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TABLE OF CONTENTS
Helicos BioSciences Corporation (A development stage company) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As filed with the Securities and Exchange Commission on February 28, 2007

Registration No. 333-             



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


HELICOS BIOSCIENCES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State of Incorporation)
  3826
(Primary Standard Industrial
Classification Code Number)
  05-0587367
(I.R.S. Employer
Identification Number)

One Kendall Square
Building 700
Cambridge, Massachusetts 02139
(617) 264-1800

(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)

Stanley N. Lapidus
President and Chief Executive Officer
Helicos BioSciences Corporation
One Kendall Square
Building 700
Cambridge, Massachusetts 02139
(617) 264-1800

(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)



Copies to:
Lawrence S. Wittenberg, Esq.
Edward A. King, Esq.

Goodwin Procter
LLP
Exchange Place
53 State Street
Boston, Massachusetts 02109
(617) 570-1000
  Donald J. Murray, Esq.
Eric W. Blanchard, Esq.

Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York
10019-6092
(212) 259-8000

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.


If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o


CALCULATION OF REGISTRATION FEE


Title of Each Class of
Securities to be Registered

  Proposed Maximum
Aggregate Offering
Price(1)(2)

  Amount of
Registration Fee


Common Stock, $0.001 par value per share   $100,000,000   $3,070

(1)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.

(2)
Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price and includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.


The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine.



The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS Subject To Completion FEBRUARY 28, 2007


                      Shares

LOGO

Common Stock


This is the initial public offering of our common stock. No public market currently exists for our common stock. We are offering all of the                            shares of our common stock offered by this prospectus. We expect the public offering price to be between $                                 and $             per share.

We have applied to have our common stock included for quotation on the NASDAQ Global Market under the symbol "HLCS."

Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in "Risk factors" beginning on page 8 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 
  Per share

  Total


Public offering price   $                 $              

Underwriting discounts and commissions   $                 $              

Proceeds, before expenses, to us   $                 $              

The underwriters may also purchase up to an additional             shares of our common stock at the public offering price, less the underwriting discounts and commissions payable by us, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $                  and our total proceeds, before expenses, will be $                  .

The underwriters are offering the common stock as set forth under "Underwriting." Delivery of the shares will be made on or about             , 2007.

Sole Book-Running Manager

UBS Investment Bank


JPMorgan                
  Leerink Swann & Company  
        Pacific Growth Equities, LLC


You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock.


TABLE OF CONTENTS


Prospectus summary   1
Risk factors   8
Special note regarding forward-looking statements   26
Use of proceeds   27
Dividend policy   27
Capitalization   28
Dilution   30
Selected consolidated financial data   32
Management's discussion and analysis of financial condition and results of operations   34
Business   46
Management   61
Compensation   66
Certain relationships and related-party transactions   79
Principal stockholders   81
Description of capital stock   84
Shares eligible for future sale   89
Certain material U.S. federal income and estate tax considerations to non-U.S. holders   92
Underwriting   95
Notice to investors   98
Legal matters   101
Experts   101
Change in accountants   101
Where you can find more information   102
Index to consolidated financial statements   F-1

Through and including             (the 25th day after the date of this prospectus), federal securities laws may require all dealers that effect transactions in our common stock, whether or not participating in this offering, to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

The names HeliScope, tSMS and True Single Molecule Sequencing and our logo are trademarks or service marks of Helicos BioSciences Corporation. This prospectus also includes other registered and unregistered trademarks of Helicos BioSciences Corporation and other persons.

Unless the context otherwise requires, we use the terms "Helicos," "we," "us" and "our" in this prospectus to refer to Helicos BioSciences Corporation and its subsidiary.

i


Prospectus summary

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk factors" beginning on page 8, and the consolidated financial statements and notes to those consolidated financial statements, before making an investment decision.


OVERVIEW

Helicos BioSciences Corporation is a life sciences company developing innovative genetic analysis technologies for the research, drug discovery and clinical diagnostics markets. Our first commercial product, the HeliScope, is designed to enable ultra-high-throughput genetic analysis based on the direct sequencing of single molecules of DNA or single copies of RNA. We believe our proprietary True Single Molecule Sequencing, or tSMS, technology platform represents a fundamental breakthrough in the analysis of biological samples. By directly analyzing single molecules, our technology eliminates the need for costly, labor-intensive and time-consuming sample preparation techniques, such as amplification or cloning. Our tSMS technology enables the automated, parallel sequencing of billions of individual DNA or RNA molecules at orders of magnitude greater speed and lower cost than the current market-leading sequencing systems.

We believe that our technology will represent the first comprehensive and universal solution for single molecule genetic analysis and that its adoption can expand the market for genetic analysis while dramatically lowering the cost of individual analyses. Our goal is to enable revolutionary biomedical research on an unprecedented scale by providing scientists and clinicians with the ability to compare genes and genomes from thousands of individuals. The information derived using our tSMS technology may lead to improved drug therapies, personalized medical treatments and more accurate molecular diagnostics for cancer and other diseases.

We expect our HeliScope system to offer compelling advantages over existing and emerging technologies. We plan to launch the first commercial version of the HeliScope and its associated reagents and supplies in the fourth quarter of 2007, through a specialized direct sales and service force. We have designed the HeliScope system to enable substantial throughput and cost improvements in the future without the need for major changes to the technology or replacement of the instrument.

THE GENETIC ANALYSIS OPPORTUNITY

Most of the common diseases that account for significant morbidity and mortality, such as cancer, heart disease and diabetes, have complex genetic aspects that researchers are seeking to understand fully through genetic analysis. In the last 20 years, scientists have developed a variety of genetic analysis methods, including DNA sequencing, gene expression analysis and genotyping. In 2006, systems, supplies and reagents for these methods represented an approximately $5 billion dollar market worldwide according to Strategic Directions International.

Many scientists believe that a 10,000-fold improvement in the price-performance of conventional DNA sequencing is required to enable unprecedented research and large-scale clinical, scientific and agricultural studies. Although DNA and RNA sequencing provide the most comprehensive genome-wide information, the limitations of current market-leading technologies for sequencing prevent their use in large-scale genetic analysis. In particular, the limitations of these technologies include:

–>
low throughput;

–>
lack of sensitivity;

–>
high cost; and

–>
difficulty of use.

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The prohibitive cost of high-volume sequencing has caused scientists to use other genetic analysis technologies to examine discrete aspects of gene structure or function. For example, researchers use chip- or bead-based arrays or real-time PCR for gene expression analysis or genotyping. While these technologies address the cost limitations of DNA and RNA sequencing, they generally provide only limited information and suffer from a range of drawbacks. We are aware of emerging technologies under development that are seeking to improve the speed and reduce the cost of sequencing. However, these emerging technologies may continue to be limited by the need for amplification or cloning to obtain enough DNA from a sample.

For nearly 20 years, researchers have attempted without success to develop a single molecule sequencing technology that could address the limitations of conventional DNA sequencing methods. In 2003, one of our co-founders, Stephen Quake, DPhil, first demonstrated that sequence information could be obtained from single molecules of DNA. We have replicated and improved upon Professor Quake's approach to develop our technology platform. We are not aware of any other company that has successfully developed a single molecule sequencing technology.

THE HELICOS SOLUTION

Our tSMS platform is a powerful new approach to the analysis of nucleic acids. Based on this platform, our HeliScope system is designed to provide the following compelling advantages over current genetic analysis technologies:

–>
Enhanced throughput. The HeliScope system is designed to produce a raw throughput approaching one billion bases per hour, representing a 10,000-fold improvement over current market-leading sequencing technologies. Initially, our system is expected to achieve throughput of 25-90 million bases per hour, depending upon the application. As we release planned improvements, we expect the HeliScope's throughput to increase substantially.

–>
Increased sensitivity. The HeliScope is designed to directly sequence single molecules without the need for complex cloning or error-prone amplification.

–>
Simplicity. Our SimplePrep sample preparation process is cost-effective and can be readily scaled and easily replicated since it involves only a few steps, overcoming the common workflow bottlenecks of current technologies.

–>
Lower cost. Our initial HeliScope system is designed to combine higher throughput, increased sensitivity and simpler workflow, resulting in a greater than 100-fold lower cost compared to current market-leading sequencing methods. We plan to introduce improvements that are designed to achieve a further 100-fold cost reduction without requiring major modifications or a new generation of technology. We believe that our HeliScope system will also have a significant cost advantage over other emerging sequencing technologies.

–>
Universality. In addition to genetic analysis applications that are currently based on DNA sequencing, we believe the HeliScope system may be used for a broad range of analyses now performed with other methods. Moreover, it has the potential to enable genetic analyses on a scope and scale not currently practical with existing technologies and may have additional applications when used in conjunction with other genetic analysis technologies.

–>
Expanded flexibility. Our platform is designed to enable our customers to design their own applications, tailored to the needs of the particular research they are conducting.

2


OUR PRODUCT

Harnessing the potential of our tSMS technology, the HeliScope system is designed to offer scalable, cost-effective, ultra-high-throughput genetic analysis. The system comprises a computer-controlled instrument and associated reagents and supplies, including enzymes, proprietary modified nucleotides, and flow cells. The HeliScope performs sequencing reactions inside two flow cells with proprietary surface properties that enable single molecule detection. Each flow cell is connected to a fluid handling system, which is used to add reagents automatically. The flow cells are illuminated by two laser modules that are used for detecting fluorescent labels on the DNA. A high-speed stage moves the flow cells so that they can be imaged by an electronic camera through a microscope objective lens. On-board computers control the entire system, process the images and store the resulting data. Our HeliScope system has the capability to process over 3.2 billion unique strands of DNA per run.

We have designed the HeliScope system to integrate easily into the laboratory environment and workflow of our customers. Its open architecture will enable our customers to design their own applications and customized protocols, tailored to their particular needs. Over the next three years, as we develop planned improvements in chemistry, fluid handling, strand density, image acquisition and utilization of the flow cell, we expect the HeliScope's throughput and price performance to increase substantially. Importantly, these improvements will not require major changes to the technology, replacement of the instrument or significant additional capital expenditures by our customers.

We anticipate that the primary applications for large-scale genetic analysis, which we expect our single molecule sequencing technology to facilitate, will include disease association studies, cancer research, infectious and autoimmune diseases research, pharmaceutical research and development, clinical diagnostics and agricultural applications.


OUR STRATEGY

Our goal is to become the leading global provider of high-throughput genetic analysis systems. To achieve this objective, we intend to use the following strategies:

–>
Define the future of genetic analysis based on single molecule sequencing.

–>
Penetrate the genetic analysis market through an initial set of key early adopter customers.

–>
Create a specialized direct sales and service force to focus on applications enabled by single molecule sequencing.

–>
Generate a recurring revenue stream through the sale of proprietary reagents and supplies.

–>
Continually enhance product performance to increase both market share and market size.

–>
Enable future molecular diagnostic applications of our tSMS technology.

–>
In the future, explore single molecule detection assays in other key areas of biology.


RISKS AFFECTING US

You should carefully consider the matters discussed in the section "Risk factors" beginning on page 8, including the following, before you invest in our stock. For example:

–>
we have not yet built a commercial version of our product and have not generated any product revenue;

–>
we have a limited operating history and have a history of operating losses, expect to continue to incur substantial losses and might never achieve or maintain profitability; and

–>
we have limited experience in manufacturing, sales and marketing and may be unable to successfully commercialize our HeliScope system.

3


CORPORATE INFORMATION

We were incorporated in Delaware in May 2003 under the name RareEvent Medical Corporation. In April 2003, our scientific founder, Professor Stephen Quake, who was then at the California Institute of Technology, published a paper in the Proceedings of the National Academy of Sciences describing that sequence information could be obtained from a single strand of DNA without amplification. Shortly thereafter, Noubar Afeyan, Chief Executive Officer of Flagship Ventures, and Stanley Lapidus, then a Venture Partner at Flagship Ventures, met with Professor Quake and agreed to found a company to develop and commercialize technology based on Professor Quake's single molecule approach. Combining the experience of Professor Quake in single molecule methods, Dr. Afeyan in sequencing technology and life sciences businesses, and Mr. Lapidus in diagnostics and entrepreneurship, the company, which was renamed Newco LS6, Inc. in September 2003 and ultimately Helicos BioSciences Corporation in November 2003, focused exclusively on the technical and commercial development of technology based on Professor Quake's approach. Professor Eric Lander, Director of the Broad Institute of MIT and Harvard, and a leader in the DNA sequencing field, provided helpful guidance and advice during the founding stages of the company.

Our corporate headquarters are located at One Kendall Square, Building 700, Cambridge, MA 02139, and our telephone number is (617) 264-1800. Our website address is www.helicosbio.com. The information on, or that can be accessed through, our website is not part of this prospectus.

4


The offering

Common stock we are offering                              shares

Common stock to be outstanding after this
offering

 

                           shares

Use of proceeds after expenses

 

We expect to receive net proceeds from the offering of approximately $  million. We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes, including financing the development and commercialization of our technology, sales and marketing activities, capital expenditures and the costs of operating as a public company. See "Use of proceeds" for more information.

Risk factors

 

You should read the "Risk factors" section of this prospectus for a discussion of factors that you should consider carefully before deciding to invest in shares of our common stock.

Proposed NASDAQ Global Market symbol

 

HLCS

The number of shares of our common stock to be outstanding following this offering and after giving effect to the adjustments below, is based on and assumes 68,040,149 shares of our common stock outstanding as of February 15, 2007 and excludes:

–>
4,587,417 shares of common stock issuable upon exercise of options outstanding as of February 15, 2007, at a weighted average exercise price of $0.84 per share;

–>
8,488,644 shares of common stock reserved for future issuance under our equity incentive plan;

–>
1,250,000 shares of common stock reserved for future issuance as a charitable contribution to the Broad Institute of MIT and Harvard; and

–>
81,184 shares of common stock issuable upon the exercise of redeemable convertible preferred stock warrants at an exercise price of $1.29 per share.

Unless otherwise indicated, the share information in this prospectus is as of February 15, 2007 and has been adjusted to reflect or assume the following:

–>
the conversion of all outstanding shares of our redeemable convertible preferred stock on a one-for-one basis into 59,189,998 shares of common stock;

–>
the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated by-laws in connection with the consummation of this offering; and

–>
no exercise of the underwriters' over-allotment option.

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Summary consolidated financial data

The tables below summarize our financial data as of the date and for the periods indicated. You should read the following information together with the more detailed information contained in "Selected consolidated financial data," "Management's discussion and analysis of financial condition and results of operations" and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

 
  Period from
May 9, 2003
(date of
inception)
through
December 31,
2003

   
   
   
  Period from
May 9, 2003
(date of
inception)
through
December 31,
2006

 
 
  Year ended December 31,

 
Consolidated statement
of operations data:

 
  2004

  2005

  2006

 

 
 
  (in thousands, except share and per share data)

 
Grant revenue   $   $   $   $ 159   $ 159  
Operating expenses:                                
  Research and development         4,194     8,411     14,382     26,987  
  General and administrative     553     3,164     2,870     6,917     13,504  
   
 
 
 
 
 
Total operating expenses     553     7,358     11,281     21,299     40,491  
   
 
 
 
 
 
Operating loss     (553 )   (7,358 )   (11,281 )   (21,140 )   (40,332 )
Interest income     6     294     363     766     1,429  
Interest expense                 (206 )   (206 )
   
 
 
 
 
 
Net loss   $ (547 ) $ (7,064 ) $ (10,918 ) $ (20,580 ) $ (39,109 )
   
 
 
 
 
 
Net loss per share—basic and diluted(1)   $ (5.60 ) $ (3.44 ) $ (2.80 ) $ (3.63 )      
   
 
 
 
       
Weighted average number of shares used in computation—basic and diluted(1)     97,682     2,053,156     3,894,100     5,662,970        
   
 
 
 
       
Pro forma net loss per share—basic and diluted (unaudited)(1)                     $ (0.44 )      
                     
       
Weighted average number of shares used in pro forma computation—basic and diluted (unaudited)(1)                     46,842,986
       

(1)
Please see Notes 2 and 4 to the notes to our audited consolidated financial statements for an explanation of the method used to calculate basic and diluted net loss per share, the pro forma basic and diluted net loss per share and the weighted average number of shares used in the computation of the per share amounts.

6

The table below summarizes our consolidated balance sheet as of December 31, 2006:

–>
on an actual basis;

–>
on a pro forma basis to reflect the proceeds of $20.0 million from the sale of 15,503,876 shares of Series B redeemable convertible preferred stock as a result of the second closing of our Series B financing on January 19, 2007, and the recording of a beneficial conversion feature of approximately $18.1 million, as the estimated fair value of our common stock on January 19, 2007 was in excess of the $1.29 per share conversion price; and

–>
on a pro forma as adjusted basis to reflect the sale of             shares of common stock that we are offering at an assumed initial public offering price of $                                 per share, the application of the estimated net proceeds therefrom as described in "Use of proceeds," the conversion of all outstanding shares of redeemable convertible preferred stock into shares of common stock, the conversion of the redeemable convertible preferred stock warrants into common stock warrants, and the conversion of a beneficial conversion feature (associated with the January 19, 2007 second closing of the Series B redeemable convertible preferred stock financing) from redeemable convertible preferred stock to additional paid-in capital.

 
  As of December 31, 2006

Consolidated balance sheet data:

  Actual

  Pro forma(2)

  Pro forma as
adjusted(1)(3)


Cash, cash equivalents and short-term investments   $ 11,384   $ 31,384    
Working capital     8,669     28,669    
Total assets     15,300     35,300    
Long-term debt, net of current portion     1,843     1,843    
Redeemable convertible preferred stock warrants     204     204    
Redeemable convertible preferred stock     46,761     84,901    
Deficit accumulated during development stage     (39,109 )   (57,249 )  
Total stockholders' equity (deficit)     (37,339 )   (55,479 )  

(1)
Each $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease, as applicable, our cash and cash equivalents, working capital, total assets and total stockholders' equity (deficit) by approximately $    million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

(2)
On March 1, 2006, we entered into an agreement for the sale of an aggregate of 31,007,752 shares of our Series B redeemable convertible preferred stock at $1.29 per share. Of such shares, 15,503,876 were sold at an initial closing on March 1, 2006, and the remaining 15,503,876 were sold at a second closing on January 19, 2007. The pro forma data reflect the receipt of proceeds of $20.0 million from the sale of 15,503,876 shares of Series B redeemable convertible preferred stock as the result of the second closing of our Series B financing on January 19, 2007, and the recording of a beneficial conversion feature of approximately $18.1 million, as the estimated fair value of the Company's common stock on January 19, 2007 was in excess of the $1.29 per share conversion price.

(3)
The pro forma as adjusted data reflect the sale of             shares of common stock that we are offering at an assumed initial public offering price of $             per share, and the application of the estimated net proceeds therefrom as described in "Use of proceeds," the conversion of all outstanding shares of redeemable convertible preferred stock into shares of common stock, the conversion of the redeemable convertible preferred stock warrants into common stock warrants, and the conversion of a beneficial conversion feature (associated with the January 19, 2007 second closing of the Series B convertible preferred stock financing) from redeemable convertible preferred stock to additional paid-in capital.

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Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information contained in this prospectus, including the financial statements and the related notes appearing at the end of this prospectus, before making an investment decision. If any of the following risks or uncertainties actually occurs, our business, financial condition or operating results could materially suffer. In that event, the trading price of our common stock could decline and you may lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

We have not yet built a commercial version of our product.

Our first commercial product, the HeliScope system, is still in development. Additional development is required on all aspects of our instrument system for it to achieve adequate performance. We may not be able to successfully complete development of or commercialize products utilizing our technology. Our success depends on many factors, including:

–>
our ability to implement improvements in the chemistry, data analysis and hardware aspects of our instrument system;

–>
our ability to successfully integrate developments in all three areas into a commercially viable instrument system;

–>
our ability to establish an instrument manufacturing capability, or outsource the manufacture of our instruments to one or more third-parties; and

–>
our ability to manufacture reagents and supplies, have them manufactured for us, or obtain licenses to resell reagents and supplies.

Moreover, even if we are able to successfully develop a commercial product, there is no guarantee that we will in the future be able to implement planned improvements to our product.

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

We are a development-stage company with limited operating history. We have incurred significant losses in each fiscal year since our inception, including net losses of $10.9 million and $20.6 million in the years ended December 31, 2005 and 2006, respectively. As of December 31, 2006, we had an accumulated deficit of $39.1 million. These losses have resulted principally from costs incurred in our research and development programs and from our general and administrative expenses. Our operating expenses are likely to increase significantly in the near term and we will therefore need to generate significant revenue to achieve profitability. While we expect to begin commercial shipments of our products in the fourth quarter of 2007, because our products will be subject to acceptance testing by our customers we do not expect to have any recognizable revenue from the sales of our instruments until at least the first half of 2008. Moreover, even after we begin selling our products, we expect our losses to continue to increase as a result of ongoing research and development expenses, as well as increased manufacturing, sales and marketing expenses. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders' equity. Because of the numerous risks and uncertainties associated with our product development and commercialization efforts, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase

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profitability on a quarterly or annual basis. If we are unable to achieve and then maintain profitability, the market value of our common stock will decline.

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

Our success depends, in part, on our ability to develop products that displace current technology, as well as expand the market for genetic analysis to include new applications that are not practical with current technology. To accomplish this, we must continue to explore, develop and successfully commercialize our HeliScope system for use in a variety of life science applications. These markets are new and emerging and there can be no assurances that they will develop as quickly as we expect or that they will reach their full potential. There is no guarantee, even if our technology is able to successfully reduce the cost and improve the performance of genetic analysis relative to existing products, that we will be able to induce customers with installed bases of conventional genetic analysis instruments to purchase our systems or to expand the market for genetic analysis to include new applications. Even if we are able to successfully implement our technology, we may fail to achieve or sustain market acceptance of our HeliScope system by academic and government research laboratories and pharmaceutical, biotechnology and agriculture companies, among others, across the full range of our intended life science applications. Any such failure would materially harm our future sales and revenue. In addition, if our products are only utilized as a replacement for existing DNA sequencing technology, we may face a much smaller market than we currently anticipate.

We have limited experience in sales and marketing and may be unable to successfully commercialize our HeliScope system.

We have limited marketing, sales and distribution experience and capabilities. Our ability to achieve profitability depends on attracting customers for our HeliScope system. There are a limited number of research institutions, diagnostic laboratories and pharmaceutical, biotechnology and agricultural companies that are potential customers for our products. Although members of our marketing team have considerable industry experience, we must expand our sales, marketing, distribution and customer support capabilities and develop a sales, marketing and customer support group with the appropriate technical expertise to market our system. We plan to initially establish a small sales and service force to market and service our HeliScope system. We currently do not have any sales representatives, however, and therefore have limited sales and marketing infrastructure. To successfully perform sales, marketing, distribution and customer support functions ourselves, we will face a number of risks, including:

–>
our ability to attract and retain the skilled support team, marketing staff and sales force necessary to commercialize and gain market acceptance for our technology;

–>
the time and cost of establishing a support team, marketing staff and sales force for a particular application, which might not be justifiable by the revenues generated by our technology; and

–>
the ability of our direct sales, marketing and support personnel to initiate and execute successful commercialization activities.

In addition, we may seek to enlist one or more third parties to assist with sales, distribution and customer support globally or in certain regions of the world. There is no guarantee, if we do seek to enter into such arrangements, that we will be successful in attracting desirable sales and distribution partners, or that we will be able to enter into such arrangements on favorable terms. If our sales and marketing efforts, or those of any third-party sales and distribution partners, are not successful, our

9

technologies and products may not gain market acceptance, which could materially impact our business operations.

We will need to develop manufacturing capacity by ourselves or with partners.

If we are successful in developing our HeliScope system, we will need to either build internal manufacturing capacity or contract with one or more manufacturing partners, or both. We currently intend to use a combination of outsourced and internal manufacturing activities. We have not commercially manufactured any instruments, reagents or supplies. We may encounter difficulties in manufacturing our products and, due to the complexity of our technology and our manufacturing process, we cannot be sure we fully understand all of the factors that affect our manufacturing processes or product performance. There is no assurance that we will be able to build manufacturing capacity internally or find one or more suitable manufacturing partners, or both, to meet the volume and quality requirements necessary to be successful in the market. Manufacturing and product quality issues may arise as we increase production rates of our HeliScope instrument and associated reagents and supplies. If our products do not consistently meet our customers' performance expectations, we may be unable to generate sufficient revenues to become profitable. Any delay in establishing or inability to expand our manufacturing capacity could delay our ability to develop or sell our products, which could result in lost revenue and seriously harm our business, financial condition and results of operations.

Our business depends on research and development spending levels of academic, clinical and governmental research institutions and pharmaceutical, biotechnology and agriculture companies.

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

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changes in economic conditions;

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changes in government programs that provide funding to research institutions and companies;

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changes in the regulatory environment affecting life sciences companies and life sciences research;

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market-driven pressures on companies to consolidate and reduce costs; and

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other factors affecting research and development spending.

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Any decrease in our customers' budgets or expenditures or in the size, scope or frequency of capital or operating expenditures as a result of the foregoing or other factors could materially adversely affect our operations or financial condition.

If the limited number of suppliers we rely on fail to supply the materials we use in the manufacturing of our products, we might be unable to satisfy product demand, which would negatively affect our business.

