TMCnet News
HELICOS BIOSCIENCES CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In particular, statements contained in this Form 10-Q, including but not limited to, statements regarding our future results of operations and financial position, business strategy and plan prospects, projected revenue or costs and objectives of management for future research, development or operations, are forward-looking statements. These statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as "may," "will," "should," "expects," "plans," "anticipates," "intends," "targets," "projects," "contemplates," "believes," "seeks," "goals," "estimates," "predicts," "potential" and "continue" or similar words. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. "Risk Factors" and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason. Business Overview Helicos BioSciences Corporation ("Helicos" or the "Company") is a life sciences company focused on innovative genetic analysis technologies. We have developed a proprietary technology to enable the rapid analysis of large volumes of genetic material by directly sequencing single molecules of DNA or RNA. Our tSMS approach differs from current methods of sequencing DNA or RNA because it analyzes individual molecules of DNA directly instead of analyzing a large number of copies of the molecule which must be produced through complex sample preparation techniques. Our tSMS technology eliminates the need for costly, labor-intensive and time-consuming sample preparation techniques, such as amplification or cloning, which are required by other methods to produce a sufficient quantity of genetic material for analysis. Our Helicos® Genetic Analysis Platform is designed to obtain sequencing information by repetitively performing a cycle of biochemical reactions on individual DNA or RNA molecules and imaging the results after each cycle. The platform consists of an instrument called the HeliScope™ Single Molecule Sequencer, an image analysis computer tower called the HeliScope™ Analysis Engine, associated reagents, which are chemicals used in the sequencing process, and disposable supplies. The information generated from using our tSMS products may lead to improved drug therapies, personalized medical treatments and more accurate diagnostics for cancer and other diseases. We have had limited operations to date and our activities have consisted primarily of raising capital, conducting research and development and recruiting personnel. Accordingly, we are considered to be in the development stage at June 30, 2011, as defined by the Financial Accounting Standards Board ("FASB"). Our fiscal year ends on December 31. We operate as one reportable segment. Helicos is a Delaware corporation and was incorporated on May 9, 2003. We plan to deploy our limited resources by focusing on intellectual property monetization and research and development activities that are primarily related to grant-funded initiatives. In addition, we have begun to scale-down other research and development efforts in targeted areas that were designed to achieve tangible proof-of-concept goals connected with potential partnership opportunities with companies interested in next-generation sequencing, or to pursue other funding and strategic alternatives. As of the date of this filing, we do not have adequate resources and will continue to need to generate additional funding from various sources including contract sequencing service projects and government grants. We plan to defend our intellectual property rights through licensing and enforcement strategies. In this regard, we took several actions. We filed a lawsuit against Pacific 16-------------------------------------------------------------------------------- Table of Contents Biosciences of California, Inc., Illumina, Inc. and Life Technologies Corporation (collectively, the "Defendants") for patent infringement. The lawsuit, filed in the United States District Court for the District of Delaware, accuses the Defendants of infringing several patents and seeks injunctive relief and monetary damages. We are seeking a permanent injunction enjoining the Defendants from further infringement as well as monetary and punitive damages, costs and attorneys' fees, interests and other relief as determined by the Court. We believe that the proceeds generated by this litigation, if we are successful, could be substantial. We continue to pursue our technology licensing program for our Single Molecule Sequencing and Sequencing-by-Synthesis intellectual property. Although we believe that the HeliScope Sequencer has unique utility across a broad array of MDx tests, due to significant financial and resource constraints and the lack of any significant improvement to our financial outlook, we have further delayed our efforts to bring high-value MDx tests based on our technology to the market through the Clinical Laboratory Improvement Amendments of 1988 ("CLIA") laboratory partnership. Nevertheless, we still believe that diagnostic applications may benefit from the specific features of the Helicos System, including the platform's ability to sequence non-amplified natural DNA and RNA directly, provide quantitative accuracy, operate at a high throughput, utilize small sample quantities in simple and cost effective preparation methods, and demonstrate the lack of biases typically seen with sample amplification. However, there can be no assurance that we will be able to deploy MDx tests or our technology through a CLIA laboratory, out-licensing or through our own efforts. In order to further conserve