholders. If we obtain additionaldebt financing, a substantial portion of our operating cash flow may bededicated to the payment of principal and interest on such indebtedness, andthe terms of the debt securities issued could impose significant restrictionson our operations. If we raise additional funds through collaborations andlicensing arrangements, we might be required to relinquish significant rightsto our technologies or products, or grant licenses on terms that are notfavorable to us. If we are unable to obtain financing on terms favorable to us,we may be unable to execute our business plan and we may be required to ceaseor reduce development or commercialization of our technology, sell some of allof our technology or assets or merge with another entity.

 

**We use hazardous chemicals and biological materials in ourbusiness. Any claims relating to improper handling, storage or disposal ofthese materials could be time consuming and costly.**

 

Ourresearch and development processes involve the controlled use of hazardousmaterials, including chemicals and biological materials. Our operations producehazardous waste products. We cannot eliminate the risk of accidentalcontamination or discharge and any resultant injury from these materials. Wemay be sued for any injury or contamination that results from our use or the useby third parties of these materials. We do not currently maintain separateenvironmental liability coverage. Federal, state and local laws and regulationsgovern the use, manufacture, storage, handling and disposal of hazardousmaterials. Compliance with environmental laws and regulations may be expensive,and current or future environmental regulations may impair our research,development and production efforts.

 

**Because we are subject to existing and potential additionalgovernmental regulation, we may become subject to burdens on our operations,and the markets for our products may be narrowed.**

 

Weare subject, both directly and indirectly, to the adverse impact of existingand potential future government regulation of our operations and markets. For example,export of our instruments is subject to strict regulatory control in a numberof jurisdictions. The failure to satisfy export control criteria or obtainnecessary clearances could delay or prevent shipment of products, which couldadversely affect our revenues and profitability. Moreover, the life sciencesindustry, which is the market for our technology, has historically been heavilyregulated. There are, for example, laws in several jurisdictions restrictingresearch in genetic engineering, which can operate to narrow our markets. Giventhe evolving nature of this industry, legislative bodies or regulatoryauthorities may adopt additional regulation that adversely affects our marketopportunities. Additionally, if ethical and other concerns surrounding the useof genetic information, diagnostics or therapies become widespread, we may haveless demand for our products. Our business is also directly affected by a widevariety of government regulations applicable to business enterprises generallyand to companies operating in the life science industry in particular. Failureto comply with these regulations or obtain or maintain necessary permits andlicenses could result in a variety of fines or other censures or aninterruption in our business operations which may have a negative impact on ourability to generate revenues and could increase the cost of operating ourbusiness.

 

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**If we make acquisitions in the future, we may encounter arange of problems that could harm our business.**

 

Wemay acquire technologies, products or companies that we feel could accelerateour ability to compete in our core markets. Acquisitions involve numerousrisks, including:

 

•                  difficulties in integratingoperations, technologies, accounting and personnel;

 

•                  difficulties in supportingand transitioning customers of our acquired companies;

 

•                  diversion of financial andmanagement resources from existing operations;

 

•                  risks of entering newmarkets;

 

•                  potential loss of keyemployees; and

 

•                  inability to generatesufficient revenue to offset acquisition costs.

 

Acquisitionsalso frequently result in the recording of goodwill and other intangible assetswhich are subject to potential impairments in the future that could harm ourfinancial results. In addition, if we finance acquisitions by issuingconvertible debt or equity securities, our existing stockholders may bediluted, which could affect the market price of our stock. As a result, if wefail to properly evaluate acquisitions or investments, we may not achieve theanticipated benefits of any such acquisitions, and we may incur costs in excessof what we anticipate.

 

**RISKS RELATED TO OUR INTELLECTUAL PROPERTY**

 

**Our failure to establish a strong intellectual propertyposition and enforce our intellectual property rights against others couldenable competitors to develop similar or alternative technologies.**

 

Oursuccess depends in part on our ability to obtain and maintain intellectualproperty protection for our products, processes and technologies. Our policy isto seek to protect our intellectual property by, among other methods, filingU.S. patent applications related to our proprietary technology, inventions andimprovements that are important to the development of our business.

