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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 001-33775
 Nanosphere, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    36-4339870(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)4088 Commercial Avenue
    
    Northbrook, Illinois 60062(Address of principal executive offices)
    
    (Zip Code)
 (847) 400-9000
  (Title of Each Class)
    
    (Name of Each Exchange on Which Registered)Common Stock, par value $0.01
    
    NASDAQ Global Market
 None
 o þ
 o þ
 þ o
 o o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o
 Yes o No þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



NANOSPHERE, INC.
INDEX
 PagePart I.Item 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    15Item 1B. Unresolved Staff Comments
    
    
    26Item 2. Properties
    
    
    26Item 3. Legal Proceedings
    
    
    26Item 4. (Removed and Reserved)
    
    
    26Part II.Item 5. Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
    
    
    27Item 6. Selected Financial Data
    
    
    29Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 8. Financial Statements and Supplementary Data
    
    
    40Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    59Item 9A. Controls and Procedures
    
    
    59Item 9B. Other Information
    
    
    60Part III.Item 10. Directors, Executive Officers and Corporate Governance
    
    
    61Item 11. Executive Compensation
    
    
    61Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    61Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    61Item 14. Principal Accounting Fees and Services
    
    
    61Part IV.Item 15. Exhibits and Financial Statement Schedules
    
    
    62Signatures
    
    
    65Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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Forward-Looking Statements
 This Annual Report on Form 10-K contains forward-looking statements about us and our industry
that involve substantial risks and uncertainties. All statements, other than statements of
historical facts, included in this Annual Report on Form 10-K regarding our strategy, future
operations, future financial position, future net sales, projected expenses, prospects and plans
and objectives of management are forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievement to be materially different from those expressed or implied by
the forward-looking statements.
 In some cases, you can identify forward-looking statements by terms such as anticipate,
believe, estimate, expect, intend, may, might, plan, project, will, would,
should, could, can, predict, potential, continue, objective, or the negative of these
terms, and similar expressions intended to identify forward-looking statements. However, not all
forward-looking statements contain these identifying words. These forward-looking statements
reflect our current views about future events and are based on assumptions and subject to risks and
uncertainties. Given these uncertainties, you should not place undue reliance on these
forward-looking statements. Actual events or results could differ materially from those expressed
or implied by these forward-looking statements as a result of various factors.
 These forward-looking statements represent our estimates and assumptions only as of the date
of this Annual Report on Form 10-K . Unless required by U.S. federal securities laws, we do not
intend to update any of these forward-looking statements to reflect circumstances or events that
occur after the statement is made or to conform these statements to actual results. The following
discussion should be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this Annual Report on Form 10-K . Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of various
factors, including those set forth under Item 1A  Risk Factors and elsewhere in this Annual
Report on Form 10-K .
 
 PART I.
 
 Item 1.
    
    Business.
  Overview
     1




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de novo de novo
   2




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Our Products
    3




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Our Applications
  Assay
    
    Condition Detected
    
    StatusGenomic TestsHyper-coagulation
    
    Genetic mutation that could indicate increased risk of blood clots, stroke and
pulmonary embolism
    
    Verigene FDA clearance received October 2007Warfarin Metabolism
    
    Genetic mutation important in proper initial dosing of leading anticoagulant
    
    Verigene FDA clearance received September 2007Cystic Fibrosis
    
    Cystic fibrosis gene mutation; prenatal carrier screening & diagnosis confirmation
    
    Verigene FDA clearance received July 2009Respiratory Virus Panel
    
    Respiratory illness
    
    Verigene FDA clearance received May 2009;
Verigene SP FDA clearance received October 2009HFE  hemochromatosis
    
    Hemochromatosis, iron overload disease
    
    Amended 510(k) filed with the FDA in October 2009CYP450 2C19
    
    Clopidigrel metabolism
    
    In clinical trialsBlood Infection Panel
    
    Blood infection
    
    In developmentProtein TestsCardiac Troponin I
    
    Cardiovascular disease; risk stratification; diagnosis of heart attack
    
    Filed with the FDA in the fourth quarter of 2009Connective
Tissue Disease
    
    Rheumatoid arthritis, lupus,
psoriatic arthritis, spondyloarthropathies, scleroderma and
Sjogrens syndrome
    
    In developmentProstate Specific Antigen
    
    Post-surgical recurrence of prostate cancer
    
    In development
  4




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Genomic Assays
 Hyper-coagulation.
 Warfarin Metabolism.
 Cystic Fibrosis.
 Respiratory Virus Panel.
 HFE. de novo
 Cytochrome P450 2C19.
 Blood Stream Infection.
  5




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Protein Assays
  Cardiac Troponin I.
    Prostate Specific Antigen  Recurrent Prostate Cancer.
  6




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Connective-tissue.
 Biomarker Validation.
 Our Technology
  Our Gold Nanoparticle Molecular Probes
   
    
    High Signal-to-Noise Ratio.Our nanoparticle probes deliver
significantly stronger signals than the fluorescent probes, or
fluorophores, used in most diagnostic platforms today. Nanoparticles
are typically 10-100 nm in diameter and therefore significantly larger
than conventional fluorophores. This size difference enables
nanoparticles to produce up to 10,000 times more signal via light
scattering than a fluorophore. A single nanoparticle can be detected
with simple optical instrumentation with very high sensitivity, thus
eliminating the need to employ our amplification techniques.
    
    Orders of Magnitude Greater Sensitivity and Lower Detection Limits.
The sensitivity and limits of detection of our technology are further
enhanced by a silver-staining step, which effectively amplifies the
signal from each nanoparticle bound to a target molecule. In this
process, silver is coated onto the gold nanoparticle surface,
producing larger particles with enhanced optical properties. Whereas
the leading technologies today can detect molecules at the picomolar
range (10-12), our technology is capable of up to a million
times higher sensitivity at the attomolar (10-18) range,
enabling the unprecedented analysis of rarely expressed genes or low
abundance proteins for early disease detection and diagnosis.
    
    Unparalleled Specificity.A key property of the oligonucleotide-linked
gold nanoparticle is an extremely sharp melting curve. The melting
curve is the temperature range during which the capture
oligonucleotide dissociates with the complementary target
oligonucleotide in the sample.  Our nanoparticles exhibit dissociation
transitions of less than one degree in Celsius temperature, whereas
most alternative products are based on polymerase chain reaction, or
PCR, which exhibits melt transitions typically in the 15-30 degree
range. The narrow band of temperature in which binding and
dissociation occurs, creates a significantly higher signal to noise
ratio resulting in greater specificity. These qualities eliminate
errors caused by mismatched nucleotide pairs, thereby allowing genomic
targets differing by a single nucleotide (base pair) to be
distinguished with unprecedented selectivity.  Sharp melting curves
are a proprietary feature of our nanoparticles and our patent
portfolio includes issued patents protecting the methods and product
performance related to melt transition curves.
  7




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
    
    High Count Multiplexing.Our core technology enables high count
multiplexing, or simultaneous multiple target identification in a
single sample, using a simple low-density microarray. A sample and
probe mixture is introduced simultaneously into a single
self-contained reaction chamber pre-printed with multiple reaction
spots, each containing capture strand oligonucleotides or proteins
that are complementary to a specific target molecule of interest. By
utilizing the sharp melt transition of the nanoparticle probes,
multiple targets can be discretely identified in a single sample. This
methodology eliminates the need for complex and costly means of
physically isolating individual target molecules.
    
