Nanosphere 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES 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 September 30, 2014

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number 001-33775

Nanosphere, Inc.

(Exact name of registrant as specified in its charter)

Delaware	36-4339870
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4088 Commercial Avenue	Northbrook, Illinois 60062
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (847) 400-9000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s common stock, par value $0.01 per share, as of November 3, 2014 was 117,295,106

NANOSPHERE, INC.

INDEX

Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets	1
Condensed Statements of Operations	2
Condensed Statements of Cash Flows	3
Notes to Condensed Financial Statements	4-9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	17
Item 4. Controls and Procedures	17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings	18
Item 1A. Risk Factors	18
Item 6. Exhibits	19

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

Nanosphere, Inc.

Condensed Balance Sheets

(dollars in thousands, except per share amounts)

(Unaudited)

	September 30, 2014			December 31, 2013
CURRENT ASSETS:
Cash and cash equivalents	$	12,507		$	41,467
Accounts receivable — Net allowance for doubtful accounts		3,304			2,821
Inventories		10,140			8,452
Other current assets		303			248
Total current assets		26,254			52,988
PROPERTY AND EQUIPMENT— Net of accumulated depreciation		5,269			3,673
INTANGIBLE ASSETS — Net of accumulated amortization		2,161			2,406
OTHER ASSETS		206			284
TOTAL	$	33,890		$	59,351
CURRENT LIABILITIES:
Accounts payable	$	2,458		$	1,958
Accrued compensation		1,287			910
Other current liabilities		2,636			1,534
Long-term debt – current portion		3,751			2,081
Total current liabilities		10,132			6,483
LONG-TERM LIABILITIES:
Long-term debt		6,958			9,734
Total liabilities		17,090			16,217
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 150,000,000 shares authorized; 76,895,106 issued and outstanding as of September 30, 2014, and 100,000,000 shares authorized; 76,222,606 shares issued and outstanding as of December 31, 2013		769			762
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued		—			—
Additional paid-in capital		428,239			424,962
Warrants to acquire common stock		246			246
Accumulated deficit		(412,454	)		(382,836	)
Total stockholders’ equity		16,800			43,134
TOTAL	$	33,890		$	59,351

See notes to condensed financial statements.

1

Nanosphere, Inc.

Condensed Statements of Operations

(dollars and shares in thousands except per share data)

(Unaudited)

	Three Month Periods Ended September 30,						Nine Month Periods Ended September 30,
	2014			2013			2014			2013
REVENUE:
Product sales	$	3,688		$	2,367		$	9,643		$	6,588
Total revenue		3,688			2,367			9,643			6,588
COSTS AND EXPENSES:
Cost of sales		2,361			1,476			6,053			4,282
Research and development		5,534			4,992			14,705			13,985
Sales, general, and administrative		5,054			4,959			17,436			13,558
Total costs and expenses		12,949			11,427			38,194			31,825
Loss from operations		(9,261	)		(9,060	)		(28,551	)		(25,237	)
OTHER INCOME (EXPENSE):
Foreign exchange loss		(1	)		(2	)		(1	)		(5	)
Interest expense		(341	)		(369	)		(1,072	)		(582	)
Interest income		1			4			6			16
Total other expense		(341	)		(367	)		(1,067	)		(571	)
NET LOSS	$	(9,602	)	$	(9,427	)	$	(29,618	)	$	(25,808	)
Net loss per common share — basic and diluted	$	(0.13	)	$	(0.16	)	$	(0.39	)	$	(0.45	)
Weighted average number of common shares outstanding — basic and diluted		76,303			60,318			76,256			57,721

See notes to condensed financial statements.

2

Nanosphere, Inc.

Condensed Statements of Cash Flows

(dollars in thousands)

(Unaudited)

	Nine Month Periods Ended September 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(29,618	)	$	(25,808	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,551			1,526
Amortization of financing costs, accretion of debt discount and other		241			135
Share-based compensation		2,631			1,707
Provision for doubtful accounts		89			—
Changes in operating assets and liabilities:
Accounts receivable		(572	)		(964	)
Inventories		(2,435	)		(2,622	)
Other current assets		(55	)		65
Accounts payable		494			(1,418	)
Accrued and other current liabilities		1,383			755
Net cash used in operating activities		(26,291	)		(26,624	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(2,147	)		(1,041	)
Net cash used in investing activities		(2,147	)		(1,041	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt		—			12,000
Debt issuance costs		—			(278	)
Payments on debt		(1,175	)		—
Proceeds from the issuance of common stock, net of offering expenses		—			32,630
Payment of noncurrent liability		—			(750	)
Proceeds from stock option exercise		653			188
Net cash (used in) / provided by financing activities		(522	)		43,790
NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS		(28,960	)		16,125
CASH AND CASH EQUIVALENTS — Beginning of period		41,467			33,139
CASH AND CASH EQUIVALENTS — End of period	$	12,507		$	49,264
NONCASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of inventory to (from) property and equipment	$	747		$	864
Capital expenditures included in accounts payable		257			116

See notes to condensed financial statements.

3

Nanosphere, Inc.

Notes to Condensed Financial Statements

As of September 30, 2014 and

For the Three and Nine Month Periods Ended September 30, 2014 and 2013

(Unaudited)

1. Description of Business

Nanosphere, Inc. (the “Company”) develops, manufactures and markets an advanced molecular diagnostics platform, the Verigene System, that enables simple, low cost, and highly sensitive genomic and protein testing on a single platform.

Basis of Presentation — The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and in conformity with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, unless otherwise noted herein, necessary to present fairly the results of operations, financial position and cash flows have been made. Therefore, these condensed financial statements should be read in conjunction with the Company’s most recent audited financial statements for the year ended December 31, 2013 and notes thereto included in the Company’s Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations expected for the full year.

The accompanying condensed financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Deferred Financing Costs— Costs incurred to issue debt are deferred and amortized as a component of interest expense using the effective interest method over the term of the related debt agreement. Amortization expense of deferred financing costs began with the incurrence of the debt in May 2013 and was less than $0.1 million during the three months ended September 30, 2014 and $0.1 million for the nine months ended September 30, 2014. For 2013, deferred financing costs were less than $0.1 million during the three and nine month periods ending September 30, 2013.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes thereto. The Company’s significant estimates included in the preparation of the condensed financial statements are related to inventories, property and equipment, intangible assets and share-based compensation. Actual results could differ from those estimates.

Fair Value of Financial Instruments — The carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and debt approximate their fair values.

New Accounting Pronouncements —In May 2014, the FASB issued Accounting Standards Update “ASU” No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This new guidance is effective for annual reporting periods beginning on or after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

In August 2014, the FASB issued ASU No.2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.This ASU explicitly requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Management will consider relevant conditions that are known (and reasonably knowable) at the issuance date. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date. Disclosures will be required if conditions give rise to substantial doubt. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Early adoption is permitted. The Company currently discloses its uncertainty about its ability to continue as a going concern. The Company does not expect the adoption of ASU No. 2014-15 to have material impact on its disclosures or its consolidated financial statement.

