**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**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 June 30, 2007** |
| ** **                                        | ** ** |
| **OR**                                            |
| ** **                                        |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from**                  to                 .

**CommissionFile Number 001-33484**

**HELICOS BIOSCIENCES CORPORATION**

(Exact name ofregistrant as 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  telephone number, including area code: (617) 264-1800** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period than the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for the past90 days.  Yes:  o     No:  x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    Largeaccelerated filer o    Acceleratedfiler o    Non-acceleratedfiler x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)  Yes:  o    No:  x

The registrant had20,924,461 shares of common stock, $.001 par value per share, outstanding as ofJuly 31, 2007.

 

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**HELICOS BIOSCIENCES CORPORATION (a development stagecompany)**

**Table of Contents**
|                                    | **Page**   |
|------------------------------------|------------|
| **Part I - Financial Information** | ** ** |
| Item 1.                       |       | Consolidated Financial Statements (unaudited) |   |
|                               |       | Consolidated Balance  Sheets (unaudited) as of June 30, 2007 and December 31, 2006 | 3 |
|                               |       | Consolidated  Statements of Operations (unaudited) for the three and six months ended June  30, 2007 and June 30, 2006 and the period from May 9, 2003 (date of  inception) through June 30, 2007 | 4 |
|                               |       | Consolidated  Statements of Cash Flows (unaudited) for the six months ended June 30, 2007  and 2006 and the period from May 9, 2003 (date of inception) through June 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**   |       |
| 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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**HELICOS BIOSCIENCES CORPORATION (a development stagecompany)**

**CONSOLIDATED BALANCE SHEETS**

**(unaudited)**

**(in thousands, except share data)**
| ** **                                                                                                                                                                                                                                                                                        | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                        | ** ** | ** **                  | ** ** | ** **                      | ** ** |
|                                                                                                                                                                                                                                                                                              |       |                        |       |                            |       |
| Current assets                                                                                                                                                                                                                                                                                    |       |                        |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                        |       | $                           | 64,281     |                            | $          | 10,589 |   |
| Short-term  investments                                                                                                                                                                                                                                                                           |       | —                      |       | 795                             |       |
| Unbilled  government grant receivable                                                                                                                                                                                                                                                             |       | 143                         |       | 159                             |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                                        |       | 538                         |       | 502                             |       |
| Total current  assets                                                                                                                                                                                                                                                                             |       | 64,962                      |       | 12,045                          |       |
| Property and equipment,  net                                                                                                                                                                                                                                                                      |       | 2,833                       |       | 2,805                           |       |
| Restricted cash                                                                                                                                                                                                                                                                                   |       | 450                         |       | 450                             |       |
| Total assets                                                                                                                                                                                                                                                                                      |       | $                           | 68,245     |                            | $          | 15,300 |   |
|                                                                                                                                                                                                                                                                                              |       |                        |       |                            |       |
| **LIABILITIES, REDEEMABLE  CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                                                                                  | ** ** | ** **                  | ** ** | ** **                      | ** ** |
|                                                                                                                                                                                                                                                                                              |       |                        |       |                            |       |
| Current liabilities                                                                                                                                                                                                                                                                               |       |                        |       |                            |       |
| Accounts payable                                                                                                                                                                                                                                                                                  |       | $                           | 1,235      |                            | $          | 1,469 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                                                                                                   |       | 2,385                       |       | 1,299                           |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                                                |       | 893                         |       | 608                             |       |
| Total current  liabilities                                                                                                                                                                                                                                                                        |       | 4,513                       |       | 3,376                           |       |
| Long-term debt, net of  current portion                                                                                                                                                                                                                                                           |       | 1,335                       |       | 1,843                           |       |
| Redeemable convertible  preferred stock warrants                                                                                                                                                                                                                                                  |       | —                      |       | 204                             |       |
| Other long-term  liabilities                                                                                                                                                                                                                                                                      |       | 403                         |       | 455                             |       |
| Total liabilities                                                                                                                                                                                                                                                                                 |       | 6,251                       |       | 5,878                           |       |
| Redeemable convertible  preferred stock: par value $0.001 per share; 5,000,000 and 59,314,030 shares  authorized at June 30, 2007 and December 31, 2006, respectively; 0 and  43,686,122 shares issued and outstanding at June 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 June 30, 2007 and December 31, 2006,  respectively; 20,923,721 and 2,051,269 shares issued and outstanding at June  30, 2007 and December 31, 2006, respectively |       | 21                          |       | 2                               |       |
| Subscription receivable                                                                                                                                                                                                                                                                           |       | —                      |       | (4                              | )          |
| Additional paid-in  capital                                                                                                                                                                                                                                                                       |       | 135,644                     |       | 1,772                           |       |
| Deficit accumulated  during the development stage                                                                                                                                                                                                                                                 |       | (73,671                     | )          | (39,109                         | )          |
| Total stockholders’  equity (deficit)                                                                                                                                                                                                                                                        |       | 61,994                      |       | (37,339                         | )          |
| Total liabilities,  redeemable convertible preferred stock and stockholders’ equity (deficit)                                                                                                                                                                                                |       | $                           | 68,245     |                            | $          | 15,300 |   |

 

The accompanying notes are an integral part of the interim consolidatedfinancial statements

3

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**HELICOS BIOSCIENCES CORPORATION (a development stagecompany)**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(unaudited)**

**(in thousands, except share and per share data)**
| ** **                                                                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                  | ** ** | **Period from**                     | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|------------------------------------------|------------|
| ** **                                                                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                  | ** ** | **May 9, 2003**                | ** ** |
| ** **                                                                                  | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **(date of inception)** | ** ** |
| ** **                                                                                  | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**    | ** ** | **June 30, 2007**       | ** ** | **June 30, 2006** | ** ** | **through June 30, 2007** | ** ** |
| ** **                                                                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                               | ** ** |
| Grant revenue                                                                               |       | $                                | 143        |                           | $          | —                            |       | $                           | 235        |                                     | $          | — |   | $ | 394 |   |
|                                                                                        |       |                             |       |                           |       |                              |       |                        |       |                                     |       |
| Operating  expenses                                                                         |       |                             |       |                           |       |                              |       |                        |       |                                     |       |
| Research and development                                                                    |       | 5,298                            |       | 2,884                          |       | 10,683                            |       | 5,485                       |       | 37,670                                   |       |
| General and administrative                                                                  |       | 3,310                            |       | 1,556                          |       | 6,561                             |       | 2,590                       |       | 20,065                                   |       |
| Total operating expenses                                                                    |       | 8,608                            |       | 4,440                          |       | 17,244                            |       | 8,075                       |       | 57,735                                   |       |
| Operating loss                                                                              |       | (8,465                           | )          | (4,440                         | )          | (17,009                           | )          | (8,075                      | )          | (57,341                                  | )          |
| Interest income                                                                             |       | 427                              |       | 244                            |       | 694                               |       | 374                         |       | 2,123                                    |       |
| Interest expense                                                                            |       | (34                              | )          | (12                            | )          | (107                              | )          | (12                         | )          | (313                                     | )          |
| Net loss                                                                                    |       | (8,072                           | )          | (4,208                         | )          | (16,422                           | )          | (7,713                      | )          | (55,531                                  | )          |
|                                                                                        |       |                             |       |                           |       |                              |       |                        |       |                                     |       |
| Beneficial  conversion feature related to Series B redeemable convertible preferred stock   |       | —                           |       | —                         |       | (18,140                           | )          | —                      |       | (18,140                                  | )          |
|                                                                                        |       |                             |       |                           |       |                              |       |                        |       |                                     |       |
| Net loss  attributable to common stockholders                                               |       | $                                | (8,072     | )                              | $          | (4,208                            | )          | $                           | (34,562    | )                                        | $          | (7,713 | ) | $ | (73,671 | ) |
| Net loss  attributable to common stockholders per share–basic and diluted              |       | $                                | (0.87      | )                              | $          | (3.53                             | )          | $                           | (6.42      | )                                        | $          | (6.76 | ) |   |   |
| Weighted average number  of common shares  used in computation–basic  and diluted |       | 9,294,298                        |       | 1,193,726                      |       | 5,387,214                         |       | 1,140,582                   |       |                                     |       |

 

The accompanying notes are an integral part of the interim consolidatedfinancial statements

4

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**HELICOS BIOSCIENCES CORPORATION (a development stagecompany)**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(unaudited)**

**(in thousands)**
| ** **                                                                                | ** ** | ** **                     | ** ** | ** **                        | ** ** | **Period from**                     | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                | ** ** | ** **                     | ** ** | ** **                        | ** ** | **May 9, 2003**                | ** ** |
| ** **                                                                                | ** ** | **Six months ended** | ** ** | **(date of inception)** | ** ** |
| ** **                                                                                | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006**       | ** ** | **through June 30, 2007** | ** ** |
| ** **                                                                                | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                               | ** ** |
| **Cash  flows from operating activities:**                                                |       |                           |       |                              |       |                                     |       |
| Net loss                                                                                  |       | $                              | (16,422    | )                                 | $          | (7,713                                   | )          | $ | (55,531 | ) |
| Adjustments to  reconcile net loss to cash used in operating activities:                  |       |                           |       |                              |       |                                     |       |
| Depreciation and amortization                                                             |       | 737                            |       | 357                               |       | 2,352                                    |       |
| Amortization of lease incentive                                                           |       | (24                            | )          | —                            |       | (94                                      | )          |
| Common stock issued for licenses                                                          |       | —                         |       | —                            |       | 147                                      |       |
| Stock-based compensation expense                                                          |       | 1,535                          |       | 488                               |       | 3,030                                    |       |
| Interest expense recorded on warrants                                                     |       | (16                            | )          | —                            |       | 121                                      |       |
| Changes in  operating assets and liabilities:                                             |       |                           |       |                              |       |                                     |       |
| Unbilled government grant receivable                                                      |       | 16                             |       | —                            |       | (143                                     | )          |
| Prepaid expenses and other current assets                                                 |       | (148                           | )          | (161                              | )          | (516                                     | )          |
| Accounts payable                                                                          |       | (234                           | )          | (291                              | )          | 1,235                                    |       |
| Accrued expenses and other current liabilities                                            |       | 1,166                          |       | (1                                | )          | 2,316                                    |       |
| Other long-term liabilities                                                               |       | (19                            | )          | —                            |       | 392                                      |       |
|                                                                                      |       |                           |       |                              |       |                                     |       |
| Net cash used in operating activities                                                     |       | (13,409                        | )          | (7,321                            | )          | (46,691                                  | )          |
|                                                                                      |       |                           |       |                              |       |                                     |       |
| **Cash  flows from investing activities:**                                                | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                               | ** ** |
| Purchases of  property and equipment                                                      |       | (765                           | )          | (1,095                            | )          | (5,185                                   | )          |
| Increase in  restricted cash                                                              |       | —                         |       | (450                              | )          | (450                                     | )          |
| Purchases of  short-term investments                                                      |       | —                         |       | (3,956                            | )          | (34,709                                  | )          |
| Maturities of  short-term investments                                                     |       | 795                            |       | —                            |       | 34,709                                   |       |
|                                                                                      |       |                           |       |                              |       |                                     |       |
| Net cash  provided by (used in) investing activities                                      |       | 30                             |       | (5,501                            | )          | (5,635                                   | )          |
|                                                                                      |       |                           |       |                              |       |                                     |       |
| **Cash  flows from financing activities:**                                                | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                               | ** ** |
| Proceeds from  debt issuances                                                             |       | —                         |       | 1,029                             |       | 2,473                                    |       |
| Payments on debt                                                                          |       | (227                           | )          | —                            |       | (227                                     | )          |
| Deferred initial  public offering costs                                                   |       | (1,664                         | )          | —                            |       | (1,753                                   | )          |
| 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                                       |       |
| Proceeds from  issuance of restricted common stock                                        |       | 4                              |       | 152                               |       | 339                                      |       |
| Payments to  employees for cancelled restricted common stock                              |       | (52                            | )          | —                            |       | (52                                      | )          |
| Proceeds from  exercise of stock options                                                  |       | 5                              |       | 13                                |       | 35                                       |       |
| Proceeds from  initial public offering                                                    |       | 49,011                         |       | —                            |       | 49,011                                   |       |
|                                                                                      |       |                           |       |                              |       |                                     |       |
| Net cash  provided by financing activities                                                |       | 67,071                         |       | 21,086                            |       | 116,607                                  |       |
|                                                                                      |       |                           |       |                              |       |                                     |       |
| Net increase in  cash and cash equivalents                                                |       | 53,692                         |       | 8,264                             |       | 64,281                                   |       |
| Cash and cash  equivalents, beginning of period                                           |       | 10,589                         |       | 8,566                             |       | —                                   |       |
| Cash and cash  equivalents, end of period                                                 |       | $                              | 64,281     |                              | $          | 16,830                                   |       | $ | 64,281 |   |
|                                                                                      |       |                           |       |                              |       |                                     |       |
| **Supplemental  disclosure of cash flow information**                                     | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                               | ** ** |
| Cash paid during  the year for:                                                           |       |                           |       |                              |       |                                     |       |
| Interest                                                                                  |       | $                              | 122        |                              | $          | —                                   |       | $ | 191 |   |
|                                                                                      |       |                           |       |                              |       |                                     |       |
| Noncash  financing activities:                                                            |       |                           |       |                              |       |                                     |       |
| Issuance of  redeemable convertible preferred stock warrants                              |       | $                              | —     |                              | $          | 88                                       |       | $ | 95 |   |
| Conversion of  bridge loan to equity                                                      |       | $                              | —     |                              | $          | —                                   |       | $ | 350 |   |
| 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 |   |