our limited resources, during the second quarter of 2011, we further reduced our workforce by phasing out six business and research positions. These six positions will be phased out during the third quarter of 2011 and will ultimately reduce our total headcount to ten positions by the end of the third quarter. In addition, we are reducing the size and associated expense of our leased facility in Cambridge, Massachusetts which will house our headquarters and scientific laboratory. We did not incur or pay out severance charges or lease exit costs with the implementation of these changes in the second quarter. Notwithstanding these most recent workforce reductions and despite our previous reductions, restructurings, expense saving measures, and the Senior Debt and the Bridge Debt Financing (see Note 7 of Notes to Consolidated Financial Statements), we may not have sufficient funds to pursue our business priorities. We will require significant additional capital in the fourth quarter of 2011 to continue our operations beyond the existing $2,000,000 committed portion of the Bridge Debt. As of the date of this filing, $666,667 has been drawn against this committed facility and $1,333,333 remains available to support ongoing operations. Potential sources of additional funding may include funding from the $2,000,000 uncommitted portion of the Bridge Debt Financing facility and/or from other sources that have not yet been identified, but there can be no assurance that any such funding will be available on reasonable terms, if at all. As a result, we are no longer able to remain current in making payments to trade vendors and other unsecured creditors when such payments are due and, despite the restructuring of our Senior Debt, this inability to remain current increases the likelihood that the Lenders could declare a default under the Senior Debt in the near-term, including with regard to solvency. For the period from November 2010 through April 2011, we made interest only payments on amounts outstanding on the Senior Debt. Beginning in May 2011, we resumed making monthly principal payments of approximately $0.25 million on our Senior Debt. The resumption of principal repayments will put additional pressure on our liquidity and capital resources. Workforce reductions, as well as curtailed financial resources, will further impact our ability to implement our business priorities. In addition, these constraints have caused us to significantly scale back service support and reagent supply to our current installed base. We have also significantly curtailed collaborative activities with other parties. Nevertheless, we believe that these actions will preserve our viability and provide additional time to execute our business priorities. In November 2010, our securities were delisted from the NASDAQ Global Market and the trading of our common stock was suspended before the opening of business on November 16, 2010, and a 17 -------------------------------------------------------------------------------- Table of Contents Form 25-NSE was subsequently filed with the Securities and Exchange Commission on January 21, 2011 which removed our securities from listing and registration on The NASDAQ Stock Market. Our securities are currently traded under the symbol "HLCS" on the OTCQB which is a market tier for OTC-traded companies that are registered and reporting with the SEC. Our future capital requirements will depend on many factors and it may require additional capital beyond our currently anticipated amounts. Any such required additional capital may not be available on reasonable terms, if at all, given our prospects, the current economic environment and restricted access to capital markets. The continued depletion of our resources may make future funding more difficult or expensive to attain. Additional equity financing may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business; and strategic partnerships may result in royalties or other terms which reduce its economic potential from any adjustments to our existing long-term strategy. If we are unable to execute our operations according to our plans or to obtain additional financing, we may be forced to cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amount of reclassification of liabilities, or any adjustment that might be necessary should we be unable to continue as a going concern. Since inception, we have incurred losses and have not generated positive cash flows from operations. We expect losses to continue for a considerable period of time. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders' equity/(deficit). As of June 30, 2011 and July 31, 2011, we had $1.6 million and $1.4 million, respectively, in cash and cash equivalents. We will require significant additional capital in the fourth quarter of 2011 to continue our operations beyond the existing $2,000,000 committed portion of the Bridge Debt. As of the date of this filing, $666,667 has been drawn against this committed facility and $1,333,333 remains available to support ongoing operations. Potential sources of additional funding may include funding from the $2,000,000 uncommitted portion of the Bridge Debt Financing facility and/or from other sources that have not yet been identified, but there can be no assurance that any such funding will be available on reasonable terms, if at all. Our present capital resources are not sufficient to fund our planned operations for a twelve month period as of the date of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011; accordingly, our current financial resources