    Detection of Genomic and Protein Molecules Simultaneously.We are able
to synthesize our gold nanoparticle probes for the simultaneous
multiplexed detection of both protein and genomic targets in the same
assay.
    
    Superior Reaction Kinetics.The sharp melt transition curves in our
gold nanoparticles increase binding affinity thereby leading to
improved assay kinetics and efficiency.
    
    Long-Term Stability.The high density of oligonucleotides per
nanoparticle, serves both as a protective and recognition layer on the
nanoparticle surface and ensures the long-term stability of our
nanoparticles. We have patented approaches using localized salt and
buffer concentrations that deliver long-shelf life for our technology
and reagent set.
 Assay Format
    8




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Schematic of Microarray Based Detection Using Nanoparticle Probes
 
  Research and Development
  
    
    Expanding and Enhancing the Capabilities of Our Instrument
Platform.Design elements and components of our current instrument
platform, the Verigene System, will serve as the foundation for future
generation development. The Verigene SP incorporates sample preparation
into our system. By adding this step, labs can now process a raw sample
material, in most cases whole blood, in a single step. This feature is
critical for analyzing infectious diseases and will further simplify the
processing of clinical samples from swab, cerebrospinal fluid and serum.

We are also developing a fully automated instrument with increased high
throughput and sample preparation for both infectious disease and human
genetic tests for larger hospital based laboratories. By basing future
generations of our instrument platform on existing design elements, each
new generation of development will process assays developed for previous
generations.
 
    
    Developing Additional Genomic and Protein Assays.We are in
various phases of developing and commercializing new assays for detecting
protein biomarkers, infectious diseases and human genetic markers.
Currently, we are researching additional human genetic, infectious
disease and ultra-sensitive protein assays.
  9




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
    
    Validating and Commercializing New Biomarkers.We have a
dedicated team of protein scientists and assay developers who conduct
assay development to support feasibility testing and new protein
biomarker validation. This team is collaborating with clinical
researchers in academic and private settings to apply our ultra-sensitive
protein detection technology to the researchers efforts to create
diagnostic methods with greater clinical sensitivity and specificity. We
are also applying our ultra-sensitivity methods to the development of
established protein biomarkers that may lead to earlier detection of
medical conditions including cancer, neurodegenerative disorders
including Alzheimers disease, sepsis and mad cow disease, as well as for
blood screening and veterinary applications.
 
    
    Enhancing Performance of Established Product Systems and
Developing New Applications.We have entered into a license agreement
with Northwestern which provides us with an exclusive license to certain
patents and patent applications related to the application of
nanotechnology to biodiagnostics and to biobarcode technology. This
license covers all discoveries from the International Institute for
Nanotechnology at Northwestern in the field of biodiagnostics through
January 1, 2013. Nanosphere also has the right of first negotiation for
an exclusive license on inventions after such date. Our research team
utilizes the research and patents developed at Northwestern to develop
diagnostic applications including additional genomic and protein testing
assays for use in the Verigene System.
 Employees
  Government Grants and Contracts
    Manufacturing
     10




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Sales and Marketing
    Competition
    Regulation by the United States Food and Drug Administration
   11




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5 10(k) Clearance
  Premarket Approval
      12




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Clinical Investigations
   Obtaining FDA Clearance for Our Products
    Regulation After FDA Approval or Clearance
    13




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Export of Our Products
  Clinical Laboratory Improvement Amendments of 1988
  Foreign Government Regulation
  Other
Information
   14




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Item 1A.
    
    Risk Factors.
  Risks Related to Our Business
 We have a history of losses and we may never achieve or maintain profitability.
  Our financial results depend on commercial acceptance of the Verigene System, its array of tests,
and the development of additional tests.
   The regulatory approval process is expensive, time consuming and uncertain and the failure to
obtain such approvals will prevent us from commercializing our future products.
   15




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We and our customers are subject to various governmental regulations, and we may incur significant
expenses to comply with, and experience delays in our product commercialization as a result of,
these regulations.
     If third-party payors do not reimburse our customers for the use of our clinical diagnostic
products or if they reduce reimbursement levels, our ability to sell our products will be harmed.
     16




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We may fail to receive positive clinical results from the diagnostic tests currently in development
that require clinical trials, and even if we receive positive clinical results, we may still fail
to receive the necessary clearances or approvals to market our products.
  Our operating results may be variable and unpredictable.
  If we do not achieve significant product revenue, we may not be able to meet our cash requirements
without obtaining additional capital from external sources, and if we are unable to do so, we may
have to curtail or cease operations.
  
    
    the level of research and development investment required to maintain and improve our technology;
    
    the amount and growth rate, if any, of our revenues;
    
    changes in product development plans needed to address any difficulties in manufacturing or commercializing
the Verigene System and enhancements to our system;
    
    the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
    
    competing technological and market developments;
    
    our need or decision to acquire or license complementary technologies or acquire complementary businesses;
    
    the expansion of our sales force; and
    
    changes in regulatory policies, practices or laws that affect our operations, including clearance to market
our products.
   17




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The adverse capital and credit market conditions could affect our liquidity.
  If our products do not perform as expected or the reliability of the technology on which our
products are based is questioned, we could experience lost revenue, delayed or reduced market
acceptance of our products, increased costs and damage to our reputation.
   We rely on third-party license agreements for patents and other technology related to our products,
and the termination of these agreements could delay or prevent us from being able to commercialize
our products.
    If we are unable to obtain, maintain and enforce intellectual property protection covering our
products, others may be able to make, use, or sell our products, which could adversely affect our
ability to compete in the market.
   18




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Our products could infringe patent rights of others, which may require costly litigation and, if we
are not successful, could cause us to pay substantial damages or limit our ability to commercialize
our products.
   19




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We have limited experience in sales and marketing and may be unable to successfully commercialize
our Verigene System, or it may be difficult to build brand loyalty.
  
    
    our ability to attract and retain the skilled support team, marketing staff and sales
force necessary to commercialize and gain market acceptance for our technology and
our products;
    
    the ability of our sales and marketing team to identify and penetrate the potential
customer base including hospitals, research institutions, and independent diagnostic
laboratories;
    
    the time and cost of establishing a support team, marketing staff and sales force; and
    
    the difficulty of establishing brand recognition and loyalty for our products.
  We may be unsuccessful in our long-term goal of expanding our product offerings outside the United
States.
   Manufacturing risks and inefficiencies may adversely affect our ability to produce products.
    20




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We will need to develop manufacturing capacity by ourselves or with third parties.
  Our business and future operating results may be adversely affected by events outside of our
control.
  We face intense competition from established and new companies in the molecular diagnostics field.
  Our success may depend upon how we and our competitors anticipate and adapt to market conditions.
   21




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We may not be able to manage our anticipated growth, and we may experience constraints or
inefficiencies caused by unanticipated acceleration and deceleration of customer demand.
   We use hazardous chemicals, biological materials, and infectious diseases in our business. Any
claims relating to improper handling, storage or disposal of these materials could be time
consuming and costly.
  If we are unable to recruit and retain key executives and scientists, we may be unable to achieve
our goals.
    22




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Healthcare reform and restrictions on reimbursement may adversely affect our profitability.
  Risks Related to Our Common Stock
 The market price of our common stock may be volatile and fluctuate significantly, which could
result in substantial losses for investors and subject us to securities class action litigation.
  