 

The accompanying notes are an integral part of the interim consolidatedfinancial statements

5

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**HELICOSBIOSCIENCES CORPORATION (a development stage company)**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

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

Helicos BioSciences Corporation (“Helicos” or the “Company”)is a life sciences company focused on innovative genetic analysis technologiesfor the research, drug discovery and clinical diagnostics markets. Helicos hasdeveloped a proprietary technology to enable the rapid analysis of largevolumes of genetic material by directly sequencing single molecules of DNA orsingle DNA copies of RNA. Helicos is a Delaware Corporation and wasincorporated on May 9, 2003.

The Company has had limited operations to date andits activities have consisted primarily of raising capital, conducting researchand development and recruiting personnel. Accordingly, the Company isconsidered to be in the development stage at June 30, 2007, as defined by theFinancial Accounting Standards Board (“FASB”) in Statement of FinancialAccounting Standards (“SFAS”) No. 7, “Accounting and Reporting byDevelopment Stage Enterprises.” The Company’s fiscal year ends onDecember 31. The Company operates as one reportable segment.

Since inception, the Company has incurred losses and has not generatedpositive cash flows from operations.  TheCompany expects such losses to continue into the foreseeable future as itcontinues to develop and commercialize its products.  If required, the Company would seek to raise additional funds throughpublic or private equity or debt financings, collaborative or otherarrangements with corporate sources, or through other sources offinancing.  However, additionalfinancing may not be available on a timely basis on terms acceptable to theCompany, 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.  If adequate funds are not available, theCompany may have to delay, reduce or eliminate 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 interim consolidated financial statementshave been prepared in accordance with the instructions to Form 10-Q and do notinclude all of the information and note disclosures required by generallyaccepted accounting principles (“GAAP”) in the United States of America.  The consolidated financial statements includethe accounts of the Company and its wholly-owned subsidiary.  All intercompany accounts and transactionshave been eliminated.

The preparation of financial statements in conformity with GAAP requiresthe Company to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent liabilities at the dates of the financial statements.  Actual amounts may differ from theseestimates, different assumptions or conditions.

It is management’s opinion that the accompanying interim consolidatedfinancial statements reflect all adjustments (which are normal and recurring)that are necessary for a fair statement of the results for the interimperiods.  The interim consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements for the year ended December 31, 2006 included in theCompany’s Registration Statement on Form S-1, as amended, which was declaredeffective by the Securities and Exchange Commission (“SEC”) on May 24, 2007.

**2. Initial Public Offering**

On May 24, 2007, the Company completed its initialpublic offering (“IPO”) of 5,400,000 shares of common stock at an initialpublic offering price of $9.00 per share. Net proceeds were approximately $43.9 million after deductingunderwriting discounts and commissions and offering expenses paid by theCompany.  Total fees and expenses paid bythe Company, excluding underwriting discounts and commissions wereapproximately $1.8 million which included legal, accounting and printing costsand various other fees associated with registration and listing of the Company’scommon stock.

On May 24, 2007, upon completion of the Company’sIPO, all of the Company’s 59,189,998 shares of redeemable convertible preferredstock outstanding on that date were automatically converted into 13,153,293shares of common stock.  In addition, theoutstanding warrants to purchase 81,184 shares of Series B redeemableconvertible preferred stock were converted into warrants to purchase 18,040shares of common stock.  During theperiod January 1, 2007 through the date of the Company’s IPO, the estimatedfair value of the warrants to purchase 81,184 shares of Series B redeemableconvertible preferred stock decreased by $42,000 to $162,000.  Upon conversion on the date of the Company’sIPO, the warrants to purchase 18,040 shares of the Company’s common stock werereclassified to additional paid-in capital.

On June 27, 2007, the underwriters exercised theirover-allotment option and purchased an additional 397,000 shares of the Company’scommon stock, and the net proceeds after deducting underwriters’ discounts andcommissions related to the offering were approximately $3.3 million.

As of December 31, 2006, the Company had100,000,000 shares of common stock authorized. 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. Recent Accounting Pronouncements**

On January 1, 2007, the Company adopted theprovisions of FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN48 requires the Company to recognize in its financial statements the impact ofa tax position if that position is more likely than not of being sustained uponexamination, based on the technical merits of the position. The adoption of FIN 48did not have a material impact on the Company’s financial position, results ofoperations or cash flows. At the adoption date of January 1, 2007 and also atJune 30, 2007, the Company had no unrecognized tax benefits.

6

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In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements” (“SFAS No. 157”). This Statementdefines fair value as used in numerous accounting pronouncements, establishes aframework for measuring fair value in GAAP and expands disclosure related tothe use of fair value measures in financial statements. SFAS No. 157 doesnot expand the use of fair value measures in financial statements, butstandardizes its definition and guidance in GAAP. The Standard emphasizes thatfair value is a market-based measurement and not an entity-specificmeasurement based on an exchange transaction in which the entity sells an assetor transfers a liability (exit price). SFAS No. 157 establishes a fairvalue hierarchy from observable market data as the highest level to fair valuebased on an entity’s own fair value assumptions as the lowest level. SFASNo. 157 is effective for the Company’s financial statements issued in2008; however, earlier application is encouraged. The Company has not yetdetermined the impact that the adoption of SFAS No. 157 will have on itsfinancial position, results of operations or cash flows.

In March 2007, the Emerging Issues Task Force (“EITF”) issued EITFAbstract 07-3, “Accounting for Nonrefundable Advance Payments for Goods orServices to Be Used in Future Research and Development Activities” (“EITF 07-3”).  The pronouncement concluded that nonrefundabledeposits should be capitalized and expensed as the research and developmentactivity is performed.  The Company iscalculating the impact that EITF 07-3 will have, if any, on its financialposition, results of operations and cash flows for the first quarter of 2008.

**4. Net Loss per Share**

Basic net loss per share is computed by dividingnet loss by the weighted average number of common shares outstanding for theperiod. The Company’s potential dilutive shares, which include outstandingcommon stock options, unvested restricted stock, and common stock warrants,have not been included in the computation of diluted net loss per share for allperiods as the result would have been antidilutive. Such potentially dilutiveshares are excluded when the effect would be to reduce net loss per share.Because the Company reported a net loss for the three months and six monthsended June 30, 2007 and 2006, all potential common shares have beenexcluded from the computation of the dilutive net loss per share for allperiods presented because the effect would have been antidilutive.  Such potential common shares consist of thefollowing:
|                                        | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**    | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
| ** **                             | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock options                          |       | 1,432,985                        |       | 634,493                        |       | 1,204,800 |   | 416,015 |   |
| Unvested restricted stock              |       | 438,065                          |       | 482,736                        |       | 461,778 |   | 532,408 |   |
| Warrants                               |       | 18,040                           |       | 2,856                          |       | 18,040 |   | 1,436 |   |
| Redeemable convertible preferred stock |       | 7,660,731                        |       | 9,708,026                      |       | 10,049,231 |   | 8,584,971 |   |

 

**5. Income Taxes**

There is no provision for income taxes because theCompany has incurred operating losses since inception.

On January 1, 2007, the Company adopted theprovisions of FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109”, (“FIN 48”). TheCompany has no amounts recorded for any unrecognized tax benefits as of June30, 2007 or January 1, 2007. In addition, the Company did not record any amountfor the implementation of FIN 48. The Company’s policy is to recordestimated interest and penalties related to the underpayment of income taxes asa component of its income tax provision. As of June 30, 2007 and January 1,2007, the Company had no accrued interest or tax penalties recorded. The Company’sincome tax return reporting periods since May 9, 2003 (date of inception)are open to income tax audit examination by the federal and state taxauthorities.

Utilization of net operating loss (“NOL”) andresearch and development credit carryforwards may be subject to a substantialannual limitation due to ownership changes that have occurred previously orthat could occur in the future provided by Section 382 of the InternalRevenue Code of 1986, as well as similar state provisions. These ownershipchanges may limit the amount of NOL and research and development creditcarryforwards that can be utilized annually to offset future taxable income andtax, respectively. In general, an ownership change, as defined bySection 382, results from transactions increasing the ownership of certainstockholders or public groups in the stock of a corporation by more than50 percentage points over a three-year period. Since the Company’sformation, the Company has raised capital through the issuance of common stockand preferred stock, which, combined with the purchasing stockholders’subsequent disposition of those shares, may have resulted in a change ofcontrol, as defined by Section 382, or could result in a change of controlin the future upon subsequent disposition. The Company has not currentlycompleted a study to assess whether a change of control has occurred or whetherthere have been multiple changes of control since the Company’s formation dueto the significant complexity and cost associated with such study and thatthere could be additional changes in control in the future. If the Companyexperienced a change of control at any time since its formation, utilization ofNOL or research and development credit carryforwards would be subject to anannual limitation under Section 382. Any limitation may result inexpiration of a portion of the NOL or research and development creditcarryforwards before utilization. Further, until a study is completed and anylimitation known, no amounts are being presented as an uncertain tax positionunder FIN 48.  The Company does notanticipate a significant change to unrecognized tax benefits over the nexttwelve months.

**6. Commitments and Contingencies**

**License agreements and patents**

In April 2007, the Company entered into anagreement with PerkinElmer LAS, Inc., (“PerkinElmer”), in which PerkinElmergranted the Company a worldwide, non-exclusive, non-transferable,non-sublicensable, royalty bearing license under specified patents.  The license from PerkinElmer grants the Companyrights under certain patents to produce and commercialize certain of thereagents used in some applications on the HeliScope system, which containchemicals purchased from PerkinElmer.  Inexchange for rights licensed from PerkinElmer, the Company is obligated to payPerkinElmer a portion of the Company’s net revenue from the sale of reagentsthat contain chemicals covered by the patents licensed under the PerkinElmeragreement.  The Company has the right toterminate the agreement at any time upon 90 days written notice toPerkinElmer.  Each party has the right toterminate the agreement upon breach by the other party subject to notice and anopportunity to cure.  The agreement alsoterminates upon the occurrence of specified bankruptcy events.  PerkinElmer has the sole right under theagreement to enforce the licensed patents.