4

2. Liquidity and Capital Resources

As of September 30, 2014, the Company has incurred net losses attributable to common stock of $412.5 million since inception, and has funded those losses primarily through the sale and issuance of equity securities and secondarily through the issuance of debt. While the Company is currently in the commercialization stage of operations, the Company has not yet achieved profitability and anticipates that it will continue to incur net losses in the foreseeable future. The Company had cash and cash equivalents of $12.5 million as of September 30, 2014 and net cash used in operating activities of $26.3 million for the nine month period ended September 30, 2014.

In May 2013, the Company entered into a $22 million loan agreement with Silicon Valley Bank and Oxford Finance LLC and concurrently the Company drew down $12 million of the facility. The Company did not achieve the established milestones by September 30, 2014 to access the remainder of the facility and therefore the additional facility is no longer available. The Company also has entered into a Common Stock Purchase Agreement, the Purchase Agreement, with Aspire Capital Fund, LLC, or Aspire, to purchase, at the Company’s option, up to an aggregate of $30.0 million of shares of common stock over a two-year term. To date, no shares have been purchased under this agreement. See Note 10 for details on the termination of this common stock purchase agreement with Aspire.

Management is uncertain that its current and anticipated cash resources would be sufficient to support currently forecasted operations through at least the next twelve months, and therefore, the Company will need additional debt or equity financing in the future to execute its business plan and to be able to continue as a going concern. Capital outlays and operating expenditures may increase over the next twelve months as the Company expands its infrastructure, manufacturing capacity and research and development activities to support commercialization of our products. These capital outlays and operating expenditures would be curtailed if the Company is not successful in raising additional funds. Many of the aspects of the Company’s forecasts involve management’s judgments and estimates that include factors that could be beyond our control and actual results could differ. These and other factors could cause our forecasted plans to be unsuccessful which could have a material adverse effect on our operating results, financial condition, and liquidity.

3. Net Loss Per Common Share

Basic and diluted net loss, per common share have been calculated in accordance with ASC Topic 260, “Earnings Per Share”, for the three and nine month periods ended September 30, 2014 and 2013. As the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the same.

The computation of basic net loss per common share for the three and nine month periods ended September 30, 2014 and 2013 excluded 592,000 and 478,250 shares of restricted stock, respectively (see Note 6). While these restricted shares of stock are included in outstanding shares on the condensed balance sheet, these restricted shares are excluded from basic net loss per common share in accordance with ASC Topic 260 due to the forfeiture provisions associated with these shares.

The computations of diluted net loss per common share for the three and nine month periods ended September 30, 2014 and 2013 did not include the outstanding shares of restricted stock as well as the effects of the following options to acquire common stock and common stock warrants as the inclusion of these securities would have been antidilutive:

	Nine Month Periods Ended September 30,
	2014		2013
Restricted stock		592,000		478,250
Restricted stock units		—		220,000
Stock options		5,362,434		6,068,489
Common stock warrants		136,019		136,019
		6,090,453		6,902,758

4. Intangible Assets

Intangible assets, consisting of purchased intellectual property, as of September 30, 2014 and December 31, 2013 comprise the following (in thousands):

	September 30, 2014							December 31, 2013
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Intellectual property—licenses	$	3,263	$	(1,363	)	$	1,900	$	3,263	$	(1,152	)	$	2,111
Patents		455		(194	)		261		455		(160	)		295
	$	3,718	$	(1,557	)	$	2,161	$	3,718	$	(1,312	)	$	2,406

5

Amortization expense for intangible assets was $0.1 million and $0.2 million for the three and nine month periods ended September 30, 2014 and 2013, respectively. Estimated future amortization expense is as follows (in thousands):

Years Ending December 31
2014 (Period from October 1 to December 31)	$	81
2015		322
2016		309
2017		293
2018		211
Thereafter		945

Licenses are amortized from the date of initial use of the licensed technology and such amortization continues over the remaining life of the license. The future amortization expense reflected above is based on licenses for which the licensed technology is being used as of September 30, 2014.

5. Related Party Transactions

Dr. Chad Mirkin, a co-founder of the Company, provided contracted research and development services to the Company. The Company incurred expenses of less than $0.1 million for these services for the nine months period ended September 30, 2013. On March 27, 2013, the Company advised Dr. Mirkin that his consulting agreement would not be renewed and would expire pursuant to its terms on May 31, 2013. On April 22, 2013, Dr. Mirkin advised the Company that he would not stand for re-election to the Company’s board of directors at the 2013 annual meeting and retired from the board of directors at the expiration of his 2013 term.

6. Equity Incentive Plan

The Company’s board of directors has adopted and the shareholders have approved the Nanosphere, Inc. 2000 Equity Incentive Plan (the “2000 Plan”), the Nanosphere, Inc. 2007 Long-Term Incentive Plan (the “2007 Plan”) and the Nanosphere, Inc. 2014 Long-Term Incentive Plan (the “2014 Plan,” and together with the 2000 Plan and the 2007 Plan, the “Plans”). Upon adoption of the 2014 Plan at the Company’s annual meeting of shareholders on May 28, 2014, the 2000 Plan and 2007 Plan were terminated. The Plans authorize the compensation committee to grant stock options, share appreciation rights, restricted shares, restricted share units, unrestricted shares, incentive stock options, deferred share units and performance awards. Option awards are generally granted with an exercise price equal to or above the fair value of the Company’s common stock at the date of grant with ten year contractual terms. Certain options vest ratably over four years of service, while other options cliff vest after seven years of service but provide for accelerated vesting contingent upon the achievement of various company-wide performance goals, such as decreasing time to market for new products and entering into corporate collaborations (as defined in the option grant agreements). For these “accelerated vesting” options, 20-25% of the granted option shares will vest upon the achievement of each of four or five milestones as defined in the option grant agreements, with any remaining unvested options vesting on the seven year anniversary of the option grant dates. Approximately 15% of the options granted and outstanding contain “accelerated vesting” provisions. The fair values of the Company’s option awards granted during the nine month period ended September 30, 2014 were estimated at the dates of grant using the Black-Scholes option pricing model with the following assumptions:

Expected dividend yield		0	%
Expected volatility		78	%
Risk free interest rate		1.78	%
Weighted-average expected option life in years		5.51
Estimated weighted-average fair value on the date of grant based on the above assumptions	$	0.88
Estimated forfeiture rate for unvested options		0	%

The expected volatility for option awards granted in 2014 was based on the Company’s actual historical volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grants for periods consistent with the expected life of the option. The expected life of options that vest ratably over four years of service is derived from the average of the vesting period and the term of the option as defined in the Plans, following the guidance in Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Nos. 107 and 110. The Company estimates the expected life of options with accelerated vesting terms giving consideration to the dates that the Company expects to achieve key milestones under the option agreements and the term of the option.