 

Currently,our patent portfolio relating to our proprietary technology is comprised, on aworldwide basis, of fifteen issued patents and 133 pending patentapplications which, in either case, we own directly or for which we are theexclusive or semi-exclusive licensee. Some of these patents and patentapplications are foreign counterparts of U.S. patents or patent applications.The issued patents expire on dates ranging from 2018 through 2024. We may notbe able to maintain and enforce existing patents or obtain further patents forour products, processes and technologies. Even if we are able to maintain ourexisting patents or obtain further patents, these patents may not provide uswith substantial protection or be commercially beneficial. The issuance of apatent is not conclusive as to its validity or enforceability, nor does itprovide the patent holder with freedom to operate unimpeded by the patentrights of others. Patent law relating to the scope of claims in the technologyfields in which we operate is still evolving and the extent of futureprotection is highly uncertain, so there can be no assurance that the patentrights that we have or may obtain will be valuable. Others have filed patentapplications that are similar in scope to ours, and in the future are likely tofile patent applications that are similar or identical in scope to ours orthose of our licensors. We cannot predict whether any of our competitors’ pendingpatent applications will result in the issuance of valid patents. Moreover, wecannot assure investors that any such patent applications will not havepriority or dominate over our patents or patent applications. The invalidationof key patents owned by or licensed to us or non-approval of pending patentapplications could increase competition, and materially adversely affect ourbusiness, financial condition and results of operations. Furthermore, there canbe no assurance that others will not independently develop similar oralternative technologies, duplicate any of our technologies, or, if patents areissued to us, design around the patented technologies developed by us.

 

**We may be involved in lawsuits to protect or enforce ourpatents and proprietary rights and to determine the scope and validity ofothers’ proprietary rights, which could result in substantial costs anddiversion of resources.**

 

Litigationmay be necessary to enforce our patent and proprietary rights and/or todetermine the scope and validity of others’ proprietary rights. Litigation onthese matters has been prevalent in our industry and we expect that this willcontinue. To determine the priority of inventions, we may have to initiate andparticipate in interference proceedings declared by the U.S. Patent andTrademark Office that could result in substantial costs in legal fees and couldsubstantially affect the scope of our patent protection. Also, our intellectualproperty may be subject to significant administrative and litigation proceedingssuch as invalidity, opposition, reexamination, or reissue proceedings againstour patents. The outcome of any litigation or administrative proceeding mightnot be favorable to us, and, in that case, we might require licenses fromothers that we may not be able to obtain. Even if such licenses are obtainable,they may not be available at a reasonable cost. We may also be held liable formoney damages to third parties and could be enjoined from manufacturing orselling our products or technologies. In addition, if we resort to legalproceedings to enforce our intellectual property rights or to determine thevalidity and scope of the intellectual property or other proprietary rights ofothers, the proceedings could be burdensome and expensive, even if we were toprevail. Any litigation that may be necessary in the future could result insubstantial costs and diversion of resources and could have a material adverseeffect on our business, operating results or financial condition.

 

**We depend upon our ability to license technologies, and thefailure to license or otherwise acquire necessary technologies could harm ourability to commercialize our products or defend our intellectual propertyposition.**

 

Wehold licenses from Arizona Technology Enterprises, California Institute ofTechnology, Roche Diagnostics GmbH and PerkinElmer, LAS, Inc. to usecertain technologies that we consider to be material to our business. Each ofthese licenses imposes a range of obligations on us and may be terminated if webreach the terms of any of the respective agreements. We may also be requiredto enter into additional licenses with third parties for other technologiesthat we consider to be necessary for our business. If we are unable to maintainour existing licenses or obtain additional technologies on acceptable terms, wecould be required to develop alternative technologies, either alone or withothers, in order to avoid infringing the intellectual property to which we nolonger hold a license. This could require our product to be re-configured whichcould negatively impact its availability for commercial sale and increase ourdevelopment costs. Failure to license or otherwise acquire necessarytechnologies would harm our ability to commercialize our products, which couldmaterially adversely affect our business, financial condition and results ofoperations. In addition, any licenses we obtain from federally-fundedinstitutions are subject to the march-in rights of the U.S. government.