7

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**7. Redeemable ConvertiblePreferred Stock**

As of December 31, 2006, the Company had59,314,030 authorized shares of preferred stock, of which 28,182,246 weredesignated as Series A redeemable convertible preferred stock and31,131,784 were designated as Series B redeemable convertible preferredstock.  As of June 30, 2007, the Companyhad 5,000,000 authorized shares of preferred stock.

As of December 31, 2006, redeemable convertiblepreferred 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     |                                        |       |   |

 

In March 2006, the Company sold 15,503,876shares of Series B redeemable convertible preferred stock, at a price of$1.29 per share, resulting in net proceeds of approximately $19.9 million,net of $108,000 of issuance costs.

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.

As discussed at Note 2, on May 24, 2007, uponcompletion of the Company’s IPO, 59,189,998 shares of redeemable convertiblepreferred stock were automatically converted into 13,153,293 shares of commonstock.

8

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**8****. Stock-Based Compensation**

The Company’s 2007 Stock Option and Incentive Plan (“2007Option Plan”), was adopted by the Company’s Board of Directors inApril 2007 and approved by the Company’s stockholders in May 2007.The 2007 Option Plan permits the Company to make grants of incentive stockoptions, non-qualified stock options, stock appreciation rights, deferred stockawards, restricted stock awards, unrestricted stock awards and dividendequivalent rights. The Company has reserved 1,440,266 shares of the Company’scommon stock for the issuance of awards under the 2007 Option Plan. The 2007Option Plan provides that the number of shares reserved and available forissuance under the plan will be automatically increased each January 1,beginning in 2008, by 4.5% of the outstanding number of shares of common stockon the immediately preceding December 31 or such lower number of shares ofcommon stock as determined by the Board of Directors. This number is subject toadjustment in the event of a stock split, stock dividend or other change in theCompany’s capitalization. Generally, shares that are forfeited or canceled fromawards under the 2007 Option Plan also will be available for future awards. Inaddition, available shares under the Company’s 2003 Stock Option and IncentivePlan, including as a result of the forfeiture, expiration, cancellation,termination or net issuances of awards, are automatically made available forissuance under the 2007 Option Plan.

The Company accounts for stock-basedcompensation issued to employees and non-employees in accordance with SFASNo. 123(R) “Share Based Payment” and EITF No. 96-18, “Accounting forEquity Instruments that are Issued to Other Than Employees for Acquiring, or inConjunction with, Selling Goods or Services.” The Company records the expenseof such services based on the estimated fair value of the equity instrumentusing the Black-Scholes option pricing model. The value of the equityinstrument is charged to earnings over the term of the service agreement.

The Company recognized stock-based compensation expense on all employeeand non-employee awards as follows:
| ** **                             | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **($ in thousands)**              | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**    | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
| ** **                             | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and development               |       | $                                | 188        |                           | $          | 19 |   | $ | 472 |   | $ | 28 |   |
| General and administrative             |       | 632                              |       | 231                            |       | 1,063 |   | 460 |   |
| Total stock-based compensation expense |       | $                                | 820        |                           | $          | 250 |   | $ | 1,535 |   | $ | 488 |   |

 

For the six months endedJune 30, 2007 and 2006, the fair value of stock options wasestimated on the date of grant using the Black-Scholes option valuation modelwith the following assumptions:
|                                          | ** ** | **Six months ended** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006** | ** ** |
| ** **                               | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Expected volatility                      |       | 76.3                           | %          | 75.7 | % |
| Expected option life                     |       | 6.5 years                      |       | 7 years |   |
| Weighted average risk-free interest rate |       | 4.9                            | %          | 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**

**Forward Looking Statements**

This quarterly report on Form 10-Q contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933,as amended, and Section 21E of the Securities Exchange Act of 1934, asamended.  In particular, statementscontained in the 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-lookingstatements.  These statements relate toour future plans, objectives, expectations and intentions and may be identifiedby words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,”“targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,”“predicts,” “potential” and “continue” or similar words.  Readers are cautioned that theseforward-looking statements are only predictions and are subject to risks,uncertainties, and assumptions that are difficult to predict, including thoseidentified below, under “Part II, Item 1A. Risk Factors” and elsewhereherein. Therefore, actual results may differ materially and adversely fromthose expressed in any forward-looking statements. We undertake no obligationto revise or update any forward-looking statements for any reason.

**Business Overview**

We are a life sciences company focused oninnovative genetic analysis technologies for the research, drug discovery andclinical diagnostics markets. We have developed our true Single MoleculeSequencing technology (“tSMS”) to enable the rapid analysis of large quantitiesof genetic material by directly sequencing single molecules of DNA or singleDNA copies of RNA. By enabling direct sequencing of single DNA molecules, webelieve our technology represents a fundamental breakthrough in geneticanalysis.

We plan to launch our first product, the HeliScopesystem by the end of 2007. It will be comprised of an instrument, itsassociated reagents and disposable supplies. We believe that we have incurredthe substantial majority of the costs related to the development of the initialversion of our HeliScope system. We have designed, assembled and are testingmultiple prototypes of our HeliScope system, and we are purchasing thesubassemblies and components for our first commercial shipments. To launch acommercial version of our product, we need to complete the assembly, testingand performance validation of the system and we are taking other steps toprepare for the commercial scale manufacture of the system, including thedevelopment of manufacturing documentation and the implementation of qualityassurance and quality control procedures. We also are manufacturing theproprietary reagents and disposable supplies that are part of the system.

Because of the dynamic nature of the market forgenetic analysis instruments, we expect to expend significant amounts on anongoing basis to improve our HeliScope system and tSMS technology.  The goals of these improvements are toincrease the throughput of the HeliScope system and to achieve a furtherapproximate 100-fold reduction in the cost per base of sequencing. Wealso plan to explore other markets for the HeliScope system in the longer term,such as diagnostics.

Although we plan to launch our first HeliScopesystem by the end of 2007, this product will be subject to various customerevaluation periods with acceptance criteria, and we expect the customerevaluation period to extend beyond the end of the year. For this reason, we donot expect to recognize any revenue from product sales in 2007. Our revenuesfrom sales of proprietary reagents and disposable supplies will depend on thetiming of system placements, customers’ use of the system, and our ability tomaintain our proprietary position on the reagents and disposable supplies.Because we have not yet commercialized our HeliScope system, we do not have thecommercial experience to predict the percentage of our revenues that we willderive from sales of proprietary reagents and disposable supplies. However,over time we would expect the sales of the reagents and disposable supplies toincrease as our installed base of instruments grows and usage of theseinstruments increases.

We were incorporated in May 2003, and ouractivities to date have consisted primarily of conducting research anddevelopment. Accordingly, we are considered to be in the development stage atJune 30, 2007, as defined by the Financial Accounting Standards Board (“FASB”) inStatement of Financial Accounting Standards (“SFAS”) No. 7, “Accountingand Reporting by Development Stage Enterprises.” Our fiscal year ends onDecember 31, and we operate as one reportable segment.

We expect to continue to incur operating losses forat least the next two years, and we may need additional financing to supportour activities. If required, we will seek to fund our operations through publicor private equity or debt financings or other sources, such as collaborations.Adequate additional funding may not be available to us on acceptable terms, orat all. Our failure to raise capital as and when needed could have a negativeimpact on our financial condition and our ability to pursue businessstrategies. If adequate funds are not available to us, we may be required todelay, reduce or eliminate research and development programs, reduce oreliminate commercialization efforts, obtain funds through arrangements withcollaborators or others on terms unfavorable to us or pursue merger oracquisition strategies.

In May 2007, we completed an initial publicoffering (“IPO”) of our common stock in which we sold and issued 5.4 millionshares of our common stock at an issue price of $9.00 per share.  We raised a total of $48.6 million in grossproceeds from the IPO, or $43.9 million in net proceeds after deductingunderwriting discounts and commissions of $2.9 million and other offering costsof $1.8 million.  In June 2007, we soldan additional 397,000 shares of our common stock at $9.00 per share resultingin net proceeds of $3.3 million after deducting underwriting discounts andcommissions of $250,000, pursuant to the over-allotment option granted by us tothe underwriters of our IPO. Upon the closing of our IPO, all outstandingshares of our preferred stock were converted into common stock.

**Financial Overview**

**Grant revenue**

In September 2006, we were awarded a grantfrom the National Human Genome Research Institute, a branch of the NationalInstitutes of Health, pursuant to which we are eligible to receivereimbursement of our research expenses of up to $2.0 million throughSeptember 2009. We recognized revenue during the three months and six monthsended June 30, 2007 of $143,000 and $235,000, respectively, in connection withthis award. We will continue to recognize revenue under this grant as therelated expenses are incurred.

10

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**Research and development expenses**

Research and development expenses consist of costsassociated with scientific research activities, and engineering developmentefforts. Such costs primarily include salaries, benefits and stock-basedcompensation; lab and engineering supplies; investment in equipment; consultingfees; and facility related costs, including rent and depreciation.

We are focused on preparing for the launch of theinitial version of the HeliScope system and on further improvements to theHeliScope system. All research and development expenses since our inceptionhave been in connection with this project. Although we plan to launch our firstproduct by the end of 2007, we do not expect to receive cash inflows from thesesales until 2008. We believe the development of the initial version of theHeliScope system will be completed shortly before its commercial launch. Webelieve that we have already incurred the substantial majority of the costsnecessary to complete the development of the initial version of the HeliScopesystem.

Research and development expenses for the threemonths ended June 30, 2007 and 2006 were $5.3 million and$2.9 million, respectively. Research and development expenses for the sixmonths ended June 30, 2007 and 2006 were $10.7 million and $5.5 millionrespectively.  From 2006 to 2007,expenses increased as our research progressed and we built infrastructure andhired additional employees with the requisite expertise to execute the nextsteps in the development process.

In 2007, in addition to our ongoing research anddevelopment efforts, we have incurred start-up manufacturing costs related tothe assembly, testing and performance validation of the HeliScope system. Thesecosts are being accounted for as research and development expenses in our pre-commercializationphase as we prepare to launch the HeliScope system. Once the HeliScope systemis ready for commercial launch, going forward, we will record the cost ofcomponents for the HeliScope system in inventory.

The completion of our research and developmentprojects is dependent upon achieving technical objectives, which are inherentlyuncertain. As a result of these uncertainties, we are unable to predict to whatextent we will receive cash inflows from the commercialization and sale of products.Our inability to complete our research and development projects in a timelymanner could significantly increase our capital requirements and couldadversely impact our liquidity. These uncertainties could force us to seekadditional, external sources of financing from time to time in order tocontinue with our strategy. Our inability to raise additional capital, or to doso on terms reasonably acceptable to us, would jeopardize the future success ofour business.

**General and administrativeexpenses**

General and administrative expenses consistprincipally of salaries, benefits and stock-based compensation,consulting and professional fees, including patent related costs, generalcorporate costs and facility costs not otherwise included in research and developmentexpenses.

General and administrative expenses for the threemonths ended June 30, 2007 and 2006 were $3.3 million and $1.6 million,respectively. General and administrative expenses for the six months ended June30, 2007 and 2006 were $6.6 million and $2.6 million, respectively.  We expect that these expenses will increasesignificantly in 2007 and beyond as we hire our specialized sales, marketingand service personnel and increase our finance and administrative staff tosupport the requirements of being a public company. We also anticipate that wewill incur increased expenses for the costs associated with Sarbanes-Oxleycompliance, directors’ and officers’ insurance, investor relations programs anddirectors’ fees.

 **Overview of Results ofOperations**

**Three and six months endedJune 30, 2007 compared to three and six months ended June 30, 2006**

*Grant revenue.*  We recognized $143,000 and $235,000 of grantrevenue during the three and six months ended June 30, 2007, respectively, andno revenue during the three and six months ended June 30, 2006. Grant revenuerecognized during the three and six months ended June 30, 2007 related to thereimbursement of expenses in connection with our government research grant.