Total compensation cost recognized for all stock option awards was $0.8 million and $2.6 million in the three and nine month periods ended September 30, 2014, respectively, and $0.4 million and $1.1 million for the three and nine month periods ended September 30, 2013, respectively.

As of September 30, 2014, the total compensation cost not yet recognized related to the non-vested stock option awards is approximately $2.0 million, which is expected to be recognized over the next three years, with a weighted average term of 1.7 years. Certain milestone events are deemed probable of achievement prior to their seven year vesting term, and the acceleration of vesting resulting from the achievement of such milestone events has been factored into the weighted average vesting term. While the Company does not have a formally established policy, as a practice, the Company has delivered newly issued shares of its common stock upon the exercise of stock options.

6

A summary of option activity under the plans as of September 30, 2014, and for the nine month period then ended is presented below:

Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value of Options
Outstanding — January 1, 2014		5,963,478		$	3.66
Granted		707,816		$	1.35
Exercised		(467,500	)	$	1.45
Expired		(812,110	)	$	5.30
Forfeited		(29,250	)	$	3.73
Outstanding — September 30, 2014		5,362,434		$	3.31		6.34	$	165,433
Exercisable — September 30, 2014		3,138,140		$	4.01		4.92	$	18,017
Vested and Expected to Vest—September 30, 2014		5,260,116		$	3.33		6.30	$	158,652

There were 467,500 options exercised in the nine month period ended September 30, 2014 and 106,265 in the nine month period ended September 30, 2013.

Included in the number of options outstanding at September 30, 2014 are 794,186 options with a weighted average exercise price of $5.24 per share and accelerated vesting provisions based on the criteria mentioned above. The total fair value of shares vested during the three and nine month periods ended September 30, 2014 was $0.1 million and $1.9 million, respectively, and was $0.7 million and $0.8 million, respectively, for the three and nine month periods ended September 30, 2013.

As of January 1, 2014, there were 807,000 shares of restricted stock outstanding under the Plans and during the nine month period ended September 30, 2014, 51,000 shares were forfeited and 256,000 additional shares of restricted stock were granted. The restricted shares vest on various dates between August 15, 2014 and October 29, 2017 and are subject to forfeiture until vested. There were 420,000 shares that vested during the nine month period ended September 30, 2014. The Company recognized $0.5 million and $1.7 million in restricted stock compensation expense during the three and nine month periods ended September 30, 2014, respectively, and recognized $0.3 million and $0.6 million during the three and nine month periods ended September 30, 2013, respectively. As of September 30, 2014, the total compensation cost not yet recognized related to the non-vested restricted stock awards was approximately $0.4 million; this amount is expected to be recognized over a weighted average term of less than one year.

7. License Agreements

The Company has entered into several nonexclusive license agreements with various companies covering certain technologies which are embedded in the Company’s diagnostic instruments and diagnostic test products. As of September 30, 2014, the Company has paid aggregate initial license fees of $3.7 million for these licenses, and has agreed to pay a percentage of net sales as royalties, in percentage amounts ranging from less than 1.0% to 12.0%. These initial license fees were capitalized as intangible assets (see Note 4). Certain license agreements have minimum annual royalty payments, and such minimum payments are $0.2 million in each of 2014, and 2015 and are less than $0.1 million annually thereafter through the dates the respective licenses terminate. These licenses expire at various times, corresponding to the subject patents expirations, which currently range from 2015 to 2027.

8. Stockholders’ Equity

On September 19, 2014, the Company received a deficiency letter from the Listing Qualifications Department of The NASDAQ Stock Market, notifying the Company that, for the prior 30 consecutive business days, the closing bid price of our common stock was not maintained at the minimum required closing bid price of at least $1.00 per share as required for continued listing on The NASDAQ Global Market. In accordance with NASDAQ Listing Rules, the Company has been given until March 18, 2015 to regain compliance with this requirement.

On March 18, 2014, the Company entered into a Common Stock Purchase Agreement, or the Purchase Agreement, with Aspire Capital Fund, LLC, or Aspire, to purchase, at our option, up to an aggregate of $30.0 million of shares of our common stock over a two-year term, which expires in March 2016. The Company has not sold any shares under the Purchase Agreement. See Note 10 for discussion on the termination of this agreement October 21, 2014.

9. Commitments and Contingencies

In November 2013, the Company exercised its renewal option on its corporate facility and the lease term was extended to May 2017. Rent and operating expenses associated with the office and laboratory space were $0.2 million and $0.5 million for the three and nine month periods ended September 30, 2014, respectively, and $0.2 million and $0.4 million for the three and nine month periods ended September 30, 2013, respectively.

7

Annual future minimum obligations for the operating leases as of September 30, 2014, are as follows (in thousands):

Years Ending December 31	Operating Lease
2014 (Period from October 1 to December 31)	$	122
2015		496
2016		508
2017		257
Total minimum lease payments	$	1,383

10. Subsequent Events

On October 13, 2014, the Company announced that it received 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) for the Company’s Verigene® Enteric Pathogens Nucleic Acid Test (EP).

Effective at the close of business on October 21, 2014, the Company terminated the Purchase Agreement with Aspire. No shares of common stock were sold to Aspire Capital under the Purchase Agreement.

As part of the Company’s efforts to regain compliance with the NASDAQ minimum bid requirements, the listing of the Company’s common stock was transferred from the NASDAQ Global Market to the NASDAQ Capital Market effective October 23, 2014. The Company also has opted-in to NASDAQ’s all inclusive annual listing fee program for 2015.

On October 27, 2014, the Company completed an underwritten public offering of 40,000,000 shares of its common stock, par value $0.01 per share, at a public offering price of $0.50 per share. As part of the fee payable to the underwriters in connection with the offering, the Company also issued 400,000 shares of common stock to the underwriters. The Company received net proceeds of approximately $18.4 million from the offering after deducting underwriting discounts and commissions and offering expenses. The Company intends to use the net proceeds from the offering for general corporate purposes and working capital.