 

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**We may be the subject of costly and time-consuming lawsuitsbrought by third parties for alleged infringement of their proprietary rights,which could limit our ability to use certain technologies in the future, forceus to redesign or discontinue our products, or pay royalties to continue tosell our products.**

 

Oursuccess depends, in part, on us neither infringing patents or other proprietaryrights of third parties nor breaching any licenses to which we are a party. Wemay be the subject of legal claims by third-parties that we infringe theirpatents or otherwise violate their intellectual property rights. In addition,the technology that we license from third parties for use in our system couldbecome subject to similar infringement claims. Infringement claims assertedagainst us or our licensors may have a material adverse effect on our business,results of operations or financial condition. Any claims, either with orwithout merit, could be time-consuming and expensive to defend, and coulddivert our management’s attention away from the execution of our business plan.Moreover, any settlement or adverse judgment resulting from the claim couldrequire us to pay substantial amounts of money or obtain a license to continueto use the technology that is the subject of the claim, or otherwise restrictor prohibit our use of the technology. There can be no assurance that we wouldbe able to obtain a license on commercially reasonable terms, if at all, fromthird parties asserting an infringement claim; that we would be able to developalternative technology on a timely basis, if at all; or that we would be ableto obtain a license to use a suitable alternative technology to permit us tocontinue offering, and our customers to continue using, our affected products.Accordingly, an adverse determination could prevent us from offering ourinstruments, reagents or disposable supplies to others. In addition, we may berequired to indemnify our customers for third-party intellectual property infringementclaims, which would increase the cost to us of an adverse ruling for such aclaim. We believe that there may be significant litigation in the industryregarding patent and other intellectual property rights. If we become involvedin such litigation, it could consume a substantial portion of our managerialand financial resources.

 

Furthermore,because of the substantial amount of discovery required in connection withintellectual property litigation, there is a risk that some of our confidentialinformation could be compromised by disclosure during this type of litigation.In addition, during the course of this kind of litigation, there could bepublic announcements of the results of hearings, motions or other interimproceedings or developments. If securities analysts or investors perceive theseresults to be negative, it could have a substantial adverse effect on the priceof our common stock.

 

**The measures that we use to protect the security of ourintellectual property and other proprietary rights may not be adequate, whichcould result in the loss of legal protection for, and thereby diminish thevalue of, such intellectual property and other rights.**

 

Oursuccess depends in part on our ability to protect our intellectual property andother proprietary rights. In addition to patent protection, we also rely upon acombination of trademark, trade secret, copyright and unfair competition laws,as well as license agreements and other contractual provisions, to protect ourintellectual property and other proprietary rights. In addition, we attempt toprotect our intellectual property and proprietary information by requiring ouremployees, consultants and certain academic collaborators to enter intoconfidentiality and assignment of inventions agreements. There can be noassurance, however, that such measures will provide adequate protection for ourpatents, copyrights, trade secrets or other proprietary information. Inaddition, there can be no assurance that trade secrets and other proprietaryinformation will not be disclosed, that others will not independently developsubstantially equivalent proprietary information and techniques or otherwisegain access to or disclose our trade secrets and other proprietary information.To the extent that our intellectual property and other proprietary rights arenot adequately protected, third parties might gain access to our proprietaryinformation, develop and market genetic analysis systems similar to our tSMStechnology, or use trademarks similar to ours, each of which could materiallyharm our business. Existing U.S. federal and state intellectual property lawsoffer only limited protection. Moreover, the laws of other countries in whichwe may market our technology may afford little or no effective protection of ourintellectual property. The failure to adequately protect our intellectualproperty and other proprietary rights could materially harm our business.