*Research and developmentexpenses.*  Research and developmentexpenses during the three and six months ended June 30, 2007 and 2006 wereas follows:
|                           | ** ** | **Three months ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six months ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|---------------------------------------------------|------------|------------|------------|------------|------------|
| **($ in thousands)** | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** | **2007**                                          | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and development  |       | $                                                   | 5,298      |       | $          | 2,884      |       | $                                                 | 2,414      |       | 84%        |       | $          | 10,683 |   | $ | 5,485 |   | $ | 5,198 |   | 95% |   |
|                           |            |                                                     |            |            |            |            |            |                                                   |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Research and development expenses increased by $2.4million from the three months ended June 30, 2006 to the three months endedJune 30, 2007.  The increase wasprimarily due to a $1.1 million increase in product development costs insupport of pre-production activity, which included lab expenses, materials,supplies, temporary help and prototype expenses. To support the pre-productionactivity, we hired additional personnel which led to an added $695,000 insalary and benefit expenses and $169,000 in stock-basedcompensation.   The increased headcountand pre-production activity precipitated the need for additional space, raisingoccupancy costs by $281,000, which included rent, depreciation and utilities.

In comparing the six months ended June 30, 2006 tothe six months ended June 30, 2007, research and development expenses increased$5.2 million.   The increase was againprimarily due to increased product development costs of $2.1 million related topre-production activity.  The hiring ofadditional personnel resulted in increases in salary and benefits by $1.8million and stock-based compensation by $444,000.  Increased headcount and pre-productionactivity required additional space, raising occupancy costs by $547,000.  We expect our research and developmentexpenses to continue to increase as we expand our start-up manufacturingefforts this year prior to commercialization and as we continue to invest infuture versions of our system.

11

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*General and administrativeexpenses.*  General and administrativeexpenses during the three and six months ended June 30, 2007 and 2006 were asfollows:
|                             | ** ** | **Three months ended June 30,** | ** ** | ** ** | ** ** | **Six months ended June 30,** | ** ** | ** ** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|------------|------------|
| **($ in  thousands)**  | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change**                                        | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                        |       |                                                |       |       |       |                                              |       |       |       |   |   |   |   |   |   |   |   |
| General and  administrative |       | $                                                   | 3,310      |       | $          | 1,556                                             |       | $          | 1,754      |   | 113 | % | $ | 6,561 |   | $ | 2,590 |   | $ | 3,971 |   | 153 | % |
|                             |            |                                                     |            |            |            |                                                   |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in general and administrative expensesof $1.8 million from the three months ended June 30, 2006 to the three monthsended June 30, 2007 was primarily due to additional administrative expenses ofapproximately $639,000.  These expensesincluded $201,000 related to becoming a public company, including investorrelations expenses and consulting fees; $324,000 related to initiating amarketing program; and $114,000 for patent filings.   The hiring of additional administrativestaff resulted in increased salary and benefit expenses of $674,000 andadditional stock-based compensation expense of $401,000.

In comparing the six months ended June 30, 2007 tothe six months ended June 30, 2006, the increase in general and administrativeexpenses of $4.0 million was primarily due to additional administrativeexpenses of $1.8 million.  Of thisamount, $874,000 related to becoming a public company, including legalexpenses, investor relations expenses, accounting fees, dues and fees andconsulting fees; $638,000 related to initiating a marketing program; and$253,000 for patent filings.   The hiringof additional administrative staff resulted in additional salary and benefitexpenses of $1.3 million, additional stock-based compensation expense of$603,000 and an increase of $175,000 in recruiting expenses.  We expect our general and administrativeexpenses to increase as we expand our sales and marketing functions, and incuradditional administrative costs associated with the requirements of being apublic company.

*Interest income.*  Interest income for the three and six monthsended June 30, 2007 and 2006 was as follows:
|                            | ** ** | **Three months ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six months ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|---------------------------------------------------|------------|------------|------------|------------|------------|
| **($ in  thousands)** | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** | **2007**                                          | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income            |       | $                                                   | 427        |       | $          | 244        |       | $                                                 | 183        |       | 75         | %          | $          | 694 |   | $ | 374 |   | $ | 320 |   | 86 | % |
|                            |            |                                                     |            |            |            |            |            |                                                   |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

The increase in interest income from the three andsix months ended June 30, 2006 compared to the three and six months ended June30, 2007 was due primarily to higher cash and cash equivalents during the threemonths and six months ended June 30, 2007 in connection with the receipt ofproceeds from the IPO.

*Interest expense.*  Interest expense was $12,000 during the threeand six months ended June 30, 2006 compared to $34,000 for the three monthsended June 30, 2007 and $107,000 for the six months ended June 30, 2007.   The interest expense was related to interestpaid on a term loan under a line of credit facility and security agreemententered into in June 2006, and interest expense related to theSeries B redeemable convertible preferred stock warrants that were issuedin connection with the line of credit facility.

**Liquidity and Capital Resources**

We have incurred losses since our inception inMay 2003 and, as of June 30, 2007 we had an accumulated deficit of$73.7 million. We have financed our operations to date principally throughthe sale of preferred stock and common stock, including our IPO, debt financingand interest earned on investments. Through June 30, 2007, we have received netproceeds of $66.8 million from the issuance of preferred stock, $47.6million through the issuance of common stock, including our IPO, and$2.5 million in debt financing from a lender to finance equipmentpurchases. Working capital as of June 30, 2007 was $60.4 million,consisting of $64.9 million in current assets and $4.5 million incurrent liabilities. Working capital as of December 31, 2006 was$8.7 million, consisting of $12.0 million in current assets and$3.4 million in current liabilities. Our cash, cash equivalents and short-term investment balances are heldin a variety of interest-bearing instruments, including corporate bonds,commercial paper and money market funds. Cash in excess of immediaterequirements is invested in accordance with our investment policy, primarily toachieve liquidity and capital preservation.

The following table summarizes our net increase incash and cash equivalents for the six months ended June 30, 2007 and 2006:
|                                            | ** ** | **Six months ended** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| **($ in thousands)**                  | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006** | ** ** |
| ** **                                 | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net cash  provided by (used in):           |       |                           |       |   |   |
| Operating activities                       |       | $                              | (13,409    | ) | $ | (7,321 | ) |
| Investing activities                       |       | 30                             |       | (5,501 | ) |
| Financing activities                       |       | 67,071                         |       | 21,086 |   |
|                                       |       |                           |       |   |   |
| Net increase in cash  and cash equivalents |       | $                              | 53,692     |   | $ | 8,264 |   |

 

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Net cash used in operating activities was $13.4 million for the sixmonths ended June 30, 2007 compared to $7.3 million for the six months endedJune 30, 2006.  The $6.1 million increasewas primarily due to an increase in the net loss of $8.7 million, partiallyoffset by an increase in non-cash stock-based compensation expense of $1.0million, an increase in accrued expenses and other current liabilities of $1.2million, and an increase in non-cash depreciation and amortization expense of$380,000.

Netcash provided by investing activities was $30,000 for the six months ended June30, 2007 compared to net cash used by investing activities of $5.5 million forthe six months ended June 30, 2006.  The$5.5 million increase was primarily due to a $4.0 million decrease in the cashused in the purchases of short-term investments and the increase in restrictedcash of $450,000 during the six months ended June 30, 2006 used for a securitydeposit.

Netcash provided by financing activities was $67.1 million and $21.1 million forthe six months ended June 30, 2007 and 2006, respectively.  The $46.0 million increase was primarily dueto $49.0 million of cash proceeds from the IPO, partially offset by $1.7 millionof initial public offering costs and a $1.0 million decrease in cash proceedsfrom debt issuances.

**Operating capital and capitalexpenditure requirements**

To date, we have not commercialized any productsand have not achieved profitability. We anticipate that we will continue toincur substantial net losses for the next several years as we develop andprepare for the commercial launch of our HeliScope system and develop thecorporate infrastructure required to manufacture and sell our products andoperate as a publicly traded company.

We do not expect to generate product revenue until atleast 2008. We believe that our existing cash, cash equivalents and investmentbalances, and interest income we earn on these balances, will be sufficient throughthe end of 2008. It is difficult to predict the actual rate of product sales asa result of the complex nature of the HeliScope system and its expected longsales cycle. If our available cash, cash equivalents and investment balancesand net proceeds from the IPO 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. Anysuch required additional capital may not be available on reasonable terms, ifat all. 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.

Our forecast of the period of time through which ourfinancial resources will be adequate to support our operations, the costs tocomplete development of products and the cost to commercialize our futureproducts are forward-looking statements and involve risks anduncertainties, and actual results could vary materially and negatively as aresult of a number of factors, including the factors discussed in the “Risk Factors”section of this report. We have based these estimates on assumptions that mayprove to be wrong, and we could utilize our available capital resources soonerthan we currently expect.

Because of the numerous risks and uncertaintiesassociated with the development of our product, we are unable to estimate theexact amounts of capital outlays and operating expenditures necessary tocomplete the development of our future products and successfully deliver anysuch products to the market. Our future capital requirements will depend onmany factors, including, but not limited to, the following:

·                  the rate of progress and cost of our commercializationactivities;

·                  the success of our research and developmentefforts;

·                  the expenses we incur in marketing and sellingour products;

·                  the revenue generated by future sales of ourproducts;

·                  the emergence of competing or complementarytechnological developments;

·                  the costs of filing, prosecuting, defendingand enforcing any patent claims and other intellectual property rights;

·                  the terms and timing of any collaborative,licensing or other arrangements that we may establish; and

·                  the acquisition of businesses, products andtechnologies, although we currently have no commitments or agreements relatingto any of these types of transactions.

Working capital as of June 30, 2007 was$60.4 million, consisting of $64.9 million in current assets and $4.5million in current liabilities. Working capital as of December 31, 2006was $8.7 million, consisting of $12.0 million in current assets and$3.4 million in current liabilities.

**Contractual obligations**

A summary of our contractualobligations is included in our Registration Statement on Form S-1, as amended,which was declared effective by the Securities and Exchange Commission on May24, 2007.  We reviewed our contractualobligations as of June 30, 2007 and determined that there were no significantchanges from the ones set forth in Form S-1.

**License agreements and patents**

We have fixed annual costs associated with licenseagreements into which we have entered. In addition we may have to makecontingent payments in the future upon realization of certain milestones orroyalties payable under these agreements.

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**Line of credit facility andsecurity agreement**

In June 2006, we entered into a line of creditfacility and security agreement with General Electric Capital Corporation, orGE Capital. The credit facility provides that we may borrow up to$8.0 million at an interest rate based on the Federal Reserve’s three yearTreasury Constant Maturities Rate. The end of the advance period isDecember 31, 2007. The proceeds of the credit facility may be used for thepurchase of equipment and are collateralized by specific equipment assets.Payments are required to be made on a monthly basis. For the first six monthsinterest-only payments are required. Thereafter, for the following30 months, payments of principal and interest will be due for eachadvance. The outstanding balance is collateralized by the equipment purchasedwith the proceeds from each equipment advance. As of June 30, 2007, advances onthe credit facility were $2.5 million at a weighted-average interestrate of 10.1%.

**OFF-BALANCE SHEET ARRANGEMENTS**

During the six months ended June 30, 2007 and2006, we did not engage in any off-balance sheet arrangements.

**Critical Accounting Policies and Estimates**

In our Registration Statement on Form S-1, asamended, which was declared effectiveby the Securities and Exchange Commission on May 24, 2007, our most criticalaccounting policies and estimates upon which our financial status depends wereidentified as those relating to stock-based compensation; revenue recognition;inventory; allowance for doubtful accounts; and net operating losses and taxcredit carryforwards.  We reviewed ourpolicies and determined that those policies remain our most critical accountingpolicies for the six months ended June 30, 2007.  We did not make any changes in those policiesduring the six months ended June 30, 2007, except for the changes related tothe adoption of FIN 48.  FIN 48prescribes a new methodology by which a company must measure, report, presentand disclose in its financial statements the effects of any uncertain taxreturn reporting positions that a company has taken or expects to take.  See Note 5, Income Taxes, in the Notes toConsolidated Financial Statements for additional information.