Components used in the manufacturing of our HeliScope system and certain raw materials used in the manufacturing of our reagent products and supplies are available from one of only a few suppliers. We acquire some of these raw materials on a purchase-order basis, which means that the supplier is not required to supply us with specified quantities of these raw materials over a certain period of time or to set aside part of its inventory for our forecasted requirements. If supplies from these vendors were delayed or interrupted for any reason, we may not be able to manufacture and sell our HeliScope instrument and associated reagents and supplies in a timely fashion or in sufficient quantities or under acceptable terms. Additionally, for certain of these components and raw materials, we have not yet arranged for alternative suppliers and it might be difficult to find alternative suppliers in a timely manner and on terms acceptable to us. Consequently, as we begin our commercialization efforts, if we do not forecast properly, or if our suppliers are unable or unwilling to supply us in sufficient quantities or on commercially acceptable terms, we might not have access to sufficient quantities of these materials on a timely basis and might not be able to satisfy product demand. Moreover, if any of these components and raw materials becomes unavailable in the marketplace, we will be forced to further develop our technologies to incorporate alternate components.

Our inability to continually enhance our product performance to keep pace with rapidly changing technology and customer requirements could adversely affect our ability to compete effectively.

The success of any products utilizing our True Single Molecule Sequencing platform will depend on our ability to continue to increase the performance and decrease the price of sequencing. New technologies, techniques or products could emerge which might allow the analysis of genomic information with similar or better price-performance than our system and could exert pricing pressures on or take market share from our products. It is critical to our success for us to anticipate changes in technology and customer requirements and to successfully introduce new, enhanced and competitive technology to meet our customers' and prospective customers' needs on a timely basis. We could incur substantial costs if we need to modify our system to adapt to technological changes or developments. We may not have adequate resources available to develop new technologies or be able to successfully introduce enhancements to our system. There can be no guarantee that we will be able to maintain our technological advantages over emerging technologies in the future and we will need to respond to technological innovation in a rapidly changing industry. If we fail to keep pace with emerging technologies our system will become uncompetitive, our market share will decline and our business, revenue, financial condition and operating results could suffer materially.

We operate in a highly competitive industry and if we are not able to compete effectively, our business and operating results will be harmed.

Some of our current competitors, as well as many of our potential competitors, have greater name recognition, more substantial intellectual property portfolios, longer operating histories, significantly greater resources to invest in new technologies and more substantial experience in new product

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development, regulatory expertise, manufacturing capabilities and the distribution channels to deliver products to customers. For example, companies such as Affymetrix, Inc., Agilent Technologies, the Applied Biosystems division of Applera Corporation, GE Healthcare (through its acquisition of Amersham Biosciences), Illumina, Inc. (through its acquisition of Solexa, Inc.) and Roche Applied Science (in partnership with 454 Life Sciences) have products for genetic analysis which compete in certain segments of the market in which we plan to sell our HeliScope system. Pharmaceutical and biotechnology companies have significant needs for genomic information and may also choose to develop or acquire competing technologies to meet these needs. In addition, a number of other companies and academic groups are in the process of developing novel techniques for genetic analysis, many of which have also received grants from the National Human Genome Research Institute for the development of technologies that can achieve substantially lower costs, referred to as a "$100,000 genome" or a "$1,000 genome." These competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Further, in light of these advantages, even if our technology is more effective than the product or service offerings of our competitors, current or potential customers might accept competitive products and services in lieu of purchasing our technology. We cannot assure you that we can maintain or enhance our competitive position against current and future competitors. Increased competition is likely to result in pricing pressures, which could harm our sales, profitability or market share. Our failure to compete effectively could materially adversely affect our business, financial condition or results of operations.

In addition, to the extent that, in the long term, we commercialize any products utilizing our True Single Molecule Sequencing platform for use in future life science applications, such as clinical diagnostic or protein analysis applications, we will face additional competition. In the event that we develop new technology and products that compete with existing technology and products of well established companies, there can be no guarantee that the marketplace will readily adopt any such new technology and products that we may introduce in the future.

Failure to manage our rapid growth effectively could harm our business.

We will need to add a significant number of new personnel and expand our capabilities to successfully pursue our commercialization strategy for our HeliScope system as well as our research and development efforts. To manage our anticipated future growth effectively, we must enhance our manufacturing capabilities and operations, information technology infrastructure, and financial and accounting systems and controls. For instance, certain aspects of our operations, such as our manufacturing capabilities, must be scaled up to increase the number of instrument systems we can manufacture per quarter. We also must attract, train and retain a significant number of qualified sales, marketing and customer support personnel, engineers, scientists and other technical personnel and management personnel. Our failure to manage our rapid growth effectively could have a material adverse effect on our business, operating results or financial condition. Organizational growth and scale-up of operations could strain our existing managerial, operational, financial and other resources. Our growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of new products or enhancements. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our revenue could grow more slowly than expected and we may not be able to achieve our research and development and commercialization goals.

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Our results of operations and financial condition may be dependent upon large contracts for the sale and installation of our instrument systems.

Our business may depend upon securing and maintaining large contracts for the sale and installation of our instrument systems to a limited number of customers each year. We expect the sales cycle for these large contracts to be longer than for other contracts because we will need to educate potential customers regarding the benefits of our system to a variety of constituencies within such customer organizations. Moreover, even after a purchase decision is made, these contracts may be delayed by factors outside our control, including financial and budget constraints of the customers purchasing our product. Accordingly, we may expend substantial funds and management effort with no assurance that an agreement will be reached with a potential customer. Our business, results of operations and financial condition could be materially adversely affected if we were unable to obtain major contracts for the sale and installation of our instrument systems, or if we experienced delays in the performance of such contracts.

We expect that our sales cycle will be lengthy and unpredictable, which will make it difficult for us to forecast revenue and increase the magnitude of quarterly fluctuations.

Potential customers for our instrument systems typically commit significant resources to evaluate genetic analysis technologies. The complexity of our products will require us to spend substantial time and effort to assist potential customers in evaluating our instrument systems and in benchmarking them against available technologies. Because our products require a significant investment of time and cost by our customers, we must target those senior managers within the customer's organization who are able to make these decisions on behalf of such organizations. We may face difficulty identifying and establishing contact with such decisionmakers. Even after initial acceptance, the negotiation and documentation processes can be lengthy. We expect our sales cycle to typically range between six and twelve months, but it may be longer. Any delay in completing sales in a particular quarter could cause our operating results to fall below expectations.

Our customers may find replacements for the reagents and supplies that are a part of our instrument systems or discover a method that allows them to use less than the expected amounts of such products.

The success of our business depends, in part, on the recurring sales of the proprietary reagents and supplies for our instrument systems. However, our customers or competitors could potentially produce reagents and supplies that are compatible with our instrument systems at a lower cost, which could exert pricing pressures on, or take market share from, our reagents and supplies. Similarly, our customers or competitors may discover a method of utilizing smaller quantities of our proprietary reagents and supplies while achieving satisfactory results, which could reduce the amount of reagents and supplies we are able to sell. In either case, there could be a material adverse effect on our business, financial condition and results of operations.

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

Our performance is substantially dependent on the performance of our senior management and key scientific and technical personnel, particularly Stanley N. Lapidus, our President and Chief Executive Officer, J. William Efcavitch, PhD, our Senior Vice President of Research and Development and

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Stephen J. Lombardi, our Executive Vice President and Chief Operating Officer. We do not maintain employment contracts with any of our employees. The loss of the services of any member of our senior management or our scientific or technical staff may significantly delay or prevent the development of our products and other business objectives by diverting management's attention to transition matters and identification of suitable replacements, if any, and could have a material adverse effect on our business, operating results and financial condition. We do not maintain key man life insurance on any of our employees other than Stanley N. Lapidus.

In addition, our product development and marketing efforts could be delayed or curtailed if we are unable to attract, train and retain highly skilled employees and scientific advisors, particularly our management team, senior scientists and engineers and sales and marketing personnel. To expand our research, product development and sales efforts we need additional people skilled in areas such as bioinformatics, organic chemistry, information services, manufacturing, sales, marketing and technical support. Because of the complex and technical nature of our system and the dynamic market in which we compete, any failure to attract and retain a sufficient number of qualified employees could materially harm our ability to develop and commercialize our technology. Competition for these people is intense. Further, our inability to attract, train and retain direct sales and marketing personnel could have a material adverse affect on our ability to generate sales or successfully commercialize our technology. Each of our executive officers and other key employees could terminate his or her relationship with us at any time. The loss of any of these persons' expertise would be difficult to replace and could have a material adverse effect on our ability to achieve our business goals. There can be no assurance that we will be successful in hiring or retaining qualified personnel and our failure to do so could have a material adverse effect on our business, financial condition and results of operations.

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

One of the potential uses for our product is genetic testing for predisposition to certain conditions. Genetic testing has raised ethical, legal and social issues regarding privacy and the appropriate uses of the resulting information. Governmental authorities could, for social or other purposes, call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. These and other ethical, legal and social concerns about genetic testing may limit market acceptance of our technology for certain applications or reduce the potential markets for our technology, either of which could have a material adverse effect on our business, financial condition and results of operations.

Our products could in the future be subject to regulation by the U.S. Food and Drug Administration or other regulatory agencies.

Our products are not currently subject to U.S. Food and Drug Administration, or FDA, clearance or approval. However, in the future, certain of our products or related applications could be subject to FDA regulation, the FDA's regulatory jurisdiction could be expanded to include our products, or both. Even where a product is exempted from FDA clearance or approval, the FDA may impose restrictions as to the types of customers to which we can market and sell our products. Such regulation and restrictions may materially and adversely affect our business, financial condition and results of operations.

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

Our products could have unknown defects or errors, which may give rise to claims against us or divert application of our resources from other purposes.

Any product utilizing our True Single Molecule Sequencing platform will be complex and may develop or contain undetected defects or errors. We cannot assure you that a material performance problem will not arise. Despite testing, defects or errors may arise in our system, which could result in a failure to achieve market acceptance or expansion, diversion of development resources, injury to our reputation and increased service and maintenance costs. Defects or errors in our products might also discourage customers from purchasing our system. The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating margins. In addition, such defects or errors could lead to the filing of product liability claims, which could be costly and time-consuming to defend and result in substantial damages. We cannot assure you that our product liability insurance would protect our assets from the financial impact of defending a product liability claim. A product liability claim could have a serious adverse effect on our business, financial condition and results of operations.

We depend on the assistance of academic collaborators, consultants and scientific advisors to advise us on the development of our technology.

We rely on academic collaborators, consultants, and scientific advisors to assist us in formulating our research, development and commercialization strategy. These collaborators, consultants, and scientific advisors are not our employees and they collaborate with, consult for and advise us on a non-exclusive basis. Moreover, these individuals may collaborate with, consult for or advise our competitors. Substantially all of these individuals are engaged by other employers and have commitments to other entities that may limit their availability to us. As a result, we have limited control over their activities and, except as otherwise required by our collaboration, consulting agreements and advisory agreements, can expect only limited amounts of their time to be dedicated to our activities. A scientific advisor's other obligations may prevent him or her from assisting us in developing our technical and business strategies and we may not be able to negotiate additional acceptable collaborations with other collaborators, consultants or scientific advisors at academic and other institutions. In addition, although these individuals generally sign confidentiality agreements, we may be unable to maintain the confidentiality of our technology and other confidential information in connection with all of our academic collaborations, consulting or advisory arrangements. Any unauthorized dissemination of our confidential information could materially adversely affect our business, financial condition, and results of operations.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes- Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange

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Commission and the NASDAQ Global Market, have imposed various new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage.

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, commencing in 2008, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues. We currently do not have an internal audit group and we will evaluate the need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NASDAQ Global Market, the Securities and Exchange Commission or other regulatory authorities, which would require additional financial and management resources.

We may need to raise additional funding, which may not be available on favorable terms, if at all, or without dilution to our stockholders.

We anticipate that our current cash and cash equivalents, together with the net proceeds of this offering, will be sufficient to meet our current needs for general corporate purposes, including expected research, development and commercialization expenditures, for at least the next two years. However, we may need additional financing to execute on our current or future business strategies. We expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, commercialization, manufacturing and research, development activities. The amount of additional capital we may need to raise depends on many factors, including:

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the level of research and development investment required to maintain and improve our technology position;

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the amount and growth rate of our revenues;

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changes in product development plans needed to address any difficulties in manufacturing or commercializing our HeliScope system and enhancements to our system;

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

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competing technological and market developments;

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our need or decision to acquire or license complementary technologies or acquire complementary businesses; and

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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 biotechnology or life sciences 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. 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. If we are unable to obtain financing on terms favorable to us, we may be unable to execute our business plan and we may be required to cease or reduce development or commercialization of our technology, sell some of all of our technology or assets or merge with another entity.

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

Our research and development processes involve the controlled use of hazardous materials, including chemicals and biological materials. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our insurance coverage and our total assets. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development and production efforts.

We are subject to existing and potential additional regulation, which can impose burdens on our operations and narrow the markets for our products.

We are subject, both directly and indirectly, to the adverse impact of existing and potential future government regulation of our operations and markets. For example, export of our instruments, is subject to strict regulatory control in a number of jurisdictions. The failure to satisfy export control criteria or obtain necessary clearances could delay or prevent shipment of products, which could adversely affect our revenues and profitability. Moreover, the life sciences industry, which is the market for our technology, has historically been heavily regulated. There are, for example, laws in several jurisdictions restricting research in genetic engineering, which can operate to narrow our markets. Given the evolving nature of this industry, legislative bodies or regulatory authorities may adopt additional regulation that adversely affects our market opportunities. Additionally, if ethical and other concerns surrounding the use of genetic information, diagnostics or therapies become widespread, we may have less demand for our products. Our business is also directly affected by a wide variety of government regulations applicable to business enterprises generally and to companies operating in the life science industry in particular. Failure to comply with these regulations or obtain or maintain

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necessary permits and licenses could result in a variety of fines or other censures or an interruption in our business operations which may have a negative impact on our ability to generate revenues and could increase the cost of operating our business.

Potential future acquisitions could be difficult to integrate, divert the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.

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

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difficulties in integrating operations, technologies, accounting and personnel;

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difficulties in supporting and transitioning customers of our acquired companies;

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diversion of financial and management resources from existing operations;

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risks of entering new markets;

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potential loss of key employees; and

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inability to generate sufficient revenue to offset acquisition costs.

Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which could affect the market price of our stock. As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate.


RISKS RELATED TO OUR INTELLECTUAL PROPERTY

Our success will require that we establish a strong intellectual property position and that we can enforce our intellectual property rights against others.

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

Currently, our patent portfolio relating to our proprietary technology is comprised, on a worldwide basis, of ten issued patents and 83 pending patent applications which, in either case, we own directly or for which we are the exclusive or semi-exclusive licensee. The issued patents expire on dates ranging from 2018 through 2024. We may not be able to maintain and enforce existing patents or obtain further patents for our products, processes and technologies. Even if we are able to maintain our existing patents or obtain further patents, these patents may not provide us with substantial protection or be commercially beneficial. The issuance of a patent is not conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate unimpeded by the patent rights of others. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and the extent of future protection is highly uncertain, so there can be no assurance that the patent rights that we have or may obtain will be valuable. Others have filed patent applications that are similar in scope to ours, and in the future are likely to file patent applications that are similar or identical in scope to ours or those of our licensors. We cannot predict whether any

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of our competitors' pending patent applications will result in the issuance of valid patents. Moreover, we cannot assure investors that any such patent applications will not have priority or dominate over our patents or patent applications. The invalidation of key patents owned by or licensed to us or non-approval of pending patent applications could increase competition, and materially adversely affect our business, financial condition and results of operations. Furthermore, there can be no assurance that others will not independently develop similar or alternative technologies, duplicate any of our technologies, or, if patents are issued to us, design around the patented technologies developed by us.

We may be involved in lawsuits to protect or enforce our patents and proprietary rights and to determine the scope and validity of others' proprietary rights.

Litigation may be necessary to enforce our patent and proprietary rights and/or to determine the scope and validity of others' proprietary rights. Litigation on these matters has been prevalent in our industry and we expect that this will continue. To determine the priority of inventions, we may have to initiate and participate in interference proceedings declared by the U.S. Patent and Trademark Office that could result in substantial costs in legal fees and could substantially affect the scope of our patent protection. Also, our intellectual property may be subject to significant administrative and litigation proceedings such as invalidity and/or opposition proceedings against our patents. The outcome of any litigation or interference proceeding might not be favorable to us, and we might not be able to obtain licenses to technology that we require. Even if such licenses are obtainable, they may not be available at a reasonable cost. In addition, if we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. Any litigation that may be necessary in the future could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results or financial condition.

We depend upon our ability to license technologies.

We rely on licenses to use certain technologies that are material to our True Single Molecule Sequencing platform. We may also be required to enter into additional licenses with third parties for other technologies for use in our system. If we are unable to maintain our existing licenses or obtain additional technologies on acceptable terms, we could be required to develop alternative technologies, either alone or with others. This could require our system to be re-configured which could negatively impact its availability for commercial sale and increase our development costs. Failure to license or otherwise acquire necessary technologies could materially adversely affect our business, financial condition and results of operations.

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

Our success depends, in part, on us neither infringing patents or other proprietary rights of third parties nor breaching any licenses to which we are a party. We may be the subject of legal claims by third-parties that we infringe their patents or otherwise violate their intellectual property rights. In addition, the technology that we license from third parties for use in our system could become subject to similar infringement claims. Infringement claims asserted against us or our licensors may have a material adverse effect on our business, results of operations or financial condition. Any claims, either with or without merit, could be time-consuming and expensive to defend, and could divert our

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management's attention away from the execution of our business plan. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts of money or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. There can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all, from third parties asserting an infringement claim; that we would be able to develop alternative technology on a timely basis, if at all; or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using, our affected products. Accordingly, an adverse determination could prevent us from offering our instruments, reagents or supplies to others. In addition, we may be required to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling for such a claim. We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in such litigation, it could consume a substantial portion of our managerial and financial resources.

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

Our security measures may not adequately protect our intellectual property and other proprietary rights.

Our success depends in part on our ability to protect our intellectual property and other proprietary rights. In addition to patent protection, we also rely upon a combination of trademark, trade secret, copyright and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring our employees, consultants and certain academic collaborators to enter into confidentiality and assignment of inventions agreements. There can be no assurance, however, that such measures will provide adequate protection for our patents, copyrights, trade secrets or other proprietary information. In addition, there can be no assurance that trade secrets and other proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose our trade secrets and other proprietary information. To the extent that our intellectual property and other proprietary rights are not adequately protected, third parties might gain access to our proprietary information, develop and market genetic analysis systems similar to our True Single Molecule Sequencing technology, or use trademarks similar to ours, each of which could materially harm our business. Existing U.S. federal and state intellectual property laws offer only limited protection. Moreover, the laws of other countries in which we may market our technology may afford little or no effective protection of our intellectual property. The failure to adequately protect our intellectual property and other proprietary rights could materially harm our business.

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RISKS RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON STOCK

An active trading market for our common stock may not develop, and you may not be able to sell your common stock at or above the initial public offering price or at a time that is acceptable to you.

Prior to this offering, there has been no public market for our common stock. Although we have applied to have our common stock quoted on the NASDAQ Global Market, an active trading market for shares of our common stock may never develop or be sustained following this offering. If no trading market develops, securities analysts may not initiate or maintain research coverage of our company, which could further depress the market for our common stock. As a result, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell.

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

After this offering, our directors and executive officers and their affiliates will collectively control approximately             % of our outstanding common stock. As a result, these stockholders, if they act together, will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might negatively affect the market price of our common stock.

The market price of our common stock may be volatile, which could result in substantial losses for investors purchasing shares in this offering and subject us to securities class action litigation.

Prior to this offering, there has been no public market for our common stock and an active trading market for shares of our common stock may never develop or be sustained following this offering. The initial public offering price for our common stock will be determined through negotiations with the underwriters. This initial public offering price may vary from the market price of our common stock after the offering. If an active market for our stock develops and continues, our stock price nevertheless may be volatile. Market prices of technology and healthcare companies have been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:

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fluctuations in our quarterly operating results or the operating results of companies perceived to be similar to us;

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changes in estimates of our financial results or recommendations by securities analysts;

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

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changes in market valuations of similar companies;

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success of competitive products and services;

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

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announcements by us or our competitors of significant products, contracts, acquisitions or strategic alliances;

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

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litigation involving our company, our general industry or both;

–>
additions or departures of key personnel;

–>
investors' general perception of us; and

–>
changes in general economic, industry and market conditions.

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

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

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

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of the lock-up agreements described in "Underwriting." These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have              shares of common stock outstanding based on the number of shares outstanding as of February 15, 2007. This includes the             shares that we are selling in this offering, which may be resold in the public market immediately. The remaining 68,040,149 shares, or             % of our outstanding shares after this

22

offering will be able to be sold, subject to any applicable volume limitations under federal securities laws, in the near future as set forth below.

Number of shares

  % of total
outstanding

  Date available for sale into public market


      % On the date of this prospectus
      % 90 days after the date of this prospectus
      % 180 days after the date of this prospectus due to expiration of lock-up agreements between the holders of these shares and the underwriters. However, UBS Securities LLC can waive the provisions of these lock-up agreements and allow these stockholders to sell their shares at any time
      % Between 181 and 365 days after the date of this prospectus, depending on the requirements of the federal securities laws

In addition, as of February 15, 2007, there were 81,184 shares subject to an outstanding redeemable convertible preferred stock warrant, 4,587,417 shares subject to outstanding options, 1,250,000 shares of common stock reserved for future issuance as charitable contribution to the Broad Institute of MIT and Harvard and an additional 8,488,644 shares reserved for future issuance under our stock option plan that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended. Moreover, after this offering, holders of an aggregate of approximately 59,730,554 shares of our common stock as of February 15, 2007, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our employee benefit plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements.

You will incur immediate and substantial dilution as a result of this offering.

If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. In addition, the initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. As a result, you will incur immediate and substantial dilution of $                                  per share, representing the difference between the assumed initial public offering price of $                                 per share and our net tangible book value per share after giving effect to this offering. Moreover, we issued options in the past to acquire common stock at prices significantly below the initial public offering price. As of February 15, 2007, there were 81,184 shares of common stock issuable upon the exercise of redeemable convertible preferred stock warrants at an exercise price of $1.29 per share and 4,587,417 shares subject to outstanding options at a weighted average exercise price of $0.84 per share. To the extent that these warrants or outstanding options are ultimately exercised, you will incur further dilution.

23

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

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

–>
a staggered board of directors;

–>
limitations on the removal of directors;

–>
advance notice requirements for stockholder proposals and nominations;

–>
the inability of stockholders to act by written consent or to call special meetings; and

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

The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, our board of directors has the ability to designate the terms of and issue new series of preferred stock without stockholder approval. Also, absent approval of our board of directors, our by-laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote. Accordingly, any two of our significant stockholders identified under the heading "Principal stockholders" acting together will have the ability to block any such amendment.

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

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

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

We cannot specify with certainty the particular uses of the net proceeds we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in "Use of proceeds." Accordingly, you will have to rely upon the judgment of our management with respect to the use of the proceeds, with only limited information concerning management's specific intentions. Our management may spend a portion or all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a favorable return. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

24


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

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

25



Special note regarding forward-looking statements

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future net sales, projected costs, projected expenses, prospects and plans and objectives of management are forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.

The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying any of our forward-looking statements are reasonable, these expectations may prove to be incorrect, and all of these statements are subject to risks and uncertainties. We discuss many of the risks that we believe could cause actual results or events to differ materially from these forward-looking statements in greater detail in the section entitled "Risk factors." Should one or more of these risks and uncertainties materialize, or should underlying assumptions, projections or expectations prove incorrect, actual results, performance or financial condition may vary materially and adversely from those anticipated, estimated or expected. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

26


Use of proceeds

We estimate that the net proceeds of the sale of the common stock that we are offering will be approximately $                    million, assuming an initial public offering price of $                    per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses that we must pay. A $1.00 increase (decrease) in the assumed initial public offering price of $                    per share would increase (decrease) the net proceeds to us from this offering by approximately $                    million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes, including financing the development and commercialization of our technology, sales and marketing activities, capital expenditures and the costs of operating as a public company. We may use a portion of the net proceeds to us to expand our current business through strategic alliances with, or acquisitions of, other businesses, products or technologies. We currently have no agreements or commitments for any specific acquisitions at this time. Pending any use, as described above, we plan to invest the net proceeds in investment-grade, short-term, interest-bearing securities.

This expected use of the net proceeds of this offering represents our current intentions based upon our present plans and business condition. The amounts and timing of our actual expenditures will depend upon numerous factors, including cash flows from operations and the anticipated growth of our business. We will retain broad discretion in the allocation and use of our net proceeds.


Dividend policy

We have never declared or paid cash dividends on our capital stock and do not expect to pay any dividends for the foreseeable future. We currently intend to retain any future earnings to fund the operation, development and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon a number of factors, including our results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.

27



Capitalization

The following sets forth our capitalization as of December 31, 2006:

–>
on an actual basis;

–>
on a pro forma basis to reflect the proceeds of $20.0 million from the sale of 15,503,876 shares of Series B redeemable convertible preferred stock as a result of the second closing of our Series B financing on January 19, 2007, and the recording of a beneficial conversion feature of approximately $18.1 million, as the estimated fair value of our common stock on January 19, 2007 was in excess of the $1.29 conversion price; and

–>
on a pro forma as adjusted basis to reflect the sale of             shares of common stock that we are offering at an assumed initial public offering price of $                    per share, the application of the estimated net proceeds therefrom as described in "Use of proceeds," the conversion of all outstanding shares of redeemable convertible preferred stock into shares of common stock, the conversion of the redeemable convertible preferred stock warrants into common stock warrants, and the conversion of a beneficial conversion feature (associated with the January 19, 2007 second closing of our Series B redeemable convertible preferred stock financing), from redeemable convertible preferred stock to additional paid-in capital.