11. Supplemental Financial Information

Inventories:	September 30, 2014		December 31, 2013
	(in thousands)
Raw materials	$	3,431	$	2,263
Work-in-process		314		—
Finished goods		6,395		6,189
Total	$	10,140	$	8,452

Accounts Receivable – Net:	September 30, 2014			December 31, 2013
	(in thousands)
Accounts Receivable	$	3,352		$	2,821
Allowance for Doubtful Accounts Receivable		(48	)		—
Accounts Receivable—net	$	3,304		$	2,821

Property and Equipment – Net:	September 30, 2014			December 31, 2013
	(in thousands)
Total property and equipment—at cost	$	24,104		$	21,820
Less accumulated depreciation		(18,835	)		(18,147	)
Property and equipment—net	$	5,269		$	3,673

Other Current Liabilities:	September 30, 2014		December 31, 2013
	(in thousands)
Accrued clinical trial expenses	$	1,148	$	320
Accrued license fees		150		84
All other		1,338		1,130
Total	$	2,636	$	1,534

8

	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
	(in thousands)				(in thousands)
Revenues:
Instruments	$	1,278	$	1,187	$	2,291	$	2,610
Consumables		2,410		1,180		7,352		3,978
Total Revenues	$	3,688	$	2,367	$	9,643	$	6,588

9

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

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, future financial position, future net sales, projected expenses, products’ placements, performance and acceptance, prospects and plans and management’s objectives, as well as the growth of the overall market for our products in general and certain products in particular and the relative performance of other market participants, 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. Our actual results may differ materially from those anticipated by these forward-looking statements as a result of various factors, including but not limited to:

• 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;

• inaccurate estimates of the potential market size for our products (including the hospital lab market in general and the blood stream infection (BSI) market in particular) or failure of the market for these products to grow as anticipated;

• the past performance of other companies which we believe to have been in a market position analogous to where we believe we are now may not be predictive of our future results in the manner we believe them to be;

• our analysis of who our competitors have been, who they are now and who they will be in the future (particularly in the infectious disease product markets) and our predictions of relevant future performance may be inaccurate;

• comparisons of actual financial results for another company to what we predict will be our future financial results may be inappropriate;

• predictions of customer metrics needed to achieve profitability and their relationship to our cash flow position, needs and expenses may prove to be inaccurate;

• entrance of other competitors or other factors causing us to lose competitive advantage in the sample-to-result MDx market;

• a lack of commercial acceptance of the Verigene System, its array of tests, and the development of additional tests, which could negatively affect our financial results;

• failure of third-party payors to reimburse our customers for the use of our clinical diagnostic products or reduction of reimbursement levels, which could harm our ability to sell our products;

• failure of our products to perform as expected or to obtain certain approvals or the questioning of the reliability of the technology on which our products are based, which could cause lost revenue, delayed or reduced market acceptance of our products, increased costs and damage to our reputation;

• our inability to manage our anticipated growth, constraints or inefficiencies caused by unanticipated acceleration and deceleration of customer demand; and

• those set forth under “Risk Factors” in our Annual Report on Form 10-K, as amended from time to time under “Risk Factors” in our Quarterly Reports on Form 10-Q.

These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after 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 Quarterly Report on Form 10-Q. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 1A.—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, as supplemented or amended from time to time under “Item 1A.—Risk Factors” in our Quarterly Reports on Form 10-Q, and elsewhere in this Quarterly Report on Form 10-Q.

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Business Overview

We are dedicated to enhancing medicine by providing targeted molecular diagnostic tests that can lead to earlier disease detection, optimal patient treatment and improved healthcare economics. Our platform, the Verigene^® System, enables clinicians to rapidly identify and treat the bacteria and viruses responsible for some of the most complex, costly and deadly infectious diseases. The Verigene System includes a bench-top molecular diagnostics workstation that is a universal platform for genomic and protein testing.

We believe the Verigene System is differentiated by its ease of use, superior analytical performance and ability to detect many targets on a single test, referred to as “multiplexing.” It provides lower cost for laboratories already performing molecular diagnostic testing and enables smaller laboratories and hospitals without advanced diagnostic capabilities to perform genetic testing. Our ability to detect proteins, which can be as much as 100 times more sensitive than current technologies for certain targets, may enable earlier detection of and intervention in diseases associated with known biomarkers as well as the introduction of tests for new biomarkers that exist in concentrations too low to be detected by current technologies. We are focused on the infectious disease diagnostics market.

Our test menu is designed to provide hospitals with the following potential benefits:

1) save lives by identifying pathogens and appropriate treatment faster;

2) reduce medical spending by accelerating appropriate treatment; and

3) reduce antibiotic resistance prevalence by avoiding unnecessary treatments.

The Verigene System is comprised of a microfluidics processor, a touchscreen reader and disposable test cartridges. Certain assays, such as the Warfarin metabolism and hyper-coagulation tests, were cleared by the U.S. Food and Drug Administration (“FDA”) for use with the original Verigene System processor (the “Original Processor”). Subsequently, we developed and launched a second generation Verigene System processor (the “Processor SP”) that handles the same processing steps as the Original Processor and incorporates sample preparation. Some of our current customers continue to use the Original Processor for hyper-coagulation testing and Warfarin metabolism testing. Our development plans are focused on expanding the menu of tests that will run on the Processor SP, and we plan to develop and seek regulatory approval of all future assays on the Processor SP. We are also developing a next generation platform that increases the throughput and further automates the functionality of the Verigene Processor SP. The next generation system also combines the reader with the processor and reduces the number of consumables used by the Processor SP, thus reducing processing steps for the technician. At this time, we believe our instrument inventory levels are sufficient to meet demand. Although this new instrument platform is in development, we closely monitor inventory levels and forecasted sales to manage our investment to meet demand while keeping the risk of obsolete inventory low.

Our Applications

The following table summarizes the FDA and CE In-Vitro Diagnostic Mark (“CE IVD Mark”) regulatory status of our near-term genomic and protein assays on the Verigene System:

Assay	FDA Status(1)	CE IVD Mark Status(2)
Infectious Disease Assays
Respiratory Virus with Sub-Typing (RV+)	510(k) cleared	CE IVD Marked
Respiratory Pathogens/Expanded Panel (RP)	In development	In development
Blood Stream Infection (BSI) Panels
•   Blood Culture – Gram Positive (BC-GP) •   Blood Culture – Gram Negative (BC-GN) •   Blood Culture – Yeast (BC-Y)	510(k) cleared 510(k) cleared(4) In development	CE IVD Marked CE IVD Marked In development
C. difficile (CDF)	510(k) cleared	CE IVD Marked
Enteric Panel (EP)	510(k) cleared (5)	Pending CE IVD Mark
Human Pharmacogenetic Assays
Warfarin Metabolism (CYP2C9)	510(k) cleared(3)	CE IVD Marked
Hyper-Coagulation (FV, FII, MTHFR Panel)	510(k) cleared(3)	CE IVD Marked
CYP2C19 Genetic Variance	510(k) cleared	CE IVD Marked
Ultra-Sensitive Protein Assays
Cardiac Troponin I	In development	In development
Prostate-Specific Antigen (PSA)	Research use only

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(1) For further description of our FDA regulatory requirements, please refer to the section “Regulation by the United States Food and Drug Administration” beginning on page 10 of our Annual Report on Form 10-K for the year ended December 31, 2013.

(2) For further description of our CE IVD Mark regulatory requirements, please refer to the section “Foreign Government Regulation” beginning on page 13 of our Annual Report on Form 10-K for the year ended December 31, 2013.