 

**RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK**

 

**Our directors and management will exercise significant controlover our company, which will limit your ability to influence corporate matters.**

 

Certainof our directors and executive officers and their affiliates collectivelycontrol approximately 73.44% of our outstanding common stock. As a result,these stockholders, if they act together, will be able to influence ourmanagement and affairs and all matters requiring stockholder approval,including the election of directors and approval of significant corporatetransactions. This concentration of ownership may have the effect of delayingor preventing a change in control of our company and might negatively affectthe market price of our common stock.

 

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**The market price of our common stock may be volatile, which couldresult in substantial losses for our stockholders and subject us to securitiesclass action litigation.**

 

Priorto completion of our initial public offering in May 2007, there was no publicmarket for our common stock, and an active trading market for shares of ourcommon stock may never develop or be sustained following the initial publicoffering. If an active market for our stock develops and continues, our stockprice nevertheless may be volatile and be above or below the initial publicoffering price.

 

 Market prices of technology and healthcarecompanies have been particularly volatile. Some of the factors that may causethe market price of our common stock to fluctuate include:

 

•                  fluctuations in ourquarterly operating results or the operating results of companies perceived tobe similar to us;

 

•                  changes in estimates of ourfinancial results or recommendations by securities analysts;

 

•                  failure of our technologyto achieve or maintain market acceptance or commercial success;

 

•                  changes in marketvaluations of similar companies;

 

•                  success of competitiveproducts and services;

 

•                  changes in our capitalstructure, such as future issuances of securities or the incurrence ofadditional debt;

 

•                  announcements by us or ourcompetitors of significant products, contracts, acquisitions or strategicalliances;

 

•                  regulatory developments inthe United States, foreign countries or both;

 

•                  litigation involving ourcompany, our general industry or both;

 

•                  additions or departures ofkey personnel;

 

•                  investors’ generalperception of us; and

 

•                  changes in generaleconomic, industry and market conditions.

 

Inaddition, if the market for biotechnology and life sciences stocks or the stockmarket in general experiences a loss of investor confidence, the trading priceof our common stock could decline for reasons unrelated to our business,financial condition or results of operations. If any of the foregoing occurs,it could cause our stock price to fall and may expose us to class actionlawsuits that, even if unsuccessful, could be costly to defend and adistraction to management.

 

**If equity research analysts do not publish research orreports about our business or if they issue unfavorable commentary or downgradeour common stock, the price of our common stock could decline.**

 

Thetrading market for our common stock may rely in part on the research andreports that equity research analysts publish about us and our business. We donot control the opinions of these analysts. The price of our stock coulddecline if one or more equity analysts downgrade our stock or if those analystsissue other unfavorable commentary or cease publishing reports about us or ourbusiness.

 

**A significant portion of our total outstanding shares may besold into the public market in the near future, which could cause the marketprice of our common stock to drop significantly, even if our business is doingwell.**

 

Ifour existing stockholders sell substantial amounts of our common stock in thepublic market, the market price of our common stock could decreasesignificantly. The perception in the public market that our stockholders mightsell shares of common stock could also depress the market price of our commonstock. Substantially all of our stockholders prior to the initial publicoffering are subject to lock-up agreements with the underwriters that restricttheir ability to transfer their stock for 180 days following our initial publicoffering. Upon expiration of the lock-up agreements approximately 11 millionshares of our common stock will be eligible for sale in the public market. Themarket price of shares of our common stock may drop significantly when therestrictions on resale by our existing stockholders lapse and our stockholdersare able to sell shares of our common stock into the market. A decline in theprice of shares of our common stock might impede our ability to raise capitalthrough the issuance of additional shares of our common stock or other equitysecurities, and may cause you to lose part or all of your investment in our sharesof common stock.