    
    fluctuations in our quarterly operating results or the operating results of our competitors;
    
    changes in estimates of our financial results or recommendations by securities analysts;
    
    variance in our financial performance from the expectations of securities analysts;
    
    changes in the estimation of the future size and growth rate of our markets;
    
    changes in accounting principles or changes in interpretations of existing principles, which could affect our
financial results;
    
    failure of our products to achieve or maintain market acceptance or commercial success;
    
    conditions and trends in the markets we serve;
    
    changes in general economic, industry and market conditions;
    
    success of competitive products and services;
    
    changes in market valuations or earnings of our competitors;
    
    changes in our pricing policies or the pricing policies of our competitors;
    
    announcements of significant new products, contracts, acquisitions or strategic alliances by us or our competitors;
    
    changes in legislation or regulatory policies, practices, or actions;
    
    the commencement or outcome of litigation involving our company, our general industry or both;
    
    recruitment or departure of key personnel;
    
    changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
    
    actual or expected sales of our common stock by our stockholders; and
    
    the trading volume of our common stock.
  23




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If equity research analysts do not publish research or reports about our business or if they issue
unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
  Certain provisions of our corporate governing documents could make an acquisition of our company
more difficult.
  
    
    authorize the issuance of preferred stock that can be created and
issued by our board of directors without prior stockholder approval,
commonly referred to as blank check preferred stock, with rights
senior to those of our common stock;
    
    limit the persons who can call special stockholder meetings;
    
    provide that a majority vote of our stockholders is required to amend
our amended and restated certificate of incorporation and amended and
restated by-laws;
    
    establish advance notice requirements to nominate persons for election
to our board of directors or to propose matters that can be acted on
by stockholders at stockholder meetings;
    
    not provide for cumulative voting in the election of directors; and
    
    provide for the filling of vacancies on our board of directors by
action of a majority of the directors and not by the stockholders.
    24




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Our 2007 Long-Term Incentive Plan includes an automatic share replenishment, or evergreen,
provision that, unless our board of directors takes action to the contrary, will automatically
increase the number of shares of our common stock reserved for issuance under this plan each year.
Issuances of awards under this Plan would cause further dilution to existing stockholders.
     We do not currently intend to pay dividends on our capital stock and, consequently, your ability to
achieve a return on your investment will depend on appreciation in the price of our common stock.
  We will continue to incur costs and demands upon management as a result of complying with the laws
and regulations affecting public companies, which may adversely affect our operating results and
failure to achieve and maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act could cause investors to lose confidence in our operating results and in the
accuracy of our financial reports and could have a material adverse effect on our business and on
the price of our common stock.
   25




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Concentration of ownership among some of our stockholders, including directors and management may
limit your ability to influence corporate matters.
  
 Item 1B.
    
    Unresolved Staff Comments.
  
 Item 2.
    
    Properties.
   
 Item 3.
    
    Legal Proceedings.
   
 Item 4.
    
    (Removed and Reserved).
  26




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PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities.
 Market Information
  High
    
    
    LowFiscal year ended December 31, 2009First Quarter
    
    $
    6.26
    
    
    $
    2.71Second Quarter
    
    
    5.58
    
    
    
    2.95Third Quarter
    
    
    8.61
    
    
    
    3.94Fourth Quarter
    
    
    7.85
    
    
    
    5.60Fiscal year ended December 31, 2008First Quarter
    
    $
    14.61
    
    
    $
    6.78Second Quarter
    
    
    10.32
    
    
    
    6.62Third Quarter
    
    
    12.00
    
    
    
    7.10Fourth Quarter
    
    
    8.50
    
    
    
    3.03
 Stockholders
  Dividend Policy
   27




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Stock Performance Graph
  
 Investment Return Analysis
    

Nov 07
    
    
    Dec 07
    
    
    Mar 08
    
    
    Jun 08
    
    
    Sep 08
    
    
    Dec 08
    
    
    Mar 09
    
    
    Jun 09
    
    
    Sep 09
    
    
    Dec 09Nanosphere
    
    $
    100.00
    
    
    $
    99.93
    
    
    $
    61.86
    
    
    $
    56.14
    
    
    $
    60.93
    
    
    $
    34.00
    
    
    $
    35.50
    
    
    $
    35.07
    
    
    $
    51.14
    
    
    $
    46.00NASDAQ Composite
    
    $
    100.00
    
    
    $
    93.55
    
    
    $
    80.39
    
    
    $
    80.88
    
    
    $
    73.79
    
    
    $
    55.63
    
    
    $
    53.92
    
    
    $
    64.73
    
    
    $
    74.86
    
    
    $
    80.04NASDAQ Biotechnology
    
    $
    100.00
    
    
    $
    94.07
    
    
    $
    87.98
    
    
    $
    89.39
    
    
    $
    94.20
    
    
    $
    82.19
    
    
    $
    76.93
    
    
    $
    84.45
    
    
    $
    94.59
    
    
    $
    95.04
  Equity Compensation Plan Information
  Equity Compensation Plan Information
 Number of securitiesremaining available forfuture issuance underNumber of securities to be
    
    
    
    
    
    
    equity compensation plansissued upon exercise of
    
    
    Weighted Average exercise
    
    
    (excluding securitiesoutstanding awards
    
    
    price of outstanding awards
    
    
    reflected in column(a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans
approved by
stockholders
    
    
    4,338,695
    
    
    $
    5.75
    
    
    
    268,416Equity compensation plans not
approved by stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    4,338,695
    
    
    $
    5.75
    
    
    
    268,416
 Pursuant to the evergreen provision, an additional 900,000 shares of common stock
were authorized for issuance under the 2007 Plan as of January 1, 2010.  28




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Item 6.
    
    Selected Financial Data.
  As of December 31,Statements of Operations Data:
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Total revenue
    
    $
    2,214,103
    
    
    $
    1,366,732
    
    
    $
    1,167,364
    
    
    $
    1,138,011
    
    
    $
    1,914,517Research and development expense
    
    
    18,607,921
    
    
    
    23,675,138
    
    
    
    21,445,994
    
    
    
    18,185,564
    
    
    
    13,717,654Sales, general and administrative expense
    
    
    14,471,973
    
    
    
    13,615,322
    
    
    
    13,443,304
    
    
    
    5,415,525
    
    
    
    4,502,970Net loss
    
    
    (33,948,653
    )
    
    
    (37,041,996
    )
    
    
    (53,199,184
    )
    
    
    (24,269,918
    )
    
    
    (16,408,082
    )Net loss attributable to common stock
    
    
    (33,948,653
    )
    
    
    (37,041,996
    )
    
    
    (59,284,411
    )
    
    
    (46,421,053
    )
    
    
    (19,306,869
    )Net loss per common share:basic and diluted
    
    
    (1.46
    )
    
    
    (1.67
    )
    
    
    (14.18
    )
    
    
    (53.63
    )
    
    
    (31.57
    )Weighted average number of common shares:basic and diluted (1)(2)
    
    
    23,301,764
    
    
    
    22,213,164
    
    
    
    4,180,979
    
    
    
    865,559
    
    
    
    611,496
 As of December 31,Balance Sheet Data:
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Cash and cash equivalents (1)(2)
    
    $
    76,689,279
    
    
    $
    75,356,960
    
    
    $
    114,312,573
    
    
    $
    29,112,429
    
    
    $
    3,641,338Working capital (1)(2)
    
    
    71,152,601
    
    
    
    69,027,249
    
    
    
    107,684,875
    
    
    
    27,332,463
    
    
    