(3) Currently cleared only for use with the Original Processor.

(4) 510(k) cleared January 2014.

(5) 510(k) cleared October 2014 for full EP panel.

Infectious Disease Assays

Infectious disease testing is converting to molecular diagnostic methods driven by the need to improve clinical outcomes and reduce medical spending through the identification of pathogens and drug resistance markers faster. Microbiology labs need tests that can rapidly detect a wide range of potential infectious agents in an automated system. The Verigene System provides the multiplexing (ability to test for many targets at one time), rapid turnaround and ease-of-use needed by these labs. Our infectious disease menu and the Processor—SP provide microbiology labs with a compelling solution for conversion to molecular testing.

We have received 510(k) clearance from the FDA for our respiratory panel that detects the presence of influenza A and B as well as respiratory syncytial virus (“RSV”) A and B. Influenza is commonly known as the seasonal flu and RSV is a respiratory virus that infects the lungs and breathing passages. RSV is the most common cause of bronchitis and pneumonia in children under the age of one year and has become a significant concern for older adults. Our respiratory panel provides physicians with a highly accurate and fast determination of which virus is present. This test result guides the most appropriate treatment therapy.

In the first quarter of 2011, we received 510(k) clearance from the FDA and obtained CE IVD Mark for our respiratory assay that includes subtyping for seasonal H1 virus, seasonal H3 virus, and the 2009 novel H1N1 virus, commonly known as swine flu, as well as the targets on our previously cleared respiratory assay. We believe this is the first sample-to-result molecular respiratory test to include all of these viruses, thus lowering the cost of molecular respiratory testing for hospitals and demonstrating the multiplexing capability of the Verigene System. The demand for this test will be highly dependent upon the seasonality and prevalence of respiratory viruses. We are developing an expanded respiratory panel that includes additional viral and bacterial respiratory pathogens.

We developed a test to detect C. difficile, a bacterium that can cause symptoms ranging from diarrhea to life-threatening inflammation of the colon. For our C. difficile test, we received 510(k) clearance from the FDA in the fourth quarter of 2012 and obtained CE IVD Mark in the first quarter of 2013.

We have developed and continue to develop blood stream infection panels for the earlier detection of specific bacteria and resistance markers present in patients with blood stream infections. These panels include gram-positive, gram-negative and yeast pathogens as well as resistance markers. These assays are designed to enable physicians to detect bacterial strains infecting patients and thus prescribe the most appropriate antibiotic regimen within 24 hours rather than after several days, which is typical for current traditional culture assays. Treatment is sometimes initiated before these current traditional assays are complete and we believe that this early detection capability will allow patients to avoid unnecessary treatments that may expose them to serious side effects. The first blood stream infection panel developed was for the detection of gram-positive organisms (BC-GP) that represent approximately 65% of blood stream infections. In June 2012 we received a de novo 510(k) clearance to market the full BC-GP panel. In January 2014 we received 510(k) clearance for our gram-negative (BC-GN) assay. The yeast panel (BC-Y) is in development.

Our development efforts also include an enteric pathogens (EP) test. Our enteric pathogens assay identifies the Enterobacteriaceae species most often associated with food poisoning. The enteric assay tests for a wide spectrum of organisms that are treated with various antibiotics and other drug therapies. We received 510(k) clearance in June 2014 for the bacterial portion of our Enteric Pathogens Nucleic Acid Test (EP) and in October 2014 we received 510(k) clearance for the full EP panel.

Human Genetic Assays

We have received 510(k) clearance from the FDA for a warfarin metabolism assay performed on our Original Processor. This is a pharmacogenetic test to determine the existence of certain genetic mutations that affect the metabolism of warfarin-based drugs, including Coumadin^®, the most-prescribed oral anticoagulant. CE IVD Mark was obtained for this assay during the first quarter of 2011, and we may submit an FDA application for this assay to allow its use on the Processor SP, although we have no immediate plans to do so.

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We have also received 510(k) clearance from the FDA for a hypercoagulation assay performed on our Original Processor. This is a human genetic test to determine the existence of certain genetic mutations that are hereditary contributory factors in forming blood clots. This Verigene test detects the F5, F2, and MTHFR genes that are associated with hypercoagulation (i.e., thrombophilia). CE IVD Mark was obtained for this assay on the Processor SP during the fourth quarter of 2011.

In the fourth quarter of 2012, we received 510(k) clearance from the FDA for a CYP2C19 genetic variance test. This assay was CE IVD Marked during the first quarter of 2011. This test detects variances in the cytochrome P-450 2C19 gene. These genetic variances are associated with deficient metabolism of CYP2C19-metabolized therapeutic agents including clopidogrel, more commonly known by the trade name Plavix ^TM.

We have a small customer base that uses our human genetic tests, however, our current product development and marketing efforts are focused on our infectious disease menu.

Ultra-Sensitive Protein Assays

Our ability to detect proteins at sensitivity levels that can be 100 times greater than current technologies may enable earlier detection of and intervention in diseases as well as enable the introduction of tests for new biomarkers that exist in concentrations too low to be detected by current technologies. We have developed, are currently developing or plan to develop diagnostic tests for markers that can be used to diagnose a variety of medical conditions including cardiovascular, respiratory, cancer, autoimmune, neurodegenerative and other diseases.

The first ultra-sensitive protein test we plan to commercialize is for cardiac troponin I (“cTnI”), which is the gold standard biomarker for diagnosis of myocardial infarction, or heart attack, and identification of patients with acute coronary syndromes at risk for cardiovascular events. We may submit an assay for 510(k) clearance for use as a diagnostic tool for acute coronary syndromes, although we have no immediate plans to do so. Currently, we are focused on investigating the potential to sell primary functional components of this assay to commercial labs as a marker for cardiac risk. Early studies suggest that our ultra-sensitive cTnI test may also be a useful monitoring tool for chronic heart failure (“CHF”) patients. Larger studies and regulatory hurdles will need to be cleared before we market the assay for CHF monitoring purposes.

In addition to the cTnI assay, we have developed an ultra-sensitive prostate-specific antigen (“PSA”) test for early diagnosis of recurrent prostate cancer. We also may develop ultra-sensitive protein assays in the areas of immunology, allergy and cancer.