raise substantial doubt about our ability to continue as a going concern. The resumption of principal repayments under our loan and security agreement will further diminish our existing capital resources. The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates because of different assumptions or conditions. The December 31, 2010 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by GAAP in the United States of America. The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated. We were incorporated in Delaware in May 2003 under the name RareEvent Medical Corporation, renamed Newco LS6, Inc. in September 2003 and ultimately renamed Helicos BioSciences Corporation in November 2003. Our activities to date have consisted primarily of conducting research and development. Accordingly, we are considered to be in the development stage at December 31, 2010, as defined by the Financial Accounting Standards Board ("FASB"). Our fiscal year ends on December 31, 18 -------------------------------------------------------------------------------- Table of Contents and we operate as one reportable segment. Our corporate offices are located at One Kendall Square, Building 200, Cambridge, Massachusetts 02139. Overview of Results of Operations Three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2011 Revenues. Revenues during the three and six months ended June 30, 2010 and 2011 were as follows: Three months ended Six months ended June 30, June 30, 2010 2011 Change 2010 2011 Change ($ in thousands) Product revenue $ 85 $ 109 $ 24 28 % $ 127 $ 338 $ 211 166 % Service revenue - 273 273 100 % - 644 644 100 % Grant revenue 576 427 (149 ) -26 % 1,103 1,009 (94 ) -9 % Total revenue $ 661 $ 809 $ 148 22 % $ 1,230 $ 1,991 $ 761 62 % Product revenue. We recognized $85,000 and $127,000 of product revenue during the three and six months ended June 30, 2010, respectively, and $109,000 and $338,000 of product revenue during the three and six months ended June 30, 2011, respectively. Product revenue recognized during the three and six months ended June 30, 2010 and 2011 consists primarily of revenue from the sale of proprietary reagents to customers. Service revenue. We had no service revenues for the three and six months ended June 30, 2010 and $273,000 and $644,000 of service revenue during the three and six months ended June 30, 2011, respectively. Service revenue is derived from sales of DNA and RNA sequencing services which commenced in the fourth quarter of 2010. Grant revenue. We recognized $576,000 and $1.1 million of grant revenue during the three and six months ended June 30, 2010, respectively, and $427,000 and $1.0 million of grant revenue during the three and six months ended June 30, 2011, respectively. Grant revenue recognized during the three and six months ended June 30, 2010 and 2011 relates to the reimbursement of expenses in connection with our government research grants. As of December 31, 2010 and June 30, 2011, we had deferred $7.3 million and $7.7 million of revenue pursuant to multiple element, single accounting unit arrangements as we had not completed all obligations under these arrangements. These amounts have been received and future revenue recognition will have no effect on our cash balances. Cost of product revenue. We recorded $104,000 and $176,000 as cost of product revenue during the three and six months ended June 30, 2010, respectively and we recorded $33,000 and $131,000 as cost of product revenue during the three and six months ended June 30, 2011, respectively. Cost of product revenue consists of costs associated with the sale of proprietary reagents. Research and development expenses. Research and development expenses during the three and six months ended June 30, 2010 and 2011 were as follows: Three months ended Six months ended June 30, June 30, 2010 2011 Change 2010 2011 Change ($ in thousands) Research and development $ 4,216 $ 982 $ (3,234 ) -77 % $ 8,262 $ 2,135 $ (6,127 ) -74 % 19 -------------------------------------------------------------------------------- Table of Contents Research and development expenses decreased by $3.2 million, or 77%, from the three months ended June 30, 2010 to the three months ended June 30, 2011. Research and development expenses decreased by $6.1 million, or 74%, from the six months ended June 30, 2010 to the six months ended June 30, 2011. The significant decreases in research and development expenses for both the three month and six month periods ended June 30, 2011 is primarily due to a reduction in research and development personnel and research and development support costs in 2011 from 2010. Included in research and development expenses are costs associated with service and grant revenue. Selling, general and administrative expenses. Selling, general and administrative expenses during the three and six months ended June 30, 2010 and 2011 were as follows: Three months ended Six months ended June 30, June 30, 2010 2011 Change 2010 2011 Change ($ in thousands) Selling, general and administrative $ 2,693 $ 1,410 $ (1,283 ) -48 % $ 6,765 $ 2,392 $ (4,373 ) -65 % Selling, general and administrative expenses decreased by $1.3 million, or 48%, from the three months ended June 30, 2010 to the three months ended June 30, 2011. In comparing the six months ended June 30, 2010 to the six months ended June 30, 2011, selling, general and administrative expenses decreased by $4.4 million, or 65%. The significant decreases in selling, general and administrative expenses in both the three and six month periods ended June 30, 2011 is primarily due to the reduction of