 

Inaddition, the holders of an aggregate of approximately of 14 million shares ofour common stock, as of September 30, 2007, have rights, subject to someconditions, to require us to file registration statements covering their sharesor to include their shares in registration statements that we may file forourselves or other stockholders. We also have registered the issuance of allshares of common stock that we have issued and may issue under our employeeoption plans. Having registered the issuance of these shares, they can befreely sold in the public market upon issuance, subject to lock-up agreements.In addition, as of September 30, 2007, there were 18,040 shares of common stockissuable upon the exercise of common stock warrants and 277,777 shares ofcommon stock reserved for future issuance as charitable contribution to theBroad Institute of MIT and Harvard that will become eligible for sale in thepublic market to the extent permitted by Rule 144 under the Securities Actof 1933, as amended.

 

Dueto these factors, sales of a substantial number of shares of our common stockin the public market could occur at any time. These sales, or the perception inthe market that the holders of a large number of shares intend to sell shares,could reduce the market price of our common stock.

 

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**Provisions in our certificate of incorporation and by-laws orDelaware law might discourage, delay or prevent a change of control of ourcompany or changes in our management and, therefore, depress the trading priceof our common stock.**

 

Provisionsof our certificate of incorporation and by-laws and Delaware law maydiscourage, delay or prevent a merger, acquisition or other change in controlthat stockholders may consider favorable, including transactions in which youmight otherwise receive a premium for your shares of our common stock. Theseprovisions may also prevent or frustrate attempts by our stockholders toreplace or remove our management. These provisions include:

 

•                  a staggered board ofdirectors;

 

•                  limitations on the removalof directors;

 

•                  advance notice requirementsfor stockholder proposals and nominations;

 

•                  the inability ofstockholders to act by written consent or to call special meetings; and

 

•                  the ability of our board ofdirectors to make, alter or repeal our by-laws.

 

Theaffirmative vote of the holders of at least 75% of our shares of capital stockentitled to vote is necessary to amend or repeal the above provisions of our certificateof incorporation. In addition, our board of directors has the ability todesignate the terms of and issue new series of preferred stock withoutstockholder approval. Also, absent approval of our board of directors, ourby-laws may only be amended or repealed by the affirmative vote of the holdersof at least 75% of our shares of capital stock entitled to vote. Accordingly,given that our executive officers, directors and their affiliates collectivelyown approximately 73.44% of our outstanding common stock, certain of thesepersons acting together will have the ability to block any such amendment.

 

Inaddition, Section 203 of the Delaware General Corporation Law prohibits apublicly-held Delaware corporation from engaging in a business combination withan interested stockholder, generally a person which together with itsaffiliates owns, or within the last three years has owned, 15% of our votingstock, for a period of three years after the date of the transaction in whichthe person became an interested stockholder, unless the business combination isapproved in a prescribed manner.

 

Theexistence of the foregoing provisions and anti-takeover measures could limitthe price that investors might be willing to pay in the future for shares ofour common stock. They could also deter potential acquirers of our company,thereby reducing the likelihood that you could receive a premium for yourcommon stock in an acquisition.

 

**We do not currently intend to pay dividends on our commonstock and, consequently, your ability to achieve a return on your investmentwill depend on appreciation in the price of our common stock.**

 

Wehave never declared or paid any cash dividends on our common stock and do notcurrently intend to do so for the foreseeable future. We currently intend toinvest our future earnings, if any, to fund our growth. Therefore, you are notlikely to receive any dividends on your common stock for the foreseeable futureand the success of an investment in shares of our common stock will depend uponany future appreciation in its value. There is no guarantee that shares of ourcommon stock will appreciate in value or even maintain the price at which ourstockholders have purchased their shares.