    (2,642,582
    )Total assets (1)(2)
    
    
    88,668,954
    
    
    
    86,895,910
    
    
    
    125,963,862
    
    
    
    37,968,243
    
    
    
    9,015,260Long-term debt
    
    
    
    
    
    
    3,352,137
    
    
    
    7,462,237
    
    
    
    58,802
    
    
    
    Convertible preferred stock (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,868,040
    
    
    
    51,143,984Stockholders equity (deficit) (1)(2)
    
    
    79,081,998
    
    
    
    74,541,108
    
    
    
    109,199,722
    
    
    
    (108,307,662
    )
    
    
    (62,292,544
    )
 (1)
    
    In October 2009, we completed our underwritten public offering of 5,405,000 shares of
common stock at $7.00 per share. We received approximately $35.4 million of net proceeds from the
offering.(2)
    
    In November 2007, we completed our initial public offering of 8,050,000 shares of common
stock at $14.00 per share. We received approximately $102 million of net proceeds from the
offering. All shares of convertible preferred stock were converted to common stock upon the
closing of the initial public offering.  29




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##### Table of Contents



Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Business Overview
        30




---



##### Table of Contents



de novo de novo
       31




---



##### Table of Contents



Financial Operations Overview
 Revenue
  Cost of Sales
  Research and Development Expenses
   32




---



##### Table of Contents



Sales, General and Administrative Expenses
  Interest Income
  Interest Expense
  Fiscal 2009 Compared to 2008
 Revenues
  Cost of Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
   33




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##### Table of Contents



Interest Expense
  Interest Income
  Fiscal 2008 Compared to 2007
 Revenues
  Cost of Sales
  Research and Development Expenses
  Sales, General and Administrative Expenses
  Change in Fair Value of Convertible Derivative Liability
   34




---



##### Table of Contents



Interest Expense
  Interest Income
  Liquidity and Capital Resources
        35




---



##### Table of Contents




    
    the level of research and development investment required to maintain and improve our
technology;
 
    
    the amount and growth rate of our revenues;
 
    
    changes in product development plans needed to address any difficulties in manufacturing
or commercializing the Verigene System and enhancements to our system;
 
    
    the costs of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights;
 
    
    competing technological and market developments;
 
    
    our need or decision to acquire or license complementary technologies or acquire
complementary businesses; and
 
    
    changes in regulatory policies or laws that affect our operations.
  Income Taxes
   36




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##### Table of Contents



Contractual Obligations and Commitments
  Payments Due by PeriodContractual Obligations
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsLong-term debt obligations
    
    $
    3,917,293
    
    
    $
    3,917,293
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest on long-term debt obligations
    
    
    195,107
    
    
    
    195,107
    
    
    
    
    
    
    
    
    
    
    
    Operating lease
    
    
    1,972,488
    
    
    
    465,595
    
    
    
    865,564
    
    
    
    641,329
    
    
    
    Obligations under license agreements
    
    
    1,783,750
    
    
    
    173,750
    
    
    
    365,000
    
    
    
    425,000
    
    
    
    820,000Total
    
    $
    7,868,638
    
    
    $
    4,751,745
    
    
    $
    1,230,564
    
    
    $
    1,066,329
    
    
    $
    820,000
  License Agreements
   Off-Balance Sheet Arrangements
  Critical Accounting Policies and Significant Judgments and Estimates
   Revenue Recognition
   37




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##### Table of Contents



Stock-Based Compensation Expense
  Recent Accounting Pronouncements
      38




---



##### Table of Contents



Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk.
   39




---



##### Table of Contents



Item 8.
    
    Financial Statements and Supplementary Data.
  PageReports of Independent Registered Public Accounting Firm
    
    
    41Balance Sheets as of December 31, 2009 and 2008
    
    
    43Statements of Operations for the years ended December 31, 2009, 2008 and 2007
    
    
    44Statements of Stockholders Equity (Deficit) for the years ended December 31, 2009, 2008 and 2007
    
    
    45Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
    
    
    46Notes to Financial Statements
    
    
    47-58
  40




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal ControlIntegrated Framework
  
  41




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal Control  Integrated Framework
    Internal Control
 Integrated Framework
   
  42




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##### Table of Contents



Nanosphere, Inc.
 
 Balance Sheets
 As of December 31,2009
    
    
    2008CURRENT ASSETS:Cash and cash equivalents
    
    $
    76,689,279
    
    
    $
    75,356,960Accounts receivable
    
    
    735,047
    
    
    
    385,908Inventories
    
    
    2,940,574
    
    
    
    1,727,518Other current assets
    
    
    374,657
    
    
    
    559,528Total current assets
    
    
    80,739,557
    
    
    
    78,029,914PROPERTY AND EQUIPMENT  Net
    
    
    6,144,555
    
    
    
    7,294,224INTANGIBLE ASSETS  Net of accumulated amortization
    
    
    1,709,842
    
    
    
    1,443,582OTHER ASSETS
    
    
    75,000
    
    
    
    128,190TOTAL
    
    $
    88,668,954
    
    
    $
    86,895,910CURRENT LIABILITIES:Accounts payable
    
    $
    2,509,405
    
    
    $
    1,813,777Accrued compensation
    
    
    955,130
    
    
    
    829,292Other current liabilities
    
    
    2,303,631
    
    
    
    1,541,385Long-term debt  current portion
    
    
    3,818,790
    
    
    
    4,818,211Total current liabilities
    
    
    9,586,956
    
    
    
    9,002,665LONG-TERM LIABILITIES:Long-term debt  noncurrent portion
    
    
    
    
    
    
    3,352,137Total liabilities
    
    
    9,586,956
    
    
    
    12,354,802COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.01 par value; 100,000,000 shares
authorized; 28,422,461 shares and 22,228,696
shares issued and outstanding as of December 31,
2009 and 2008, respectively
    
    
    284,225
    
    
    
    222,287Preferred stock, $0.01 par value; 10,000,000
shares authorized; no shares issued
    
    
    
    
    
    
    Additional paid-in capital
    
    
    312,660,430
    
    
    
    274,232,825Warrants to acquire common stock
    
    
    5,423,771
    
    
    
    5,423,771Accumulated deficit
    
    
    (239,286,428
    )
    
    
    (205,337,775
    )Total stockholders equity
    
    
    79,081,998
    
    
    
    74,541,108TOTAL
    
    $
    88,668,954
    
    
    $
    86,895,910
   43




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##### Table of Contents



Nanosphere, Inc.
 