You should read the following table in conjunction with our consolidated financial statements and related notes and "Management's discussion and analysis of financial condition and results of operations" appearing elsewhere in this prospectus.

 
  As of December 31, 2006

 
  Actual

  Pro
forma(2)

  Pro forma as
adjusted(1)(3)


      (In thousands, except share
and per share data)
Cash, cash equivalents and short-term investments   $ 11,384   $ 31,384    
   
 
 
Long-term debt, net of current portion   $ 1,843   $ 1,843    
Redeemable convertible preferred stock warrants     204     204    
Redeemable convertible preferred stock: par value $0.001 per share; 59,314,030 shares authorized, 43,686,122 shares issued and outstanding on an actual basis; 59,314,030 shares authorized, 59,189,998 shares issued and outstanding on a pro forma basis; no shares authorized, issued or outstanding on a pro forma as adjusted basis     46,761     84,901    
Stockholders' equity (deficit)                
  Preferred Stock: par value $0.001 per share; no shares authorized, actual and pro forma; 5,000,000 shares authorized on a pro forma as adjusted basis; no shares outstanding on an actual, pro forma and pro forma as adjusted basis                
  Common stock: par value $0.001 per share; 100,000,000 shares authorized, 9,230,751 shares issued and outstanding on an actual basis and on a proforma basis; 120,000,000 shares authorized,                      shares issued and outstanding on a pro forma as adjusted basis     9     9    
  Subscription receivable     (4 )   (4 )  
  Additional paid-in capital     1,765     1,765    
  Deficit accumulated during the development stage     (39,109 )   (57,249 )  
   
 
 
  Total stockholders' equity (deficit)     (37,339 )   (55,479 )  
   
 
 
    Total capitalization   $ 11,469   $ 31,469    
   
 
 

(1)
Each $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease, as applicable, the amount of cash, cash equivalents and short-term investments, total stockholders' equity (deficit) and total capitalization by approximately $    million, assuming the number of shares offered by us, as set forth on the

28

    cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

(2)
On March 1, 2006, we entered into an agreement for the sale of an aggregate of 31,007,752 shares of our Series B redeemable convertible preferred stock at $1.29 per share. Of such shares, 15,503,876 were sold at an initial closing on March 1, 2006, and the remaining 15,503,876 were sold at a second closing on January 19, 2007. The pro forma data reflect the receipt of proceeds of $20.0 million from the sale of 15,503,876 shares of Series B redeemable convertible preferred stock as the result of the second closing of our Series B financing on January 19, 2007, and the recording of a beneficial conversion feature (associated with the January 19, 2007 second closing of the Series B redeemable convertible preferred stock) of approximately $18.1 million, as the estimated fair value of our common stock on January 19, 2007 was in excess of the $1.29 per share conversion price.

(3)
The pro forma as adjusted data reflect the sale of             shares of common stock that we are offering at an assumed initial public offering price of $             per share, and the application of the estimated net proceeds therefrom as described in "Use of proceeds," the conversion of all outstanding shares of redeemable convertible preferred stock into shares of common stock, the conversion of the redeemable convertible preferred stock warrants into common stock warrants, and the conversion of a beneficial conversion feature (associated with the January 19, 2007 second closing of the Series B redeemable convertible preferred stock) from redeemable convertible preferred stock to additional paid-in capital.

The above table does not include:

    –>
    3,202,990 shares of common stock issuable upon exercise of options outstanding as of December 31, 2006, at a weighted average exercise price of $0.12 per share;

    –>
    2,992,511 shares of common stock reserved for future issuance under our equity incentive plan as of December 31, 2006;

    –>
    1,250,000 shares of common stock reserved for future issuance as a charitable contribution to the Broad Institute of MIT and Harvard; and

    –>
    81,184 shares issuable upon the exercise of Series B redeemable convertible preferred stock warrants at an exercise price of $1.29 per share.

29



Dilution

As of December 31, 2006, we had a historical net tangible book value (deficit) of our common stock of $(37.3) million, or approximately $(4.05) per share of common stock, not taking into account the conversion of our outstanding redeemable convertible preferred stock. Net tangible book value per share represents the amount of our total tangible assets less total liabilities and redeemable convertible preferred stock, divided by the number of common shares outstanding. Our pro forma net tangible book value as of December 31, 2006 was $     million, or $    per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities and redeemable convertible preferred stock, divided by the number of shares of common stock outstanding, as of December 31, 2006 after giving effect to the conversion of all of our redeemable convertible preferred stock into shares of our common stock, which will occur upon completion of this offering.

After giving effect to the sale by us of shares of common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our adjusted pro forma net tangible book value as of December 31, 2006 would have been approximately $             million, or approximately $             per share. This amount represents an immediate increase in pro forma net tangible book value of $             per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $             per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price. We determine dilution by subtracting the adjusted pro forma net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock. The following table illustrates this dilution on a per share basis:

Assumed initial public offering price per share         $  
  Pro forma net tangible book value as of December 31, 2006   $        
   
     
  Increase per share attributable to new investors            
Adjusted pro forma net tangible book value per share after this offering            
         
Dilution in pro forma net tangible book value per share to new investors         $  
         

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) our adjusted pro forma net tangible book value as of December 31, 2006 by approximately $             million, the adjusted pro forma net tangible book value per share after this offering by $             and the dilution in adjusted pro forma net tangible book value to new investors in this offering by $             per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, as of December 31, 2006, the differences between the number of shares purchased from us, the total consideration paid to us and the average price per share that existing stockholders and new investors paid. The table gives effect to the conversion of all of our redeemable convertible preferred stock, which will occur upon completion of this offering. The calculation below is based on an assumed initial public offering price of $             per share, which is

30


the midpoint of the range listed on the cover page of this prospectus, and before deducting underwriting discounts and commissions and estimated offering expenses that we must pay.

 
  Total shares

  Total consideration

   
 
  Average price
per share

 
  Number

  %

  Number

  %


Existing stockholders   52,916,873     % $ 47,322,989     % $ 0.89
New investors                        
  Total       100.0 %       100.0 %    
   
 
 
 
 

A $1.00 increase (decrease) in the assumed initial public offering price of $    per share would increase (decrease) total consideration paid to us by investors participating in this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The discussion and tables above assume no exercise of the underwriters' over-allotment option. If the underwriters' over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be further reduced to             , or         % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to             , or         % of the total number of shares of common stock to be outstanding after this offering.

In addition, the above discussion and table do not reflect the sale of 15,503,876 shares of Series B redeemable convertible preferred stock at a price of $1.29 per share in January 2007 and assume no exercise of stock options after December 31, 2006. As of December 31, 2006, we had outstanding options to purchase a total of 3,202,990 shares of common stock at a weighted average exercise price of $0.12 per share, 1,250,000 shares of common stock reserved for future issuance as charitable contribution to the Broad Institute of MIT and Harvard and 81,184 shares issuable upon the exercise of Series B redeemable convertible preferred stock warrants at an exercise price of $1.29 per share. If all such options and warrants had been exercised as of December 31, 2006, adjusted pro forma net tangible book value per share would be $             per share and dilution to new investors would be $             per share.

31



Selected consolidated financial data

The following consolidated statements of operations data for the years ended December 31, 2004, 2005 and 2006 and consolidated balance sheet data as of December 31, 2005 and 2006 have been derived from our audited consolidated financial statements and related notes, which are included elsewhere in this prospectus. The consolidated statements of operations data for the period from May 9, 2003 (date of inception) through December 31, 2003 and the consolidated balance sheet data as of December 31, 2004 has been derived from our audited consolidated financial statements that do not appear in this prospectus. The consolidated balance sheet data as of December 31, 2003 has been derived from our unaudited financial data which does not appear in this prospectus. The following selected consolidated financial data should be read in conjunction with, and is qualified by reference to, our consolidated financial statements and related notes and "Management's discussion and analysis of financial condition and results of operations" appearing elsewhere in this prospectus.

 
  Period from
May 9, 2003
(date of
inception)
through
December 31,
2003

   
   
   
  Period from
May 9, 2003
(date of
inception)
through
December 31,
2006

 
 
  Year ended December 31,

 
Consolidated statement
of operations data:

 
  2004

  2005

  2006

 

 
      (in thousands, except share and per share data)  
Grant revenue   $   $   $   $ 159   $ 159  
Operating expenses:                                
  Research and development         4,194     8,411     14,382     26,987  
  General and administrative     553     3,164     2,870     6,917     13,504  
   
 
 
 
 
 
Total operating expenses     553     7,358     11,281     21,299     40,491  
   
 
 
 
 
 
Operating loss     (553 )   (7,358 )   (11,281 )   (21,140 )   (40,332 )
Interest income     6     294     363     766     1,429  
Interest expense                 (206 )   (206 )
   
 
 
 
 
 
Net loss   $ (547 ) $ (7,064 ) $ (10,918 ) $ (20,580 ) $ (39,109 )
   
 
 
 
 
 
Net loss per share—basic and diluted(1)   $ (5.60 ) $ (3.44 ) $ (2.80 ) $ (3.63 )      
   
 
 
 
       
Weighted average number of shares used in computation—basic and diluted(1)     97,682     2,053,156     3,894,100     5,662,970        
   
 
 
 
       
Pro forma net loss per share—basic and diluted (unaudited)(1)                     $ (0.44 )      
                     
       
Weighted average number of shares used in pro forma computation—basic and diluted (unaudited)(1)                       46,842,986        
                     
       

(1)
Please see Note 2 to the notes to our audited consolidated financial statements for an explanation of the method used to calculate basic and diluted net loss, the pro forma basic and diluted net loss per share and the weighted average number of shares used in the computation of the per share amounts.

32

 
  Years ended December 31,

 
Balance sheet data:

  2003

  2004

  2005

  2006

 

 
      (in thousands)  
Cash, cash equivalents and short-term investments   $ 26,522   $ 19,379   $ 8,566   $ 11,384  
Working capital     26,315     18,790     7,621     8,669  
Total assets     26,533     20,235     9,665     15,300  
Long-term debt, net of current portion                 1,843  
Redeemable convertible preferred stock warrants                 204  
Redeemable convertible preferred stock     26,819     26,869     26,869     46,761  
Deficit accumulated during development stage     (547 )   (7,611 )   (18,529 )   (39,109 )
Total stockholders' equity (deficit)     (502 )   (7,435 )   (18,243 )   (37,339 )

33



Management's discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the "Risk factors" section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.


OVERVIEW

We are a life sciences company developing innovative genetic analysis technologies for the research, drug discovery and clinical diagnostics markets. We have developed a proprietary technology to enable ultra-high-throughput genetic analysis based on the direct sequencing of single molecules of DNA or single copies of RNA. We believe our platform represents a fundamental breakthrough in the analysis of biological samples, at greater speed and lower cost than the current market-leading sequencing systems.

We plan to launch our first product by the end of 2007, which will be comprised of an instrument called the HeliScope and its associated reagents and supplies. In order to prepare for this launch, we anticipate a significant increase in our cash outlays during 2007 as we invest in the necessary commercialization infrastructure such as tooling and parts inventory for manufacturing and the recruitment of a direct sales and service force.

We were incorporated in May 2003, and 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, 2006, as defined in Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises." Our fiscal year ends on December 31, and we operate as one reportable segment.

We expect to incur substantial expenditures in the foreseeable future for the commercialization, and continued development, of our products. We expect to continue to incur operating losses for at least the next two years, and we may need additional financing to support our activities. If required, we will seek to fund our operations through public or private equity or debt financings or other sources, such as collaborations. Adequate additional funding may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue business strategies. If adequate funds are not available to us, we may be required to delay, reduce or eliminate research and development programs, reduce or eliminate commercialization efforts, obtain funds through arrangements with collaborators or others on terms unfavorable to us or pursue merger or acquisition strategies.

Although we plan to launch our first product by the end of 2007, this product will be subject to various customer evaluation periods with acceptance criteria, and we expect the customer evaluation period to extend beyond the end of the year. For this reason, we do not expect to recognize any revenue from product sales in 2007.

On March 1, 2006, we entered into an agreement for the sale of an aggregate of 31,007,752 shares of our Series B redeemable convertible preferred stock at $1.29 per share. Of such shares, 15,503,876 were sold at an initial closing on March 1, 2006, and the remaining 15,503,876 were sold at a second closing on January 19, 2007. In March 2006, we sold 15,503,876 shares of Series B redeemable convertible preferred stock, at a price of $1.29 per share, resulting in net proceeds of approximately

34


$19.9 million, net of $108,000 of issuance costs. The transaction documents in connection with this initial sale of our Series B convertible preferred common stock contemplated a second closing of our Series B financing at a price of $1.29 per share. In January 2007, we sold an additional 15,503,876 shares of Series B redeemable convertible preferred stock, at a price of $1.29 per share, resulting in proceeds of approximately $20.0 million. This issuance of Series B redeemable convertible preferred stock contains a beneficial conversion feature as the estimated fair value of the Company's common stock is in excess of the $1.29 per share conversion price.


FINANCIAL OVERVIEW

Grant revenue

In September 2006, we were awarded a grant from the National Human Genome Research Institute, a branch of the National Institutes of Health, pursuant to which we are eligible to receive reimbursement of our research expenses of up to $2.0 million over the next three years. We recognized revenue during the year ended December 31, 2006 of $159,000 in connection with this award. We will continue to recognize revenue under this grant as the related expenses are incurred.


Research and development expenses

Research and development expenses consist of costs associated with scientific research activities, and engineering development efforts. Such costs primarily include salaries, benefits and stock-based compensation; lab and engineering supplies; investment in equipment; consulting fees; and facility related costs, including rent and depreciation.

Research and development expenses for the years ended December 31, 2004, 2005 and 2006 were $4.2 million, $8.4 million and $14.4 million, respectively. During this time, expenses increased as our research progressed and we built infrastructure and hired additional employees with the requisite expertise to execute the next steps in the development process. In 2007, in addition to our ongoing research and development efforts, we expect to incur start-up manufacturing costs. These will be accounted for as research and development expenses in our pre-commercialization phase as we prepare to launch the HeliScope system. After the initial launch of the HeliScope system, we expect to incur significant research and development costs as we develop improvements and future versions of our system. We cannot predict the timing or total cost of completion of our research and development projects. These are dependent upon achieving technical objectives, which are inherently uncertain. As a result of these uncertainties, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will receive cash inflows from the commercialization and sale of products. Our inability to complete our research and development projects in a timely manner could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.


General and administrative expenses

General and administrative expenses consist principally of salaries, benefits and stock-based compensation, consulting and professional fees, including patent related costs, general corporate costs and facility costs not otherwise included in research and development expenses.

General and administrative expenses for the years ended December 31, 2004, 2005 and 2006 were $3.2 million, $2.9 million and $6.9 million, respectively. We expect that these expenses will increase significantly in 2007 and beyond as we hire our sales force and field service engineers and increase our

35


finance and administrative staff to support the requirements of being a public company. We also anticipate that we will incur increased expenses for the costs associated with Sarbanes-Oxley compliance, directors' and officers' insurance, investor relations programs and directors' fees.


RESULTS OF OPERATIONS

Year ended December 31, 2006 compared to year ended December 31, 2005

Grant revenue.    We recognized $159,000 of grant revenue during the year ended December 31, 2006, and no revenue during the year ended December 31, 2005. Grant revenue recognized during the year ended December 31, 2006 related to the reimbursement of expenses in connection with our government research grant.

Research and development expenses.    Research and development expenses during the years ended December 31, 2005 and 2006 were as follows:

 
  Year ended December 31,

  Change

 
 
  2005

  2006

  $

  %

 

 
      ($ in thousands)  
Research and development   $ 8,411   $ 14,382   $ 5,971   71.0 %

The increase in research and development expenses from the year ended December 31, 2005 to the year ended December 31, 2006 was primarily due to an increase of $3.3 million in salary and benefit expenses associated with increased headcount. Stock-based compensation increased from $12,000 in 2005 to $99,000 in 2006. Product development costs, which include lab expenses, materials, supplies and equipment depreciation expense, increased by $1.7 million in support of increased personnel. In addition, facility related expenses, consisting of additional rent, utilities and telephone costs, increased by $726,000 due to our relocation in July 2006. We expect our research and development expenses to continue to increase as we expand our manufacturing efforts this year prior to commercialization and as we continue to invest in future versions of our system.

General and administrative expenses.    General and administrative expenses during the years ended December 31, 2005 and 2006 were as follows:

 
  Year ended December 31,

  Change

 
 
  2005

  2006

  $

  %

 

 
      ($ in thousands)  
General and administrative   $ 2,870   $ 6,917   $ 4,047   141.0 %

The increase in general and administrative expenses from the year ended December 31, 2005 to the year ended December 31, 2006 was primarily due to an increase of $1.6 million in salary and benefit expense associated with the hiring of additional administrative staff, including our Senior Vice President of Marketing and Chief Financial Officer. Stock-based compensation expense increased by $1.1 million from $43,000 in 2005 to $1.1 million in 2006; and legal, accounting and consulting fees increased by $496,000; marketing related expenses increased by $266,000. The combination of increased occupancy costs, travel and other employee-related expenses accounts for the remaining increase of $505,000. We expect our general and administrative expenses to increase as we expand our sales and marketing functions, and incur additional administrative costs associated with the requirements of being a public company.

36


Interest income.    Interest income for the years ended December 31, 2005 and 2006 was as follows:

 
  Year ended December 31,

  Change

 
 
  2005

  2006

  $

  %

 

 
      ($ in thousands)  
Interest income   $ 363   $ 766   $ 403   111.0 %

The increase in interest income from the year ended December 31, 2005 to the year ended December 31, 2006 was due primarily to higher cash and cash equivalents during 2006 in connection with the receipt of proceeds of our Series B redeemable convertible preferred stock financing in March 2006 of $19.9 million, net of issuance costs.

Interest expense.    Interest expense was $206,000 during the year ended December 31, 2006. We did not incur any interest expense in the year ended December 31, 2005. The interest expense during the year ended December 31, 2006 was related to interest paid on a term loan under a line of credit facility and security agreement entered into in June 2006, and interest expense related to the Series B redeemable convertible preferred stock warrants that were issued in connection with the line of credit facility.

Year ended December 31, 2005 compared to year ended December 31, 2004

Grant revenue.    We did not recognize any revenue during the years ended December 31, 2004 or 2005.

Research and development expenses.    Research and development expenses during the years ended December 31, 2004 and 2005 were as follows:

 
  Year ended December 31,

  Change

 
 
  2004

  2005

  $

  %

 

 
      ($ in thousands)  
Research and development   $ 4,194   $ 8,411   $ 4,217   100.5 %

The increase in research and development expenses from the year ended December 31, 2004 to the year ended December 31, 2005 was primarily due to an increase of $1.6 million in salary and benefit expenses associated with increased headcount as we built out our research and development team, an increase of $1.0 million due to consulting services associated with specific technical research efforts, an increase of $1.2 million due to product development costs, including lab expenses, materials, supplies and equipment depreciation expense, an increase of $320,000 in license fees and an increase of $132,000 due to facility related expenses. Stock-based compensation expense was $2,000 in 2004 and $12,000 in 2005.

General and administrative expenses.    General and administrative expenses during the years ended December 31, 2004 and 2005 were as follows:

 
  Year ended December 31,

  Change

 
 
  2004

  2005

  $

  %

 

 
      ($ in thousands)  
General and administrative   $ 3,164   $ 2,870   $ (294 ) (9.3 )%

37

The decrease in general and administrative expenses from the year ended December 31, 2004 to the year ended December 31, 2005 was primarily due to a decrease in stock-based compensation expense, recruiting fees and facility expenses offset by a $484,000 increase in sales and marketing related expenses. General and administrative expenses for the years ended December 31, 2004 and 2005 included $136,000 and $43,000, respectively, of stock-based compensation.

Interest income.    Interest income during the years ended December 31, 2004 and 2005 was as follows:

 
  Year ended December 31,

  Change

 
 
  2004

  2005

  $

  %

 

 
      ($ in thousands)  
Interest income   $ 294   $ 363   $ 69   23.5 %

The increase in interest income from the year ended December 31, 2004 to the year ended December 31, 2005 was due primarily to cash and cash equivalents held in higher interest rate accounts.


LIQUIDITY AND CAPITAL RESOURCES

We have incurred losses since our inception in May 2003 and, as of December 31, 2006 we had an accumulated deficit of $39.1 million. We have financed our operations to date principally through the sale of preferred stock and common stock, debt financing and interest earned on investments. Through December 31, 2006, we have received net proceeds of $46.8 million from the issuance of preferred stock, $391,000 through the issuance of common stock and $2.5 million in debt financing from a lender to finance equipment purchases. Our cash, cash equivalents and short-term investment balances are held in a variety of interest-bearing instruments, including corporate bonds, commercial paper and money market funds. Cash in 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) increase in cash and cash equivalents for the years ended December 31, 2004, 2005 and 2006:

 
  Year ended December 31,

 
 
  2004

  2005

  2006

 

 
      ($ in thousands)  
Net cash provided by (used in):                    
  Operating activities   $ (6,439 ) $ (10,014 ) $ (16,532 )
  Investing activities     (13,369 )   11,704     (3,998 )
  Financing activities     135     27     22,553  
   
 
 
 
Net (decrease) increase in cash and cash equivalents   $ (19,673 ) $ 1,717   $ 2,023  
   
 
 
 

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

In January 2007, in the second closing of our Series B financing, we sold 15,503,876 shares of Series B redeemable convertible preferred stock at a price of $1.29 per share, resulting in proceeds of approximately $20.0 million.

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Net cash used in operating activities.    Net cash used in operating activities was $10.0 million for the year ended December 31, 2005 compared to $16.5 million for the year ended December 31, 2006. The $6.5 million increase was primarily due to an increase in the net loss of $9.7 million, partially offset by an increase in the changes of accounts payable and other accrued liabilities of $1.4 million, an increase in non-cash stock-based compensation expense of $1.2 million, and an increase in non-cash depreciation and amortization expense of $471,000.

Net cash used in operating activities was $6.4 million for the year ended December 31, 2004 compared to $10.0 million for the year ended December 31, 2005. The $3.6 million increase was primarily due to an increase in net loss of $3.9 million, partially offset by an increase in non-cash depreciation and amortization of $302,000.

Net cash (used in) provided by investing activities.    Net cash provided by investing activities was $11.7 million for the year ended December 31, 2005, compared to net cash used in investing activities of $4.0 million for the year ended December 31, 2006. The $15.7 million decrease was primarily due to an $11.3 million decrease in cash provided by the maturities of short-term investments, a $2.0 million increase in the cash used in the purchases of short-term investments, a $1.9 million increase in cash used in the purchase of property and equipment and an increase in restricted cash of $450,000 used for a security deposit.

Net cash used in investing activities was $13.4 million for the year ended December 31, 2004 compared to net cash provided by investing activities of $11.7 million for the year ended December 31, 2005. The $25.1 million increase was primarily due to a $16.4 million decrease in cash used in the purchase of short-term investments and an $8.7 million increase in cash provided by the maturities of short-term investments.

Net cash provided by financing activities.    Net cash provided by financing activities was $135,000, $27,000 and $22.6 million for the years ended December 31, 2004, 2005 and 2006, respectively. Net cash provided by financing activities during the year ended December 31, 2006 consisted primarily of $19.9 million provided by the net proceeds of the Series B redeemable convertible preferred stock financing and $2.5 million provided by the proceeds from long-term debt borrowings.

Operating capital and capital expenditure requirements

To date, we have not commercialized any products and have not achieved profitability. We anticipate that we will continue to incur substantial net losses for the next several years as we develop and prepare for the commercial launch of our products and develop the corporate infrastructure required to manufacture and sell our products and operate as a publicly traded company.

We do not expect to generate significant product revenue until at least 2008. We believe the net proceeds from this offering, together with our forecasted revenue, cash, cash equivalents and investment balances and interest income we earn on these balances will be sufficient to meet our anticipated cash requirements for at least the next two years. If our available cash, cash equivalents and investment balances and net proceeds from this offering are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or enter into another credit facility. The sale of additional equity and debt securities may result in dilution to our stockholders. If we raise additional funds through the issuance of debt securities, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay, or eliminate some or all of, our

39


planned research, development and commercialization activities, which could materially harm our business.

Our forecast of the period of time through which our financial resources will be adequate to support our operations, the costs to complete development of products and the cost to commercialize our future products 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 this prospectus. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Because of the numerous risks and uncertainties associated with the development of our product, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of our future products and successfully deliver any such products to the market. Our future capital requirements will depend on many factors, including, but not limited to, the following:

–>
the rate of progress and cost of our commercialization activities;

–>
the success of our research and development efforts;

–>
the expenses we incur in marketing and selling our products;

–>
the revenue generated by sales of our future products;

–>
the emergence of competing or complementary technological developments;

–>
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

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

–>
the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

Working capital as of December 31, 2006 was $8.7 million, consisting of $12.0 million in current assets and $3.4 million in current liabilities. Working capital as of December 31, 2005 was $7.6 million, consisting of $8.6 million in current assets and $1.0 million in current liabilities.