Financial Operations Overview

Since inception we have incurred net losses each year, and we expect to continue to incur losses for the foreseeable future. Our net loss was $29.6 million for the nine month period ended September 30, 2014 and $25.8 million for the nine month period ended September 30, 2013. As of September 30, 2014, we had an accumulated deficit of approximately $412.5 million. Our operations to date have been funded principally through capital contributions from investors in six underwritten public offerings of common stock and, prior thereto, in private placements of our convertible preferred stock which was converted to common stock in 2007. In May 2013, the Company entered into a $22 million loan agreement with Silicon Valley Bank and Oxford Finance LLC secured by all the assets of the Company and bearing an interest rate of 9.25%. Proceeds are to be used for working capital needs and to fund general business requirements. As of September 30, 2014, we have drawn $12 million of the facility. The term of the loan is up to four years, with payments during the initial 12 month period being interest-only and then interest and principal payments monthly for the next 3 years. On February 18, 2014, we entered into an amendment of our loan and security agreement with Silicon Valley Bank and Oxford Bank (the “Amendment”). The Amendment extended the period of time during which we could achieve the financial milestones to access the second, $10 million tranche of this loan from March 31, 2014 to September 30, 2014. The Company did not achieve these financial milestones and therefore the additional $10 million facility may not be drawn by the Company.

Revenue

Product sales revenue is derived from the sale or lease of the Verigene System, including consumables and related products sold to research laboratories and hospitals. Grant and contract revenue consists of funds received under contracts and government grants, including funds for the reimbursement of certain research and development expenses. Our market efforts are focused on driving product sales rather than grants and contracts. We have observed that initial customer validation and implementation of our blood-culture—gram positive (BC-GP) assay have averaged between nine and twelve months.

Cost of Sales

Cost of sales represents the cost of materials, direct labor and other manufacturing overhead costs incurred to produce Verigene cartridges and instruments, as well as royalties on product sales, amortization of purchased intellectual property relevant to products available for sale and depreciation of instruments leased to customers. Labor, validation and testing costs associated with our custom assay development contracts are also included in cost of sales.

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Research and Development Expenses

Research and development expenses include all costs incurred during the development of the Verigene System and assays, and the expenses associated with fulfilling our development obligations related to the United States government contracts and grants. Such expenses include salaries and benefits for research and development personnel, consulting services, materials, patent-related costs and other expenses. We expense all research and development costs in the periods in which they are incurred. We expect research and development expenses to grow modestly as we continue to develop future generations of the Verigene System and expand the genomic and protein tests. The Company changed its presentation of clinical trial costs to present those costs as Research and development expenses rather than Sales, general and administrative expenses. The prior year costs have been reclassified to conform to the new presentation.

Sales, General and Administrative Expenses

Sales, general and administrative expenses include compensation for employees in our sales, customer service, marketing, management and administrative functions. We also include professional services, facilities, technology, communications and administrative expenses in sales, general and administrative. The professional services costs primarily consist of legal and accounting costs. We expect sales and marketing expenses will increase as additional sales and customer support are needed to drive and support customer growth. The Company has changed its presentation of clinical trial costs to present those costs as Research and development expenses rather than Sales, general and administrative expenses. The prior year costs have been reclassified to conform to the new presentation.

Interest Income

Interest income includes interest earned on our excess cash balances. Such balances are invested in money market and bank checking accounts at major financial institutions. We anticipate that interest income will decline as capital reserves are consumed by operating losses and working capital. Recent declines in interest rates will also contribute to reduced interest income for the foreseeable future.

Three month Period Ended September 30, 2014 Compared to the Three month Period Ended September 30, 2013

Revenues

Revenues were $3.7 million for the three month period ended September 30, 2014, as compared to $2.4 million for the three month period ended September 30, 2013. This 54% increase in revenue was driven primarily by an increase in test cartridge sales to our U.S. microbiology customers. There were 30 new customer placements during the third quarter of 2014.

Cost of Sales

Cost of sales increased to $2.4 million for the three month period ended September 30, 2014 from $1.5 million for the three month period ended September 30, 2013. This 60% increase in cost was due primarily to increased cartridge sales during the third quarter of 2014.

Gross Margin

Gross margins decreased to 36% in the third quarter of 2014 from 38% in the third quarter of 2013 driven by reduced pricing on instrument sales.

Research and Development Expenses

Research and development expenses were up to $5.5 million for the three month period ended September 30, 2014 compared to $5.0 million for the same period in 2013. The Company has changed its presentation of clinical trial costs to present those costs as Research and development expenses rather than Sales, general and administrative expenses. The prior year costs have been reclassified to conform to the new presentation. For the three months ended September 30, 2013, $1.1 million of pre-regulatory approval clinical trial costs have been reclassified accordingly.

Sales, General and Administrative Expenses

Sales, general and administrative expenses increased slightly in the third quarter of 2014 to $5.1 million compared to $5.0 million for the third quarter of 2013. This was due to field sales and customer support team expansion and increased stock compensation expense. The Company has changed its presentation of clinical trial costs to present those costs as Research and development expenses rather than Sales, general and administrative expenses. The prior year costs have been reclassified to conform to the new presentation. For the three months ended September 30, 2013, $1.1 million of pre-regulatory approval clinical trial costs have been reclassified accordingly.

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Nine month Period Ended September 30, 2014 Compared to the Nine month Period Ended September 30, 2013

Revenues

Revenues were $9.6 million for the nine month period ended September 30, 2014, as compared to $6.6 million for the nine month period ended September 30, 2013. Product sales increased $3.0 million from the nine month period ended September 30, 2013 to the same period in 2014 primarily due to an increase in sales of cartridges to our U.S. microbiology customers. There were 115 new customer placements during the first nine months of 2014.

Cost of Sales

Cost of sales was $6.1 million for the nine month period ended September 30, 2014 and $4.3 million for the nine month period ended September 30, 2013. The $1.8 million increase in cost of sales for the nine month period ended September 30, 2014 was due to the higher volume of cartridge units sold during the nine month period.

Gross Margin

Gross margins increased to 37% in the first nine months of 2014 from 35% from the same period in 2013 driven by lower per unit cartridge manufacturing costs attributable to production cost reductions.

Research and Development Expenses

Research and development expenses increased from $14.0 million for the nine month period ended September 30, 2013 to $14.7 million for the nine month period ended September 30, 2014. This increase was due to increased spending on clinical trial testing of new products. The Company has changed its presentation of clinical trial costs to present those costs as research and development expenses rather than Sales, general and administrative expenses. The prior year costs have been reclassified to conform to the new presentation. For the nine months ended September 30, 2013, $3.0 million of pre-regulatory approval clinical trial costs have been reclassified accordingly.

Sales, General and Administrative Expenses

Sales, general and administrative expenses increased from $13.6 million for the nine month period ended September 30, 2013 to $17.4 million for the nine month period ended September 30, 2014 due to field sales and customer support team expansion and increased stock compensation expense. The Company has changed its presentation of clinical trial costs to present those costs as Research and development expenses rather than Sales, general and administrative expenses. The prior year costs have been reclassified to conform to the new presentation. For the nine months ended September 30, 2013 $3.0 million of pre-regulatory approval clinical trial costs have been reclassified accordingly.