**Item 3. Quantitative and Qualitative Disclosuresabout Market Risk**

Our exposure to market risk is limited to our cashand cash equivalents which have maturities of less than one year. The goals ofour investment policy are preservation of capital, fulfillment of liquidityneeds and fiduciary control of cash and investments. We also seek to maximizeincome from our investments without assuming significant risk. To achieve ourgoals, we maintain a portfolio of cash equivalents in a variety of securitiesof high credit quality. The securities in our investment portfolio are notleveraged, are classified as available for sale and are, due to their veryshort-term nature, subject to minimal interest rate risk. We currently do nothedge interest rate exposure. Because of the short-term maturities of ourinvestments, we do not believe that an increase in market rates would have anymaterial negative impact on the value of our investment portfolio.

**Item 4. Controls and Procedures**

Our management, with the participation of our chiefexecutive officer and chief financial officer, has evaluated the effectivenessof our disclosure controls and procedures (as defined inRules 13a-15(e) or 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)) as of the end of the period coveredby this report. Based on such evaluation, our chief executive officer and chieffinancial officer have concluded that, as of the end of such period, ourdisclosure controls and procedures were effective in ensuring that informationrequired to be disclosed by Helicos in the reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported, on atimely basis, and is accumulated and communicated to our management, includingour chief executive officer and chief financial officer, as appropriate, toallow timely decisions regarding required disclosure.

No change in our internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))occurred during the period covered by this quarterly report that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

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**Part II - Other Information:**

**Item 1. Legal Proceedings**

Not applicable.

**Item 1A. Risk Factors**

Thefollowing important factors could cause our actual business and financialresults to differ materially from those contained in forward-looking statementsmade in this Quarterly Report on Form 10-Q or elsewhere by management from timeto time.

**RISKS RELATED TO OUR BUSINESS**

**We are beginning to assemble andtest our first commercial product, the HeliScope system, but have not yet soldany of these systems. We may not be able to successfully complete themanufacturing process and commercialize the HeliScope system, in which event ourbusiness would be materially harmed.**

To commercialize our HeliScope system, we need tocomplete the assembly, testing and performance validation of the system andtake other steps to prepare for the commercial scale manufacture of the system,including the development of manufacturing documentation and the developmentand implementation of quality assurance and quality control procedures. We alsoneed to manufacture the proprietary reagents and disposable supplies that arepart of the system or have them manufactured for us by third parties. If we areunable to successfully complete these tasks, we may not be able tocommercialize our HeliScope system in a timely manner, or at all, which wouldmaterially harm our business. In addition, although we believe that we havealready incurred the substantial majority of the costs related to thedevelopment of the initial version of our HeliScope system for commerciallaunch later this year, if we experience unanticipated delays or problems,these costs could substantially increase, which would materially harm ourbusiness.

**We have a history of operatinglosses, expect to continue to incur substantial losses, and might never achieveor 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 June 30, 2007, we had an accumulated deficitof $73.7 million. These losses have resulted principally from costsincurred in our research and development programs and from our general andadministrative expenses. In 2006, we used cash in operating activities of$16.5 million and had capital expenditures totaling $2.8 million. Inthe first half of 2007, we used cash in operating activities of$13.4 million and had capital expenditures totaling $0.8 million. Weexpect our cash expenditures to increase significantly in the near term.

Accordingly, we will need to generate significantrevenue to achieve profitability. While we expect to begin commercial shipmentsof our products in the fourth quarter of 2007, because our products will besubject to acceptance testing by our customers we do not expect to have anyrecognizable revenue from the sales of our instruments until at least 2008. Wecurrently do not have any orders for the HeliScope system. Moreover, even afterwe begin selling our products, we expect our losses to continue as a result ofongoing research and development expenses, as well as increased manufacturing,sales and marketing expenses. These losses, among other things, have had andwill continue to have an adverse effect on our working capital, total assetsand stockholders’ equity. Because of the numerous risks and uncertaintiesassociated with our product development and commercialization efforts, we areunable to predict when we will become profitable, and we may never becomeprofitable. Even if we do achieve profitability, we may not be able to sustainor increase profitability on a quarterly or annual basis. If we are unable toachieve and then maintain profitability, the market value of our common stockwill decline.

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**If our technology fails to achieveand sustain sufficient market acceptance, we will not generate expectedrevenue.**

Our success depends, in part, on our ability todevelop products that displace current technology, as well as expand the marketfor genetic analysis to include new applications that are not practical withcurrent technology. To accomplish this, we must develop and successfullycommercialize our HeliScope system for use in a variety of life scienceapplications. These markets are new and emerging and there can be no assurancesthat they will develop as quickly as we expect or that they will reach theirfull potential. There is no guarantee, even if our technology is able tosuccessfully reduce the cost and improve the performance of genetic analysisrelative to existing products, that we will be able to induce customers withinstalled bases of conventional genetic analysis instruments to purchase oursystems or to expand the market for genetic analysis to include newapplications. Even if we are able to successfully implement our technology, wemay fail to achieve or sustain market acceptance of our HeliScope system byacademic and government research laboratories and pharmaceutical, biotechnologyand agriculture companies, among others, across the full range of our intendedlife science applications. Any such failure would materially harm our futuresales and revenue., The price of the HeliScope instrument is significantlygreater than the instrument cost of current market-leading sequencers,which may adversely affect our ability to penetrate or grow the market for geneticanalysis. In addition, if our products are only utilized as a replacement forexisting DNA sequencing technology, we may face a much smaller market thanwe currently anticipate.

We are aware of other companies that havedeveloped, or are developing, emerging sequencing technologies. Even if ourproduct demonstrates dramatic cost and throughput improvements over currentmarket-leading technologies, we may fail to achieve market acceptance dueto adoption of those emerging technologies by our potential customers, therebyreducing our market opportunity.

**We have no experience in sellingand limited experience in marketing and, as a result, may be unable tosuccessfully commercialize our HeliScope system.**

We have no sales experience and limited marketing experience.Our ability to achieve profitability depends on attracting customers for ourHeliScope system. Although members of our sales and marketing team haveconsiderable industry experience and have engaged in pre-launch marketingactivities for our HeliScope system, we must expand our sales, marketing,distribution and customer support capabilities and develop a specialized sales,marketing and service force with the appropriate technical expertise to marketour system. We currently have a limited number of sales representatives,however, and therefore have limited sales and marketing infrastructure.  We plan to initially establish a specializedsales, marketing and service force of approximately 20 people.  To successfully perform sales, marketing, distributionand customer support functions ourselves, we will face a number of risks,including:

·                  our ability to attract and retain thespecialized sales, marketing and service force necessary to commercialize andgain market acceptance for our technology;

·                  the time and cost of establishing aspecialized sales, marketing and service force for a particular application,which might not be justifiable by the revenues generated by our technology; and

·                  the ability of our specialized sales,marketing and service force to initiate and execute successfulcommercialization activities.

In addition to the recruitment of our specializedsales, marketing and service force, we may seek to enlist one or more thirdparties to assist with sales, distribution and customer support globally or incertain regions of the world. There is no guarantee, if we do seek to enterinto such arrangements, that we will be successful in attracting desirablesales and distribution partners, or that we will be able to enter into sucharrangements on favorable terms. If our sales and marketing efforts, or thoseof any third-party sales and distribution partners, are not successful,our technologies and products may not gain market acceptance, which couldmaterially impact our business operations.

**If we are unable to timelyestablish manufacturing capacity by ourselves or with partners,commercialization of our products would be delayed, which could result in lostrevenues and harm our business.**

To commercialize our HeliScope system, we need to eitherbuild internal manufacturing capacity or contract with one or moremanufacturing partners, or both. We currently intend to use a combination ofoutsourced and internal manufacturing resources. We have not manufactured on acommercial scale any instruments, reagents or disposable supplies. We mayencounter difficulties in manufacturing our products and, due to the complexityof our technology and our manufacturing process, we cannot be sure we fullyunderstand all of the factors that affect our manufacturing processes orproduct performance. There is no assurance that we will be able to continue tobuild manufacturing capacity internally or find one or more suitablemanufacturing partners, or both, to meet the volume and quality requirementsnecessary to be successful in the market. Manufacturing and product qualityissues may arise as we increase production rates of our HeliScope system andassociated proprietary reagents and disposable supplies. If our products do notconsistently meet our customers’ performance expectations, we may be unable togenerate sufficient revenues to become profitable. Any delay in establishing orinability to expand our manufacturing capacity could delay our ability todevelop or sell our products, which could result in lost revenue and seriouslyharm our business, financial condition and results of operations.

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**Future product sales will depend,in part, on research and development spending levels of academic, clinical andgovernmental research institutions and pharmaceutical, biotechnology andagriculture companies, and any reduction in such spending levels could limitour ability to sell our product.**

We expect that our revenues in the foreseeablefuture will be derived primarily from sales of instruments, reagents anddisposable supplies to a relatively small number of academic, clinical,governmental and other research institutions and pharmaceutical, biotechnologyand agriculture companies that conduct large-scale genetic analyses. Oursuccess will depend upon their demand for and use of our products. Accordingly,the spending policies of these customers could have a significant effect on thedemand for our technology. These policies are based on a wide variety offactors, including the resources available to make purchases, the spendingpriorities among various types of equipment, policies regarding spending duringrecessionary periods and changes in the political climate. In addition,academic, governmental and other research institutions that fund research anddevelopment activities may be subject to stringent budgetary constraints thatcould result in spending reductions, reduced allocations or budget cutbacks,which could jeopardize the ability of these customers to purchase our system.Our operating results may fluctuate substantially due to reductions and delaysin research and development expenditures by these customers. For example,reductions in capital expenditures by these customers may result in lower thanexpected instrument sales and similarly, reductions in operating expendituresby these customers could result in lower than expected sales of reagents anddisposable supplies. These reductions and delays may result from factors thatare not within our control, such as:

·                  changes in economic conditions;

·                  changes in government programs that providefunding to research institutions and companies;

·                  changes in the regulatory environmentaffecting life sciences companies and life sciences research;

·                  market-driven pressures on companies toconsolidate and reduce costs; and

·                  other factors affecting research anddevelopment spending.

Any decrease in our customers’ budgets orexpenditures or in the size, scope or frequency of capital or operatingexpenditures as a result of the foregoing or other factors could materially adverselyaffect our operations or financial condition.

**If the suppliers we rely on failto supply the materials we use in the manufacturing of our products, we mightbe unable to satisfy product demand, which would negatively affect ourbusiness.**

Some components used in the manufacturing of ourHeliScope system and certain raw materials used in the manufacturing of ourreagents and disposable supplies are available from only a few suppliers. Weacquire some of these components and raw materials on a purchase-orderbasis, which means that the supplier is not required to supply us withspecified quantities of these components or raw materials over a certain periodof time or to set aside part of its inventory for our anticipated requirements.If supplies from these vendors were delayed or interrupted for any reason, wemay not be able to manufacture and sell our HeliScope system and associatedreagents and disposable supplies in a timely fashion or in sufficientquantities or under acceptable terms. Additionally, for certain of thesecomponents and raw materials, we currently purchase from sole-sourcesuppliers and have not yet arranged for alternative suppliers. It might bedifficult to find alternative suppliers in a timely manner and on termsacceptable to us. Consequently, as we begin our commercialization efforts, ifwe do not forecast properly, or if our suppliers are unable or unwilling tosupply us in sufficient quantities or on commercially acceptable terms, wemight not have access to sufficient quantities of these materials on a timelybasis and might not be able to satisfy product demand. Moreover, if any ofthese components and raw materials becomes unavailable in the marketplace, wewill be forced to further develop our technologies to incorporate alternatecomponents or raw materials.