Contractual obligations

The following table summarizes our outstanding contractual obligations as of December 31, 2006 and the effect those obligations are expected to have on our liquidity and cash flows in future periods:

 
  Payments due by period

Contractual obligations

  Total

  Less than
1 year

  1-3 years

  3-5 years

  More than
5 years


      ($ in thousands)
Operating leases   $ 2,371   $ 828   $ 1,543   $   $
Long-term debt (including interest)     2,891     838     2,053        
   
 
 
 
 
  Total   $ 5,262   $ 1,666   $ 3,596   $   $
   
 
 
 
 

40

The table above reflects only payment obligations that are fixed and determinable and does not include possible contingent payments under license agreements or acquired patents. Our commitments for operating leases relate to the lease for our corporate headquarters in Cambridge, Massachusetts.

In February 2007, we amended our existing operating lease for office and laboratory space to include additional office space in the same building, which will result in additional cash payments of approximately $200,000 per year for each of the years ending December 31, 2007, 2008 and 2009.

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 realization of certain milestones or royalties payable under these agreements.

Line of credit facility and security agreement

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


OFF-BALANCE SHEET ARRANGEMENTS

During 2004, 2005 and 2006, we did not engage in any off-balance sheet arrangements.


CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Our management's discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.

Stock-based compensation

Prior to January 1, 2006, we accounted for employee stock-based compensation arrangements in accordance with the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123 "Accounting for Stock-Based Compensation," or SFAS No. 123. Under the fair value recognition provisions of SFAS No. 123, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period.

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), "Share-Based Payment," or SFAS No. 123(R), using the modified prospective transition method. Under

41


the modified prospective transition method, compensation cost recognized in the year ended December 31, 2006 included: (a) the pro rata compensation cost for all share-based compensation granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) the pro rata compensation cost for all share-based payments granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). In accordance with the modified prospective transition method of SFAS No. 123(R), results for prior periods have not been restated, and the impact of adopting SFAS No. 123(R) was not material to the net loss or cash flows. For all grants, the amount of share-based compensation expense recognized has been adjusted for estimated forfeitures of awards for which the requisite service was not expected to be provided. Estimated forfeiture rates are developed based on our analysis of historical forfeiture data. Prior to the adoption of the fair value recognition provisions of SFAS No. 123(R), share-based payment expense was adjusted for actual forfeitures as they occurred. The cumulative effect of the change in accounting for forfeitures was immaterial.

We account for stock-based compensation issued to non-employees in accordance with SFAS 123(R) and EITF No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or Services." We record the expense of such services based on the estimated fair value of the equity instrument using the Black-Scholes option pricing model. The value of the equity instrument is charged to earnings over the term of the service agreement.

Determining the appropriate fair value model and calculating the fair value of stock-based awards require the input of highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Stock-based compensation expense is significant to our financial statements and is calculated using our best estimates which involve inherent uncertainties and the application of management's judgment. Significant estimates include the expected life of the stock option, stock price volatility, risk-free interest rate and forfeiture rates.

The expected life represents the weighted-average period that our stock options are expected to be outstanding. The expected life assumption is based on the expected life assumptions of similar entities. As we have been operating as a private company since inception with no active market for our stock or traded options, it is not possible to use actual price volatility data. Therefore, we estimate the volatility of our common stock based on volatility of similar entities. We base the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with terms equal to the expected lives of the stock options. We have never and do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model. In order to properly attribute compensation expense, we are required to estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If the actual forfeiture rate is materially different from the estimate, stock-based compensation expense could be significantly different from what has been recorded. For stock options granted to employees, we allocate expense on a straight-line basis over the requisite service period. For stock options granted to nonemployees, we allocate expense using an accelerated recognition method as prescribed in FIN 28 "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans—an Interpretation of APB Opinion No. 15 and 25."

There are significant differences among option valuation models, and this may result in a lack of comparability with other companies that use different models, methods and assumptions. If factors change and we employ different assumptions in the application of SFAS No. 123(R) in future periods,

42


or if we decide to use a different valuation model, the stock-based compensation expense that we record in the future under SFAS No. 123(R) may differ significantly from what we have recorded and could materially affect our operating results.

In the absence of a public trading market for our common stock, our board of directors determined the fair market value of our common stock in good faith based upon consideration of a number of relevant factors including the status of our development and commercialization efforts, results of operations, financial status and market conditions. In addition, we considered a number of factors applicable to common stock of privately-held companies including, among others, the total company valuation implied by the most recent prior venture capital round of financing, the market value of similarly situated public companies, our anticipated future risks and opportunities, the rights and preferences of our preferred stock existing at the time and the lack of a liquid market. In addition, we retained an independent valuation firm in January 2007 to perform a contemporaneous valuation of our common stock as of January 19, 2007, and to perform two retrospective valuations on our common stock as of March 31, 2006 and October 31, 2006. We recorded stock-based compensation expense to the extent that the fair value of our common stock at the date of the grant exceeded the exercise price of the equity awards.

During the year ended December 31, 2006, we recognized approximately $1.3 million of stock-based compensation expense related to equity awards granted to employees and non-employees during fiscal 2006. Total unrecognized share-based compensation expense for all stock-based awards was approximately $2.9 million at December 31, 2006, of which $905,000 will be recognized in 2007, $844,000 in 2008, $785,000 in 2009 and $405,000 thereafter. This results in these amounts being recognized over a weighted-average period of 3.5 years.

Information on employee and non-employee stock options granted in 2006 is summarized as follows:

Grants made during quarter ended

  Number of
stock options
granted

  Weighted average
exercise price

  Weighted average
fair value per
share

  Average
intrinsic value
per share


March 31, 2006 (unaudited)   2,171,000   $0.13   $0.40   $0.27
June 30, 2006 (unaudited)   19,000   $0.13   $0.75   $0.62
September 30, 2006 (unaudited)   56,900   $0.13   $1.54   $1.41
December 31, 2006 (unaudited)   401,000   $0.13   $2.15   $2.02

In the first quarter of 2007, we commenced an option amendment program to re-price the exercise price of all unvested option grants made from January through October 2006 from $0.13 per share to $0.40 per share, and all unvested option grants made in November and December 2006 from $0.13 per share to $1.97 per share. This option re-pricing is anticipated to be completed on March 5, 2007. The increase in option exercise prices is not expected to have a material impact on our financial position, statement of operations or cash flows.

43

Information on employee and non-employee restricted stock grants in 2006 is summarized as follows:

Grants made during quarter ended

  Shares of
restricted
stock
granted

  Cash paid
per share

  Weighted average
fair value
per share

  Average
intrinsic value
per share


March 31, 2006 (unaudited)   405,000   $0.13   $0.40   $0.27
June 30, 2006 (unaudited)              
September 30, 2006 (unaudited)   1,375,000   $0.13   $1.51   $1.38
December 31, 2006 (unaudited)              

We recognized stock-based compensation expense on all employee and non-employee awards as follows (in thousands):

 
   
   
   
  Period from
May 9, 2003
(date of
inception) to
December 31,
2006

 
  Year ended December 31,

 
  2004

  2005

  2006


 
  ($ in thousands)

General and administrative expense   $136   $43   $1,180   $1,382
Research and development expense   2   12   99   113
   
 
 
 
    $138   $55   $1,279   $1,495
   
 
 
 

Net operating losses and tax credit carryforwards

We record income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases and operating loss and tax credit carryforwards. Our consolidated financial statements contain certain deferred tax assets, which have arisen primarily as a result of operating losses, as well as other temporary differences between financial and tax accounting. SFAS No. 109 "Accounting for Income Taxes," requires us to establish a valuation allowance if the likelihood of realization of the deferred tax assets is reduced based on an evaluation of objective verifiable evidence. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against those net deferred tax assets. We evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the net deferred income tax assets will not be realized.


RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109," or FIN No. 48, which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. The provisions of FIN No. 48 are effective as of the beginning of the 2007 calendar year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We believe that FIN No. 48 will not have a material impact on our financial position, results of operations or cash flows.

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In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," or SFAS No. 157. This Statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in GAAP and expands disclosure related to the use of fair value measures in financial statements. SFAS No. 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. The Standard emphasizes that fair value is a market-based measurement and not an entity-specific measurement based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). SFAS No. 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity's own fair value assumptions as the lowest level. SFAS No. 157 is effective for our financial statements issued in 2008; however, earlier application is encouraged. We have not yet determined the impact that the adoption of SFAS No. 157 will have on our financial position, results of operations or cash flows.


QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS

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


CONTROLS AND PROCEDURES

Our management and independent registered public accounting firm did not perform an evaluation of our internal control over financial reporting as of December 31, 2006 in accordance with the provisions of the Sarbanes-Oxley Act of 2002. Had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act of 2002, control deficiencies may have been identified by management or our independent registered public accounting firm, and those control deficiencies could have also represented one or more material weaknesses.

Material weaknesses may exist when we report on the effectiveness of our internal control over financial reporting for purposes of our reporting requirements under the Securities Exchange Act of 1934 or Section 404 of the Sarbanes-Oxley Act of 2002 after this offering. The existence of one or more material weaknesses precludes a conclusion that we maintain effective internal control over financial reporting. Such conclusion would be required to be disclosed in our future Annual Reports on Form 10-K and may impact the accuracy and timing of our financial reporting and the reliability of our internal control over financial reporting.

45



Business

OVERVIEW

Helicos BioSciences Corporation is a life sciences company developing innovative genetic analysis technologies for the research, drug discovery and clinical diagnostics markets. Our first commercial product, the HeliScope, is designed to enable ultra-high-throughput genetic analysis based on the direct sequencing of single molecules of DNA or single copies of RNA. We believe our proprietary True Single Molecule Sequencing, or tSMS, technology platform represents a fundamental breakthrough in the analysis of biological samples. By directly analyzing single molecules, our technology eliminates the need for costly, labor-intensive and time-consuming sample preparation techniques, such as amplification or cloning. Our tSMS technology enables the automated, parallel sequencing of billions of individual DNA or RNA molecules at orders of magnitude greater speed and lower cost than the current market-leading sequencing systems. We are incorporating our tSMS technology into our first commercial product consisting of an instrument called the HeliScope and its associated reagents and supplies. We plan to launch the first commercial version of the HeliScope and its associated reagents and supplies in the fourth quarter of 2007 through a specialized direct sales and service force.

Most of the common diseases that account for significant morbidity and mortality, such as cancer, heart disease and diabetes, have complex genetic aspects, which researchers are seeking to understand fully through genetic analysis. In the last 20 years, scientists have developed a variety of genetic analysis methods, including DNA sequencing, gene expression analysis and genotyping, to study genetic variance. Systems, supplies and reagents for these genetic analysis methods represent an approximately $5 billion dollar market worldwide according to Strategic Directions International. Despite their broad use, most existing technologies have significant cost, accuracy and throughput limitations and lack the capacity for cost-effective and comprehensive genome-wide analysis on large numbers of samples. Knowledge of the human genome has grown dramatically since its sequence was determined earlier this decade. Recent research suggests that a significant portion of what was once thought to be composed of non-functional "junk DNA" is functionally active. To fully understand the biology of gene and genome regulation, we believe that researchers are contemplating experiments on an exponentially larger scale involving thousands of patients or thousands of compounds. Many scientists believe that a DNA sequencing price approaching $1,000 per genome is necessary to reach this goal.

We believe that our technology will represent the first comprehensive and universal solution for single molecule genetic analysis and that its adoption can expand the market for genetic analysis while dramatically lowering the cost of individual analyses. Our goal is to enable revolutionary biomedical research by providing scientists and clinicians with the ability to compare genes and genomes from thousands of individuals. The information derived using our tSMS technology may lead to improved drug therapies, personalized medical treatments and more accurate molecular diagnostics for cancer and other diseases.

We were incorporated in Delaware in May 2003. In April 2003, our scientific founder, Professor Stephen Quake, who was then at the California Institute of Technology, published a paper in the Proceedings of the National Academy of Sciences describing that sequence information could be obtained from a single strand of DNA without amplification. Shortly thereafter, Noubar Afeyan, Chief Executive Officer of Flagship Ventures, and Stanley Lapidus, then a Venture Partner at Flagship Ventures, met with Professor Quake and agreed to found a company to develop and commercialize technology based on Professor Quake's single molecule approach. Combining the experience of Professor Quake in single molecule methods, Dr. Afeyan in the sequencing technology and life sciences businesses, and Mr. Lapidus in diagnostics and entrepreneurship, we focused exclusively on the

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technical and commercial development of technology based on Professor Quake's approach. Professor Eric Lander, Director of the Broad Institute of MIT and Harvard, and a leader in the DNA sequencing field, provided helpful guidance and advice during the founding stages of the company.


BACKGROUND ON DNA STRUCTURE AND FUNCTION

The genetic program that controls a living cell is encoded in its DNA. The diagram below shows the typical double-helix structure of DNA. The two strands are made of subunits called nucleotides, each of which contains a phosphate, a sugar and a side-chain called a base. The phosphates and sugars form the backbone of the polymer, and the bases face each other. The letters A, G, T and C represent the four types of bases: adenine, guanine, thymine and cytosine.


The bases align with each other in a complementary structure held together by hydrogen bonds. A "T" on one strand always bonds with an "A" on the other strand, and a "G" on one strand always bonds with a "C" on the other strand. This bonding between DNA strands is called hybridization.
A human cell contains about three billion base-pairs of DNA, called the human genome, which includes thousands of genes. Genes are segments of DNA that tell the cell how to make proteins. Each gene has one or more parts called coding regions that specify the sequence of amino acids for that protein. Genes also contain regulatory elements that determine when, where and how much protein is made. While it is currently understood that approximately 97% of the genome does not code for proteins, recent research suggests that this non-coding DNA also contains important regulatory elements.
The process of making proteins using the information in DNA is called gene expression. When a gene is expressed, enzymes called RNA polymerases transcribe the coding region into molecules of messenger RNA, or mRNA. The mRNA moves from the nucleus into the cytoplasm, where the cell's protein synthesis machinery translates the genetic sequence information and assembles a chain of amino acids into a protein.

 

PICTURE

On June 26, 2000, scientists announced completion of the rough draft human genome sequence. This ten-year effort, known as the Human Genome Project, yielded many surprising discoveries. Among these was the realization that the human genome contains roughly the same number of genes, about 30,000, as other mammalian species. Moreover, the vast majority of genes and their sequences were found to be remarkably similar among different species. Much ongoing research involves understanding the subtle variations in genes and regulatory regions of the genome that make a human different from a mouse, and make individuals within a species different from each other.

Studying how genes and proteins differ between species and among individuals within a species helps scientists to determine their functions and their roles in health and disease. Inherited genetic variations among individuals contribute to differences in susceptibility to diseases and responses to drug treatments. Genetic mutations that arise in the body can lead to the development of cancer and other diseases. In addition, cells of the immune system have the means to rearrange their genes to better fight infection, but faulty operation of this system can lead to inflammatory and autoimmune diseases.

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Increased understanding of genetic variation is expected to yield improvements in the diagnosis, treatment and even prevention of many diseases.


INDUSTRY OVERVIEW

Genetic analysis market opportunity

Since the development of genetic engineering techniques in the 1970s, the analysis of genetic material has become a mainstay of biological research. The first automated DNA sequencer was invented in 1986, based on technology developed by Frederick Sanger and his colleagues in 1975, which is commonly referred to as Sanger sequencing. Subsequent versions of commercial DNA sequencers have increased the speed of DNA sequencing by 3,000 fold, making possible the Human Genome Project. Today, manufacturers of systems, supplies and reagents for genetic analysis, which includes techniques such as genotyping, expression arrays and Sanger sequencing methods, serve a worldwide market of about $5 billion, according to Strategic Directions International. Strategic Directions International estimates that DNA sequencing serves approximately 17% of this demand for genetic analysis. We believe that the cost, time and complexity of Sanger methods of DNA and RNA sequencing have limited its applications within the genetic analysis market. The remainder of this market is addressed by other methods, such as microarray-based technologies for gene expression analysis and various genotyping technologies, which have lower costs than sequencing but provide more limited information.

The problem

To explore the next frontier of biomedical research, scientists must design comprehensive experiments on a larger scale than previously thought possible. Current methods of genetic analysis include DNA sequencing, gene expression analysis and genotyping. DNA and RNA sequencing provide the most comprehensive genome-wide information; however, the limitations of Sanger sequencing technologies prevent their use in large-scale studies and as a replacement for multiple technologies. In particular, limitations of Sanger sequencing include:

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Low throughput. The highest throughput automated Sanger sequencers can produce up to 2.9 million bases of raw genomic sequence data per day. Accordingly, we estimate it would take a single Sanger sequencer nearly 50 years to sequence an entire individual human genome. This timeframe is impractical for population disease studies as well as for individualized patient analysis and diagnostics.

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Lack of sensitivity. Sanger sequencing instruments lack the sensitivity to analyze single molecules and therefore require the use of amplification or cloning to make thousands to millions of copies of DNA in order to obtain sufficient material for sequencing. A preferred method of amplification involves a biochemical process known as a polymerase chain reaction, or PCR. However, PCR introduces new errors in the analyzed genetic sequence in each round of the copying process, which may result in incorrect and possibly misleading results. In an important recent study of mutations in cancer cells published in the October 2006 edition of Science, PCR-related errors accounted for more than one-third of the putative cancer-related mutations. In addition, the use of amplification or cloning results in a population of molecules, the sequences of which are averaged together, thus making it difficult to detect low-prevalence sequence variations in the starting sample.

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High cost. The cost to sequence a complete individual human genome using current Sanger sequencing methods is approximately $10 million according to the National Institutes of Health. This high cost of sequencing has restricted scientific research. For example, for almost twenty years

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    the scientific community has understood that cancer is a disease arising from mutations of the genome, yet, to our knowledge, not a single complete cancer genome has been sequenced to date.

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Complex and hard-to-use. Sanger sequencing technologies require extensive, labor-intensive and time-consuming pre-analytical sample preparation processes. These sample preparation processes often involve costly additional capital equipment, reagents, supplies and physical space as well as experimental redundancy to account for human error or limitations in accuracy. Thus, the complexity of sample preparation processes creates workflow bottlenecks in applying Sanger sequencing to large numbers of samples.

We are aware of emerging technologies under development that are seeking to improve the speed and reduce the cost of sequencing. However, these emerging technologies may continue to be limited by the need for amplification or cloning to obtain enough DNA or RNA from a sample for their instrume nt to be able to adequately read the sequence. As with Sanger-based sequencing technologies, this requirement for amplification or cloning adds to the cost and complexity of these emerging sequencing methods and may limit the accuracy of the data they produce.

The prohibitive cost of high-volume sequencing has caused scientists to use other genetic analysis technologies to examine discrete aspects of gene structure or function. For example, researchers use chip- or bead-based arrays or real-time PCR, also called RT-PCR, for gene expression analysis or genotyping. Gene expression analysis compares amounts of mRNA made from different genes. Genotyping examines specific gene segments known to contain sequence variations, called single nucleotide polymorphisms, or SNPs. While these technologies address the cost limitations of DNA and

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RNA sequencing, they generally provide only limited information and suffer from a range of drawbacks as illustrated in the following table:

Comparison of established genetic analysis technologies

Analysis

  Description

  Technology

   
Advantages

   
Disadvantages


    Determination of the complete sequences of DNA or RNA molecules   Automated Sanger-based instruments
 
 
 
Chip-based microarrays
  –>
 
–>
 
  
–>
  
–>
Comprehensive sequence information
Industry standard technology
  
Faster than Sanger-based sequencing
Lower capital cost
  –>
–>
–>
  
  
–>
–>
High cost
Low throughput
Complex sample preparation
 
High cost of use
Applicable to known sequences only
        Sequencing

 

 

Detection and quantitation of RNA to determine gene expression levels

 

DNA arrays on chips or beads
 
 
  
RT-PCR

 

–>
  
  
–>
  
–>
–>

Can perform genome-wide analysis of expressed genes
Widely available
  
Absolute quantitation
Greater sensitivity

 

–>
–>
–>
 
 
–>

Low sensitivity
Relative quantitation
Limited sequence information
  
Higher cost per gene than arrays
        Expression Analysis

Genotyping

 

 

 

DNA arrays on chips or beads
  
  
  
  
RT-PCR

 

–>
  
–>
  
  
  
–>

High throughput/low cost per genotype
Can be applied to large numbers of samples
 
Higher sensitivity than arrays

 

–>
  
–>
  
  
  
–>

Provides only limited genomic information
Applies only to known sequence variants
  
Higher cost per genotype than arrays
        Analysis of short specific sequences within genomic DNA to look for known variants

The scope and pace of much important research, and the routine application of genetics in clinical medicine, remain limited by the cost and throughput of the currently available genetic analysis systems. Many scientists believe that a further 10,000-fold improvement in the price-performance of Sanger DNA sequencing is required to enable unprecedented research and large-scale clinical, scientific and agricultural studies. This goal is endorsed by the National Institutes of Health, whose National Human Genome Research Institute has established a grant program to fund researchers' efforts to develop technology to enable the complete sequencing of an individual human genome at a cost of approximately $1,000.

Scientists have long realized that many of the disadvantages of Sanger sequencing could be addressed through the direct sequencing of single molecules. For nearly 20 years, many researchers have attempted without success to develop such a single molecule sequencing technology. Past efforts fell short largely due to complexity or technological hurdles in signal detection, surface materials, biochemistry, enzymology, bioinformatics, automation or engineering. In 2003, one of our co-founders, Stephen Quake, DPhil, published the first proof-of-principle demonstration that sequence information could be obtained from single molecules of DNA. We have replicated and improved upon Professor Quake's approach to develop our technology platform. We are not aware of any other company that has successfully developed a single molecule sequencing technology.

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THE HELICOS SOLUTION

Our tSMS platform is a powerful, new approach to the analysis of nucleic acids. We believe that instrument systems based on this platform will deliver unprecedented performance compared to the current market-leading methods. By directly sequencing single molecules of DNA or single copies of RNA, our proprietary technology significantly increases the speed and accuracy of sequencing while decreasing its cost. This novel approach allows our system to analyze billions of sequences in parallel and avoids the need for amplification or cloning required by existing methods. Our platform utilizes simple, scalable sample preparation techniques and automated high-throughput sequencing processes that we believe enable sequencing at significantly greater speed and much lower cost than other methods. We believe the platform will provide scientists and clinicians with extensive capabilities for basic and translational research, for pharmaceutical research and development and for the development and clinical application of genetic diagnostics. By allowing the comparison of genes and genomes from thousands of individuals, our tSMS technology has the potential to enable revolutionary biomedical research. In turn, subsequent discoveries may lead to more accurate molecular diagnostics for cancer and other diseases, improved drug therapies and personalized medical treatments. We are incorporating our tSMS technology into an instrument called the HeliScope and its reagents and supplies.

Our HeliScope system is designed to provide the following compelling advantages over current genetic analysis technologies:

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Enhanced throughput. The HeliScope system is designed to produce a raw throughput approaching one billion bases per hour. The actual throughput of the first version of our instrument will depend on the application. For certain gene expression applications of interest to pharmaceutical companies, we initially expect the HeliScope to operate at a throughput of about 90 million bases per hour. For sequencing applications, the throughput will depend on a number of parameters but we initially expect it to be in the range of 25 million to 90 million bases per hour. As we develop planned improvements over the next three years in our chemistry, fluid handling, strand density, image acquisition and utilization of the flow cell, we expect the HeliScope's throughput will increase substantially.

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Increased sensitivity. The HeliScope is designed to directly sequence single molecules without the need for cloning or amplification of samples, reducing the complexity of sample preparation and eliminating errors inherent in the amplification process.

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Simplicity. Our SimplePrep sample preparation process involves only a few steps, overcoming the common workflow bottlenecks of current technologies. Our sample preparation process is cost-effective and can be readily scaled and easily replicated to meet the requirements of large-scale experiments and we believe it can also be employed in diagnostic settings.

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Lower cost. The combination of higher throughput, increased sensitivity and simpler workflow results in dramatically lower cost compared to Sanger sequencing methods. We believe that we will also have a significant cost advantage over other emerging sequencing technologies. We expect the first version of our HeliScope system to achieve a greater than 100-fold improvement over the current $10 million dollar cost to sequence a human genome with Sanger-based systems. Moreover, we plan to introduce improved versions of the chemistry and certain hardware components over the next few years that we have designed to enable up to a further 100-fold improvement in the system's price performance. Thus we believe that the HeliScope system will represent the first genetic analysis platform that can approach the $1,000 Genome goal without requiring major modifications or a new generation of technology. In September 2006, we received a $2 million grant under the National Human Genome Research Institute's $1,000 Genome Program.

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–>
Universality. We believe the HeliScope system will make it practical to use DNA sequencing not just for its current genetic analysis applications, but for a broad range of analyses currently performed with other methods. We also believe that, if we successfully develop our HeliScope system, it will enable researchers to conduct genetic analyses on a scope and scale not currently feasible with existing technologies. Further, our technology may have additional applications when used in conjunction with other genetic analysis methods.

–>
Expanded flexibility. Our platform is designed to enable our customers to design their own applications and customized protocols, tailored to the needs of the particular research they are conducting.


OUR PRODUCT AND TECHNOLOGY

The HeliScope system will comprise the computer-controlled instrument and associated reagents and supplies. The reagents consist of enzymes, proprietary modified nucleotides and various solutions. The supplies include flow cells with the proprietary surface properties needed to enable single molecule detection. We have designed the HeliScope system to integrate easily into the laboratory environment and workflow of our customers. The instrument will have a similar footprint to existing high-end sequencers but will be taller, and therefore floor-mounted, rather than sitting on a laboratory bench as do most current sequencers. A proof-of-principle version of our instrument is currently in use in collaboration with the Institute for Systems Biology. We expect to ship a production version of the HeliScope and associated reagents and supplies in the fourth quarter of 2007.