Liquidity and Capital Resources

From our inception in December 1999 through September 30, 2014, we have received net proceeds of $103.9 million from the sale of convertible preferred stock and issuance of notes payable that were exchanged for convertible preferred stock, $102.2 million from our November 2007 initial public offering, $35.4 million from our October 2009 underwritten public offering, $32.2 million from our May 2011 underwritten public offering, $27.0 million from our July 2012 underwritten public offering of common stock, $4.7 million from our May 2013 underwritten public offering, $11.7 million from our May 2013 issuance of debt and warrants, $27.8 million from our September 2013 underwritten public offering of common stock, and $10.3 million from government grants. We also drew down $12 million under our debt facility in May 2013. We have devoted substantially all of these funds to research and development and sales, general and administrative expenses. Since our inception, we have generated minimal revenues from the sale of the Verigene System, including consumables and related products, to our initial clinical customers, research laboratories and government agencies. We also incurred significant losses and, as of September 30, 2014, we had an accumulated deficit of approximately $412.5 million. While we are currently in the commercialization stage of operations, we have not yet achieved profitability and anticipate that we will continue to incur net losses in the foreseeable future.

On March 18, 2014, the Company entered into a Common Stock Purchase Agreement, or the Purchase Agreement, with Aspire Capital Fund, LLC, or Aspire, to purchase, at our option, up to an aggregate of $30.0 million of shares of our common stock over a two-year term, which expires in March 2016. We terminated our Purchase Agreement with Aspire on October 21, 2014 prior to our public announcement of our underwritten public offering of common stock with Chardan Capital Markets, LLC as the sole book-running manager on October 22, 2014. See Note 10 for discussion on the termination of the Aspire Purchase Agreement and our underwritten public offering with Chardan Capital Markets, LLC.

         We do not anticipate achieving positive operating cash flow in at least the next twelve months. We require increased investment in additional manufacturing scale-up, and to add sales, marketing and customer support personnel during the next twelve months to advance the commercialization of our products. We operate in a market that makes our prospects difficult to evaluate, and achievement of positive cash flow from operations will depend upon revenue resulting from adoption of both our current products and future products that depend upon regulatory clearance. Demand for our respiratory products is directly proportional to the size and duration of the annual season for influenza and other respiratory illnesses. Any unanticipated acceleration or deceleration of customer demand for our products relative to projections will have a material effect on our cash flows.

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Management is uncertain that our current and anticipated cash resources would be sufficient to support currently forecasted operations through at least the next twelve months, and we will need additional debt or equity financing in the future to execute our business plan and to be able to continue as a going concern. We did not achieve the financial milestones required to access the second, $10 million tranche under our debt facility with Silicone Valley Bank and Oxford Finance, LLC.

Although we successfully closed the market offering, market conditions may limit our ability to raise additional capital on favorable terms, or at all, and the terms of any public or private offerings of debt or equity securities likely would be significantly dilutive to existing shareholders. Management also believes that, if necessary, it can implement plans in the short term to conserve existing cash should additional financing activities be delayed. Capital outlays and operating expenditures may increase over the next twelve months as the Company expands its infrastructure, manufacturing capacity and research and development activities to support commercialization of our products.

A customer may purchase the Verigene System instruments, lease them from a third party or enter into a reagent rental agreement. Our reagent rental agreements include customer commitments to purchase a certain minimum volume of cartridges over the term of the agreement. As part of these agreements, a portion of the charge for each cartridge is a rental fee for use of the equipment. We may need to increase our investment in such systems rented to customers in order to support future customer growth. We have established a relationship with a third party financing company to provide our customers with lease financing for Verigene equipment. This arrangement may help mitigate the demand on our capital resources as it allows us to receive the market value of such systems immediately, instead of over the term of a rental agreement.

As of September 30, 2014, we had $12.5 million in cash and cash equivalents as compared to $41.5 million at December 31, 2013, a decrease of $29.0 million. The decrease in cash and cash equivalents was principally due to the use of cash in operating activities. The primary driver was the $29.6 million loss along with $2.4 million in increased inventory due to lower than forecast sales. This shortfall resulted from an increase in the time required for customer validation and contract completion. This was partially offset by $1.4 million increase in accrued liabilities. Net cash used in operating activities decreased $0.3 million from $26.6 million to $26.3 million for the nine months ended September 30, 2013 and 2014, respectively. Net cash used in investing activities was $2.1 million for the nine months ended September 30, 2014, compared to $1.0 million for the nine months ended September 30, 2013. This 2014 capital spending was for the purchase of certain manufacturing equipment to increase manufacturing capacity and lower per unit manufacturing costs.

There was $0.5 million use of cash by financing activities for the nine month period ended September 30, 2014 compared to $43.8 million of cash provided by financing activities for the same period in 2013. In May 2013, the Company received approximately $12 million in debt from drawing down the first tranche of the debt facility and in September 2013, the Company received approximately $32.76 million from a stock offering.

We may need to increase our capital outlays and operating expenditures over the next several years as we expand our product offering, drive product adoption, further scale-up manufacturing and implement product cost saving techniques. The amount and the timing of the additional capital we will need to raise depend on many factors, including:

• the level of research and development investment required to maintain and improve our products and 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.

We cannot be certain that additional capital will be available when and as needed or that our actual cash requirements will not be greater than anticipated. If we require additional capital at a time when investment in diagnostics companies or in the marketplace in general is limited due to the then prevailing market or other conditions, we may not be able to raise such funds at the time that we desire or any time thereafter or on terms that are acceptable to us. In addition, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we obtain additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.

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Subsequent Events

On October 13, 2014, the Company announced that it received 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) for the Company’s Verigene^® Enteric Pathogens Nucleic Acid Test (EP).

On March 18, 2014, we entered into a common stock purchase agreement dated as of March 18, 2014 with Aspire Capital Fund, LLC, or Aspire, which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire was committed to purchase up to an aggregate of $30 million of shares of our common stock over the 24-month term of the Purchase Agreement. Effective at the close of business on October 21, 2014, we terminated the Purchase Agreement. No shares of common stock were sold to Aspire under the Purchase Agreement.

As part of our efforts to regain compliance with the NASDAQ minimum bid requirements, the listing of our common stock was transferred from the NASDAQ Global Market to the NASDAQ Capital Market effective October 23, 2014. We also have opted-in to NASDAQ’s all inclusive annual listing fee program for 2015.

On October 27, 2014, we completed an underwritten public offering of 40,000,000 shares of our common stock. Chardan Capital Markets, LLC acted as the sole book-running manager for the offering. The shares were issued and sold by us pursuant to an underwriting agreement dated October 22, 2014 by and between us and Chardan Capital Markets, LLC, as representative of the several underwriters, at a public offering price of $0.50 per share. As part of the fee payable to the underwriters in connection with the offering, we also issued 400,000 shares of common stock to the underwriters.

We received net proceeds of approximately $18.4 million from the offering after deducting underwriting discounts and commissions and offering expenses. We intend to use the net proceeds from the offering for general corporate purposes and working capital.