 

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**Item 2. Unregistered Sale of Equity Securities and Useof Proceeds**

 

Use of Proceeds from Public Offering of Common Stock

 

On May 24, 2007, we completed our initial public offering of 5,400,000shares of our common stock at a price to the public of $9.00 per share for anaggregate offering price of $48.6 million. We received aggregate net proceedsof approximately $45.7 million, after deducting underwriting discounts andcommissions of $2.9 million. The offer and sale of all of the shares in theinitial public offering were registered under the Securities Act of 1933, asamended, pursuant to a registration statement on Form S-1 (FileNo. 333-140973), which was declared effective by the Securities andExchange Commission on May 24, 2007.  UBS Investment Bank, JPMorgan,Leerink Swann & Company, and Pacific Growth Equities, LLC were theunderwriters of the initial public offering. The offering commenced on May 24,2007 and did not terminate until after the sale of all of the securitiesregistered in the registration statement.

 

We received aggregate net proceeds of approximately $45.7 million, afterdeducting underwriting discounts and commissions of $2.9 million. We incurredapproximately $1.8 million for additional expenses associated with the initialpublic offering. None of the underwriting discounts and commissions or offeringexpenses were incurred or paid, directly or indirectly, to directors orofficers of ours or their associates or to persons owning 10% or more of ourcommon stock or to any affiliates of ours.

 

On June 27, 2007, we sold an additional 397,000 shares of our commonstock at $9.00 per share pursuant to the over-allotment option granted to theunderwriters of our initial public offering.  UBS Securities LLC, J.P.Morgan Securities Inc., Leerink Swann & Co., Inc. and Pacific GrowthEquities, LLC acted as representatives of the underwriters.

 

Of the $47.2 million of net proceeds we received in our initial publicoffering, including the exercise of the over-allotment options, throughSeptember 30, 2007, we have spent approximately $3.2 million on underwritingdiscounts and commissions and approximately $1.8 million for payment ofexpenses related to our initial public offering.  Additionally, we havespent $2.9 million on pre-production research and development expenses. None ofthese expenses were incurred or paid, directly or indirectly, to directors orofficers of ours or their associates or to persons owning 10% or more of ourcommon stock or to any affiliates of ours.

 

The remaining proceeds are invested in short-term, investment-grade,interest bearing securities.

 

We expect to use the remaining proceeds from our initial public offeringfor general corporate purposes which include ongoing research and developmentactivities, funding the recruitment of our specialized sales, marketing andservices force and marketing initiatives in connection with the initial productlaunch of the HeliScope system and funding start-up manufacturing expensesassociated with the commercial version of our HeliScope system.   Ourmanagement has broad discretion as to the use of the net proceeds.  We mayuse a portion of the net proceeds for the acquisition of, or investment in,technologies or products that complement our business.  As required bySecurities and Exchange Commission regulations, we will provide further detailon our use of the net proceeds from our initial public offering in futureperiodic reports.

 

**Item 3. Defaults upon Senior Securities**

 

Not applicable.

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

Not applicable.

 

**Item 5. Other Information**

 

None.

 

**Item 6. Exhibits**

 

The exhibits listed in the Exhibit Indeximmediately preceding such exhibits are filed as part of this report and suchExhibit Index is incorporated herein by reference.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
| Dated: November 5, 2007 | /s/ Stanley N. Lapidus                                        |   |
|-------------------------|---------------------------------------------------------------|--------|
|                    | Chairman and Chief  Executive Officer                         |
|                    | (Principal Executive  Officer)                                |
|                    |                                                          |
|                    |                                                          |
| Dated: November 5, 2007 | /s/ Louise Mawhinney                                          |   |
|                    | Senior Vice President,  Chief Financial Officer and Treasurer |
|                    | (Principal Financial and  Accounting Officer)                 |

 

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**EXHIBIT INDEX**

 

31.1         Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2         Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1         Certificationspursuant to 18 U.S.C. Section 1350

 

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