The HeliScope performs sequencing reactions inside two flow cells which together have an active area of about 32 square centimeters. Because the HeliScope can detect single molecules, the density of DNA strands that are bound to the surface can be about 100 million strands per square centimeter, or over 3.2 billion in total. Each flow cell is connected to a fluid handling system, which is used to add reagents automatically. The flow cells are illuminated by two laser modules that are used for detecting fluorescent labels on the DNA. A high-speed stage moves the flow cells so that they can be imaged by an electronic camera through a microscope objective lens. On-board computers control the system, process the images and store the resulting data. The series of figures below outlines our proprietary process for sequencing genomic DNA.


Figure 1
To prepare the sample for sequencing, the genomic DNA is first cut into small pieces of about 100 base pairs in length. The enzyme terminal transferase then adds a string of "A" nucleotides to one end of each strand. Finally, a nucleotide labeled with a single fluorescent dye molecule is added to the end of the strand.

 

PICTURE


Figure 2
Inside the flow cell, short strands of "T" nucleotides, called primers, have already been attached to the surface at a density of about 100 million primers per square centimeter.


 


PICTURE
     

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Figure 3
When the DNA sample is added, the strings of As on each DNA strand hybridize with the strands of Ts on the surface, anchoring the sample strands. The sample strands will act as a template and the strand of Ts as a "primer" for DNA synthesis. A laser illuminates the flow cell and the camera records the location of each captured sample strand. The flow cell is moved in sequential steps to allow the camera to cover its entire active area. The dye molecules are then cleaved and washed away.


 


PICTURE


Figure 4
DNA polymerase enzyme and the first of the four types of novel fluorescently labeled nucleotides are added. If the nucleotide is complementary to the next base in the template strand the polymerase will add it to the primer strand. The nucleotides are designed to inhibit the polymerase from incorporating more than one base at a time on the same strand. Excess polymerase and unincorporated nucleotides are then washed away


 


PICTURE


Figure 5
The laser illuminates the flow cell and the camera records the locations where fluorescently labeled nucleotides were added. The fluorescent dye molecules are then cleaved from the labeled nucleotides and washed away.


 


PICTURE


Figure 6
The process outlined in Figures 4 and 5 is repeated with each of the four types of labeled nucleotides. Repeating this cycle 100 times adds an average of more than 29 nucleotides to the primer strand. In sequencing, this is known as the "read length."


 


PICTURE
     

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Figure 7
The system's computer analyzes the series of images from each cycle and determines the sequence of bases in the template strand. The sequence is "read" by correlating the position of a fluorescent molecule in its vertical track with the knowledge of which base was added at that cycle. Finally, the sequence data is exported to another computer system for further analysis depending on the application.


 


PICTURE


APPLICATIONS

We anticipate that the primary applications for large-scale genetic analysis, which we expect our single molecule sequencing technology to facilitate, will include:

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Disease association studies. Many common diseases and conditions involve complex genetic factors interacting to produce the visible features of that disease, also called a phenotype. Multiple genes and regulatory regions are often associated with a particular disease or symptom. By sequencing the genomes or selected genes of many individuals with a given condition, it may be possible to identify the causative mutations underlying the disease. This research may lead to breakthroughs in disease detection, prevention and treatment.

–>
Cancer research. Cancer genetics involves understanding the effects of inherited and acquired mutations and other genetic alterations. The challenge of diagnosing and treating cancer is further compounded by individual patient variability and hard-to-predict responses to drug therapy. We believe the availability of low-cost genome sequencing to characterize acquired changes of the genome that contribute to cancer based on small samples or tumor cell biopsies, would enable improved diagnosis and treatment of cancer. In addition, recent research suggests the potential to use our sequencing technology to enable novel studies to characterize regulatory genes and proteins associated with tumor growth.

–>
Infectious disease. All viruses, bacteria and fungi contain DNA or RNA. The detection and sequencing of DNA or RNA from pathogens at the single molecule level would provide medically and environmentally useful information for the diagnosis, treatment and monitoring of infections and to predict potential drug resistance.

–>
Autoimmune conditions. Several autoimmune conditions, ranging from multiple sclerosis and lupus to transplant rejection risk, are believed to have a genetic component. Monitoring the genetic changes associated with these diseases may enable better patient management.

–>
Pharmaceutical research and development. One promise of genomics has been to accelerate the discovery and development of more effective new drugs. The impact of genomics in this area has emerged slowly because of the complexity of biological pathways, disease mechanisms and multiple drug targets. Single molecule sequencing could enable high-throughput screening in a cost-effective manner using large-scale expression analysis to better identify promising drug leads. In clinical development, our technology could potentially be used to generate individual gene profiles that can provide valuable information on likely response to therapy, toxicology or risk of adverse events, and possibly to facilitate patient screening and individualization of therapy.

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–>
Clinical diagnostics. Patients who present the same disease symptoms often have different prognoses and responses to drugs based on their underlying genetic differences. Delivering patient-specific genetic information at a reasonable cost represents a multi-billion dollar potential market waiting to be unlocked. Commercial markets for molecular diagnostics include gene- or expression-based diagnostic kits and services, companion diagnostic products for selecting and monitoring particular therapies, as well as patient screening for early disease detection and disease monitoring. Creating more effective and targeted molecular diagnostics and screening tests requires a better understanding of genes, regulatory factors and other disease- or drug-related factors, which we believe is enabled by our single molecule sequencing technology.

–>
Agriculture. Agricultural research has increasingly turned to genomics for the discovery, development and design of genetically superior animals and crops. The agribusiness industry has been a large consumer of genetic technologies—particularly microarrays—to identify relevant genetic variations across varieties or populations. Our sequencing technology provides a more powerful, direct and cost-effective approach to expression analysis and population studies for this industry.


OUR BUSINESS STRATEGY

Our goal is to be the leading global provider of high-throughput genetic analysis systems. To achieve this objective, we intend to:

–>
Define the future of genetic analysis based on single molecule sequencing. We intend to launch the first commercial version of our HeliScope system in the fourth quarter of 2007, which we expect will be the world's first single molecule sequencing platform. We intend to leverage this system to establish a leadership position in the genetic analysis marketplace by focusing on the unique advantage of our tSMS technology and the large scale genetic analysis applications that it enables.

–>
Penetrate the genetic analysis market through an initial set of key early adopter customers. We expect to focus initially on early adopters who routinely purchase cutting-edge technologies. Typical early adopters include genome sequencing centers focused on establishing the technology infrastructure for medical genetics studies, pharmaceutical companies conducting gene expression based drug discovery efforts—from primary screening of millions of compounds to detailed mechanism of action studies of preclinical candidates, and translational clinical research institutions.

–>
Create a specialized direct sales and service force focused on customers interested in large scale genetic analysis applications. Customers that are funded for large scale studies represent a subset of the broader genetic analysis market. Our intent is to build a specialized sales and service force that can exploit this niche, differentiate our offering, and create substantial value.

–>
Generate a recurring revenue stream not dependent on our customers' capital budgets. After the initial capital commitment by our customers to purchase the HeliScope system, high utilization of the system will generate substantial ongoing revenue from the sale of proprietary reagents and supplies. A portion of our sales force will focus on maximizing follow-on sales to existing customers by understanding the account and supporting their needs.

–>
Continually enhance product performance to increase both market share and market size. We intend to focus our research and development and engineering efforts on continuously developing our technology platform to enable novel experiments at the $1,000 genome scale, thereby expanding the market for genetic analysis tools while dramatically lowering the cost of individual experiments. Critical to the deployment of such a product strategy, we also intend to create a

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    technical customer support capability that can provide expert field-based engineering, chemistry and application support. Moreover, we have designed our system with an open and flexible architecture to allow our customers to help drive innovation with our products.

–>
Enable molecular diagnostic applications of our tSMS technology. In the long term, we intend to devote some of our research effort to enabling potential molecular diagnostic applications of our technology. Although this is not our initial focus, we believe that a very large market opportunity awaits those who can deliver patient-specific genomic information to clinicians at the required price point. As we achieve technical progress, we will determine an appropriate commercialization strategy, which may include forming partnerships with established clinical diagnostic companies.

–>
Explore single molecule detection assays in other key areas of biology. The first several versions of our HeliScope instrument will be used to analyze DNA or RNA molecules. Yet, the fundamental design principles and some of the key technological innovations can apply as well to the analysis of proteins and other molecules. We believe that our technology could be used to create a new class of assay focused on studying protein-protein interactions, single molecule protein identification, analyzing antibody-antigen binding, or performing single molecule protein detection assays, for example.


RESEARCH AND DEVELOPMENT

Over 75% of our current employees are engaged in research, development and engineering. The wide variety of technical disciplines required for the development of a commercial single molecule sequencing system is represented within our research and development organization, which includes the following functional groups: research, methods development, chemical development, organic synthesis, engineering, sequencing development and scientific informatics. Our research and development staff includes 30 PhD scientists and two PhD engineers.

Our research and development accomplishments include the development of:

–>
proprietary flow cell surfaces with properties suitable for single molecule imaging;

–>
optimized reagents and conditions for our tSMS process;

–>
novel fluorescently-labeled nucleotide analogs for accurately sequencing DNA containing homopolymers, which are repetitions of the same base;

–>
extremely simple methods and reagents for sample preparation; and

–>
sequencing applications, including genomic DNA and messenger RNA.

Our engineering group has assembled several versions of internal-use-only single molecule sequencing instruments, which are currently used by the scientists at Helicos in virtually all phases of the research and development activities described above. Since this initial activity, the engineering group has been designing, prototyping and testing all of the internal subsystems to be used in the commercial version of the HeliScope. Their efforts have included development of a proprietary solid state laser illumination module, a fluidics module, flow cells incorporating the template capture surfaces, a mosaic CCD camera, a high-throughput, high-sensitivity imaging acquisition subsystem and all of the control hardware and software required to enable the imaging of approximately one billion bases per hour. We are also developing the computational processes necessary for real-time image analysis, base calling and sequence alignment in support of the large amount of data generated by the HeliScope instrument.

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In the years ended December 31, 2004, 2005 and 2006, we spent $4.2 million, $8.4 million and $14.4 million, respectively, on company-sponsored research and development activities.

MARKETING AND DISTRIBUTION

The market for high-performance genetic analysis tools is relatively concentrated among large genome sequencing centers, major biotechnology and pharmaceutical companies and major academic medical centers and research institutions. With this concentration of potential value, we are creating a commercial channel designed specifically for these types of customers to directly market, sell and support the HeliScope system. We expect to initially hire a field force of approximately 20 marketing, sales and support personnel to launch the HeliScope. We intend to expand the direct channel to support broad sales of our system in North America, Europe and parts of Asia. This level of resource commitment is made both necessary and possible by the large average sales price of the HeliScope instrument, the high-value consumable stream associated with large-scale experiments across the application space of interest to our customers and the sale of instrument service contracts that provide post-warranty field-based support.

MANUFACTURING

We initially intend to manufacture our instruments using a combination of outsourced components and subassemblies with internal final assembly and testing. We have located and qualified manufacturers for each of the major components and are in the process of putting the necessary subassembly contracts in place. We will initially manufacture the proprietary reagents for our system internally. Over time we may establish additional outsourcing partnerships. While we believe our current facilities are adequate to meet our manufacturing needs for at least the next two years, we may need to lease additional space.

OUR SCIENTIFIC ADVISORY BOARD

We have established a scientific advisory board consisting of individuals whom we have selected for their particular expertise in the fields of genomics, physics, molecular biology, chemistry and engineering. We anticipate that our scientific advisory board members will consult with us on matters relating to:

–>
our sales and marketing strategy;

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our research and development efforts;

–>
opportunities for strategic collaborations;

–>
new technologies relevant to our research and development efforts; and

–>
scientific and technical issues relevant to our business.

All of our advisors are employed by organizations other than us and may have commitments to or consulting or advisory agreements with other entities that may limit their availability to us. Our scientific advisory board currently consists of the following members:

Stephen R. Quake, DPhil, is a co-founder of Helicos and serves as the Chairman of our Scientific Advisory Board. Stephen R. Quake is a Professor of Bioengineering at Stanford University and an Investigator of the Howard Hughes Medical Institute. In 2003, Professor Quake and his team made a major breakthrough in genetic analysis by being the first to successfully obtain sequence information from single molecules of DNA. Professor Quake's numerous career recognitions include "Career" and "First" awards from the National Science Foundation and National Institutes of Health, the Packard

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Fellowship and the NIH Director's Pioneer Award. His contributions to the development of new biotechnology at the interface between physics and biology have also been recognized with recent awards from the MIT Technology Review Magazine and Popular Science.

Steven Chu, PhD, is a Nobel Laureate in Physics who is currently the Director of the Lawrence Berkeley National Laboratory, Professor of Physics and Professor of Molecular and Cellular Biology at the University of California, Berkeley. Dr. Chu's lab developed novel methods to cool and trap atoms with laser light for which he received the 1997 Nobel Prize in Physics. Dr. Chu serves on the Boards of the Hewlett Foundation, the University of Rochester and NVIDIA, as well as the scientific boards of the Moore Foundation and NABsys. Dr. Chu is a member of the National Academy of Sciences, the American Philosophical Society, the American Academy of Arts and Sciences, the Academia Sinica and a foreign member of the Chinese Academy of Sciences and the Korean Academy of Science and Engineering.

Donald M. Crothers, PhD, is a Sterling Professor Emeritus of Chemistry and Professor Emeritus of Molecular Biophysics and Biochemistry at Yale University, where he began his faculty career in 1964. His research interests encompass the physical chemistry of biological polymers, particularly that of nucleic acids. He also served on the editorial board of numerous journals including Biochemistry, Journal of Molecular Biology, Biopolymers, Nucleic Acid Research and the Quarterly Review of Biophysics.

Leroy Hood, PhD, is the President and co-founder of the Institute for Systems Biology in Seattle, Washington. His research has focused on the study of molecular immunology, biotechnology and genomics. Dr. Hood is well known as the inventor of the automated Sanger DNA sequencer. He has also played a role in founding numerous biotechnology companies, including Amgen, Applied Biosystems, Systemix, Darwin and Rosetta Inpharmatics. Dr. Hood is a member of the National Academy of Sciences, the American Philosophical Society, the American Association of Arts and Sciences and the Institute of Medicine. He has published more than 600 peer-reviewed papers, has 14 issued patents, and has co-authored textbooks in biochemistry, immunology, molecular biology and genetics.

David R. Liu, PhD, is Professor of Chemistry and Chemical Biology at Harvard University, a Howard Hughes Medical Institute investigator and an Associate Member of the Broad Institute of MIT and Harvard. He initiated the first general effort to expand the genetic code in living cells. He has received distinctions including the American Chemical Society Pure Chemistry Award, the American Chemical Society Arthur C. Cope Young Scholar Award, the GlaxoSmithKline Chemistry Scholar Award, the AstraZeneca Pharmaceuticals Excellence in Chemistry Award, the Searle Scholars Award, the NSF CAREER Award, the Sloan Foundation Fellowship, the Beckman Foundation Young Investigator Award, the Office of Naval Research Young Investigator Award and the university-wide Roslyn Abramson Award for undergraduate teaching at Harvard. He was recently named to the Popular Science "Brilliant 10" for young scientists in the United States, as well as to the MIT TR100 for young innovators.

Eugene W. Myers, PhD, is a Group Leader at the Janelia Farm Research Campus of the Howard Hughes Medical Institute. He was one of the first computer scientists to enter the field of computational molecular biology in the early 1980s, and was a key developer in the 1990s of BLAST, the industry standard tool for performing DNA sequence comparisons. In 1995 he and James Weber proposed the whole genome shotgun sequencing of the human genome, and in 1998 he joined the founding team of Celera Genomics to accomplish that mission. Dr. Myers has received multiple distinctions in his career, including the Newcomb Cleveland Award for best article in Science, the ACM Paris Kanellakis Theory and Practice Award and the International Max Planck Prize. He has

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been elected to the National Academy of Engineering as well as the German National Academy of Science, Leopoldina. Dr. Myers has authored more than 90 peer-reviewed articles and four patents.

Milan Mrksich, PhD, is a Professor of Chemistry at the University of Chicago and a Howard Hughes Medical Institute investigator. He is a founding member of the Institute for Biophysical Dynamics and serves as the Associate Director of the NanoScale Science and Engineering Center, centered at Northwestern University. His group leads in the emerging area of engineering interfaces between materials and biological environments. Dr. Mrksich also serves on the scientific advisory boards of ChemoCentryx and Surface Logix and on the advisory board of the Searle Scholars Program and the National Institutes of Health EBT Study Section. Dr. Mrksich also serves on the board of governors of Argonne National Laboratory, as Vice Chair of the DARPA Defense Sciences Research Council and as a member of the editorial boards of Langmuir, IEEE Transactions on NanoBioscience, Chemistry & Biology and Chemical Society Reviews. He has over 100 published papers and ten patents.

John Quackenbush, PhD, serves on the faculty at the Dana-Farber Cancer Institute with appointments as Professor of Biostatistics and Computational Biology and as Professor of Computational Biology and Bioinformatics at the Harvard School of Public Health. Dr. Quackenbush's work focuses on functional and comparative genomics and bioinformatics and its application to the study of human disease. He is on the editorial boards of five major journals and Editor-in-Chief at Genomics, recently completed a four-year appointment as a standing member of the NIH GCAT Study Section, and is a member to two National Research Council panels examining the applications of genomic approaches to the study of toxicology.

Victor E. Velculescu, MD, PhD, is an Assistant Professor of Oncology at The Sidney Kimmel Comprehensive Cancer Center at Johns Hopkins. He is internationally known for developing technologies that have been instrumental in the molecular analysis of human cancer, including SAGE (serial analysis of gene expression), a revolutionary method for global gene expression profiling and recently led an effort that described the first mutational analysis of an entire gene family in human cancers. Dr. Velculescu has already received a variety of honors for his work in genomic technologies and cancer research, including the Grand Prize Winner of the Amersham Pharmacia Biotech & Science Young Scientist Prize, The Johns Hopkins University Michael A. Shanoff Award and the Dynal Literature Award. In the lay press, Dr. Velculescu has been recognized by Popular Science as one of the "Brilliant 10" young scientists of the year and by Biography magazine as one of "10 Future Classics."


COMPETITION

Competition among entities developing or commercializing instruments, research tools or services for genetic analysis is intense. A number of companies offer DNA sequencing equipment or consumables, including the Applied Biosystems division of Applera Corporation, Beckman Coulter, Inc., the Amersham Biosciences business of General Electric Company, and Roche Applied Science in partnership with 454 Life Sciences. Furthermore, a number of other companies and academic groups are in the process of developing novel techniques for DNA sequencing. These companies include, among others, Agencourt Personal Genomics, Genizon BioSciences, Genovoxx, Solexa, which was recently acquired by Illumina, Inc., Intelligent Bio-Systems, LI-COR Biosciences, Lucigen, Microchip Biotechnologies, Pacific Biosciences, Perlegen Sciences, Shimadzu Biotech and VisiGen Biotechnologies. A number of companies offer equipment and supplies for gene expression and/or genotyping including Affymetrix, Inc., Agilent Technologies, Applera Corporation, Bio-Rad Laboratories and Illumina, Inc. In order to successfully compete against existing and future technologies, we will need to demonstrate to potential customers that our technologies, products and customer support capabilities are superior to those of our competitors.

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Many of our competitors have substantially greater capital resources, research and product development capabilities and greater financial, scientific, manufacturing, marketing, and distribution experience and resources, including human resources, than we do. These competitors may develop or commercialize genetic analysis technologies before us or that are more effective than those we are developing. Moreover, our competitors may obtain patent protection or other intellectual property rights that could limit our rights to offer genetic analysis products or services.


INTELLECTUAL PROPERTY

Developing and maintaining a strong intellectual property position is an important element of our business strategy. We have developed an extensive patent strategy. Currently, our patent portfolio relating to our proprietary technology is comprised, on a worldwide basis, of ten issued patents and 83 pending patent applications which, in either case, we own directly or for which we are the exclusive or semi-exclusive licensee. The issued patents expire on dates ranging from 2018 through 2024.

Patent law relating to the scope of claims in the technology field in which we operate is still evolving. The degree to which we will be able to protect our technology with patents, therefore, is uncertain. Others may independently develop similar or alternative technologies, duplicate any of our technologies and, if patents are licensed or issued to us, design around the patented technologies licensed to or developed by us. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.

With respect to proprietary know-how that is not patentable and for processes for which patents are difficult to enforce, we may rely on trade secret protection and confidentiality agreements to protect our interests. We may maintain several important aspects of our technology platform as trade secrets. While we require all employees, consultants, collaborators, customers and licensees to enter into confidentiality agreements, we cannot be certain that proprietary information will not be disclosed or that others will not independently develop substantially equivalent proprietary information.


LEGAL PROCEEDINGS

We are not party to any material pending or threatened litigation.


FACILITIES

Our executive, research and development and manufacturing functions are all located at a 37,000 square foot leased facility in Cambridge, Massachusetts. The lease for our Cambridge facility expires in 2009 with respect to 27,000 square feet of our facility and in early 2010 with respect to the remaining 10,000 square feet. While we believe our current facilities are adequate to meet our manufacturing needs for at least the next two years, we may need to lease additional space.


EMPLOYEES

We had 71 full time employees at February 15, 2007. Of these employees, 55 were in research, development and engineering, and 16 were in marketing, general and administrative functions. We have never had a work stoppage and none of our employees are covered by collective bargaining agreements. We believe our employee relations are good.

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Management

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth information regarding our directors and executive officers, including their ages and positions:

Name

  Age

  Position(s)


Stanley N. Lapidus   57   President, Chief Executive Officer and Director

Stephen J. Lombardi

 

51

 

Executive Vice President and Chief Operating Officer

Louise A. Mawhinney

 

51

 

Vice President, Chief Financial Officer and Treasurer

J. William Efcavitch, PhD

 

54

 

Senior Vice President of Research and Development

Thomas C. Meyers

 

47

 

Vice President, Chief Intellectual Property Counsel and Secretary

Noubar B. Afeyan, PhD(1)(2)

 

44

 

Chairman

Brian G. Atwood(1)

 

54

 

Director

Peter Barrett, PhD(3)

 

54

 

Director

Robert F. Higgins(2)(3)

 

60

 

Director

Steven St. Peter, MD(1)(2)

 

40

 

Director

(1)
Member of the audit committee.

(2)
Member of the nominating and corporate governance committee.

(3)
Member of the compensation committee.

Stanley N. Lapidus.    Mr. Lapidus, one of our co-founders, has served as our President and Chief Executive Officer since May 2003. Prior to founding Helicos, Mr. Lapidus served as a Venture Partner at Flagship Ventures from March 2002 through September 2003. Mr. Lapidus founded EXACT Sciences Corporation in 1995, where he served as President from 1995 through 2000 and Chairman from 2000 through 2005. Prior to EXACT Sciences, Mr. Lapidus founded Cytyc Corporation, where he served as President from 1987 to 1994. Mr. Lapidus also holds academic appointments in the Pathology Department at Tufts University Medical School and Massachusetts Institute of Technology's Sloan School of Management. He earned a BSEE from Cooper Union. He has served as a trustee of Cooper Union since 2002. Mr. Lapidus is named as an inventor on 30 issued U.S. patents.

Stephen J. Lombardi.    Mr. Lombardi is our Executive Vice President and Chief Operating Officer. He joined Helicos in June 2006 as Senior Vice President of Sales and Marketing and assumed his current duties in February 2007. He has over 27 years of commercial biotechnology experience as a scientist and in business management. Prior to Helicos he spent four years as a Senior Vice President at Affymetrix, Inc., serving as an executive in its Corporate Development, Product R&D and Marketing divisions. From 1986 to 2002, Mr. Lombardi was employed by Applied Biosystems, a division of Applera Corporation, most recently as Senior Vice President of Applications and Products. From 1989 to 1998, Mr. Lombardi led the formation of Applied Biosystems' DNA sequencing and genetic analysis

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business, resulting in widely-used sequencers, including those which became the standard used for the Human Genome Project. Mr. Lombardi was also involved in forming Celera Genomics within the Applera corporate structure. He earned a BA in Biology from Merrimack College.

Louise A. Mawhinney.    Ms. Mawhinney joined us in September 2006 as Vice President, Chief Financial Officer and Treasurer. Prior to that, Ms. Mawhinney served as Vice President, Finance and Chief Financial Officer of ArQule Inc., a biotechnology company engaged in the research and development of cancer therapeutics from December 2003 to August 2006. From February 2000 until December 2003 Ms. Mawhinney held the position of Chief Financial Officer, Secretary and Treasurer of Cleanwise, Inc., a third-party logistics software company. Ms. Mawhinney holds a Masters degree in Russian and Moral Philosophy from St. Andrews University in Scotland and has been a CPA since 1989.

J. William Efcavitch, PhD.    Dr. Efcavitch joined us in October 2004 and serves as our Senior Vice President of Product Research and Development. Previously, he spent 23 years at Applied Biosystems, a division of Applera Corporation, most recently as Director of the Synthesis and Arrays Business Unit which commercialized several products, including an expression array system. At Applied Biosystems, Dr. Efcavitch led the successful development and commercialization of Applied Biosystems' DNA sequencing instruments, reagents, consumables and software products, including the sequencer that became the standard used for the Human Genome Project. Dr. Efcavitch is a co-author of eleven research publications and is named as an inventor on fifteen patents. He earned his PhD in Biochemistry from Ohio University.