**Our inability to continuallyenhance our product performance, including our planned improvements to theHeliScope system, to keep pace with rapidly changing technology and customerrequirements could adversely affect our ability to compete effectively.**

The success of any products utilizing our tSMStechnology will depend on our ability to continue to increase the performanceand decrease the price of sequencing using this technology. New technologies,techniques or products could emerge which might allow the analysis of genomicinformation with similar or better price-performance than our HeliScopesystem and could exert pricing pressures on or take market share from ourproducts. It is critical to our success for us to anticipate changes intechnology and customer requirements and to successfully introduce new,enhanced and competitive technology to meet our customers’ and prospectivecustomers’ needs on a timely basis. While we have planned substantialimprovements to the HeliScope system, including enhancing the performance ofthe system’s reagents and disposable supplies and image processing subsystemand reducing the consumption of reagents, we may not be able to successfullyimplement these improvements. Even if we successfully implement some or all ofthese planned improvements, we could incur substantial development costs.  We may not have adequate resources availableto develop new technologies or be able to successfully introduce enhancementsto our system. There can be no guarantee that we will be able to maintaintechnological advantages over emerging technologies in the future, and we willneed to respond to technological innovation in a rapidly changing industry. Ifwe fail to keep pace with emerging technologies, our system will becomeuncompetitive, our market share will decline and our business, revenue,financial condition and operating results could suffer materially.

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**We operate in a highly competitiveindustry and if we are not able to compete effectively, our business andoperating results will be harmed.**

Some of our current competitors, as well as many of ourpotential competitors, have greater name recognition, more substantialintellectual property portfolios, longer operating histories, significantlygreater resources to invest in new technologies and more substantial experiencein new product development, regulatory expertise, manufacturing capabilitiesand the distribution channels to deliver products to customers than we do. Forexample, companies such as Affymetrix, Inc., Agilent Technologies, theApplied Biosystems division of Applera Corporation, GE Healthcare (through itsAmersham Biosciences unit), Illumina, Inc., (through its Solexa unit) andRoche Diagnostics (through its 454 Life Sciences unit) have products forgenetic analysis which compete in certain segments of the market in which weplan to sell our HeliScope system. For example, Illumina recently introduced anext generation DNA sequencing system to the market, against which we expectour HeliScope system will directly compete. Pharmaceutical and biotechnologycompanies have significant needs for genomic information and may also choose todevelop or acquire competing technologies to meet these needs. In addition, anumber of other companies and academic groups are in the process of developingnovel techniques for genetic analysis, many of which have also received grantsfrom the National Human Genome Research Institute, a branch of the NationalInstitutes of Health, for the development of technologies that can achievesubstantially lower costs, referred to as a “$100,000 genome” or a “$1,000genome.” These competitors may be able to respond more quickly and effectivelythan we can to new or changing opportunities, technologies, standards orcustomer requirements. Further, in light of these advantages, even if ourtechnology is more effective than the product or service offerings of ourcompetitors, current or potential customers might accept competitive productsand services in lieu of purchasing our technology. We may not be able tocompete effectively against these organizations. Increased competition islikely to result in pricing pressures, which could harm our sales,profitability or market share. Our failure to compete effectively couldmaterially adversely affect our business, financial condition or results ofoperations.

In addition, to the extent that, in the long term, wecommercialize any products utilizing our tSMS technology for use in future lifescience applications, such as clinical diagnostic or protein analysisapplications, we will face additional competition. In the event that we developnew technology and products that compete with existing technology and productsof well established companies, the marketplace might not adopt our technologyand products.

**Failure to manage our rapid growtheffectively could harm our business.**

We will need to add a significant number of new personneland expand our capabilities to successfully pursue our commercializationstrategy for our HeliScope system as well as our research and developmentefforts. To manage our anticipated future growth effectively, we must enhanceour manufacturing capabilities and operations, information technologyinfrastructure, and financial and accounting systems and controls. Forinstance, certain aspects of our operations, such as our manufacturingcapabilities, must be scaled up to increase the number of HeliScope systems wecan manufacture per quarter. We also must attract, train and retain asignificant number of qualified sales, marketing and service personnel,engineers, scientists and other technical personnel and management personnel.Our failure to manage our rapid growth effectively could have a materialadverse effect on our business, operating results or financial condition.Organizational growth and scale-up of operations could strain our existingmanagerial, operational, financial and other resources. Our growth couldrequire significant capital expenditures and may divert financial resourcesfrom other projects, such as the development of new products or enhancements.If our management is unable to effectively manage our growth, our expenses mayincrease more than expected, our revenue could grow more slowly than expectedand we may not be able to achieve our research and development andcommercialization goals.

**Our business could be harmed if weare not successful in entering into large contracts for the sale and installationof our HeliScope systems.**

Our business may depend upon securing and maintaininglarge contracts for the sale and installation of our HeliScope systems to alimited number of customers each year. We expect the sales cycle for theselarge contracts to be longer than for other contracts because we will need toeducate potential customers regarding the benefits of our system to a varietyof constituencies within such customer organizations. Moreover, even after apurchase decision is made, these contracts may be delayed by factors outsideour control, including financial and budget constraints of the customerspurchasing our product. Accordingly, we may expend substantial funds andmanagement effort with no assurance that an agreement will be reached with apotential customer. Our business, results of operations and financial conditioncould be materially adversely affected if we are unable to obtain majorcontracts for the sale and installation of our HeliScope systems, or if weexperience delays in the performance of such contracts.

**We expect that our sales cyclewill be lengthy and unpredictable, which will make it difficult for us toforecast revenue and increase the magnitude of quarterly fluctuations in ouroperating results.**

Potential customers for our HeliScope system typicallycommit significant resources to evaluate genetic analysis technologies. Thecomplexity of our product will require us to spend substantial time and effortto assist potential customers in evaluating our HeliScope system and inbenchmarking it against available technologies. Because our HeliScope systemrequires a significant investment of time and cost by our customers, we musttarget those senior managers within the customer’s organization who are able tomake these decisions on behalf of such organizations. We may face difficultyidentifying and establishing contact with such decision makers. Even afterinitial acceptance, the negotiation and documentation processes can be lengthy.We expect our sales cycle to typically range between six and twelve months, butit may be longer. Any delay in completing sales in a particular quarter couldcause our operating results to fall below expectations.

**Our customers may purchasereplacements for the reagents and disposable supplies that are a part of ourHeliScope system from third parties or discover a method that allows them touse less than the expected amounts of such products, which could materially andadversely affect our revenues.**

The success of our business depends, in part, on therecurring sales of the proprietary reagents and disposable supplies for oursystem. Because we have not yet commercialized our HeliScope system, we do nothave the experience to predict the percentage of our revenues that we willderive from sales of proprietary reagents and disposable supplies.Nevertheless, we expect such sales to represent a material source of our futurerevenues.  Our customers or competitorscould potentially produce reagents and disposable supplies that are compatiblewith our HeliScope system at a lower cost, which could exert pricing pressureson, or take market share from, our reagents and disposable supplies. Similarly,our customers or competitors may discover a method of utilizing smallerquantities of our proprietary reagents and disposable supplies while achievingsatisfactory results, which could reduce the amount of reagents and supplies weare able to sell. In either case, there could be a material adverse effect onour revenues and harm to our business, financial condition and results ofoperations.

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

We are substantially dependent on the performanceof our senior management and key scientific and technical personnel,particularly Stanley N. Lapidus, our President and Chief Executive Officer, J.William Efcavitch, PhD, our Senior Vice President of Product Research andDevelopment and Stephen J. Lombardi, our Executive Vice President andChief Operating Officer. We do not maintain employment contracts with any ofour employees. The loss of the services of any member of our senior managementor our scientific or technical staff may significantly delay or prevent thedevelopment of our products and other business objectives by divertingmanagement’s attention to transition matters and identification of suitablereplacements, if any, and could have a material adverse effect on our business,operating results and financial condition.

In addition, our product development and marketingefforts could be delayed or curtailed if we are unable to attract, train andretain highly skilled employees and scientific advisors, particularly ourmanagement team, senior scientists and engineers and sales, marketing andservice personnel. To expand our research, product development and salesefforts we need additional people skilled in areas such as bioinformatics,manufacturing, sales, marketing and technical support. Because of the complexand technical nature of our system and the dynamic market in which we compete,any failure to attract and retain a sufficient number of qualified employeescould materially harm our ability to develop and commercialize our technology.Competition for these people is intense. Further, our inability to attract,train and retain sales, marketing and service personnel could have a materialadverse affect on our ability to generate sales or successfully commercializeour technology. Each of our executive officers and other key employees couldterminate his or her relationship with us at any time. These persons’ expertisewould be difficult to replace and could have a material adverse effect on ourability to achieve our business goals. There can be no assurance that we willbe successful in hiring or retaining qualified personnel and our failure to doso could have a material adverse effect on our business, financial conditionand results of operations.

**Ethical, legal and social concernssurrounding the use of genetic information could reduce demand for our technology.**

One of the potential uses for our product isgenetic testing for predisposition to certain conditions. Genetic testing hasraised ethical, legal and social issues regarding privacy and the appropriateuses of the resulting information. Governmental authorities could, for socialor other purposes, call for limits on or regulation of the use of genetictesting or prohibit testing for genetic predisposition to certain conditions,particularly for those that have no known cure. Similarly, such concerns maylead individuals to refuse to use genetics tests even if permissible. These andother ethical, legal and social concerns about genetic testing may limit marketacceptance of our technology for certain applications or reduce the potentialmarkets for our technology, either of which could have a material adverseeffect on our business, financial condition and results of operations.

**Our products could in the futurebe subject to regulation by the U.S. Food and Drug Administration or otherregulatory agencies, which could increase our costs and delay ourcommercialization efforts, thereby materially and adversely affecting ourbusiness and results of operations.**

Our products are not currently subject to U.S. Foodand Drug Administration (“FDA”), clearance or approval. However, in the future,certain of our products or related applications could be subject to FDAregulation; the FDA’s regulatory jurisdiction could be expanded to include ourproducts, or both. Even where a product is exempted from FDA clearance orapproval, the FDA may impose restrictions as to the types of customers to whichwe can market and sell our products. Such regulation and restrictions maymaterially and adversely affect our business, financial condition and resultsof operations.

Laws and regulations are also in effect in manycountries that could affect our products. The number and scope of theserequirements are increasing. We may not be able to obtain regulatory approvalsin such countries or may incur significant costs in obtaining or maintainingour foreign regulatory approvals. In addition, the export by us of certain ofour products which have not yet been cleared for domestic commercialdistribution may be subject to FDA or other export restrictions.

**Our products could have unknowndefects or errors, which may give rise to claims against us or divertapplication of our resources from other purposes.**

Any product utilizing our tSMS technology will becomplex and may develop or contain undetected defects or errors. We cannot assureyou that a material performance problem will not arise. Despite testing,defects or errors may arise in our system, which could result in a failure toachieve market acceptance or expansion, diversion of development resources,injury to our reputation and increased service and maintenance costs. Defectsor errors in our products might also discourage customers from purchasing oursystem. The costs incurred in correcting any defects or errors may besubstantial and could adversely affect our operating margins. In addition, suchdefects or errors could lead to the filing of product liability claims, whichcould be costly and time-consuming to defend and result in substantial damages.Although we plan to obtain product liability insurance prior to the commerciallaunch of our HeliScope system, any future product liability insurance that weprocure may not protect our assets from the financial impact of a productliability claim. Moreover, we may not be able to obtain adequate insurancecoverage on acceptable terms. Any insurance that we do obtain will be subjectto deductibles and coverage limits. A product liability claim could have aserious adverse effect on our business, financial condition and results ofoperations.

**We will incur significantincreased costs as a result of operating as a public company, and ourmanagement will be required to devote substantial time to new complianceinitiatives.**

We have never operated as a public company. As apublic company, we will incur significant legal, accounting and other expensesthat we did not incur as a private company. In addition, the Sarbanes-OxleyAct of 2002, as well as new rules subsequently implemented by the Securitiesand Exchange Commission and the NASDAQ Global Market, have imposed various newrequirements on public companies, including requiring changes in corporategovernance practices. Our management and other personnel will need to devote asubstantial amount of time to these new compliance initiatives. Moreover, theserules and regulations will increase our legal and financial compliance costsand will make some activities more time-consuming and costly. For example, weexpect these new rules and regulations to make it more difficult and moreexpensive for us to obtain director and officer liability insurance and we maybe required to incur substantial costs to maintain the same or similarcoverage.