personnel and related support costs in 2011 from 2010. Interest income. Interest income for the three and six months ended June 30, 2010 and 2011 was as follows: Three months ended Six months ended June 30, June 30, 2010 2011 Change 2010 2011 Change ($ in thousands) Interest Income $ 4 $ - $ (4 ) -100 % $ 16 $ - $ (16 ) -100 % The decrease in interest income from the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2011 was due primarily to decreased cash balances. Interest expense. Interest expense for the three and six months ended June 30, 2010 and 2011 was as follows: Three months ended Six months ended June 30, June 30, 2010 2011 Change 2010 2011 Change ($ in thousands) Interest Expense $ 162 $ 196 $ 34 21 % $ 345 $ 393 $ 48 14 % The increase in interest expense from the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2011 is attributable to the year over year increase in interest expense, including amortization of deferred financing costs, related to the Bridge Debt and Notes in 2011. 20 -------------------------------------------------------------------------------- Table of Contents Change in fair value of warrant liability. Change in fair value of warrant liability for the three and six months ended June 30, 2010 and 2011 was as follows: Three months ended Six months ended June 30, June 30, 2010 2011 Change 2010 2011 Change ($ in thousands) Change in fair value of warrant liability $ 1,796 $ 41 $ (1,755 ) -98 % $ 3,248 $ (15 ) $ (3,263 ) -100 % In connection with the September and December 2009 equity offerings, we issued warrants to purchase an aggregate of 6,482,509 shares of common stock. As of June 30, 2011, 681,884 of these warrants remained unexercised. The fair value of the warrants is recorded in the liability section of the balance sheet and at June 30, 2010 and 2011 was estimated at $1.7 million and $43,000, respectively. The fair value of the warrant liability will be determined at the end of each reporting period with the resulting gains and losses recorded as the change in fair value of warrant liability on the statement of operations. For the three and six month period ended June 30, 2010, we realized a gain of $1.8 million and $3.3 million, respectively, due to the change in the fair value of the warrant liability. This gain is principally a result of the decrease of our stock price between December 31, 2009 and June 30, 2010. The gains and losses recognized during the three and six month period ended June 30, 2011 were due to the changes in our common stock price during the respective periods. During the three month period ended June 30, 2011 there were no exercises of warrants. For the six months ended June 30, 2011, warrants for 1,263,215 shares of common stock were exercised. The warrant liability was $43,000 at June 30, 2011. Futures changes in the fair value of the warrant liability will be due primarily to fluctuations in the value of our common stock and potential exercises of the remaining warrants outstanding. Other Income Other income of $900,000 in the six months ended June 30, 2011 included $251,000 received from the federal government related to the Therapeutic Discovery Tax Credit pursuant to grants received under the Patient Protection and Affordable Care Act of 2010 and $649,000 received pursuant to a business interruption insurance claim we made in 2010. We will not receive any additional funds related to the Therapeutic Discovery Tax Credit or the business interruption insurance claim. Both the Therapeutic Discovery Tax Credit and the business interruption insurance claim were received in the first quarter of 2011. Liquidity and Capital Resources We have incurred losses since our inception in May 2003 and, as of June 30, 2011 we have an accumulated deficit of $188.6 million. We have financed our operations to date principally through the sale of common stock and preferred stock, including our IPO, two private placements of common stock and warrants, an underwritten offering of common stock and warrants, debt financing and interest earned on investments and revenue. Through June 30, 2011, we have received net proceeds of $80.3 million through the issuance of common stock, including our IPO, private placements and an underwritten offering of common stock and warrants, $66.4 million from the issuance of preferred stock, $2.5 million in debt financing from a lender to finance equipment purchases, and $20.3 million in debt financing from lenders for working capital, capital expenditures and general corporate purposes and $11.0 million in revenue. Working capital deficit as of December 31, 2010 was $(5.6) million, consisting of $6.7 million in current assets and $12.3 million in current liabilities. Working capital deficit as of June 30, 2011 was $(7.0) million, consisting of $5.4 million in current assets and $12.4 million in current liabilities. Our cash and cash equivalents are held in interest-bearing cash accounts. Cash in 21-------------------------------------------------------------------------------- Table of Contents excess of immediate requirements is invested in accordance with our investment policy, primarily to achieve liquidity and capital preservation. The following table summarizes our net decrease in cash and cash equivalents for the six months ended June 30, 2010 and 2011: Six months ended June 30, 2010 2011 ($ in thousands) Net cash (used in) provided by: Operating activities $ (8,539 ) $ (407 ) Investing activities (37 ) - Financing activities (1,185 ) (472 ) Net decrease in cash and cash equivalents $ (9,761 ) $ (879 ) Net cash used in operating activities