 Statements of Operations
 Years Ended December 31,2009
    
    
    2008
    
    
    2007REVENUE:Grant and contract revenue
    
    $
    1,089,890
    
    
    $
    346,070
    
    
    $
    1,056,874Product sales
    
    
    1,124,213
    
    
    
    1,020,662
    
    
    
    110,490Total revenue
    
    
    2,214,103
    
    
    
    1,366,732
    
    
    
    1,167,364COSTS AND EXPENSES:Cost of sales
    
    
    2,175,281
    
    
    
    1,464,066
    
    
    
    86,349Research and development
    
    
    18,607,921
    
    
    
    23,675,138
    
    
    
    21,445,994Sales, general, and administrative
    
    
    14,471,973
    
    
    
    13,615,322
    
    
    
    13,443,304Total costs and expenses
    
    
    35,255,175
    
    
    
    38,754,526
    
    
    
    34,975,647Loss from operations
    
    
    (33,041,072
    )
    
    
    (37,387,794
    )
    
    
    (33,808,283
    )OTHER INCOME (EXPENSE):Change in fair value of convertible derivative liability
    
    
    
    
    
    
    
    
    
    
    (14,860,901
    )Change in fair value of preferred stock warrants
    
    
    
    
    
    
    
    
    
    
    (4,414,207
    )Foreign exchange loss
    
    
    (4,207
    )
    
    
    (23,691
    )
    
    
    (52,362
    )Interest expense
    
    
    (1,257,445
    )
    
    
    (2,080,629
    )
    
    
    (1,977,619
    )Interest income
    
    
    354,071
    
    
    
    2,450,118
    
    
    
    1,914,188Total other income (expense)
    
    
    (907,581
    )
    
    
    345,798
    
    
    
    (19,390,901
    )NET LOSS
    
    
    (33,948,653
    )
    
    
    (37,041,996
    )
    
    
    (53,199,184
    )Accumulated convertible preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (5,476,287
    )Convertible preferred stock redemption value adjustment
    
    
    
    
    
    
    
    
    
    
    (608,940
    )NET LOSS ATTRIBUTABLE TO COMMON STOCK
    
    $
    (33,948,653
    )
    
    $
    (37,041,996
    )
    
    $
    (59,284,411
    )Net loss per common share  basic and diluted
    
    $
    (1.46
    )
    
    $
    (1.67
    )
    
    $
    (14.18
    )Weighted average number of common shares outstanding 
basic and diluted
    
    
    23,301,764
    
    
    
    22,213,164
    
    
    
    4,180,979
   44




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##### Table of Contents



Nanosphere, Inc.
 
 Statements of Stockholders Equity (Deficit)
 NoteWarrants
    
    
    ReceivableAdditional
    
    
    To Acquire
    
    
    From ChiefCommon Stock
    
    
    Paid-In
    
    
    Common
    
    
    Executive
    
    
    AccumulatedShares
    
    
    Par Value
    
    
    Capital
    
    
    Stock
    
    
    Officer
    
    
    Deficit
    
    
    TotalBALANCE  January 1, 2007
    
    
    932,646
    
    
    $
    92,580
    
    
    $
    2,051,126
    
    
    $
    
    
    
    $
    (1,440,000
    )
    
    $
    (109,011,368
    )
    
    $
    (108,307,662
    )Share-based compensation related to stock options
    
    
    
    
    
    
    
    
    
    
    1,669,006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,669,006Exercise of stock options on common stock
    
    
    16,150
    
    
    
    162
    
    
    
    119,863
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,025Issuance of common stock from initial public
offering, net of offering expenses
    
    
    8,050,000
    
    
    
    80,500
    
    
    
    102,092,417
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,172,917Conversion of preferred stock to common stock
    
    
    13,048,119
    
    
    
    130,481
    
    
    
    116,151,384
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,281,865Conversion of convertible derivative liability
to additional paid-in capital
    
    
    
    
    
    
    
    
    
    
    47,554,882
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,554,882Conversion of warrant liability to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,424,551
    
    
    
    
    
    
    
    
    
    
    
    5,424,551Exercise of warrants
    
    
    145,090
    
    
    
    1,451
    
    
    
    2,036,358
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,037,809Interest received on note receivable from chief
executive officer
    
    
    
    
    
    
    
    
    
    
    90,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,740Proceeds from note receivable from chief
executive officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,440,000
    
    
    
    
    
    
    
    1,440,0006% dividends, earned on Series C-2 and Series D
Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,476,287
    )
    
    
    (5,476,287
    )Convertible preferred stock redemption value
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (608,940
    )
    
    
    (608,940
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,199,184
    )
    
    
    (53,199,184
    )BALANCE  December 31, 2007
    
    
    22,192,005
    
    
    
    305,174
    
    
    
    271,765,776
    
    
    
    5,424,551
    
    
    
    
    
    
    
    (168,295,779
    )
    
    
    109,199,722Share-based compensation related to stock options
    
    
    
    
    
    
    
    
    
    
    2,217,858
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,217,858Exercise of stock options on common stock
    
    
    36,491
    
    
    
    365
    
    
    
    163,845
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    164,210Exercise of warrants
    
    
    200
    
    
    
    2
    
    
    
    2,966
    
    
    
    (780
    )
    
    
    
    
    
    
    
    
    
    
    2,188Other
    
    
    
    
    
    
    (83,254
    )
    
    
    82,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (874
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,041,996
    )
    
    
    (37,041,996
    )BALANCE  December 31, 2008
    
    
    22,228,696
    
    
    
    222,287
    
    
    
    274,232,825
    
    
    
    5,423,771
    
    
    
    
    
    
    
    (205,337,775
    )
    
    
    74,541,108Share-based compensation
    
    
    672,500
    
    
    
    6,725
    
    
    
    2,527,352
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,534,077Exercise of stock options on common stock
    
    
    116,265
    
    
    
    1,163
    
    
    
    520,969
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    522,132Issuance of common stock from public offering,
net of offering expenses
    
    
    5,405,000
    
    
    
    54,050
    
    
    
    35,379,284
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,433,334Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,948,653
    )
    
    
    (33,948,653
    )BALANCE  December 31, 2009
    
    
    28,422,461
    
    
    $
    284,225
    
    
    $
    312,660,430
    
    
    $
    5,423,771
    
    
    $
    
    
    
    $
    (239,286,428
    )
    
    $
    79,081,998
   45




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##### Table of Contents



Nanosphere, Inc.
 
 Statements of Cash Flows
 Years Ended December 31,2009
    
    
    2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (33,948,653
    )
    
    $
    (37,041,996
    )
    
    $
    (53,199,184
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    3,067,063
    
    
    
    3,170,265
    
    
    
    1,785,972Amortization of financing costs and accretion of debt discount
    
    
    499,386
    
    
    
    762,277
    
    
    
    671,480Loss from write-off of intangible assets
    
    
    
    
    
    
    245,134
    
    
    
    Loss from disposal of fixed assets
    
    
    2,758
    
    
    
    326,291
    
    
    
    Share-based compensation
    
    
    2,534,077
    
    
    
    2,217,858
    
    
    
    1,669,006Change in fair value of preferred stock warrants
    
    
    
    
    
    
    
    
    
    
    4,414,207Change in fair value of convertible derivative liability
    
    
    
    
    
    
    
    
    
    
    14,860,901Changes in operating assets and liabilities:Accounts receivable
    
    
    (349,139
    )
    
    
    (285,109
    )
    
    
    (55,983
    )Inventories
    
    
    (1,334,763
    )
    
    
    (1,078,965
    )
    
    
    (1,018,155
    )Other current assets
    
    
    205,328
    
    
    
    110,874
    
    
    
    (207,544
    )Other assets
    
    
    
    
    
    
    2,630
    
    
    
    10,830Accounts payable
    
    
    518,640
    
    
    
    (208,760
    )
    
    
    712,225Accrued and other current liabilities
    
    
    856,137
    
    
    
    (195,047
    )
    
    
    1,038,759Net cash used in operating activities
    
    
    (27,949,166
    )
    
    
    (31,974,548
    )
    
    
    (29,317,486
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (1,326,542
    )
    
    
    (2,332,267
    )
    
    
    (3,157,478
    )Investments in intangible assets
    
    
    (507,794
    )
    
    
    (400,732
    )
    
    
    (399,911
    )Net cash used in investing activities
    
    
    (1,834,336
    )
    