Thomas C. Meyers.    Mr. Meyers joined us in February 2004. He is currently our Vice President, Chief Intellectual Property Counsel and Secretary. Prior to joining us, Mr. Meyers was an attorney at Testa, Hurwitz & Thibeault LLP, a Boston law firm, where he practiced from February 1996 to February 2004, most recently as a Partner. For 16 years, he has represented numerous companies in the life science and medical device space. His practice has centered on developing and implementing intellectual property strategies to create barriers to entry in areas of commercial importance. Mr. Meyers is also an Adjunct Professor of Law at Suffolk University Law School, where he teaches patent practice and strategy. He earned his law degree from Northwestern University Law School in 1991.

Noubar B. Afeyan, PhD.    Dr. Afeyan, one of our co-founders, has served as Chairman of our board of directors since 2003. In 1999 Dr. Afeyan founded Flagship Ventures, a venture capital firm, where he serves as Managing Partner and Chief Executive Officer. Dr. Afeyan is also a Senior Lecturer at the Massachusetts Institute of Technology's Sloan School of Management as well as the Biological Engineering Division. Dr. Afeyan serves as a director of Color Kinetics Incorporated and Antigenics, Inc., as well as several private companies. Dr. Afeyan received a BS in chemical engineering from McGill University and a PhD in biochemical engineering from the Massachusetts Institute of Technology.

Brian G. Atwood.    Mr. Atwood has served as a member of our board of directors since 2003. Since 1999, Mr. Atwood has served as a Managing Director of Versant Ventures, a venture capital firm focusing on healthcare, which he co-founded. Mr. Atwood also serves on the board of directors of Cadence Pharmaceuticals, Inc. and Pharmion Corporation, as well as several private companies. Mr. Atwood holds a BS in biological sciences from the University of California, Irvine, a MS in ecology from the University of California, Davis and a MBA from Harvard University.

Peter Barrett, PhD.    Dr. Barrett has served as a member of our board of directors since 2003. Dr. Barrett has served as a Partner of Atlas Venture, a venture capital firm, since January 2002. From August 1998 to December 2001, he served as Executive Vice President and Chief Business Officer of

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Celera Genomics, a biopharmaceutical company, which he co-founded. Dr. Barrett serves on the board of Atlas Venture investments Alnylam, LAB International and Momenta Pharmaceuticals, as well as several private companies. He is also the President of the Autism Consortium Board of Directors and is Vice Chairman of the Advisory Council of the Barnett Institute of Chemical and Biological Analysis at Northeastern University. Dr. Barrett received his BS in chemistry from Lowell Technological Institute (now known as the University of Massachusetts, Lowell) and his PhD in Analytical Chemistry from Northeastern University. He also completed Harvard Business School's Management Development Program.

Robert F. Higgins.    Mr. Higgins has been a member of our board of directors since 2003. Mr. Higgins co-founded Highland Capital Partners in 1988 and serves as its Managing General Partner. Currently, he is a member of the Advisory Board of the Department of Health Care Policy at Harvard Medical School and the Advisory Board of the Harvard–MIT Division of Health Sciences & Technology. Also, Mr. Higgins is a faculty member at the Harvard Business School where he teaches courses in entrepreneurial management. He received a BA in history from Harvard College and a MBA from Harvard Business School.

Steven St. Peter, MD.    Dr. St. Peter has been a member of our board of directors since July 2005. Dr. St. Peter holds the position of General Partner at MPM Capital, which he joined in 2003. Prior to joining MPM Capital, Dr. St. Peter served as from 2001 to 2003 as a principal at Apax Partners and from 1999 to 2001 as a senior associate at The Carlyle Group. Dr. St. Peter is board certified in internal medicine and was previously an Assistant Clinical Professor of Medicine at Columbia University. He completed his MD at Washington University and his residency and fellowship at the Hospital of the University of Pennsylvania. Prior to his medical training, he was an investment banker at Merrill Lynch. He also holds an MBA from the Wharton School of the University of Pennsylvania and a BA in chemistry from the University of Kansas. He is a Director of OMRIX Biopharmaceuticals and PharmAthene, Inc.


BOARD OF DIRECTORS

We currently have six directors. Other than Mr. Lapidus, each of these directors was elected pursuant to a stockholders agreement among us, certain of our management stockholders and other investors. Under the terms of our certificate of incorporation in effect prior to the closing of this offering, the holders of outstanding shares of redeemable convertible preferred stock, voting as a class, are entitled to elect five members of our board of directors. The board composition provisions of the stockholders agreement and our certificate of incorporation will be terminated upon the closing of this offering. Upon the termination of these provisions, there will be no further contractual obligations regarding the election of our directors. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal.

Following the offering, our board of directors will be divided into three classes with members of each class serving for three-year terms. Our board of directors will initially consist of two Class I directors (currently Mr. Atwood and Dr. St. Peter) two Class II directors (currently Dr. Barrett and Mr. Higgins) and two Class III directors (currently Dr. Afeyan and Mr. Lapidus), whose initial terms will expire at the annual meetings of stockholders held in 2008, 2009 and 2010, respectively. Our classified board could have the effect of making it more difficult for a third party to acquire control of us.

Our board of directors has considered the relationships of all directors and, where applicable, the transactions involving them described under "Certain relationships and related party transactions." After such consideration, our board determined that none of the directors, with the exception of Mr. Lapidus, our Chief Executive Officer, have any relationship which would interfere with the

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exercise of independent judgment in carrying out his or her responsibility as a director and that each director, other than Mr. Lapidus, qualifies as an "independent director" under the applicable rules of the NASDAQ Global Market and the SEC.


BOARD COMMITTEES

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and function of each of our committees complies with the applicable rules of the SEC and the NASDAQ Global Market, and we intend to comply with additional requirements to the extent that they become applicable to us.

Audit committee.    Brian G. Atwood, Steven St. Peter, MD and Noubar B. Afeyan, PhD currently serve on our audit committee. Mr. Atwood is the chairman of our audit committee. The audit committee's responsibilities include, but are not limited to:

–>
appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;

–>
pre-approving auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm;

–>
reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures;

–>
coordinating the oversight and reviewing the adequacy of our internal control over financial reporting;

–>
establishing policies and procedures for the receipt and retention of accounting related complaints and concerns; and

–>
preparing the audit committee report required by SEC rules to be included in our annual proxy statement.

Our board of directors has determined that Mr. Atwood qualifies as an "audit committee financial expert" as defined under the Securities Exchange Act of 1934 and the applicable rules of the NASDAQ Global Market. We believe that the composition of our audit committee meets the requirements for independence and financial sophistication under the current requirements of the Nasdaq Global Market and SEC rules and regulations.

Compensation committee.    Robert F. Higgins and Peter Barrett, PhD currently serve on the compensation committee. Mr. Higgins is the chairman of our compensation committee. We believe that the composition of our compensation committee meets the requirements for independence under the current requirements of the NASDAQ Global Market and SEC rules and regulations. The compensation committee's responsibilities include, but are not limited to:

–>
annually reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer;

–>
evaluating the performance of our chief executive officer in light of such corporate goals and objectives and reviewing and approving the compensation of our chief executive officer and recommending such compensation to the board;

–>
reviewing and reviewing and approving the compensation of our other executive officers and recommending such compensation to the board;

64

–>
overseeing and administering our compensation, welfare, benefit and pension plans and similar plans; and

–>
reviewing and making recommendations to the board with respect to director compensation.

Nominating and corporate governance committee.    Noubar B. Afeyan, PhD, Robert F. Higgins and Steven St. Peter, MD currently serve on the nominating and corporate governance committee. Dr. Afeyan is the chairman of our nominating and corporate governance committee. We believe that the composition of our nominating and corporate governance committee meets the requirements for independence under the current requirements of the NASDAQ Global Market. The nominating and corporate governance committee's responsibilities include, but are not limited to:

–>
developing and recommending to the board criteria for board and committee membership;

–>
establishing procedures for identifying and evaluating director candidates including nominees recommended by stockholders;

–>
identifying individuals qualified to become board members;

–>
recommending to the board the persons to be nominated for election as directors and to each of the board's committees;

–>
developing and recommending to the board a code of business conduct and ethics and a set of corporate governance guidelines; and

–>
overseeing the evaluation of the board and management.


CORPORATE GOVERNANCE

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics will be available on our internet site at www.helicosbio.com. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website.

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Compensation

COMPENSATION DISCUSSION AND ANALYSIS

We believe that the compensation of our executive officers should focus executive behavior on the achievement of near-term corporate targets as well as long-term business objectives and strategies. It is the responsibility of the compensation committee of our board of directors to administer our compensation practices to ensure that they are competitive and include incentives which are designed to appropriately drive corporate performance. Overall, we intend to create an executive compensation program that is set at levels competitive with comparable public life sciences companies and, in particular, companies in the genetic analysis market segment. Our compensation committee reviews and approves all of our compensation policies, including executive officer salaries, bonuses and equity incentive compensation.

Objectives of our executive compensation programs

Our compensation programs for our named executive officers are designed to achieve the following objectives:

–>
attract and retain talented and experienced executives in the highly competitive and dynamic life sciences industry;

–>
motivate and reward executives whose knowledge, skills and performance are critical to our success;

–>
align the interests of our executives and stockholders by motivating executives to increase stockholder value and rewarding executives when stockholder value increases;

–>
ensure fairness among the executive management team by recognizing the contributions each executive makes to our success; and

–>
motivate our executives to manage our business to meet our short- and long-term objectives, and reward them for meeting these objectives.

We use a mix of short-term compensation (base salaries and cash incentive bonuses) and long-term compensation (equity incentive compensation) to provide a total compensation structure that is designed to achieve these objectives. We determine the percentage mix of compensation structures that we think is appropriate for each of our executive officers. The compensation committee uses its judgment and experience and the recommendations of the chief executive officer (except for his own compensation) to determine the appropriate mix of compensation for each individual. In 2006, for purposes of approving the compensation of our executive officers, the compensation committee approved and recommended compensation awards to our full board of directors for approval.

Our executive compensation programs

Our executive compensation primarily consists of base salary, periodic cash incentive bonuses and equity awards and broad-based benefits programs. We believe it is important that the interests of our executives are aligned with those of our stockholders; therefore, equity incentive compensation constitutes a significant portion of our total executive compensation.

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Within the context of the overall objectives of our compensation programs, we determined the specific amounts of compensation to be paid to each of our executives in 2006 based on a number of factors including:

–>
our understanding of the amount of compensation generally paid by similarly situated companies to their executives with similar roles and responsibilities;

–>
the roles and responsibilities of our executives;

–>
the individual experience and skills of, and expected contributions from, our executives;

–>
the amounts of compensation being paid to our other executives; and

–>
our executives' historical compensation at our company.

We discuss each of the primary elements of our executive compensation in detail below. While we have identified particular compensation objectives that each element of executive compensation serves, our compensation programs to complement each other and collectively serve all of our executive compensation objectives described above. Accordingly, whether or not specifically mentioned below, we believe that, as a part of our overall executive compensation, each element to a greater or lesser extent serves each of our objectives.

Annual cash compensation

Base salary

We intend to pay base salaries that are competitive with similar positions at our peer group companies. The base salaries of all executive officers are reviewed annually and adjusted to reflect individual roles and performance. We may also increase the base salary of an executive officer at other times if a change in the scope of the officer's responsibilities justifies such consideration or in order to maintain salary equity among executive officers. We believe that a competitive base salary is a necessary element of any compensation program designed to attract and retain talented and experienced executives. We also believe that attractive base salaries can motivate and reward executives for their overall performance.

In 2006, we increased the base salaries of our named executive officers as follows: the base salary of Mr. Lapidus, our President and Chief Executive Officer, increased from $255,000 to $318,000 per year, and the base salary of Dr. Efcavitch, our Senior Vice President of Product Research and Development increased from $250,000 to $262,500 per year. The base salary of Mr. Meyers, our Vice President and Chief Intellectual Property Counsel increased from $225,750 to $237,000 per year. This reflects an increase of approximately 25% to the base salary of Mr. Lapidus and 5% to each of our other named executive officers employed by us at the time of the increase. We hired Mr. Lombardi as our Senior Vice President of Marketing in June 2006 and established his base salary at $300,000 per year. In September 2006 we hired Ms. Mawhinney as Vice President and Chief Financial Officer and established her base salary at $250,000 per year. In February 2007 the base salary of Mr. Lapidus increased to $350,000, the base salary of Dr. Efcavitch increased to $275,625, the base salary of Mr. Lombardi, now our Executive Vice President and Chief Operating Officer, increased to $325,000, the base salary of Ms. Mawhinney increased to $253,125 and the base salary of Mr. Meyers increased to $248,850. This reflects an increase of approximately 5% to each of our executive officers other than Ms. Mawhinney, to whom it represented a pro-rated 5% bonus based upon her term of service to the company in 2006. Our executives' base salaries reflect the initial base salaries that we negotiated with each of our executives at the time of his or her initial employment or promotion and our subsequent adjustments to these amounts to reflect market increases, the growth and stage of

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development of our company, our executives' performance and increased experience, any changes in our executives' roles and responsibilities and other factors.

Cash incentive bonuses

In prior years, our compensation committee has, on occasion, granted discretionary cash bonuses to our executive officers. In 2006, no cash bonuses were paid to our executive officers. During 2006 we did not have a management incentive bonus plan in place. However, consistent with our emphasis on pay for performance incentive compensation programs in February 2007 we adopted a management incentive bonus plan. The primary objectives of the plan will be to provide an incentive for superior work, to motivate our executives toward even higher achievement and business results, to tie our executives' goals and interests to ours and our stockholders' and to enable us to attract and retain highly qualified individuals. Executive officers will earn cash bonuses, targeted at 30% of such executive officers' base salaries, based on our attainment of company-wide goals based on annual product shipments and cash flow targets. The compensation committee may also, in its discretion, award bonuses to executives based upon such other terms and conditions as the compensation committee may determine.

Equity incentive compensation

We grant equity incentive awards in the form of stock options and restricted stock purchase awards to align the interests of our executives with our stockholders by providing our executives with strong incentives to increase stockholder value. These awards represent a significant portion of total executive compensation. Our decisions regarding the amount and type of equity incentive compensation and relative weighting of these awards among total executive compensation have been based on our understanding of market practices of similarly situated companies and our negotiations with our executives in connection with their initial employment or promotion by our company.

We typically make grants of equity incentive awards to our executive officers on a periodic, but not necessarily annual, basis. All such grants are subject to approval by the compensation committee at regularly scheduled committee meetings throughout the year. The date of grant and the fair market value of the award are based upon the date of the committee meeting. In 2006, we considered a number of factors in determining the amount of equity incentive awards, if any, to grant to our executives, including:

–>
the number of shares subject to, and exercise price of, outstanding options, both vested and unvested, held by our executives;

–>
the vesting schedule of the unvested stock options held by our executives; and

–>
the amount and percentage of our total equity on a diluted basis held by our executives.

Stock option awards

Stock option awards provide our executive officers with the right to purchase shares of our common stock at a fixed exercise price typically for a period of up to ten years, subject to continued employment with our company. Stock options are earned on the basis of continued service to us and generally vest over four years, beginning with 25% vesting one year after the date of grant, then pro-rata vesting monthly thereafter. Stock option awards are made pursuant to our 2003 Stock Option and Incentive Plan.

The exercise price of each stock option granted under our 2003 Stock Option and Incentive Plan is based on the fair market value of our common stock on the date of grant. The fair market value of

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our common stock for purposes of determining the exercise price of stock options has been determined by our board of directors based on a number of factors applicable to common stock of privately-held companies including, among others, the total company valuation implied by the most recent prior venture capital round of financing, the market value of similarly situated public companies, our anticipated future risks and opportunities, the rights and preferences of our preferred stock existing at the time and the lack of a liquid market. In addition, we engaged the services of an independent accredited valuation consultant to perform a contemporaneous valuation in January 2007, and two retrospective valuations in 2006. In January 2007, our board of directors retroactively increased the valuation of our common stock. In February 2007, we adopted an equity grant policy for 2007 that formalizes how we grant equity awards by setting a regular schedule for grants, outlining grant approval requirements and specifying how awards are priced.

We have granted stock options as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, subject to the volume limitations contained in the Internal Revenue Code as well as non-qualified stock options. Generally, for stock options that do not qualify as incentive stock options, we are entitled to a tax deduction in the year in which the stock options are exercised equal to the spread between the exercise price and the fair market value of the stock for which the stock option was exercised. The holders of the non-qualified stock options are generally taxed on this same amount in the year of exercise. For stock options that qualify as incentive stock options, we do not receive a tax deduction, and the holder of the stock option may receive more favorable tax treatment than he or she would for a non-qualified stock option. Historically, we have primarily granted incentive stock options to provide these potential tax benefits to our executives and because of the limited expected benefits to our company of the potential tax deductions as a result of our historical net losses.

Restricted stock purchase awards

Restricted stock purchase awards have provided our executive officers with the ability to purchase shares of our common stock at a fixed purchase price at the time of grant pursuant to a restricted stock purchase agreement. Restricted stock purchase awards have primarily been granted to executive officers and director-level employees at the commencement of their employment with us. Similar to stock options, shares of restricted stock generally vest over four years, beginning with 25% vesting one year after the date of grant and pro-rata vesting monthly thereafter. Pursuant to the restricted stock purchase agreement, unvested shares are subject to mandatory repurchase by us in the case of termination of an executive officer's employment. Restricted stock purchase awards are made pursuant to our 2003 Stock Option and Incentive Plan.

2006 equity incentive compensation

In March 2006, in connection with our private offering of Series B redeemable convertible preferred stock, we granted incentive stock options for the purchase of 1,600,000 shares to Mr. Lapidus and for the purchase of 200,000 shares to Mr. Efcavitch. Also, in March 2006, we granted Mr. Meyers a restricted stock purchase award with the right to purchase 100,000 shares of restricted stock. In connection with the hiring of Mr. Lombardi as Senior Vice President of Marketing, we granted him the right to purchase 750,000 shares of restricted stock in August 2006. In connection with his promotion to Executive Vice President and Chief Operating Officer in February 2007, we granted Mr. Lombardi an incentive stock option for the purchase of 750,000 shares. In September 2006, we granted Ms. Mawhinney the right to purchase 600,000 shares of restricted stock and incentive stock options for the purchase of 19,400 shares.

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All grants of stock options and restricted stock purchase awards in 2006 were intended to have exercise prices per share or purchase prices per share, as applicable, not less than fair market value as determined by our board of directors in good faith based upon the information available at the time. For most of 2006, the exercise or purchase price was $0.13 per share. In the first quarter of 2007, we commenced an option amendment program to re-price all unvested option grants made from January through October 2006 to $0.40 per share, and all unvested option grants made in November and December 2006 to $1.97 per share. This option re-pricing is anticipated to be completed on March 5, 2007. The increase in option exercise prices is not expected to have a material impact on our financial position, statement of operations or cash flows.

In connection with the grant of a restricted stock purchase award made upon hiring Ms. Mawhinney, in September 2006 Ms. Mawhinney executed a full recourse promissory note in the principal amount of $28,000 in our favor under which an aggregate principal amount of $4,000 remained outstanding at December 31, 2006. The proceeds of the note, along with $50,000 of cash, were used to purchase 600,000 shares of our restricted common stock. The note bore interest at a rate of 8.5% per annum and was repaid in full in January 2007.

Other compensation

All of our executive officers are eligible for benefits offered to employees generally, including parking or commuting passes, life, health, disability and dental insurance and our 401(k) plan. In addition, we entered into offer letters with our chief executive officer and our senior vice president of research and development which provide for a housing allowance and commuting expenses. Consistent with our compensation philosophy, we intend to continue to maintain our current benefits and perquisites for our executive officers. The compensation committee in its discretion may revise, amend or add to the officer's executive benefits and perquisites if it deems it advisable. We do not believe it is necessary for the attraction or retention of management talent to provide the officers with a substantial amount of compensation in the form of perquisites. In 2006, the only perquisites we provided were housing, commuting and relocation expenses and tax gross-up payments in connection with equity awards that were granted below fair market value as determined after the revaluation described above. However, our Chief Executive Officer, Mr. Lapidus, did not receive a tax gross-up payment in connection with the 200,000 shares of our common stock he purchased in July 2006 as a term and condition of the private offering of our Series B redeemable convertible preferred stock.

The following table sets forth certain information with respect to compensation for the year ended December 31, 2006 earned by or paid to our chief executive officer, chief financial officer and our three other most highly compensated executive officers, which are referred to as the named executive officers.

70



SUMMARY COMPENSATION TABLE

Name and principal position

  Year

  Salary(1)

  Bonus

  Stock
awards(2)

  Option
awards(2)

  All other
compensation(3)

  Total


Stanley N. Lapidus
    Chief Executive Officer and President
  2006   $ 318,000     $ 221,272   $ 149,261   $ 38,400 (4) $ 726,933

Stephen J. Lombardi
    Executive Vice President and Chief Operating Officer

 

2006

 

 

167,115

 


 

 

99,761

 

 


 

 

315,913

(5)

 

582,789

Louise A. Mawhinney
    Vice President and Chief Financial Officer

 

2006

 

 

67,308

 


 

 

59,731

 

 

33,531

 

 

143,156

(6)

 

303,726

J. William Efcavitch
    Senior Vice of Research and Development

 

2006

 

 

262,500

 


 

 


 

 

27,039

 

 

84,149

(7)

 

373,688

Thomas C. Meyers
    Vice President and Chief Intellectual Property Counsel

 

2006

 

 

237,038

 


 

 

5,625

 

 


 

 

2,400

 

 

245,063

(1)
Mr. Lombardi joined our company in June 2006 and his annual base salary was $300,000. Ms. Mawhinney joined our company in September 2006 and her annual base salary was $250,000.

(2)
Based on the dollar amount recognized for financial statement reporting purposes with respect to the year ended December 31, 2006 in accordance with FAS 123(R), excluding the impact of forfeitures, and assuming that we used the modified prospective transition method for reporting awards granted prior to 2006. The assumptions we used for calculating the grant date fair values are set forth in footnote 12 to our financial statements included in this prospectus.

(3)
Excludes medical, disability and certain other benefits received by the named executive officers that are available generally to all of our employees and certain perquisites and other personal benefits received by the named executive officers which do not exceed $10,000 in the aggregate.

(4)
Includes a housing allowance in the amount of $36,000 paid to Mr. Lapidus.

(5)
Includes relocation expenses of $171,359 paid to Mr. Lombardi and income taxes of $142,954 paid on Mr. Lombardi's behalf.

(6)
Includes income taxes of $142,356 paid on Ms. Mawhinney's behalf.

(7)
Includes a housing allowance in the amount of $36,000 and commuting expenses of $48,149 paid to Dr. Efcavitch.

71

Grants of plan-based awards

The following table sets forth certain information with respect to grants of plan-based awards for the year ended December 31, 2006 to the named executive officers.

2006 GRANTS OF PLAN-BASED AWARDS

Name

  Grant
Date

  All other stock
awards: number
of shares of stock
or units (#)

  All other option
awards: number
of securities
underlying
options (#)

  Exercise or
base price
of awards
($/Sh)(1)


Stanley N. Lapidus   3/28/2006   0   1,600,000   $ 0.13

Stephen J. Lombardi

 

8/8/2006

 

750,000

 

0

 

 

0.13

Louise A. Mawhinney

 

9/26/2006
9/26/2006

 

600,000

 


19,400

 

 

0.13
0.13

J. William Efcavitch

 

3/28/2006

 

0

 

200,000

 

 

0.13

Thomas C. Meyers

 

3/28/2006

 

100,000

 

0

 

 

0.13

(1)
All awards were originally granted with an exercise price or base price of $0.13 per share. It was subsequently determined upon receiving a retrospective valuation that the fair market value for tax purposes under Internal Revenue Code sections 409A and 83 on the dates of grant was $0.40 per share. As a result, the unvested option awards were re-priced upwards to $0.40 per share in the first quarter of 2007. The restricted stock grants and the vested options were deemed to be subject to taxation and treated accordingly.

Discussion of summary compensation and grants of plan-based awards tables

Our executive compensation policies and practices, pursuant to which the compensation set forth in the Summary Compensation Table and the Grants of Plan Based Awards Table was paid or awarded, are described above under "Compensation." A summary of certain material terms of our compensation plans and arrangements is set forth below.

Offer letters

Stanley N. Lapidus, our Chief Executive Officer, executed an offer letter on October 15, 2003. The offer letter provides for at-will employment without any specific term. The offer letter established his annual base salary at $150,000, subject to an increase to $225,000 upon the closing of our private offering of Series A redeemable convertible preferred stock. His annual base salary was increased to $225,000 in January 2004 as a result of this milestone having been achieved. Mr. Lapidus' current annual base salary is $350,000 per year. Pursuant to the offer letter, Mr. Lapidus received an equity grant of 2,000,000 shares of common stock issued in the form of a stock purchase at a price of $0.001 per share. The equity grant vests over four years, beginning with 25% vesting one year after the date of grant, then pro-rata vesting monthly thereafter. In the event his employment is terminated by us without cause, as such term is defined in the offer letter, the amount of vested shares shall be recalculated as if 12.5% of the shares vested six months after the date of grant and the remainder vested pro-rata on a monthly basis for 30 months thereafter. The offer letter also granted Mr. Lapidus the right to purchase up to an additional 500,000 shares of our common stock or preferred stock provided that, as part of this right to purchase 500,000 shares, Mr. Lapidus purchased at least $100,000 of shares of our Series A redeemable convertible preferred stock in an investor-led financing.