was $8.5 million for the six months ended June 30, 2010 compared to $0.4 million for the six months ended June 30, 2011. The $8.1 million decrease was primarily due to a decrease in the net loss of $8.9 million. Additionally, the net changes in operating assets and liabilities resulted in a $0.5 million decrease in net cash used by operating activities. A $3.0 million decrease in stock-based compensation expense was essentially offset by a $3.3 million decrease in non-cash income related to the fair value of our warrant liability. Net cash used in investing activities was $37,000 for the six months ended June 30, 2010. There was no cash used in or provided by investing activities for the six months ended June 30, 2011. Net cash used in financing activities was $1.2 million for the six months ended June 30, 2010 compared to $0.5 million for the six months ended June 30, 2011. The $700,000 decrease was primarily due to a $858,000 decrease in debt payments related to the suspension of principal payments on our Senior Debt which resumed on May 1, 2011, and $158,000 in proceeds from the conversion of warrant shares into common stock. Operating capital and capital expenditure requirements As of June 30, 2011 and July 31, 2011, we had $1.6 million and $1.4 million, respectively, in cash and cash equivalents. We will require significant additional capital to continue our operations by the fourth quarter of 2011. Because our present capital resources are not sufficient to fund our planned operations for a twelve month period as of the date of this Quarterly Report on Form 10-Q for the six month period ended June 30, 2011, our current financial resources raise substantial doubt about our ability to continue as a going concern. Notwithstanding recent workforce reductions, restructurings, the Senior Debt and the Bridge Debt Financing, we may not have sufficient funds to pursue our business priorities. We will require significant additional capital in the second half of 2011 to continue our operations. As a result, we are no longer able to remain current in making payments to trade vendors and other unsecured creditors when such payments are due and, despite the restructuring of our Senior Debt discussed above, this inability to remain current increases the likelihood that the Lenders could declare a default under the credit facility in the near-term, including with regard to solvency. For the period from November 2010 through April 2011, we made interest only payments on amounts outstanding on the Senior Debt. Beginning in May 2011, we resumed making monthly principal payments of approximately $0.25 million on our Senior Debt. The resumption of principal repayments will put additional pressure on our liquidity and capital resources. Workforce reductions, as well as curtailed financial resources, will further impact our ability to implement our business priorities. In addition, these constraints have 22 -------------------------------------------------------------------------------- Table of Contents caused us to significantly scale back service support and reagent supply to our current installed base. We have also significantly curtailed collaborative activities with other parties. Nevertheless, we believe that these actions will preserve our viability and provide additional time to execute our business priorities. Our future capital requirements will depend on many factors and we may require additional capital beyond our currently anticipated amounts. Any such required additional capital may not be available on reasonable terms, if at all, given our prospects, the current economic environment and restricted access to capital markets. The continued depletion of our resources may make future funding more difficult or expensive to attain. Additional equity financing may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business; and strategic partnerships may result in royalties or other terms which reduce our economic potential as a result of required adjustments to our existing long-term strategy. If we are unable to execute our operations according to our plans or to obtain additional financing, we may be forced to cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amount of reclassification of liabilities, or any adjustment that might be necessary should we be unable to continue as a going concern. Failure to satisfy our capital requirements or any delay in doing so would have a material negative impact on our ability to continue as a going concern. Through August 10, 2011, we have received cumulative sales orders for ten Helicos Systems. From our inception to date, we recognized revenue on three of the ten sales orders, respectively. We have shipped six units that have not met our revenue recognition criteria and one sales order unit was returned. A system that was installed at The Broad Institute, Inc. on a no-cost basis was returned to us in April 2011. In addition, we had one Helicos System at a leading academic institution for scientific and commercial evaluation which was returned to us in March 2011. As of December 31, 2010 and June 30, 2011, we had deferred revenue of $7.3 million and $7.7 million, respectively. Pursuant to the revenue recognition guidelines for multiple element, single accounting unit arrangements, we have continued to defer recognition of these amounts as revenue due to the uncertainty associated with our ability to deliver on all of the obligations under these arrangements. These amounts have been received and future revenue recognition will have no effect on our cash balances. Our forecast