    
    (2,732,999
    )
    
    
    (3,557,389
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of debt
    
    
    
    
    
    
    
    
    
    
    12,500,000Repayment of long-term debt
    
    
    (4,818,211
    )
    
    
    (3,597,823
    )
    
    
    (166,673
    )Payments on capital lease obligation
    
    
    (21,434
    )
    
    
    (37,036
    )
    
    
    (32,776
    )Deferred financing fees
    
    
    
    
    
    
    
    
    
    
    (114,565
    )Proceeds from principal and interest on CEO note receivable
    
    
    
    
    
    
    
    
    
    
    1,530,740Proceeds from the issuance of common stock, net of offering
expenses
    
    
    35,433,334
    
    
    
    (778,731
    )
    
    
    102,951,648Proceeds from warrant redemptions
    
    
    
    
    
    
    2,188
    
    
    
    1,286,620Proceeds from stock option exercises
    
    
    522,132
    
    
    
    164,210
    
    
    
    120,025Other
    
    
    
    
    
    
    (874
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    31,115,821
    
    
    
    (4,248,066
    )
    
    
    118,075,019NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    1,332,319
    
    
    
    (38,955,613
    )
    
    
    85,200,144CASH AND CASH EQUIVALENTS  Beginning of year
    
    
    75,356,960
    
    
    
    114,312,573
    
    
    
    29,112,429CASH AND CASH EQUIVALENTS  End of year
    
    $
    76,689,279
    
    
    $
    75,356,960
    
    
    $
    114,312,573NONCASH INVESTING AND FINANCING ACTIVITIES:Capital expenditures included in accounts payable
    
    $
    205,677
    
    
    $
    
    
    
    $
    201,441License costs capitalized and included in accounts payable
    
    
    
    
    
    
    
    
    
    
    26,233License costs capitalized and included in other current liabilities
    
    
    278,381
    
    
    
    225,000
    
    
    
    347,5006% dividends earned on Series C-2 and Series D Convertible
Preferred Stock
    
    
    
    
    
    
    
    
    
    
    5,476,287Conversion of Preferred Stock, including accumulated dividends on
Series C-2 and Series D Convertible Preferred Stock into common
stock
    
    
    
    
    
    
    
    
    
    
    116,281,865Conversion of convertible derivative liability to additional
paid-in capital
    
    
    
    
    
    
    
    
    
    
    47,554,882Conversion of preferred stock warrant liability to warrants to
acquire common stock
    
    
    
    
    
    
    
    
    
    
    5,424,551Equity offering transaction costs included in accrued financing
costs
    
    
    
    
    
    
    
    
    
    
    778,731Reclassification of inventory to equipment at customers
    
    
    251,727
    
    
    
    1,254,451
    
    
    
    
   46




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##### Table of Contents



Nanosphere, Inc.
 
 Notes to Financial Statements
As of December 31, 2009 and 2008, and
For the years ended December 31, 2009, 2008 and 2007
 1. Description of Business
  Basis of Presentation
 2. Summary of Significant Accounting Policies
 Cash and Cash Equivalents
 Receivables
 Inventories
 Property and Equipment
 Equipment with customers
    
    3-5 yearsComputers and office equipment
    
    3 yearsEngineering and laboratory equipment, including tooling
    
    3-5 yearsFurniture and fixtures
    
    7 yearsManufacturing equipment
    
    5-7 years
   Intangible Assets
  47




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
 Deferred Financing Costs
 Impairment of Long-Lived Assets
 Use of Estimates
 Revenue Recognition
   Research and Development Costs
 Income Taxes
 Share-Based Compensation
 Preferred Stock
  48




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
 Fair Value of Financial Instruments
  New Accounting Standards
  Net Loss Per Common Share  ,
   Year ended December 31,2009
    
    
    2008
    
    
    2007Restricted stock
    
    
    672,500
    
    
    
    
    
    
    
    Stock options
    
    
    4,338,695
    
    
    
    3,362,721
    
    
    
    3,141,530Common stock warrants
    
    
    1,300,119
    
    
    
    1,300,119
    
    
    
    1,300,3196,311,314
    
    
    
    4,662,840
    
    
    
    4,441,849
 3. Intangible Assets
  December 31, 2009
    
    
    December 31, 2008Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Net
    
    
    Cost
    
    
    Amortization
    
    
    NetIntellectual property  licenses
    
    $
    2,438,218
    
    
    $
    (728,376
    )
    
    $
    1,709,842
    
    
    $
    1,877,043
    
    
    $
    (433,461
    )
    
    $
    1,443,582
  49




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
  Years Ending December 312010
    
    $
    447,7442011
    
    
    150,7192012
    
    
    139,8102013
    
    
    136,1742014
    
    
    136,174Thereafter
    
    
    447,221
  4. Related Party Transactions
      5. Equity Incentive Plans
   50




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
    2009
    
    
    2008
    
    
    2007Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    97
    %
    
    
    68
    %
    
    
    77
    %Risk free interest rate
    
    
    2.42
    %
    
    
    3.02
    %
    
    
    4.65
    %Weighted-average expected option life
    
    6.1 years
    
    
    6.4 years
    
    
    7.0 yearsEstimated weighted-average fair value on the
date of grant based on the above assumptions
    
    $
    4.59
    
    
    $
    6.97
    
    
    $
    3.38Estimated forfeiture rate for unvested options
    
    
    4.4
    %
    
    
    4.6
    %
    
    
    4.6
    %
    51




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value of OptionsOutstanding  January 1, 2009
    
    
    3,362,721
    
    
    $
    5.68Granted
    
    
    1,398,399
    
    
    $
    5.92Exercised
    
    
    (116,265
    )
    
    $
    4.49Expired
    
    
    (6,750
    )
    
    $
    6.43Forfeited
    
    
    (299,410
    )
    
    $
    6.22Outstanding  December 31, 2009
    
    
    4,338,695
    
    
    $
    5.75
    
    
    
    7.86
    
    
    $
    5,650,628Exercisable  December 31, 2009
    
    
    1,499,585
    
    
    $
    5.82
    
    
    
    6.69
    
    
    $
    2,466,252Vested and Expected to Vest  December 31, 2009
    
    
    4,208,096
    
    
    $
    5.75
    
    
    
    7.84
    
    
    $
    5,504,147
    6. Income Taxes
    52




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
  2009
    
    
    2008Deferred tax assets:Net operating losses
    
    $
    60,851,659
    
    
    $
    49,363,621Research and development credits
    
    
    8,130,439
    
    
    
    6,974,400Stock option compensation
    
    
    777,116
    
    
    
    554,748Amortization of intangible assets
    
    
    1,202,101
    
    
    
    1,233,349Other
    
    
    566,289
    
    
    
    308,09571,527,604
    
    
    
    58,434,213Valuation allowance
    
    
    (70,976,214
    )
    
    
    (57,995,579
    )Net deferred tax assets after valuation allowance
    
    
    551,390
    
    
    
    438,634Deferred tax liabilities:Depreciation on property and equipment
    
    
    (551,390
    )
    
    
    (438,634
    )Deferred tax assets  net
    
    $
    
    
    
    $
    
  Years Ended December 31,2009
    
    
    2008
    
    
    2007Tax provision at the statutory federal rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State income taxes, net of federal income tax benefit
    
    
    4.8
    %
    
    
    4.8
    %
    
    
    4.8
    %Fair value adjustments to convertible derivative liability and preferred stock warrants
    
    
    
    
    
    
    
    
    
    
    (14.1)
    %Other
    
    
    (5.5
    )%
    
    
    (5.8
    )%
    
    
    0.5
    %Valuation allowance
    
    
    (33.3
    )%
    
    
    (33.0
    )%
    
    
    (25.2
    )%0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
   7. License Agreements
    53




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
    8. Stockholders Equity
 Common Stock
       54




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
  Registration Rights
  
    
    Long-Form Registrations.Stockholders holding at least 20% of the then
outstanding shares of the Companys common stock that are subject to
the registration rights agreement, which are referred to as
registrable securities, have the right to demand that the Company file
a registration statement under the Securities Act on Form S-1 or any
similar long-form registration covering their registrable securities.
However, the Company is not obligated to file a long-form registration
statement on more than three occasions upon the request of the
stockholders.
    