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Mr. Lapidus purchased a total of 220,935 shares of our redeemable convertible preferred stock in our private offerings of Series A and Series B redeemable convertible preferred stock and 200,000 shares of our common stock on July 23, 2006 in connection with our private offering of our Series B redeemable convertible preferred stock. He retains the right to purchase up to an additional 79,065 shares pursuant to the offer letter.

Stephen J. Lombardi, our Executive Vice President and Chief Operating Officer, executed an offer letter on May 12, 2006. The offer letter provides for at-will employment without any specific term and established his annual base salary at $300,000 per year. Mr. Lombardi's current base salary is $325,000. Pursuant to the offer letter, Mr. Lombardi agreed to purchase 750,000 shares of restricted stock at a price of $0.13 per share. The restricted stock vests over four years, beginning with one-fourth vesting one year after the date of grant, then pro-rata vesting monthly thereafter provided that Mr. Lombardi remains employed with us on each such vesting date. The offer letter also provides for Mr. Lombardi to receive certain relocation expenses, including up to $100,000 towards the broker's fee on the sale of his prior residence and a $25,000 relocation bonus.

Louise A. Mawhinney, our Vice President and Chief Financial Officer, executed an offer letter on August 22, 2006. The offer letter provides for at-will employment without any specific term and established her annual base salary at $250,000 per year. Ms. Mawhinney's current base salary is $253,125. Pursuant to the offer letter, Ms. Mawhinney agreed to purchase 600,000 shares of restricted stock at a price of $0.13 per share. The restricted stock vests over four years, beginning with one-fourth vesting one year after the date of grant, then pro-rata vesting monthly thereafter provided that Ms. Mawhinney remains employed with us on each such vesting date. In addition, the offer letter provided for Ms. Mawhinney to receive a one-time fully-vested grant of 19,400 options to purchase our common stock.

J. William Efcavitch, PhD, our Senior Vice President of Research and Development, executed an offer letter on September 1, 2004. The offer letter provides for at-will employment without any specific term and established his annual base salary at $250,000 per year. Dr. Efcavitch's current base salary is $275,625. The offer letter provided for a housing allowance for up to two years and for reimbursement of certain commuting expenses and granted Dr. Efcavitch incentive stock options to purchase 400,000 shares of our common stock at an exercise price of $0.10 per share. The options vest over four years, beginning with one-fourth vesting one year after the date of grant, then pro-rata vesting monthly thereafter provided that Dr. Efcavitch remains employed with us on each such vesting date.

Thomas C. Meyers, our Vice President and Chief Intellectual Property Counsel, executed an offer letter on January 22, 2004. The offer letter provides for at-will employment without any specific term and established his annual base salary at $215,000 per year. Mr. Meyers' current base salary is $248,850. The offer letter granted Mr. Meyers the right to purchase 400,000 shares of restricted stock at a price of $0.10 per share. The restricted stock vests over four years, beginning with one-fourth vesting one year after the date of grant, then pro-rata vesting monthly thereafter provided that Mr. Meyers remains employed with us on each such vesting date.


EMPLOYEE BENEFIT PLANS

2003 Stock Option and Incentive Plan

Our 2003 Option and Incentive Plan was adopted by our board of directors and approved by our stockholders in November 2003. As of February 15, 2007, 20,576,382 shares of our common stock were reserved for the issuance of awards under the 2003 Option Plan, as amended.

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Our 2003 Option Plan is administered by either our board of directors or the compensation committee. The administrator of the 2003 Option Plan has full power and authority to grant and amend awards and to adopt, amend and repeal rules relating to the 2003 Option Plan.

The 2003 Option Plan permits us to make grants of incentive stock options, non-qualified stock options, restricted stock awards and other stock-based awards to officers, employees, directors, consultants and other advisors. Stock options granted under the 2003 Option Plan generally have a maximum term of ten years from the date of grant and incentive stock options have an exercise price of no less than the fair market value of our common stock on the date of grant.

Upon a sale event in which all awards are not assumed or substituted by the successor entity, all stock options may be terminated upon the effective time of such sale event following an exercise period, in which case all such stock options shall first become fully exercisable. Restricted stock shall be treated as provided in the relevant award agreement. Under the 2003 Option Plan, a sale event is defined as the consummation of (i) a sale of all or substantially all of the assets, (ii) a sale of the company by merger in which the shareholders of the company do not own a majority of the outstanding voting power of the successor entity or (iii) any other acquisition of the business of the company, as determined by the board of directors.

Stock option agreements.    All stock option awards that are granted to the named executive officers are covered by a Stock Option Agreement. Under the Stock Option Agreements, 25% of the shares vest on the first anniversary of the grant date and the remaining shares vest monthly over the following three years. Our board of directors may accelerate the vesting schedule in its discretion. Once an executive officer exercises his or her options and purchases shares of our common stock, we have a right of first refusal to purchase any shares that the executive officer seeks to sell to third parties at the price and on the terms offered by the proposed transferee. In the event that we do not elect to exercise such purchase right, the executive officer may sell the shares to the proposed transferee. This right of first refusal shall expire immediately prior to the closing of this offering.

Restricted stock purchase agreements.    The restricted stock purchase agreements provide that the named executive officer may not sell or transfer any unvested shares without first offering the shares to us. This does not apply to transfers to family members, to a trust or similar estate planning entity for the benefit of a family member or pursuant to a court order. Transferees must agree to be bound by the terms of the restricted stock agreement. Upon the termination of employment, including upon death, disability, retirement or discharge or resignation for any reason, whether voluntary or involuntary or upon a sale event, we have the obligation to repurchase all of the unvested shares held by the employee or any permitted transferee as of such date. We refer to this as the repurchase right. The per share purchase price of the unvested shares shall be the per share amount the employee paid for such shares.

In addition, we have a right of first refusal to purchase any vested shares that the executive officer seeks to sell to third parties at the price and on the terms offered by the proposed transferee. In the event that we do not elect to exercise such purchase right, the executive officer may sell the shares to the proposed transferee. This right of first refusal shall expire immediately prior to the closing of this offering.

Our board of directors may amend or discontinue the 2003 Option Plan at any time.

The following table sets forth certain information with respect to outstanding equity awards at December 31, 2006 with respect to the named executive officers.

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2006

 
  Option awards

   
   
 
  Stock awards

 
  Number of
securities
underlying
unexercised
options
exercisable

  Number of
securities
underlying
unexercised
options
unexercisable

   
   
Name

  Option
exercise
price

  Option
expiration
date

  Number of
shares or units
of stock that
have not vested

  Market value
of shares or
units of stock
that have
not vested(1)


Stanley N. Lapidus  
 
1,600,000

(4)

$

0.13

(3)

3/1/2016
  333,334
(2)
 
Stephen J. Lombardi             750,000 (6)  

Louise A. Mawhinney

 


19,400

 



 


$


0.13

 


9/26/2016

 

600,000

(5)

 

J. William Efcavitch

 


 

183,334
200,000

(7)
(8)

$
$

0.10
0.13


(3)

10/4/2014
3/1/2016

 



 

 

Thomas C. Meyers

 



 



 

 



 



 

116,667
100,000

(9)
(10)

 

(1)
The market value of the shares of stock that have not vested has been calculated by multiplying the number of shares times $                                 , which is the mid-point of the range listed on the cover page of this prospectus.

(2)
These shares vest monthly at the rate of 2.083333% per month.

(3)
All stock options granted in 2006 were originally granted with an exercise price of $0.13 per share. However, it was determined by a subsequent independent valuation that the fair market value for tax purposes under Internal Revenue Code Sections 409A and 83 on the dates of grant was $0.40 per share. As a result, the unvested options were re-priced upwards to $0.40 in the first quarter of 2007.

(4)
400,000 of these shares will become exercisable on March 28, 2007 and the remainder vest monthly at the rate of 2.083333% per month.

(5)
150,000 of these shares will become exercisable on September 25, 2007 and the remainder vest monthly at the rate of 2.083333% per month.

(6)
187,500 of these shares will become exercisable on June 12, 2007 and the remainder vest monthly at the rate of 2.083333% per month.

(7)
These shares vest monthly at the rate of 2.083333% per month.

(8)
50,000 of these shares will become exercisable on March 1, 2007 and the remainder vest monthly at the rate of 2.083333% per month.

(9)
These shares vest monthly at the rate of 2.083333% per month.

(10)
25,000 of these shares will become exercisable on March 28, 2007 and the remainder vest monthly at the rate of 2.083333% per month.

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Option exercises and stock vested

OPTION EXERCISES AND STOCK VESTED DURING FISCAL YEAR-END 2006

 
  Option awards

  Stock awards

Name

  Number of
shares
acquired on
exercise

  Value realized
on exercise

  Number of
shares
acquired on
vesting

  Value realized
on vesting


Stanley N. Lapidus         500,000   $ 578,835

Stephen J. Lombardi

 


 

 


 


 

 


Louise A. Mawhinney

 


 

 


 


 

 


J. William Efcavitch

 

216,660

 

$

265,912

 


 

 


Thomas C. Meyers

 


 

 


 

100,000

 

$

117,978

Director compensation

We do not pay any compensation for serving on our board of directors to our employee directors (i.e., Stanley N. Lapidus, President and Chief Executive Officer), and in the past we have not paid any compensation for serving on our board of directors to our non-employee directors. We reimburse all non-employee directors for their reasonable out-of-pocket expenses incurred in attending meetings of our board of directors or any committees thereof.

In connection with this offering, the board of directors adopted our Non-Employee Director Compensation Plan. The plan is designed to ensure that the compensation aligns the directors' interests with the long-term interests of the stockholders, that the structure of the compensation is simple, transparent and easy for stockholders to understand and that our directors are fairly compensated. Employee directors will not receive additional compensation for their services as directors.

Under the plan, upon initial election or appointment to the board of directors, new non-employee directors receive 50,000 shares of restricted stock that vest one year from the date of grant. Each year of a non-employee director's tenure, the director will receive 25,000 shares of restricted stock that vest one year from the date of grant.

In addition, each non-employee director is paid an annual retainer of $20,000 ($40,000 for any non-employee chairman) for their services. For each board of directors meeting that a non-employee director attends in person in excess of six meetings in a single calendar year, such non-employee director shall be paid $1,500. Committee members receive additional annual retainers in accordance with the following:

Committee

  Non-employee
chairman

  Non-employee
director


Audit Committee   $ 10,000   $ 5,000

Compensation Committee

 

 

6,500

 

 

3,000

Nominating and Corporate Governance Committee

 

 

6,500

 

 

3,000

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For each committee meeting a non-employee director attends in person, such non-employee director will receive $1,000 unless such committee meeting is held on the same day as a meeting of the full board of directors, in which case the non-employee directors will not be entitled to additional compensation.

These additional payments for service on a committee are due to the workload and broad-based responsibilities of the committees.

Limitation on liability and indemnity

As permitted by the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation and by-laws that limit or eliminate the personal liability of our directors. Consequently, a director will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for:

–>
any breach of the director's duty of loyalty to us or our stockholders;

–>
any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

–>
any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or

–>
any transaction from which the director derived an improper personal benefit.

These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies such as an injunction or rescission.

In addition, our by-laws provide that:

–>
we will indemnify our directors, officers and, in the discretion of our board of directors, certain employees to the fullest extent permitted by the Delaware General Corporation Law; and

–>
we will advance expenses, including attorneys' fees, to our directors and, in the discretion of our board of directors, to our officers and certain employees, in connection with legal proceedings, subject to limited exceptions.

Contemporaneous with the completion of this offering, we intend to enter into indemnification agreements with each of our executive officers and directors. These agreements provide that we will indemnify each of our directors to the fullest extent permitted by the Delaware General Corporation Law and advance expenses to each indemnitee in connection with any proceeding in which indemnification is available.

We also maintain general liability insurance to provide insurance coverage to our directors and officers for losses arising out of claims based on acts or omissions in their capacities as directors or officers, including liabilities under the Securities Act of 1933, as amended. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

These provisions may discourage stockholders from bringing a lawsuit against our directors in the future for any breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder's investment

77


may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions, the indemnification agreements and the insurance are necessary to attract and retain talented and experienced directors and officers.

At present, there is no pending litigation or proceeding involving any of our directors or officers in which indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.

78



Certain relationships and related-party transactions

Other than compensation agreements and other arrangements which are described in "Compensation" and the transactions described below, since January 1, 2004, there has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any related party, including any director, executive officer, holder of five percent or more of any class of our capital stock or any member of their immediate families had or will have a direct or indirect material interest.

All of the transactions set forth below were approved by a majority of the board of directors, including a majority of any independent and disinterested members of the board of directors. We believe that all of the transactions set forth below had terms no less favorable to us than we could have obtained from unaffiliated third parties. In connection with this offering, we have adopted a written policy which requires all future transactions between us and any related persons (as defined in Item 404 of Regulation S-K) be approved in advance by our audit committee.


PRIVATE PLACEMENTS OF SECURITIES

In December 2003, we raised approximately $27.0 million through the issuance of shares of series A redeemable convertible preferred stock. In March 2006 and January 2007, we raised an aggregate amount of approximately $40.0 million through the issuance of shares of series B redeemable convertible preferred stock. Each share of series A redeemable convertible preferred stock and series B redeemable convertible preferred stock will convert into one share of common stock upon the closing of this offering.

The following table summarizes, on a common stock equivalents basis, the participation by any related party, including our executive officers, five percent stockholders and certain stockholders associated with some of our directors in these private placements.

Purchaser(1)

  Total common
stock equivalents

  Aggregate
consideration paid

  Investment participation


Flagship Ventures(2)   13,440,066   $ 15,087,217   Series A, B
Atlas Venture(3)   11,944,987   $ 13,658,669   Series A, B
Highland Capital Partners(4)   11,944,987   $ 13,658,669   Series A, B
MPM Capital(5)   11,944,987   $ 13,658,669   Series A, B
Versant Ventures(6)   9,108,747   $ 9,999,919   Series A, B
Stanley N. Lapidus(7)   220,935   $ 249,999   Series A, B

(1)
See "Principal stockholders" for more detail on shares held by these purchasers.

(2)
Flagship Ventures includes AGTC Advisors Fund, L.P., Applied Genomic Technology Capital Fund, L.P., Flagship Ventures Fund 2004, L.P., NewcoGen Elan LLC, NewcoGen Equity Investors LLC, NewcoGen Group, LLC, NewcoGen PE LLC, NewcoGen-Long Reign Holding LLC and ST NewcoGen LLC. Consideration paid to us by Flagship Ventures for our redeemable convertible preferred stock in 2003, 2006 and 2007 was $6,428,467, $4,329,375 and $4,329,375, respectively. Noubar Afeyan, PhD, who is one of our directors, is managing partner of Flagship Ventures.

(3)
Atlas Venture includes Atlas Venture Entrepreneurs' Fund V, L.P., Atlas Venture Entrepreneurs' Fund VI, L.P., Atlas Venture Fund V, L.P., Atlas Venture Fund VI—GmbH & Co. KG, Atlas Venture Fund VI, L.P. and Atlas Venture Parallel Fund V-A, C.V. Consideration paid to us by Atlas Ventures for our redeemable convertible preferred stock in 2003, 2006 and 2007 was $4,999,919, $4,329,375 and $4,329,375, respectively. Peter Barrett, PhD, who is one of our directors, is a partner of Atlas Venture.

(4)
Highland Capital Partners includes Highland Capital Partners VI Limited Partnership, Highland Capital Partners VI-B Limited Partnership and Highland Entrepreneurs' Fund VI Limited Partnership. Consideration paid to us by Highland

79

    Capital Partners for our redeemable convertible preferred stock in 2003, 2006 and 2007 was $4,999,919, $4,329,375 and $4,329,375, respectively. Robert F. Higgins, who is one of our directors, is the managing general partner of Highland Capital Partners.

(5)
MPM Capital includes MPM Asset Management Investors 2003 BVIII LLC, MPM BioVentures III GmbH & Co., Beteiligungs KG, MPM BioVentures III Parallel Fund, LP, MPM BioVentures III, LP and MPM BioVentures III-QP, LP. Consideration paid to us by MPM Capital for our redeemable convertible preferred stock in 2003, 2006 and 2007 was $4,999,919, $4,329,375 and $4,329,375, respectively. Steven St. Peter, MD, who is one of our directors, is a general partner of MPM Capital.

(6)
Versant Ventures includes Versant Affiliates Fund II-A, L.P., Versant Side Fund II, L.P. and Versant Venture Capital II, L.P. Consideration paid to us by Versant Ventures for our redeemable convertible preferred stock in 2003, 2006 and 2007 was $4,999,919, $2,500,000 and $2,500,000, respectively. Brian Atwood, who is one of our directors, is a managing director of Versant Ventures.

(7)
Mr. Lapidus is our President and Chief Executive Officer and one of our directors.

In December 2003, in connection with the private placement of our Series A redeemable preferred stock, we entered into an investor rights agreement and a stockholders agreement, both of which were amended in March 2006 in connection with the private placement of our Series B redeemable preferred stock, with all of our preferred stockholders and certain of our common stockholders, including Stanley N. Lapidus, our President, Chief Executive Officer and Director, pursuant to which we granted such stockholders certain registration rights with respect to shares of our common stock by them. For more information regarding this agreement, see "Description of capital stock—registration rights."

TRANSACTIONS WITH OUR EXECUTIVE OFFICERS AND DIRECTORS

From time to time, our executive officers enter into stock restriction agreements upon the exercise of their option grants.

Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our executive officers and directors, providing for indemnification against expenses and liabilities reasonably incurred in connection with their service for us on our behalf. For more information regarding these agreements, see "Compensation."

On July 23, 2006 we sold 200,000 shares of common stock to Mr. Lapidus at a per share purchase price of $0.13.

On September 26, 2006 we issued 600,000 shares of restricted stock to Louise A. Mawhinney, our Vice President and Chief Financial Officer, in exchange for cash of $50,000 and a full recourse promissory note in the amount of $28,000. This transaction is more fully described under the heading "Compensation."

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Principal stockholders

The following table sets forth information with respect to the beneficial ownership of our common stock as of February 15, 2007, the most recent practicable date, and as adjusted to reflect the sale of common stock offered by us in this offering, for:

–>
each beneficial owner of more than 5% of our outstanding common stock;

–>
each of our named executive officers;

–>
each of our directors; and

–>
all of our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of February 15, 2007 are deemed outstanding but are not deemed outstanding for computing the percentage ownership of any other person. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to such securities. Except as otherwise indicated, all of the shares reflected in the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. Percentage ownership calculations are based on 68,040,149 shares outstanding as of February 15, 2007, which assumes the conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 59,189,998 shares of common stock that will occur at the closing of this offering, but does not include any unexercised options.

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Unless otherwise indicated, the address for each of the beneficial owners in the table below is c/o Helicos BioSciences Corporation, One Kendall Square, Building 700, Cambridge, Massachusetts 02139.

 
   
  Percentage of shares outstanding
 
  Shares
beneficially
owned

Name

  Before
offering

  After
offering


5% Stockholders            
Flagship Ventures(1)   13,980,622   20.55 %  
Atlas Venture(2)   11,944,987   17.56 %  
Highland Capital Partners(3)   11,944,987   17.56 %  
MPM Capital(4)   11,944,987   17.56 %  
Versant Ventures(5)   9,108,747   13.39 %  

Directors and Named Executive Officers

 

 

 

 

 

 
Stanley N. Lapidus(6)   2,654,268   3.90 %  
Stephen J. Lombardi   750,000   1.10 %  
Louise A. Mawhinney   619,400   *    
J. William Efcavitch, PhD(7)   304,160   *    
Thomas C. Meyers   449,752   *    
Noubar B. Afeyan, PhD(1)   13,980,622   20.55 %  
Brian G. Atwood(5)   9,108,747   13.39 %  
Peter Barrett, PhD(2)   11,944,987   17.56 %  
Robert F. Higgins(3)   11,944,987   17.56 %  
Steven St. Peter, MD(4)   11,944,987   17.56 %  

All executive officers and directors as a group (10 persons)

 

63,701,910

 

93.62

%

 

*
Represents less than 1% of the outstanding shares of common stock.

(1)
Consists of 478,520 shares held by AGTC Advisors Fund, L.P., 7,916,565 shares held by Applied Genomic Technology Capital Fund, L.P., 3,162,306 shares held by Flagship Ventures Fund 2004, L.P., 179,323 shares held by NewcoGen Elan LLC, 915,577 shares held by NewcoGen Equity Investors LLC, 1,063,276 shares held by NewcoGen Group, LLC, 190,733 shares held by NewcoGen PE LLC, 37,263 shares held by NewcoGen-Long Reign Holding LLC and 37,059 shares of ST NewcoGen LLC. Noubar B. Afeyan, PhD is managing partner of Flagship Ventures and may be deemed to share voting and investment power with respect to all shares held by Flagship Ventures. Dr. Afeyan disclaims beneficial ownership of such shares except to the extent of his pecuniary interest, if any.

(2)
Consists of 62,869 shares held by Atlas Venture Entrepreneurs' Fund V, L.P., 208,955 shares held by Atlas Venture Entrepreneurs' Fund VI, L.P., 3,776,840 shares held by Atlas Venture Fund V, L.P., 125,115 shares held by Atlas Venture Fund VI—GmbH & Co. KG, 6,832,923 shares held by Atlas Venture Fund VI, L.P. and 938,286 shares held by Atlas Venture Parallel Fund V-A, C.V. Peter Barrett, PhD is a partner of Atlas Venture and may be deemed to share voting and investment power with respect to all shares held by Atlas Venture. Dr. Barrett disclaims beneficial ownership of such shares except to the extent of his pecuniary interest, if any.

(3)
Consists of 7,476,723 shares held by Highland Capital Partners VI Limited Partnership, 4,097,969 shares held by Highland Capital Partners VI-B Limited Partnership and 370,294 shares held by Highland Entrepreneurs' Fund VI Limited Partnership. Robert F. Higgins is the managing general partner of Highland Capital Partners and may be deemed to share voting and investment power with respect to all shares held by Highland Capital Partners. Mr. Higgins disclaims beneficial ownership of such shares except to the extent of his pecuniary interest, if any.

(4)
Consists of 192,517 shares held by MPM Asset Management Investors 2003 BVIII LLC, 840,330 shares held by MPM BioVentures III GmbH & Co., Beteiligungs KG, 300,298 shares held by MPM BioVentures III Parallel Fund, LP, 668,560 shares held by MPM BioVentures III, LP and 9,943,282 shares held by MPM BioVentures III-QP, LP. Steven St. Peter, MD is a general partner of MPM Capital and may be deemed to share voting and investment power with respect to all shares

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    held by MPM Capital. Dr. St. Peter disclaims beneficial ownership of such shares except to the extent of his pecuniary interest, if any.

(5)
Consists of 168,165 shares held by Versant Affiliates Fund II-A, L.P., 79,198 shares held by Versant Side Fund II, L.P. and 8,861,384 shares held by Versant Venture Capital II, L.P. Brian G. Atwood is a managing director of Versant Ventures and may be deemed to share voting and investment power with respect to all shares held by Versant Ventures. Mr. Atwood disclaims beneficial ownership of such shares except to the extent of his pecuniary interest, if any.

(6)
Includes 900,000 shares held by certain family members of Mr. Lapidus and 433,333 shares issuable to Mr. Lapidus upon exercise of stock options.

(7)
Includes 87,500 shares issuable to J. William Efcavitch PhD upon exercise of stock options.

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Description of capital stock

GENERAL

Upon completion of this offering, our authorized capital stock will consist of 120,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of undesignated preferred stock, par value $0.001 per share. The following description of our capital stock is intended as a summary only and is qualified in its entirety by reference to our amended and restated certificate of incorporation and amended and restated by-laws to be in effect at the closing of this offering, which are filed as exhibits to the registration statement, of which this prospectus forms a part, and to the applicable provisions of the Delaware General Corporation Law. We refer in this section to our amended and restated certificate of incorporation as our certificate of incorporation, and we refer to our amended and restated by-laws as our by-laws.

As of February 15, 2007, we had 8,850,151 shares of our common stock outstanding, 59,189,998 shares of our redeemable convertible preferred stock outstanding and options to purchase 4,587,417 shares of our common stock under our stock option plan, 232,142 of which were vested. Upon the completion of this offering, all shares of our currently outstanding redeemable convertible preferred stock will be converted into an aggregate of 59,189,998 shares of common stock.


COMMON STOCK

As of December 31, 2006, there were 52,916,873 shares of our common stock outstanding, assuming conversion of all outstanding shares of preferred stock.

Holders of our common stock are entitled to one vote for each share of common stock held of record for the election of directors and on all matters submitted to a vote of stockholders. Holders of our common stock are entitled to receive dividends ratably, if any, as may be declared by our board of directors out of legally available funds, subject to any preferential dividend rights of any preferred stock then outstanding. Upon our dissolution, liquidation or winding up, holders of our common stock are entitled to share ratably in our net assets legally available after the payment of all our debts and other liabilities, subject to the preferential rights of any preferred stock then outstanding. Holders of our common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. Except as described below in "Anti-takeover provisions of our certificate of incorporation and by-laws," a majority vote of common stockholders is generally required to take action under our certificate of incorporation and by-laws.


PREFERRED STOCK

Upon completion of this offering, our board of directors will be authorized, without action by the stockholders, to designate and issue up to 5,000,000 shares of preferred stock in one or more series. Our board of directors can fix the rights, preferences and privileges of the shares of each series and any of its qualifications, limitations or restrictions. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common stock. The issuance of preferred stock, while providing flexibility in connection with possible future financings and acquisitions and other corporate purposes could, under certain circumstances, have the effect of delaying, deferring or preventing a change in control and could harm the market price of our common stock.