for the period of time through which our financial resources will be adequate to support our operations, and the costs associated with our new business priorities are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2010. We have based these estimates on assumptions that may prove to be wrong, and we could consume our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with our business we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to sustain our operations. Our future capital requirements will depend on many factors, including, but not limited to, the following: º • º any litigation related to defending our intellectual property or defending lawsuits that allege our actions infringe intellectual property of third parties; º • º the success of our research and development efforts; º • º the expenses we incur in marketing and selling our products or services; º • º the revenue generated by future sales of our products or services; 23-------------------------------------------------------------------------------- Table of Contents º • º the timeliness of payments from our customers; º • º the ability to structure arrangements with and make payments to our unsecured creditors; º • º the ability to further restructure our Senior Debt arrangement in the future; º • º the continued funding to the Bridge Debt Financing facility; º • º the emergence of competing or complementary technological developments; º • º the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; º • º regulatory changes in our markets; and º • º the terms and timing of any collaborative, licensing or other arrangements that we may establish. Working capital deficit as of December 31, 2010 was $(5.6) million, consisting of $6.7 million in current assets and $12.2 million in current liabilities. Working capital deficit as of June 30, 2011 was $(7.0) million, consisting of $5.4 million in current assets and $12.4 million in current liabilities. Contractual Obligations A summary of our contractual obligations is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. There have been no material changes to our contractual obligations previously disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010 except that we resumed making monthly principal payments of $0.25 million per month under our loan and security agreement in May 2011. License agreements and patents We have fixed annual costs associated with license agreements into which we have entered. In addition, we may have to make contingent payments in the future upon the realization of certain milestones or royalties payable under these agreements. Senior Debt and Bridge Debt Financing Facility As of June 30, 2011, we owed aggregate payments, including interest, of $2.6 million pursuant to the Senior Debt which is due to be paid over the period ending January 1, 2012. In addition to interest being paid monthly, in May 2011 we resumed making monthly principal payments of approximately $0.25 million. In addition, a deferred payment of $800,000, which is included in the total aggregate payments owed on the Senior Debt, is due on January 1, 2012. The Senior Debt contains a subjective material adverse clause, which allows the Lenders to call the loans upon the occurrence of a material adverse event. Also, pursuant to the Bridge Debt Financing, we borrowed $0.7 million through June 30, 2011 and have the ability to borrow an additional $1.3 million in monthly amounts of $333,333 through the due date of December 31, 2012. The purchasers of the Notes issued pursuant to the Bridge Debt Financing also have the right, but not the obligation, upon our request to purchase up to an additional $2,000,000 of notes on or before December 31, 2012. As of December 31, 2010 and June 30, 2011, we owed principal and accrued interest aggregating $674,000 and $708,000, respectively. As an inducement for the purchasers to purchase the notes pursuant to the Bridge Debt Financing, we entered into a Risk Premium Payment Agreement in November 2010 with such purchasers (the "Risk Premium Agreement"). Under the terms of the Risk Premium Agreement, and with certain exceptions, we have agreed to pay the purchasers of the notes the following portions of the consideration we receive (the "Payment Consideration") in certain liquidity transactions: (i) until the 24-------------------------------------------------------------------------------- Table of Contents aggregate Payment Consideration equals $10 million, 60% of the Payment Consideration; (ii) for aggregate Payment Consideration from $10 million to $20 million, 50% of the Payment Consideration; (iii) for aggregate Payment Consideration from $20 million to $30 million, 40% of the Payment Consideration; (iv) for aggregate Payment Consideration from $30 million to $40 million, 30% of the Payment Consideration; and (v) for aggregate Payment Consideration in excess of $40 million, 10% of the Payment Consideration (any such payments, "Risk Premium Payments"). For purposes of determining amounts payable under the Risk Premium Agreement, the Payment Consideration will not include amounts we use to first satisfy specified existing obligations, including obligations under the Loan Agreement, under professional contingency arrangements and obligations that may arise under existing technology license agreements (the "Existing IP Licensing Agreements") between us and each of Arizona Technology Enterprises, Roche Diagnostics GMBH and Roche Diagnostics Corporation, and California Institute of Technology. For purposes of the Risk Premium Agreement and subject to various provisions