    Short-Form Registrations.Stockholders holding at least 10% of the
then outstanding registrable securities have the right to demand that
the Company file a registration statement on Form S-3 or any similar
short-form registration covering their registrable securities,
provided that such short-form registration is then available to the
Company under applicable law. Such stockholders are entitled to
request an unlimited number of short-form registrations.
   Expenses of Registration.
 Transferability.
 Convertible Preferred Stock
   55




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
    Number of
    
    
    ExpirationSeries of Stock to which the Warrant is Exercisable
    
    Warrants
    
    
    DateCommon  exercise price of $15.32 per share
    
    
    1,135,194
    
    
    April 2011Common  exercise price of $8.75 per share
    
    
    164,925
    
    
    April 2013
   Expected dividend yield
    
    
    6
    %Expected volatility
    
    
    55
    %Risk free interest rate
    
    
    3.83
    %Weighted-average warrant term
    
    3.4 yearsEstimated weighted-average fair value
    
    $
    0.17
 9. Commitments and Contingencies
    OperatingYears Ending December 31
    
    Leases2010
    
    $
    465,5952011
    
    
    426,6432012
    
    
    438,9212013
    
    
    451,1982014
    
    
    190,131Total minimum lease payments
    
    $
    1,972,488
   56




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
 10. Long-Term Debt
    11. Supplemental Financial Information
 2009
    
    
    2008Inventories:Work-in-process component parts
    
    $
    1,061,982
    
    
    $
    1,068,840Finished goods
    
    
    1,878,592
    
    
    
    658,678Total
    
    $
    2,940,574
    
    
    $
    1,727,518
 2009
    
    
    2008Property and Equipment  Net:Equipment with customers
    
    $
    1,567,573
    
    
    $
    1,582,580Computer equipment and software
    
    
    1,015,559
    
    
    
    973,376Laboratory equipment
    
    
    4,721,224
    
    
    
    3,819,860Furniture and fixtures
    
    
    269,047
    
    
    
    269,047Leasehold improvements
    
    
    2,869,258
    
    
    
    2,787,273Manufacturing equipment
    
    
    4,142,417
    
    
    
    3,857,945Office equipment
    
    
    67,068
    
    
    
    67,068Tooling
    
    
    1,377,386
    
    
    
    1,159,222Total property and equipment  at cost
    
    
    16,029,532
    
    
    
    14,516,371Less accumulated depreciation
    
    
    (9,884,977
    )
    
    
    (7,222,147
    )Property and Equipment  Net
    
    $
    6,144,555
    
    
    $
    7,294,224
 2009
    
    
    2008Other Current Liabilities:Accrued clinical trial expenses
    
    $
    939,509
    
    
    $
    266,135All other
    
    
    1,364,122
    
    
    
    1,275,250Total
    
    $
    2,303,631
    
    
    $
    1,541,385
  57




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##### Table of Contents



Nanosphere, Inc.
 Notes to Financial Statements  (Continued)
 12. Selected Quarterly Financial Data (Unaudited)
 2009 QuartersFirst
    
    
    Second
    
    
    Third
    
    
    FourthTotal revenue
    
    $
    255,225
    
    
    $
    402,237
    
    
    $
    729,017
    
    
    $
    827,624Loss from operations
    
    $
    (7,982,063
    )
    
    $
    (8,131,319
    )
    
    $
    (7,996,289
    )
    
    $
    (8,931,401
    )Net loss
    
    $
    (8,193,473
    )
    
    $
    (8,384,143
    )
    
    $
    (8,242,361
    )
    
    $
    (9,128,676
    )Per share data:Net loss per common
share  basic and
diluted
    
    $
    (0.37
    )
    
    $
    (0.38
    )
    
    $
    (0.37
    )
    
    $
    (0.34
    )
 2008 QuartersFirst
    
    
    Second
    
    
    Third
    
    
    FourthTotal revenue
    
    $
    576,016
    
    
    $
    194,715
    
    
    $
    283,231
    
    
    $
    312,770Loss from operations
    
    $
    (9,106,140
    )
    
    $
    (9,832,796
    )
    
    $
    (9,023,050
    )
    
    $
    (9,425,808
    )Net loss
    
    $
    (8,783,368
    )
    
    $
    (9,831,924
    )
    
    $
    (9,026,472
    )
    
    $
    (9,400,232
    )Per share data:Net loss per common
share  basic and
diluted
    
    $
    (0.40
    )
    
    $
    (0.44
    )
    
    $
    (0.41
    )
    
    $
    (0.42
    )
  58




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##### Table of Contents



Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
  
 Item 9A.
    
    Controls and Procedures.
     (1)
    
    Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;(2)
    
    Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and(3)
    
    Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the financial statements.
 Internal Control  Integrated Framework Internal Control  Integrated Framework
    59




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##### Table of Contents



Item 9B.
    
    Other Information.
   60




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##### Table of Contents



PART III.
 
 Item 10.
    
    Directors and Executive Officers of the Registrant.
  
 Item 11.
    
    Executive Compensation.
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
  
 Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14.
    
    Principal Accounting Fees and Services.
   61




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##### Table of Contents



PART IV.
 
 Item 15.
    
    Exhibits, Financial Statement Schedules.
 (a)(1) Financial Statements
 Reports of Independent Registered Public Accounting FirmBalance Sheets as of December 31, 2009 and 2008Statements of Operations for the years ended December 31, 2009, 2008 and 2007Statements of Stockholders Equity (Deficit) for the years ended December 31, 2009, 2008 and 2007Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007Notes to Financial Statements
 (a)(2) Financial Statement Schedules
  (a)(3) Exhibits required by Item 601 of Regulation S-K.
 Exhibit Number
    
    Exhibit Description3.1
    
    
    Second Amended and Restated Certificate of Incorporation of Nanosphere, Inc. (3)
(Exhibit 3.1)3.2
    
    
    Amended and Restated Bylaws of Nanosphere, Inc. (3) (Exhibit 3.2)4.1
    
    
    Specimen of common stock certificate (4) (Exhibit 4.3)10.1
    
    
    Nanosphere, Inc. 2000 Equity Incentive Plan (1) (Exhibit 10.1)10.2
    
    
    Form of Nanosphere, Inc. 2000 Equity Incentive Plan Non-Qualified Stock Option Award
Agreement, as amended (1) (Exhibit 10.2)10.3
    
    
    Form of Nanosphere, Inc. 2000 Equity Incentive Plan Option Award Agreement (1) (Exhibit
10.3)10.4
    
    
    Nanosphere, Inc. 2007 Long-Term Incentive Plan, as amended and restated (4) (Exhibit 10.4)10.5
    