Contractual Obligations and Commitments

The Company’s contractual obligations and commitments have not changed materially from the disclosures included in the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 18, 2014.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing or unconsolidated special-purpose entities as of September 30, 2014.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is currently confined to our cash and cash equivalents. We have not used derivative financial instruments for speculation or trading purposes. The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments through a variety of securities, including commercial paper, money market funds and corporate debt securities. Our cash and cash equivalents through September 30, 2014 included amounts in bank checking and liquid money market accounts. As a result, we believe we have minimal interest rate risk; however, a one percentage point increase or decrease in the average interest rate on our portfolio, if such a decrease were possible, would have impacted interest income to zero for the three and nine month periods ended September 30, 2014.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of September 30, 2014. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2014.

(b) Changes in Internal Control over Financial Reporting

There have been no material changes to the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

We are from time to time subject to various claims and legal actions during the ordinary course of our business. We believe that there are currently no claims or legal actions that would, in management’s judgment based on information currently available, have a material adverse effect on our results of operations or financial condition.

Item 1A. Risk Factors

In addition to the other information set forth in this report, the following risk factors supplement the risk factors discussed in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results.

Our stock price has in the past and may in the future not meet the minimum bid price for continued listing on the Nasdaq Global Market. Our ability to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are delisted from The NASDAQ Global Market or Capital Market or if we are unable to transfer our listing to another national securities exchange or stock market.

On September 19, 2014, we received a deficiency letter from the Listing Qualifications Department of The NASDAQ Stock Market (the “Staff”), notifying us that, for the last 30 consecutive business days, the closing bid price of our common stock has not been maintained at the minimum required closing bid price of at least $1.00 per share as required for continued listing on The NASDAQ Global Market pursuant to Listing Rule 5450(a)(1) (“Minimum Bid Price Rule”). In accordance with NASDAQ Listing Rules, we have been given 180 calendar days, or until March 18, 2015, to regain compliance with the Minimum Bid Price. If at any time before March 18, 2015 the closing bid price of our common stock is at least $1.00 for a minimum of 10 consecutive business days, the Staff will provide written notification to us that we comply with the Minimum Bid Price Rule. During this 180 calendar day period, we also may submit a plan to regain compliance to NASDAQ and may request up to an additional 180 calendar days to complete the plan. We currently are evaluating various alternative courses of action to regain compliance with the Minimum Bid Price Rule, however, there can be no assurance that we will regain compliance or maintain the listing of our common stock on the NASDAQ Global Market, the NASDAQ Capital Market, or qualify to transfer the listing of our common stock to another national securities exchange or stock market. Delisting from NASDAQ would adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common stock. Delisting also could have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.

We may require additional financing after completion of our recent common stock offering before we are able to generate net income.

We currently do not have sufficient capital to fully fund the activities needed to commercialize and market our full panel of assays for the Verigene Processor SP to generate net income. As of September 30, 2014, we had approximately $12.5 million of cash and cash equivalents, which would be increased by approximately $18.4 million as of September 30, 2014 after giving effect to our receipt of the net proceeds from our underwritten public offering of common stock that we completed on October 27, 2014. After our receipt of the $18.4 million of net proceeds from the offering, we anticipate having sufficient cash on hand and cash from future operations to fund our operations for less than twelve months, however there can be no assurance that our marketing and sales efforts will progress as anticipated or that our cash generated from operations will be as expected.

We do not anticipate achieving positive operating cash flow in at least the next twelve months. We require increased investment in additional manufacturing scale-up, and to add sales, marketing and customer support personnel during the next twelve months to advance the commercialization of our products. We operate in a market that makes our prospects difficult to evaluate, and achievement of positive cash flow from operations will depend upon revenue resulting from adoption of both our current products and future products that depend upon regulatory clearance. Demand for our respiratory products is directly proportional to the size and duration of the annual season for influenza and other respiratory illnesses. Any unanticipated acceleration or deceleration of customer demand for our product relative to projections will have a material effect on our cash flows.

         Management is uncertain that our current and anticipated cash resources would be sufficient to support currently forecasted operations through at least the next twelve months, and we will need additional debt or equity financing in the future to execute our business plan and to be able to continue as a going concern. If in the future, we fail to satisfy the continued listing standards of NASDAQ, we may not be able to sell shares of our common stock. Accordingly, market conditions may limit our ability to raise capital on favorable terms, or at all, and the terms of any public or private offerings of debt or equity securities likely would be significantly dilutive to existing shareholders. Management also believes that, if necessary, it can implement plans in the short term to conserve existing cash should additional financing activities be delayed. Capital outlays and operating expenditures may increase over the next twelve months as the Company expands its infrastructure, manufacturing capacity and research and development activities to support commercialization of our products.

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We cannot guarantee that we would be able to obtain any of the additional debt or equity financing on commercially reasonable terms or at all, and we may continue to evaluate a full range of potential strategic alternatives. Additional equity funding could be dilutive to existing stockholders. If we fail to obtain the necessary debt or equity financing when needed, we may not be able to execute our planned development and commercialization efforts, which would have a material adverse effect on our growth strategy and our results of operations and financial condition. If we are unable to generate sufficient capital from operations or raise additional funds, we will need to do one or more of the following:

• delay, scale-back or eliminate research and development of some or all of assays or the next generation Verigene System;

• license third parties to develop and commercialize products or technologies that we would otherwise seek to develop and commercialize ourselves;

• attempt to sell our company;

• cease operations; or

• declare bankruptcy.

The occurrence of any of the foregoing events would have a material adverse effect on our growth strategy and our results of operations and financial condition, and there can be no assurance that we would be able to continue as a going concern.

Our ability to issue additional shares of our common stock without shareholder approval is limited.

After the issuance of shares of our common stock in the underwritten public offering that we completed on October 27, 2014, we will have approximately 22.9 million unissued and unreserved shares of common stock authorized for issuance under our certificate of incorporation. We will not be able to raise additional capital through the sale of additional shares of common stock in excess of our remaining authorized shares of common stock without shareholder approval of an amendment to our charter to authorize additional shares of capital stock. Failure to obtain such shareholder approval would have a material adverse effect on our ability to raise capital and our overall financial condition, and there can be no assurance that we would be able to continue as a going concern.

Item 6. Exhibits, Financial Statement Schedules

Exhibit Number	Exhibit Description
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
101.1*	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL: (i) Balance Sheets (unaudited), (ii) Statements of Operations (unaudited), (iii) Statements of Stockholders’ Equity (unaudited), (iv) Statements of Cash Flows (unaudited), and (v) Notes of Consolidated Financial Statements.

* Filed herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NANOSPHERE, INC.
By:	/s/ Michael K. McGarrity
	Michael K. McGarrity
	President and Chief Executive Officer

Date: November 5, 2014

By:	/s/ Roger Moody
	Roger Moody
	Chief Financial Officer and Treasurer

Date: November 5, 2014

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