In addition, the Sarbanes-Oxley Act requires, amongother things, that we maintain effective internal control over financialreporting and disclosure controls and procedures. In particular, commencing in2008, we must perform system and process evaluation and testing of our internalcontrol over financial reporting to allow management and our independentregistered public accounting firm to report on the effectiveness of ourinternal control over financial reporting, as required by Section 404 ofthe Sarbanes-Oxley Act. Our testing, or the subsequent testing by ourindependent registered public accounting firm, may reveal deficiencies in ourinternal control over financial reporting that are deemed to be materialweaknesses. Our compliance with Section 404 will require that we incursubstantial accounting expense and expend significant management time oncompliance-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 ExchangeCommission or other regulatory authorities, which would require additionalfinancial and management resources.

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**We may need to raise additionalfunding, which may not be available on favorable terms, if at all, or withoutdilution to our stockholders. If we do not raise any necessary funds, we mayneed to cut back or terminate some or all aspects of our operations which couldmaterially adversely affect our business prospects.**

Because our HeliScope system is complex and will benew to the market and involve significant capital expenditures by customers anda long sales cycle, it is very difficult to predict the actual rate of productsales.  We may need additional financingto execute on our current or future business strategies. We expect capitaloutlays and operating expenditures to increase over the next several years aswe expand our infrastructure, commercialization, manufacturing and research anddevelopment activities. The amount of additional capital we may need to raisedepends on many factors, including:

·                  the level of research and developmentinvestment required to maintain and improve our technology position;

·                  the amount and growth rate of our revenues;

·                  changes in product development plans needed toaddress any difficulties in manufacturing or commercializing our HeliScopesystem and enhancements to our system;

·                  the costs of filing, prosecuting, defendingand enforcing patent claims and other intellectual property rights;

·                  competing technological and marketdevelopments;

·                  our need or decision to acquire or licensecomplementary technologies or acquire complementary businesses; and

·                  changes in regulatory policies or laws that affectour operations.

We cannot be certain that additional capital willbe available when and as needed or that our actual cash requirements will notbe greater than anticipated. If we require additional capital at a time wheninvestment in biotechnology or life sciences companies or in the marketplace ingeneral is limited due to the then prevailing market or other conditions, wemay not be able to raise such funds at the time that we desire or any timethereafter. In addition, if we raise additional funds through the issuance ofequity or convertible debt securities, the percentage ownership of ourstockholders could be significantly diluted, and these newly-issuedsecurities may have rights, preferences or privileges senior to those ofexisting stockholders. If we obtain additional debt financing, a substantialportion of our operating cash flow may be dedicated to the payment of principaland interest on such indebtedness, and the terms of the debt securities issuedcould impose significant restrictions on our operations. If we raise additionalfunds through collaborations and licensing arrangements, we might be requiredto relinquish significant rights to our technologies or products, or grantlicenses on terms that are not favorable to us. If we are unable to obtainfinancing on terms favorable to us, we may be unable to execute our businessplan and we may be required to cease or reduce development or commercializationof our technology, sell some of all of our technology or assets or merge withanother entity.

**We use hazardous chemicals andbiological materials in our business. Any claims relating to improper handling,storage or disposal of these materials could be time consuming and costly.**

Our research and development processes involve thecontrolled use of hazardous materials, including chemicals and biologicalmaterials. Our operations produce hazardous waste products. We cannot eliminatethe risk of accidental contamination or discharge and any resultant injury fromthese materials. We may be sued for any injury or contamination that resultsfrom our use or the use by third parties of these materials. We do notcurrently maintain separate environmental liability coverage. Federal, stateand local laws and regulations govern the use, manufacture, storage, handlingand disposal of hazardous materials. Compliance with environmental laws andregulations may be expensive, and current or future environmental regulationsmay impair our research, development and production efforts.

**Because we are subject to existingand potential additional governmental regulation, we may become subject toburdens on our operations, and the markets for our products may be narrowed.**

We are subject, both directly and indirectly, tothe adverse impact of existing and potential future government regulation ofour operations and markets. For example, export of our instruments is subjectto strict regulatory control in a number of jurisdictions. The failure tosatisfy export control criteria or obtain necessary clearances could delay orprevent shipment of products, which could adversely affect our revenues andprofitability. Moreover, the life sciences industry, which is the market forour technology, has historically been heavily regulated. There are, forexample, laws in several jurisdictions restricting research in geneticengineering, which can operate to narrow our markets. Given the evolving natureof this industry, legislative bodies or regulatory authorities may adoptadditional regulation that adversely affects our market opportunities.Additionally, if ethical and other concerns surrounding the use of geneticinformation, diagnostics or therapies become widespread, we may have lessdemand 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 thefuture, we may encounter a range of problems that could harm our business.**

We may acquire technologies, products or companiesthat we feel could accelerate our ability to compete in our core markets.Acquisitions involve numerous risks, including:

·                  difficulties in integrating operations, technologies,accounting and personnel;

·                  difficulties in supporting and transitioningcustomers of our acquired companies;

·                  diversion of financial and managementresources from existing operations;

·                  risks of entering new markets;

·                  potential loss of key employees; and

·                  inability to generate sufficient revenue tooffset acquisition costs.

Acquisitions also frequently result in therecording of goodwill and other intangible assets which are subject topotential impairments in the future that could harm our financial results. Inaddition, if we finance acquisitions by issuing convertible debt or equitysecurities, our existing stockholders may be diluted, which could affect themarket price of our stock. As a result, if we fail to properly evaluate acquisitionsor investments, we may not achieve the anticipated benefits of any suchacquisitions, and we may incur costs in excess of what we anticipate.

**RISKS RELATED TO OUR INTELLECTUALPROPERTY**

**Our failure to establish a strongintellectual property position and enforce our intellectual property rightsagainst others could enable competitors to develop similar or alternativetechnologies.**

Our success depends in part on our ability toobtain and maintain intellectual property protection for our products, processesand technologies. Our policy is to seek to protect our intellectual propertyby, among other methods, filing U.S. patent applications related to ourproprietary technology, inventions and improvements that are important to thedevelopment of our business.

Currently, our patent portfolio relating to ourproprietary technology is comprised, on a worldwide basis, of ten issuedpatents and 89 pending patent applications which, in either case, we owndirectly or for which we are the exclusive or semi-exclusive licensee.Some of these patents and patent applications are foreign counterparts of U.S.patents or patent applications. The issued patents expire on dates ranging from2018 through 2024.  We may not be able tomaintain and enforce existing patents or obtain further patents for ourproducts, 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 a patentis not conclusive as to its validity or enforceability, nor does it provide thepatent holder with freedom to operate unimpeded by the patent rights of others.Patent law relating to the scope of claims in the technology fields in which weoperate is still evolving and the extent of future protection is highlyuncertain, so there can be no assurance that the patent rights that we have ormay obtain will be valuable. Others have filed patent applications that aresimilar in scope to ours, and in the future are likely to file patentapplications that are similar or identical in scope to ours or those of ourlicensors. We cannot predict whether any of our competitors’ pending patentapplications will result in the issuance of valid patents. Moreover, we cannotassure investors that any such patent applications will not have priority ordominate over our patents or patent applications. The invalidation of keypatents 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 toprotect or enforce our patents and proprietary rights and to determine thescope and validity of others’ proprietary rights, which could result insubstantial costs and diversion of resources.**

Litigation may be necessary to enforce our patentand proprietary rights and/or to determine the scope and validity of others’proprietary rights. Litigation on these matters has been prevalent in ourindustry and we expect that this will continue. To determine the priority ofinventions, we may have to initiate and participate in interference proceedingsdeclared by the U.S. Patent and Trademark Office that could result insubstantial costs in legal fees and could substantially affect the scope of ourpatent protection. Also, our intellectual property may be subject tosignificant administrative and litigation proceedings such as invalidity,opposition, reexamination, or reissue proceedings against our patents. Theoutcome of any litigation or administrative proceeding might not be favorableto us, and, in that case, we might require licenses from others that we may notbe able to obtain. Even if such licenses are obtainable, they may not be availableat a reasonable cost. We may also be held liable for money damages to thirdparties and could be enjoined from manufacturing or selling our products ortechnologies. In addition, if we resort to legal proceedings to enforce ourintellectual property rights or to determine the validity and scope of theintellectual property or other proprietary rights of others, the proceedingscould be burdensome and expensive, even if we were to prevail. Any litigationthat may be necessary in the future could result in substantial costs anddiversion of resources and could have a material adverse effect on ourbusiness, operating results or financial condition.

**We depend upon our ability tolicense technologies, and the failure to license or otherwise acquire necessarytechnologies could harm our ability to commercialize our products or defend ourintellectual property position.**

We hold licenses from Arizona Technology Enterprises,California Institute of Technology, Roche Diagnostics GmbH and PerkinElmer, LAS,Inc. to use certain technologies that we consider to be material to ourbusiness. Each of these licenses imposes a range of obligations on us and maybe terminated if we breach the terms of any of the respective agreements. Wemay also be required to enter into additional licenses with third parties forother technologies that we consider to be necessary for our business. If we areunable to maintain our existing licenses or obtain additional technologies onacceptable terms, we could be required to develop alternative technologies,either alone or with others, in order to avoid infringing the intellectualproperty to which we no longer hold a license. This could require our productto be re-configured which could negatively impact its availability forcommercial sale and increase our development costs. Failure to license orotherwise acquire necessary technologies would harm our ability tocommercialize our products, which could materially adversely affect ourbusiness, financial condition and results of operations. In addition, anylicenses we obtain from federally-funded institutions are subject to themarch-in rights of the U.S. government.

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**We may be the subject of costlyand time-consuming lawsuits brought by third parties for alleged infringementof their proprietary rights, which could limit our ability to use certaintechnologies in the future, force us to redesign or discontinue our products,or pay royalties to continue to sell our products.**

Our success depends, in part, on us neitherinfringing patents or other proprietary rights of third parties nor breachingany licenses to which we are a party. We may be the subject of legal claims bythird-parties that we infringe their patents or otherwise violate theirintellectual property rights. In addition, the technology that we license fromthird parties for use in our system could become subject to similarinfringement claims. Infringement claims asserted against us or our licensorsmay have a material adverse effect on our business, results of operations orfinancial condition. Any claims, either with or without merit, could betime-consuming and expensive to defend, and could divert our management’sattention away from the execution of our business plan. Moreover, anysettlement or adverse judgment resulting from the claim could require us to paysubstantial amounts of money or obtain a license to continue to use thetechnology that is the subject of the claim, or otherwise restrict or prohibitour use of the technology. There can be no assurance that we would be able toobtain a license on commercially reasonable terms, if at all, from thirdparties 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 propertyinfringement claims, which would increase the cost to us of an adverse rulingfor such a claim. We believe that there may be significant litigation in theindustry regarding patent and other intellectual property rights. If we becomeinvolved in such litigation, it could consume a substantial portion of ourmanagerial and financial resources.

Furthermore, because of the substantial amount ofdiscovery required in connection with intellectual property litigation, thereis a risk that some of our confidential information could be compromised bydisclosure during this type of litigation. In addition, during the course ofthis kind of litigation, there could be public announcements of the results ofhearings, motions or other interim proceedings or developments. If securitiesanalysts or investors perceive these results to be negative, it could have asubstantial adverse effect on the price of our common stock.