therein, the following shall constitute Liquidity Transactions: (A) the receipt by us of any payments from third parties relating to our intellectual property portfolio, including payments received as a license or other settlement in patent infringement litigation brought by us ("IP Licensing Events"); (B) a merger of Helicos in which there is a change of control; and (C) the sale or exclusive license by us of all or substantially all of our assets or intellectual property. In connection with the Bridge Debt Financing and the Senior Debt and as security for our obligations under our contingency fee arrangement with outside intellectual property litigation counsel relating to the patent infringement lawsuit we filed against Pacific Biosciences of California, Inc., Illumina, Inc. and Life Technologies Corporation, we entered into a subordinated security agreement with outside intellectual property litigation counsel pursuant to which we agreed to grant outside intellectual property litigation counsel a second priority security interest in the patent infringement lawsuit. Under the terms of the contingency fee arrangement, we are obligated to pay outside intellectual property litigation counsel up to 40% of the proceeds paid to us in connection with the settlement, judgment or other resolution of the Cause of Action (as defined in the contingency fee arrangement) or certain business transactions resulting from or relating to the patent infringement lawsuit. In approving the transactions relating to the Bridge Debt Financing and the Senior Debt, our Board of Directors approved a management incentive plan pursuant to which participants in the plan, including Dr. Ivan Trifunovich and Mr. Jeffrey Moore, will be entitled to receive, in the aggregate, an amount equal to 7.5% of the payment consideration resulting from certain IP licensing events (the "Management Incentive Plan"). The specific terms of the Management Incentive Plan, administration and all payments to be made to management thereunder will be under the control and direction of our Board of Directors. OFF-BALANCE SHEET ARRANGEMENTS During the six month periods ended June 30, 2010 and 2011, we did not have any special purpose entities or engage in any off-balance sheet financing arrangements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES In our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, our critical accounting policies and estimates upon which our financial status depends were identified as those relating to inventory; revenue recognition; impairment of long-lived assets; allowance for doubtful accounts; stock-based compensation; and fair value of financial instruments. We reviewed our policies and determined that those policies remain our critical accounting policies for the six months ended June 30, 2011. We did not make any changes in those policies during the six months ended June 30, 2011. 25-------------------------------------------------------------------------------- Table of Contents RECENT ACCOUNTING PRONOUNCEMENTS In October 2009, the FASB issued an amendment to the accounting guidance for revenue arrangements with multiple deliverables. This guidance provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The guidance introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This guidance is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We adopted this accounting guidance on a prospective basis in the first quarter of 2011 for new revenue arrangements. The adoption did not have a material impact on our consolidated financial statements. In October 2009, the FASB issued an amendment to the accounting standards related to certain revenue arrangements that include software elements. This standard clarifies the existing accounting guidance such that tangible products that contain both software and non-software components that function together to deliver the product's essential functionality, shall be excluded from the scope of the software revenue recognition accounting standards. Accordingly, sales of these products may fall within the scope of other revenue recognition accounting standards or may now be within the scope of this standard and may require an allocation of the arrangement consideration for each element of the arrangement. We adopted this standard on January 1, 2011. This adoption did not have a material impact on our consolidated financial statements. In January 2011, we adopted ASU No. 2010-06, "Improving Disclosures About Fair Value Measurements" which requires additional disclosure about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 fair value measurements. In addition, effective for interim and annual periods beginning after December 15, 2010, which for us is January 1, 2011, this standard further requires an entity to present disaggregated information about activity in Level 3 fair value measurements on a gross basis, rather than as one net amount. As this accounting standard only requires enhanced disclosure, the adoption of this newly issued accounting standard did not impact our financial position or results of operations. In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic 820): Amendment to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs". This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosure for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This ASU is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011, which for us is January 1, 2012. We do not expect that adoption of this standard will have a material impact on our financial position or results of operations. |