    
    Form of Nanosphere, Inc. 2007 Long-Term Incentive Plan Incentive Stock Option Award
Agreement (Time Vested) (1) (Exhibit 10.5)10.6
    
    
    Form of Nanosphere, Inc. 2007 Long-Term Incentive Plan Non-Qualified Stock Option Award
Agreement (Time Vested) (1) (Exhibit 10.6)10.7
    
    
    Form of Nanosphere, Inc. 2007 Long-Term Incentive Plan Option Award Agreement
(Cliff-vested, performance-accelerated) (1) (Exhibit 10.7)10.8
    
    
    Employment Agreement, dated as of July 19, 2004, by and between Nanosphere, Inc. and
William P. Moffitt III, as amended (1) (Exhibit 10.8)10.9
    
    
    Restricted Stock Purchase Agreement, dated as of March 16, 2006, by and between
Nanosphere, Inc. and William P. Moffitt III (3) (Exhibit 10.9)10.10
    
    
    Employment Agreement, dated January 2, 2001, by and between Nanosphere, Inc. and William
Cork (4) (Exhibit 10.10)10.11
    
    
    Employment Agreement, dated May 13, 2005, by and between Nanosphere, Inc. and Gregory
Shipp (1) (Exhibit 10.11)10.12
    
    
    Employment Agreement, dated September 5, 2005, by and between Nanosphere, Inc. and
Michael McGarrity (1) (Exhibit 10.12)10.13
    
    
    Employment Agreement, dated April 25, 2007, by and between Nanosphere, Inc. and J. Roger
Moody, Jr. (1) (Exhibit 10.13)10.14
    
    
    Employment Agreement, dated May 31, 2007, by and between Nanosphere, Inc. and Winton
Gibbons (1) (Exhibit 10.14)
  62




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##### Table of Contents



Exhibit Number
    
    Exhibit Description10.15
    
    
    Severance Agreement, dated as of June 4, 2007, by and between Nanosphere, Inc. and
Stephen Wasko (1) (Exhibit 10.15)10.16
    
    
    License Agreement, dated as of January 1, 2006, by and between Northwestern University
and Nanosphere, Inc. (2)# (Exhibit 10.16)10.17
    
    
    Non-Exclusive License Agreement, dated as of December 20, 2002, by and between
Nanosphere, Inc. and Abbott Laboratories (2)# (Exhibit 10.17)10.18
    
    
    Lease with Motorola, Inc., dated as of March 24, 2003, as amended (1) (Exhibit 10.18)10.19
    
    
    Loan and Security Agreement, dated as of February 7, 2007, by and between Nanosphere,
Inc. and Venture Lending & Leasing IV, Inc. (1) (Exhibit 10.19)10.20
    
    
    Loan and Security Agreement, dated as of February 21, 2007, by and between Nanosphere,
Inc. and Venture Lending & Leasing V, Inc. (1) (Exhibit 10.20)10.21
    
    
    Consulting and Non-Competition Agreement, dated as of October 31, 2002, by and between
Nanosphere, Inc. and Chad A. Mirkin, as amended (1) (Exhibit 10.21)10.22
    
    
    Bonus Agreement, dated as of March 16, 2006, by and between Nanosphere, Inc. and William
P. Moffitt III, as amended (2) (Exhibit 10.22)10.23
    
    
    Series D Preferred Stock and Warrant Purchase Agreement, dated as of April 12, 2006 (2)
(Exhibit 10.24)10.24
    
    
    Note Purchase Agreement, dated as of March 15, 2006, by and between Nanosphere, Inc. and
Lurie Investment Fund, L.L.C. (2) (Exhibit 10.28)10.25
    
    
    Form of Indemnification Agreement (3) (Exhibit 10.29)10.26
    
    
    Non-Exclusive Financial Advisory Services Engagement Letter, dated as of August 8, 2007,
by and between Nanosphere, Inc. and Allen & Company LLC (4) (Exhibit 10.30)10.27
    
    
    Amended and Restated Employment Agreement dated as of January 1, 2009, between
Nanosphere, Inc. and Mr. William P. Moffitt (5) (Exhibit 10.31)10.28
    
    
    Second Amended and Restated Registration Rights Agreement, dated August 19, 2009 (6)
(Exhibit 10.1)10.29
    
    
    Lease Agreement, dated August 28, 2009, between Nanosphere, Inc. and Northbrook
Commercial Properties, LLC (7) (Exhibit 10.1)23.1
    
    
    Consent of Deloitte & Touche LLP*31.1
    
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2
    
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *32.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
 
 *
    
    Filed herewith#
    
    Confidential treatment has been requested with respect to certain provisions of this
agreement. Omitted portions have been filed separately with the SEC.(1)
    
    Incorporated by reference from the Companys Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission on August 13, 2007. The exhibit reference in
parentheses indicates the corresponding exhibit number in such Registration Statement.(2)
    
    Incorporated by reference from the Companys Amendment No. 1 to Form S-1 as filed with the
Securities and Exchange Commission on September 27, 2007. The exhibit reference in parentheses
indicates the corresponding exhibit number in such Amendment.(3)
    
    Incorporated by reference from the Companys Amendment No. 2 to Form S-1 as filed with the
Securities and Exchange Commission on October 17, 2007. The exhibit reference in parentheses
indicates the corresponding exhibit number in such Amendment.  63




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##### Table of Contents



(4)
    
    Incorporated by reference from the Companys Amendment No. 3 to Form S-1 as
filed with the Securities and Exchange Commission on October 29, 2007. The
exhibit reference in parentheses indicates the corresponding exhibit number in
such Amendment.(5)
    
    Incorporated by reference from the Companys Current Report on Form 8-K as
filed with the Securities and Exchange Commission on March 5, 2009. The exhibit
reference in parentheses indicates the corresponding exhibit number in such
Current Report.(6)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on November 5, 2009. The
exhibit reference in parentheses indicates the corresponding exhibit number in
such Quarterly Report.(7)
    
    Incorporated by reference from the Companys Current Report on Form 8-K as filed with the
Securities and Exchange Commission on September 1, 2009. The exhibit reference in parentheses
indicates the corresponding exhibit number in such Current Report.  64




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##### Table of Contents



SIGNATURES
  NANOSPHERE, INC.By:
    /s/ William P. MoffittWilliam P. MoffittPresident and Chief Executive Officer   Signature
    
    Title(s)
    
    Date/s/ William P. Moffitt

William P. Moffitt
    
    President, Chief Executive Officer,
Director (principal executive officer)
    
    March 11, 2010/s/ Roger Moody

Roger Moody
    
    Chief Financial Officer, Treasurer
(principal financial officer and
principal accounting officer)
    
    March 11, 2010/s/ Mark Slezak

Mark Slezak
    
    Chairman of the board of directors
    
    March 11, 2010/s/ Jeffrey R. Crisan

Jeffrey R. Crisan
    
    Director
    
    March 11, 2010/s/ André de Bruin

André de Bruin
    
    Director
    
    March 11, 2010/s/ Chad A. Mirkin

Chad A. Mirkin
    
    Director
    
    March 11, 2010/s/ James J. Nahirny

James J. Nahirny
    
    Director
    
    March 11, 2010/s/ Sheli Z. Rosenberg

Sheli Z. Rosenberg
    
    Director
    
    March 11, 2010/s/ Lorin J. Randall

Lorin J. Randall
    
    Director
    
    March 11, 2010
  65