**The measures that we use toprotect the security of our intellectual property and other proprietary rightsmay not be adequate, which could result in the loss of legal protection for,and thereby diminish the value of, such intellectual property and other rights.**

Our success depends in part on our ability toprotect our intellectual property and other proprietary rights. In addition topatent protection, we also rely upon a combination of trademark, trade secret,copyright and unfair competition laws, as well as license agreements and othercontractual provisions, to protect our intellectual property and otherproprietary rights. In addition, we attempt to protect our intellectualproperty and proprietary information by requiring our employees, consultantsand certain academic collaborators to enter into confidentiality and assignmentof inventions agreements. There can be no assurance, however, that suchmeasures will provide adequate protection for our patents, copyrights, tradesecrets or other proprietary information. In addition, there can be noassurance that trade secrets and other proprietary information will not bedisclosed, that others will not independently develop substantially equivalentproprietary information and techniques or otherwise gain access to or discloseour trade secrets and other proprietary information. To the extent that ourintellectual property and other proprietary rights are not adequatelyprotected, third parties might gain access to our proprietary information,develop and market genetic analysis systems similar to our tSMS technology, oruse trademarks similar to ours, each of which could materially harm ourbusiness. Existing U.S. federal and state intellectual property laws offer onlylimited protection. Moreover, the laws of other countries in which we maymarket 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 OURCOMMON STOCK**

**Our directors and management willexercise significant control over our company, which will limit your ability toinfluence corporate matters.**

Certain of our directors and executive officers andtheir affiliates collectively control approximately 73.61% of our outstandingcommon stock. As a result, these stockholders, if they act together, will beable to influence our management and affairs and all matters requiringstockholder approval, including the election of directors and approval ofsignificant corporate transactions. This concentration of ownership may havethe effect of delaying or preventing a change in control of our company andmight negatively affect the market price of our common stock.

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**The market price of our commonstock may be volatile, which could result in substantial losses for ourstockholders and subject us to securities class action litigation.**

Prior to completion of our initial public offeringin May 2007, there was no public market for our common stock, and an activetrading market for shares of our common stock may never develop or be sustainedfollowing the initial public offering. 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 our quarterly operatingresults or the operating results of companies perceived to be similar to us;

·                  changes in estimates of our financial resultsor recommendations by securities analysts;

·                  failure of our technology to achieve ormaintain market acceptance or commercial success;

·                  changes in market valuations of similarcompanies;

·                  success of competitive products and services;

·                  changes in our capital structure, such asfuture issuances of securities or the incurrence of additional debt;

·                  announcements by us or our competitors ofsignificant products, contracts, acquisitions or strategic alliances;

·                  regulatory developments in the United States,foreign countries or both;

·                  litigation involving our company, our generalindustry or both;

·                  additions or departures of key personnel;

·                  investors’ general perception of us; and

·                  changes in general economic, industry andmarket conditions.

In addition, if the market for biotechnology andlife sciences stocks or the stock market in general experiences a loss ofinvestor confidence, the trading price of our common stock could decline forreasons unrelated to our business, financial condition or results ofoperations. If any of the foregoing occurs, it could cause our stock price tofall and may expose us to class action lawsuits that, even if unsuccessful,could be costly to defend and a distraction to management.

**If equity research analysts do notpublish research or reports about our business or if they issue unfavorablecommentary or downgrade our common stock, the price of our common stock coulddecline.**

The trading market for our common stock may rely inpart on the research and reports that equity research analysts publish about usand our business. We do not control the opinions of these analysts. The priceof our stock could decline if one or more equity analysts downgrade our stockor if those analysts issue other unfavorable commentary or cease publishingreports about us or our business.

**A significant portion of our totaloutstanding shares may be sold into the public market in the near future, whichcould cause the market price of our common stock to drop significantly, even ifour business is doing well.**

If our existing stockholders sell substantialamounts of our common stock in the public market, the market price of ourcommon stock could decrease significantly. The perception in the public marketthat our stockholders might sell shares of common stock could also depress themarket price of our common stock. Substantially all of our stockholders priorto the initial public offering are subject to lock-up agreements with theunderwriters that restrict their ability to transfer their stock for 180 daysfollowing our initial public offering. Upon expiration of the lock-upagreements approximately 11 million shares of our common stock will be eligiblefor sale in the public market. The market price of shares of our common stockmay drop significantly when the restrictions on resale by our existingstockholders lapse and our stockholders are able to sell shares of our commonstock into the market. A decline in the price of shares of our common stockmight impede our ability to raise capital through the issuance of additionalshares of our common stock or other equity securities, and may cause you tolose part or all of your investment in our shares of common stock.

In addition, the holders of an aggregate ofapproximately of 14 million shares of our common stock, as of June 30, 2007,have rights, subject to some conditions, to require us to file registrationstatements covering their shares or to include their shares in registrationstatements that we may file for ourselves or other stockholders. We also haveregistered the issuance of all shares of common stock that we have issued andmay issue under our employee option plans. Having registered the issuance ofthese shares, they can be freely sold in the public market upon issuance,subject to lock-up agreements. In addition, as of June 30, 2007, there were18,040 shares of common stock issuable upon the exercise of common stockwarrants and 277,777 shares of common stock reserved for future issuance ascharitable contribution to the Broad Institute of MIT and Harvard that willbecome eligible for sale in the public market to the extent permitted byRule 144 under the Securities Act of 1933, as amended.

Due to these factors, sales of a substantial numberof shares of our common stock in the public market could occur at any time.These sales, or the perception in the market that the holders of a large numberof shares intend to sell shares, could reduce the market price of our commonstock.

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**Provisions in our certificate ofincorporation and by-laws or Delaware law might discourage, delay or prevent achange of control of our company or changes in our management and, therefore,depress the trading price of our common stock.**

Provisions of our certificate of incorporation andby-laws and Delaware law may discourage, delay or prevent a merger, acquisitionor other change in control that stockholders may consider favorable, includingtransactions in which you might otherwise receive a premium for your shares ofour common stock. These provisions may also prevent or frustrate attempts byour stockholders to replace or remove our management. These provisions include:

·                  a staggered board of directors;

·                  limitations on the removal of directors;

·                  advance notice requirements for stockholderproposals and nominations;

·                  the inability of stockholders to act bywritten consent or to call special meetings; and

·                  the ability of our board of directors to make,alter or repeal our by-laws.

The affirmative vote of the holders of at least 75%of our shares of capital stock entitled to vote is necessary to amend or repealthe above provisions of our certificate of incorporation. In addition, ourboard of directors has the ability to designate the terms of and issue newseries of preferred stock without stockholder approval. Also, absent approvalof our board of directors, our by-laws may only be amended or repealed by theaffirmative vote of the holders of at least 75% of our shares of capital stockentitled to vote. Accordingly, given that our executive officers, directors andtheir affiliates collectively own approximately 73.61% of our outstandingcommon stock, certain of these persons acting together will have the ability toblock any such amendment.

In addition, Section 203 of the DelawareGeneral Corporation Law prohibits a publicly-held Delaware corporation fromengaging in a business combination with an interested stockholder, generally aperson which together with its affiliates owns, or within the last three yearshas owned, 15% of our voting stock, for a period of three years after the dateof the transaction in which the person became an interested stockholder, unlessthe business combination is approved in a prescribed manner.

The existence of the foregoing provisions andanti-takeover measures could limit the price that investors might be willing topay in the future for shares of our common stock. They could also deterpotential acquirers of our company, thereby reducing the likelihood that youcould receive a premium for your common stock in an acquisition.

**We do not currently intend to paydividends on our common stock and, consequently, your ability to achieve areturn on your investment will depend on appreciation in the price of ourcommon stock.**

We have never declared or paid any cash dividendson our common stock and do not currently intend to do so for the foreseeablefuture. We currently intend to invest our future earnings, if any, to fund ourgrowth. Therefore, you are not likely to receive any dividends on your commonstock for the foreseeable future and the success of an investment in shares ofour common stock will depend upon any future appreciation in its value. Thereis no guarantee that shares of our common stock will appreciate in value oreven maintain the price at which our stockholders have purchased their shares.

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**Item 2. Unregistered Sale of Equity Securities andUse of Proceeds**

(a)Issuances and Exercises of Employee Stock Options

Duringthe three months ended June 30, 2007, we granted stock options to purchase550,161 shares of common stock with exercise prices ranging from $8.63 to$11.79 per share, to employees, directors and consultants pursuant to our stockoption plans.  During the three months ended June 30, 2007, 4,524 optionshave been exercised for consideration aggregating $2,261.  Theconsideration paid was used for general corporate purposes.  The issuanceof stock options and common stock upon exercise of the options were exempt fromregulation either pursuant to Rule 701, as a transaction pursuant to acompensatory benefit plan, or pursuant to Section 4(2) of the Securities Act orRegulation S of the Securities Act, as a transaction by an issuer notinvolving a public offering.

Uponthe closing of our initial public offering, all shares of convertible preferredstock outstanding automatically converted into 13,153,293 shares of commonstock.

(b)Use of Proceeds from Public Offering of Common Stock

Duringthe three months ended June 30, 2007, we did not issue any shares of our commonstock or other equity securities of ours that were not registered under theSecurities Act of 1933, as amended.

OnMay 24, 2007, we completed our initial public offering of 5,400,000 shares ofour common stock at a price to the public of $9.00 per share for an aggregateoffering price of $48.6 million. We received aggregate net proceeds ofapproximately $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.

Wereceived aggregate net proceeds of approximately $45.7 million, after deductingunderwriting 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.

OnJune 27, 2007, we sold an additional 397,000 shares of our common stock 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.

Ofthe $47.3 million of net proceeds we received in our initial public offering,including the exercise of the over-allotment options, through June 30, 2007, wehave spent approximately $3.2 million on underwriting discounts and commissionsand approximately $1.8 million for payment of expenses related to our initialpublic offering.  Additionally, we have spent $1.0 million onpre-production research and development expenses.  None of these expenses were incurred or paid,directly or indirectly, to directors or officers of ours or their associates orto persons owning 10% or more of our common stock or to any affiliates of ours.

Theremaining proceeds are invested in short-term, investment-grade, interestbearing securities.

Weexpect to use the remaining proceeds from our initial public offering forgeneral 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**

Notapplicable.

**Item 4. Submission of Matters to a Vote ofSecurity Holders**

OnMay 7, 2007, in connection with our initial public offering, our stockholdersapproved the following matters by written consent: (i) the adoption of theCertificate of Amendment to the Second Amended and Restated Certificate ofIncorporation to effect a 4.5-for-1 split of our common stock to be effectiveprior to the closing of the initial public offering; (ii) the adoption of ourThird Amended and Restated Certificate of Incorporation to provide for certainchanges consistent with becoming a public company; (iii) the adoption of ourAmended and Restated By-laws to provide for certain changes consistent with ourbecoming a public company; (iv) the adoption of our Fourth Amended and RestatedCertificate of Incorporation to eliminate the terms of our preferred stockoutstanding to be effective upon the closing of the initial public offering;and (v) the adoption of our 2007 Stock Option and Incentive Plan. All suchactions were effected pursuant to an action by written consent of ourstockholders pursuant to Section 228 of the Delaware General Corporation Law.

**Item 5. Other Information**

None.

**Item 6. Exhibits**

The exhibits listed in the Exhibit Index immediately preceding suchexhibits are filed as part of this report and such Exhibit Index isincorporated herein by reference.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
| Dated: August 8, 2007  |   | /s/ Stanley N. Lapidus                                        |   |
|------------------------|--------|---------------------------------------------------------------|--------|
|                   |   | President and  Chief Executive Officer                        |
|                   |   | (Principal  Executive Officer)                                |
|                   |   |                                                          |
|                   |   |                                                          |
| Dated: August 8,  2007 |   | /s/ Louise Mawhinney                                          |   |
|                   |   | Senior Vice  President, Chief Financial Officer and Treasurer |
|                   |   | (Principal  Financial and Accounting Officer)                 |

 

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**EXHIBITINDEX**
| 31.1 |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|------|--------|--------------------------------------------------------------------------|
| 31.2 |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
| 32.1 |   | Certifications pursuant to 18 U.S.C. Section 1350                        |

 

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