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Our board of directors will make any determination to issue such shares based on its judgment as to our best interests and the best interests of our stockholders. We have no current plans to issue any shares of preferred stock.


WARRANTS

As of December 31, 2006, warrants to purchase a total of 81,184 shares of our Series B redeemable convertible preferred stock, which are convertible into 81,184 shares of our common stock, were outstanding with an exercise price of $1.29 per share. These warrants expire on the earliest of (i) June 16, 2013, with respect to 77,960 shares, and November 30, 2013, with respect to 3,224 shares or (ii) two years from the effective date of this offering.


REGISTRATION RIGHTS

Demand registration rights.    Pursuant to an investor rights agreement entered into in connection with the private placements of our preferred stock, at any time starting six months after the effective date of this offering, subject to certain exceptions, the holders of 59,730,554 of the then outstanding registrable securities, have the right to demand that we file a registration statement covering the offering and sale of their shares of our common stock that are subject to the registration rights agreement. We are not obligated to file a registration statement on more than three occasions upon the request of the holders of two-thirds of registrable securities; however, this offering will not count toward that limitation.

Form S-3 registration rights.    If we are eligible to file a registration statement on Form S-3, parties to the investor rights agreement holding registrable securities anticipated to have an aggregate sale price (net of underwriting discounts and commissions, if any) in excess of $1,000,000 shall have the right, on one or more occasions, to request registration of such securities on Form S-3.

We have the ability to delay the filing of a registration statement under specified conditions, such as for a period of time following the effective date of a prior registration statement, if our board of directors deems it advisable to delay such filing or if we are in possession of material nonpublic information that would be in our best interests not to disclose. Such postponements cannot exceed 90 days during any twelve month period.

Piggyback registration rights.    All parties to the investor rights agreement have piggyback registration rights. Under these provisions, if we register any securities for public sale, including pursuant to any stockholder-initiated demand registration, these stockholders will have the right to include their shares in the registration statement, subject to customary exceptions. The underwriters of any underwritten offering will have the right to limit the number of such shares that may be registered, and piggyback registration rights are also subject to the priority rights of stockholders having demand registration rights in any demand registration.

Expenses of registration.    We will pay all registration expenses, other than underwriting discounts and commissions, related to any demand or piggyback registration.

Indemnification.    The investor rights agreement contains customary cross-indemnification provisions, under which we are obligated to indemnify the selling stockholders in the event of material misstatements or omissions in the registration statement attributable to us, and they are obligated to indemnify us for material misstatements or omissions attributable to them.

Expiration of registration rights.    The registration rights granted under the investor rights agreement have no expiration date.

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ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS

Certificate of incorporation and bylaw provisions

Upon completion of this offering, our certificate of incorporation and by-laws will include a number of provisions that may have the effect of delaying, deferring or preventing another party from acquiring control of us and encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include the items described below.

Board composition and filling vacancies.    In accordance with our certificate of incorporation, our board is divided into three classes serving staggered three-year terms, with one class being elected each year. Our certificate of incorporation also provides that directors may be removed only for cause and then only by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an election of directors. Furthermore, any vacancy on our board of directors, however occurring, including a vacancy resulting from an increase in the size of our board, may only be filled by the affirmative vote of a majority of our directors then in office even if less than a quorum.

No written consent of stockholders.    Our certificate of incorporation provides that all stockholder actions are required to be taken by a vote of the stockholders at an annual or special meeting, and that stockholders may not take any action by written consent in lieu of a meeting. This limit may lengthen the amount of time required to take stockholder actions and would prevent the amendment of our by-laws or removal of directors by our stockholders without holding a meeting of stockholders.

Meetings of stockholders.    Our certificate of incorporation and by-laws provide that only a majority of the members of our board of directors then in office may call special meetings of stockholders and only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders. Our by-laws limit the business that may be conducted at an annual meeting of stockholders to those matters properly brought before the meeting.

Advance notice requirements.    Our by-laws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of our stockholders. These procedures provide that notice of stockholder proposals must be timely given in writing to our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not less than 90 days prior to the first anniversary date of the annual meeting for the preceding year. The notice must contain certain information specified in the by-laws.

Amendment to certificate of incorporation and by-laws.    As required by the Delaware General Corporation Law, any amendment of our certificate of incorporation must first be approved by a majority of our board of directors, and if required by law or our certificate of incorporation, must thereafter be approved by a majority of the outstanding shares entitled to vote on the amendment and a majority of the outstanding shares of each class entitled to vote thereon as a class, except that the amendment of the provisions relating to stockholder action, board composition, limitation of liability and the amendment of our certificate of incorporation must be approved by not less than 75% of the outstanding shares entitled to vote on the amendment, and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class. Our by-laws may be amended by the affirmative vote of a majority of the directors then in office, subject to any limitations set forth in the by-laws; and may also be amended by the affirmative vote of at least 75% of the outstanding shares entitled to vote on the amendment, or, if our board of directors recommends that the stockholders

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approve the amendment, by the affirmative vote of the majority of the outstanding shares entitled to vote on the amendment, in each case voting together as a single class.

Undesignated preferred stock.    Our certificate of incorporation provides for 5,000,000 authorized shares of preferred stock. The existence of authorized but unissued shares of preferred stock may enable our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal is not in the best interests of our stockholders, our board of directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, our certificate of incorporation grants our board of directors with broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in control of us.

Section 203 of the Delaware General Corporation Law

Upon completion of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:

–>
before the stockholder became interested, our board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

–>
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and shares owned by employee stock plans, in some instances; or

–>
at or after the time the stockholder became interested, the business combination was approved by our board of directors and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.

Section 203 defines a "business combination" to include:

–>
any merger or consolidation involving the corporation and the interested stockholder;

–>
any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;

–>
subject to exceptions, any transaction that results in the issuance of transfer by the corporation of any stock of the corporation to the interested stockholder;

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–>
subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interest stockholder; and

–>
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

In general, Section 203 defines an "interested stockholder" as any entity or person beneficially owing 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.

NASDAQ GLOBAL MARKET LISTING

We are applying to have our common stock approved for quotation on the NASDAQ Global Market under the trading symbol "HLCS."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock will be Computershare Shareholder Services, Inc.

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Shares eligible for future sale

Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the market price of our common stock. Although we intend to apply to have our common stock approved for quotation on the NASDAQ Global Market, we cannot assure you that there will be an active public market for our common stock.

Based on the number of shares outstanding as of February 15, 2007, upon completion of this offering, we will have outstanding an aggregate of             shares of common stock. Of these shares, the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to certain limitations and restrictions described below. See "—Lock-up agreements."

The remaining             shares of common stock held by existing stockholders were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. Substantially all of those shares will be subject to "lock-up" agreements described below on the effective date of this offering. Upon expiration of the lock-up agreements 180 days after the effective date of this offering,             shares will become eligible for sale, subject in most cases to the limitations of Rule 144. In addition, holders of stock options could exercise such options and sell certain of the shares issued upon exercise as described below. See "—Lock-up agreements."

Days after date of
this prospectus

  Shares eligible
for sale

  Comment
Upon effectiveness       Shares sold in the offering

Upon effectiveness

 

 

 

Freely tradable shares saleable under Rule 144(k) that are not subject to the lock-up

90 Days

 

 

 

Shares saleable under Rules 144 and 701 that are not subject to a lock-up

180 Days

 

 

 

Lock-up released; shares saleable under Rules 144 and 701

Thereafter

 

 

 

Restricted securities held for one year or less


LOCK-UP AGREEMENTS

We, our executive officers and directors have entered into lock-up agreements with the underwriters. Under these agreements, subject to certain exceptions, we and each of these persons may not, without the prior written approval of UBS Securities LLC, offer, sell, contract to sell or otherwise dispose of, directly or indirectly, or hedge our common stock or securities convertible into or exchangeable or exercisable for our common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus. At any time and without public notice, UBS Securities LLC may, in their sole discretion, release some or all of the securities from these lock-up agreements.

We have agreed to indemnify the underwriters and their controlling persons against certain liabilities, including liabilities under the Securities Act. If we are unable to provide this indemnification, we have

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agreed to contribute to payments the underwriters and their controlling persons may be required to make in respect of those liabilities.

EMPLOYEE BENEFIT PLANS AND CHARITABLE RESERVE

As of February 15, 2007, there were a total of 4,587,417 shares of common stock subject to outstanding options under our 2003 Option Plan, approximately 232,142 of which were vested and exercisable. Immediately after the completion of this offering, we intend to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for future issuance under the 2003 Option Plan. On the date which is 180 days after the effective date of this offering, a total of approximately              shares of common stock subject to outstanding options will be vested and exercisable. After the effective dates of the registration statements on Form S-8, shares purchased under the 2003 Option Plan generally will be available for resale in the public market.

We have reserved 1,250,000 shares of our common stock for purposes of a philanthropic gift in support of the Broad Institute of MIT and Harvard, in thanks for early-stage discussions about next generation sequencing technology during our formative stages. This gift is not made in consideration of any agreement to provide services in the past, the present or the future, or for any other consideration.

RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year, including an affiliate, would be entitled to sell in "broker's transactions" or to market makers, within any three-month period, a number of shares that does not exceed the greater of:

–>
1% of the number of shares of our common stock then outstanding, which will equal approximately             shares immediately after this offering; or

–>
the average weekly trading volume in our common stock on the NASDAQ Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

Sales under Rule 144 are generally subject to the availability of current public information about us.

RULE 144(K)

Under Rule 144(k), a person who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice filing provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering.

RULE 701

In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to sell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period and notice filing requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice filing provisions of Rule 144.

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The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus.

REGISTRATION RIGHTS

Upon completion of this offering, the holders of at least 59,730,554 shares of our common stock have certain rights with respect to the registration of such shares under the Securities Act. See "Description of capital stock—registration rights." Upon the effectiveness of a registration statement covering these shares, the shares would become freely tradable.

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Certain material U.S. federal income and estate tax considerations to non-U.S. holders

The following is a general discussion of the material U.S. federal income and estate tax considerations with respect to the ownership and disposition of our common stock that may be relevant to a non-U.S. holder that acquires our common stock pursuant to this offering. The discussion is based on provisions of the Internal Revenue Code of 1986, as amended, or the Code, applicable U.S. Treasury regulations promulgated thereunder and U.S. Internal Revenue Service, or IRS, rulings and pronouncements and judicial decisions, all as in effect on the date of this prospectus and all of which are subject to change (possibly on a retroactive basis) or to differing interpretations so as to result in tax considerations different from those summarized below. We have not sought, and will not seek, any ruling from the IRS with respect to the tax consequences discussed in this prospectus, and there can be no assurance that the IRS will not take a position contrary to the tax consequences discussed below or that any such positions taken by the IRS would not be sustained.

The discussion is limited to non-U.S. holders that hold our common stock as a "capital asset" within the meaning of Section 1221 of the Code (generally, property held for investment). As used in this discussion, the term "non-U.S. holder" means a beneficial owner of our common stock that is not, for U.S. federal income tax purposes:

–>
an individual who is a citizen or resident of the United States;

–>
a corporation (including any entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any political subdivision thereof;

–>
a partnership (including any entity treated as a partnership for U.S. federal income tax purposes);

–>
an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or

–>
a trust (1) if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust or (2) that has made a valid election to be treated as a U.S. person for such purposes.

This discussion does not address the U.S. federal income and estate tax rules applicable to any person who holds our common stock through entities treated as partnerships for U.S. federal income tax purposes or to such entities themselves. If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) owns our common stock, the tax treatment of a partner in that partnership will depend upon the status of the partner and the activities of the partnership. A holder that is a partnership or a holder of interests in a partnership should consult such holder's tax advisor regarding the tax consequences of the purchase, ownership and disposition of our common stock.

This discussion does not consider:

–>
any state, local or foreign tax consequences;

–>
any tax consequences or computation of the alternative minimum tax;

–>
any U.S. federal gift tax consequences; or

–>
any U.S. federal tax considerations that may be relevant to a non-U.S. holder in light of its particular circumstances or to non-U.S. holders that may be subject to special treatment under U.S. federal tax laws, including without limitation, banks or other financial institutions, insurance companies, tax-exempt organizations, certain trusts, hybrid entities, "controlled foreign corporations," "passive foreign investment companies," certain former citizens or residents of the

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    U.S., holders subject to U.S. federal alternative minimum tax, broker-dealers, dealers or traders in securities or currencies and holders that hold our common stock as part of a "straddle," "hedge," "conversion transaction," "synthetic security" or other integrated investment.

This discussion is for general purposes only. Prospective investors are urged to consult their tax advisors regarding the application of the U.S. federal income and estate tax laws to their particular situations and the consequences under U.S. federal gift tax laws, as well as foreign, state and local laws and tax treaties.

DIVIDENDS

As previously discussed, we do not anticipate paying dividends on our common stock in the foreseeable future. If we pay dividends on our common stock, however, those payments will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed our current and accumulated earnings and profits, the distributions will constitute a return of capital and first reduce the non-U.S. holder's adjusted tax basis, but not below zero, and then will be treated as gain from the sale of stock, as described in the section of this prospectus entitled "Gain on disposition of common stock."

A dividend paid to a non-U.S. holder generally will be subject to withholding of U.S. federal income tax at a 30% rate, or a lower rate under an applicable income tax treaty, unless the dividend is effectively connected with the conduct of a trade or business of the non-U.S. holder within the U.S. (and, if an applicable income tax treaty so requires, is attributable to a permanent establishment of the non-U.S. holder within the U.S.) Non-U.S. holders (generally on a properly executed IRS Form W-8 BEN) will be required to satisfy certain certification and disclosure requirements in order to claim a reduced rate of withholding pursuant to an applicable income tax treaty. These forms must be periodically updated. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty. Special rules apply in the case of common stock held by certain non-U.S. holders that are entities rather than individuals.

Dividends that are effectively connected with a non-U.S. holder's conduct of a trade or business in the United States and, if an applicable income tax treaty so requires, attributable to a permanent establishment in the United States will be taxed on a net income basis at the regular graduated U.S. federal income tax rates in the same manner as if the non-U.S. holder were a resident of the United States. In such cases, we will not have to withhold U.S. federal income tax if the non-U.S. holder complies with applicable certification and disclosure requirements. In addition, a "branch profits tax" may be imposed at a 30% rate, or a lower rate under an applicable income tax treaty, on dividends received by a foreign corporation that are effectively connected with the conduct of a trade or business in the United States.

A non-U.S. holder may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund together with the required information with the IRS.

GAIN ON DISPOSITION OF COMMON STOCK

A non-U.S. holder generally will not be subject to U.S. federal income tax with respect to gain realized on a sale or other disposition of our common stock unless one of the following applies:

–>
the gain is effectively connected with the non-U.S. holder's conduct of a trade or business in the U.S. or, if an applicable income tax treaty so requires, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; in these cases, the non-U.S. holder generally will be taxed on its net gain derived from the disposition at the regular graduated rates

93

    and in the manner applicable to United States persons and, if the non-U.S. holder is a foreign corporation, the "branch profits tax" described above may also apply;

–>
the non-U.S. holder is an individual present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met; in this case, the non-U.S. holder will be subject to a 30% tax on the amount by which the gain derived from the sale or other disposition of our common stock and any other U.S.-source capital gains realized by the non-U.S. holder in the same taxable year exceed the U.S.-source capital losses realized by the non-U.S. holder in that taxable year unless an applicable income tax treaty provides an exemption or a lower rate; or

–>
we are or have been a "U.S. real property holding corporation" for U.S. federal income tax purposes at any time within the shorter of the five-year period ending on the date of disposition or the period that the non-U.S. holder held our common stock. We do not believe that we have been, are, or will become, a U.S. real property holding corporation, although there can be no assurance in this regard. If we are, or were to become, a U.S. real property holding corporation at any time during the applicable period, however, any gain recognized on a disposition of our common stock by a non-U.S. holder that did not own (directly, indirectly or constructively) more than 5% of our common stock during the applicable period generally would not be subject to U.S. federal income tax, provided that our common stock is "regularly traded on an established securities market" (within the meaning of Section 897(c)(3) of the Code).

FEDERAL ESTATE TAX

Common stock owned or treated as owned by an individual who is a non-U.S. holder at the time of death will be included in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax or other treaty provides otherwise, and, therefore, such individual may be subject to U.S. federal estate tax.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

Dividends and proceeds from the sale or other taxable disposition of our common stock are potentially subject to backup withholding. In general, backup withholding will not apply to dividends on our common stock paid by us or our paying agents, in their capacities as such, to a non-U.S. holder if the holder has provided the required certification that it is a non-U.S. holder.

Generally, we must report to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. Pursuant to income tax treaties or some other agreements, the IRS may make its reports available to tax authorities in the recipient's country of residence.

In general, backup withholding and information reporting will not apply to proceeds from the disposition of our common stock paid to a non-U.S. holder within the United States or conducted through certain U.S.-related financial intermediaries the holder has provided the required certification that it is a non-U.S. holder.

Backup withholding is not an additional tax. Any amount withheld may be refunded or credited against the holder's U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS in a timely manner.

Non-U.S. holders should consult their tax advisors regarding the application of the information reporting and backup withholding rules to them.

Prospective non-U.S. holders of our common stock should consult their tax advisors with respect to the particular tax consequences to them of owning and disposing of our common stock, including the consequences under the laws of any state, local or foreign jurisdiction or under any applicable tax treaty.

94



Underwriting

We are offering the shares of our common stock described in this prospectus through the underwriters named below. UBS Securities LLC, J.P. Morgan Securities Inc., Leerink Swann & Co., Inc. and Pacific Growth Equities, LLC are the representatives of the underwriters. UBS Securities LLC is the sole book-running manager of this offering. We have entered into an underwriting agreement with the representatives. Subject to the terms and conditions of the underwriting agreement, each of the underwriters has severally agreed to purchase the number of shares of common stock listed next to its name in the following table:

Underwriters

  Number of
shares

UBS Securities LLC    
J.P. Morgan Securities Inc.    
Leerink Swann & Co., Inc.    
Pacific Growth Equities, LLC    
  Total    

The underwriting agreement provides that the underwriters must buy all of the shares if they buy any of them. However, the underwriters are not required to take or pay for the shares covered by the underwriters' over-allotment option described below.

Our common stock is offered subject to a number of conditions, including:

–>
receipt and acceptance of the common stock by the underwriters; and

–>
the underwriters' right to reject orders in whole or in part.

We have been advised by the representatives that the underwriters intend to make a market in our common stock but they are not obligated to do so and may discontinue making a Markey at any time without notice.

In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses electronically.

OVER-ALLOTMENT OPTION

We have granted the underwriters an option to buy up to an aggregate of             additional shares of our common stock. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with this offering. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option, they will each purchase additional shares approximately in proportion to the amounts specified in the table above.

COMMISSIONS AND DISCOUNTS

Shares sold by the underwriters to the public will initially be offered at the offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $                                 per share from the initial public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $                                 per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. Upon execution of the underwriting agreement, the underwriters will be obligated to purchase the shares at the prices and upon the terms stated therein and, as a result, will thereafter bear any risk associated with changing the offering price to the public or other selling terms. The representatives of the underwriters have informed us that they do not expect to sell more than an

95


aggregate of 300,000 shares of common stock to accounts over which such representatives exercise discretionary authority.

The following table shows the per share and total underwriting discounts and commissions that we will pay to the underwriters, assuming both no exercise and full exercise of the underwriters' option to purchase up to an additional             shares:

 
  No exercise
  Full exercise
Per share   $     $  
  Total   $     $  

We estimate that the total expenses of the offering payable by us, excluding our underwriting discounts and commissions, will be approximately $             .

NO SALES OF SIMILAR SECURITIES

We, our executive officers and directors have entered into lock-up agreements with the underwriters. Under these agreements, subject to certain exceptions, we and each of these persons may not, without the prior written approval of UBS Securities LLC, offer, sell, contract to sell or otherwise dispose of, directly or indirectly, or hedge our common stock or securities convertible into or exchangeable or exercisable for our common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus. At any time and without public notice, UBS Securities LLC may, in their sole discretion, release some or all of the securities from these lock-up agreements.

We have agreed to indemnify the underwriters and their controlling persons against certain liabilities, including liabilities under the Securities Act. If we are unable to provide this indemnification, we have agreed to contribute to payments the underwriters and their controlling persons may be required to make in respect of those liabilities.

NASDAQ GLOBAL MARKET LISTING

Our common stock has been approved for quotation on the NASDAQ Global Market, subject to notice of official issuance, under the symbol "HLCS."

PRICE STABILIZATION, SHORT POSITIONS

In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common stock, including:

–>
stabilizing transactions;

–>
short sales;

–>
purchases to cover positions created by short sales;

–>
imposition of penalty bids; and

–>
syndicate covering transactions.

Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while this offering is in progress. These transactions may also include making short sales of our common stock, which involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering. Short sales may be "covered short sales," which are short positions in an amount not greater than the underwriters' over-allotment option referred to above, or may be "naked short sales," which are short positions in excess of that amount.

96


The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which they may purchase shares through the over-allotment option.

Naked short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchased in this offering.

The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions.

As a result of these activities, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. The underwriters may carry out these transactions on NASDAQ, in the over-the-counter market or otherwise.

DETERMINATION OF OFFERING PRICE

Prior to this offering, there was not public market for our common stock. The initial public offering price will be determined by negotiation by us and the representatives of the underwriters. The principal factors to be considered in determining the initial public offering price include:

–>
the information set forth in this prospectus and otherwise available to representatives;

–>
our history and prospects and the history and prospects for the industry in which we compete;

–>
our past and present financial performance and an assessment of our management;

–>
our prospects for future earning and the present state of out development;

–>
the general condition of the securities markets at the time of this offering;

–>
the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and

–>
other factors deemed to be relevant by the underwriters and us.

AFFILIATIONS

The underwriters and their affiliates may from time to time in the future engage in transactions with us and perform services for us in the ordinary course of the their business.

DIRECTED SHARE PROGRAM

At our request, certain of the underwriters have reserved up to 5% of the common stock being offered by this prospectus for sale at the initial offering price to our employees and consultants and other persons having a relationship with us, as designated by us. The sales will be made by UBS Financial Services Inc., an affiliate of UBS Securities LLC, through a directed share program. We do not know whether these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Directed share participants purchasing these reserved shares may be subject to the restrictions described in "Underwriting—no sales of similar securities" above.

97



Notice to investors

EUROPEAN ECONOMIC AREA

In relation to each Member State of the European Economic Area, or EEA, which has implemented the Prospectus Directive (each, a Relevant Member State), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, or the Relevant Implementation Date, our common stock will not be offered to the public in that Relevant Member State prior to the publication of a prospectus in relation to our common stock that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, our common stock may be offered to the public in that Relevant Member State at any time:

    to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

    to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or

    in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.

As used above, the expression "offered to the public" in relation to any of our common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and our common stock to be offered so as to enable an investor to decide to purchase or subscribe for our common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression "Prospectus Directive" means Directive 2003/71/ EC and includes any relevant implementing measure in each Relevant Member State.

The EEA selling restriction is in addition to any other selling restrictions set out below.

UNITED KINGDOM

Our common stock may not be offered or sold and will not be offered or sold to any persons in the United Kingdom other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses and in compliance with all applicable provisions of the Financial Services and Markets Act 2000, or the FSMA, with respect to anything done in relation to our common stock in, from or otherwise involving the United Kingdom. In addition, each underwriter has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of our common stock in circumstances in which Section 21(1) of the FSMA does not apply to us. Without limitation to the other restrictions referred to herein, this prospectus is directed only at (1) persons outside the United Kingdom, (2) persons having professional experience in matters relating to investments who fall within the definition of "investment professionals" in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005; or (3) high net worth bodies corporate, unincorporated associations and partnerships and trustees of high value trusts as described in Article 49(2) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. Without limitation to the other restrictions referred to herein,

98


any investment or investment activity to which this prospectus relates is available only to, and will be engaged in only with, such persons, and persons within the United Kingdom who receive this communication (other than persons who fall within (2) or (3) above) should not rely or act upon this communication.

FRANCE

No prospectus (including any amendment, supplement or replacement thereto) has been prepared in connection with the offering of our common stock that has been approved by the Autorité des marchés financiers or by the competent authority of another State that is a contracting party to the Agreement on the European Economic Area and notified to the Autorité des marchés financiers; no common stock has been offered or sold and will be offered or sold, directly or indirectly, to the public in France except to permitted investors, consisting of persons licensed to provide the investment service of portfolio management for the account of third parties, qualified investors (investisseurs qualifiés) acting for their own account and/or corporate investors meeting one of the four criteria provided in Article 1 of Decree N7 2004-1019 of September 28, 2004 and belonging to a limited circle of investors (cercle restreint d'investisseurs) acting for their own account, with "qualified investors" and "limited circle of investors" having the meaning ascribed to them in Article L. 411-2 of the French Code Monétaire et Financier and applicable regulations thereunder; none of this prospectus or any other materials related to the offer or information contained therein relating to our common stock has been released, issued or distributed to the public in France except to Permitted Investors; and the direct or indirect resale to the public in France of any common stock acquired by any Permitted Investors may be made only as provided by articles L. 412-1 and L. 621-8 of the French Code Monétaire et Financier and applicable regulations thereunder.

ITALY

The offering of shares of our common stock has not been cleared by the Italian Securities Exchange Commission (Commissione Nazionale per le Società e la Borsa, or the CONSOB) pursuant to Italian securities legislation and, accordingly, shares of our common stock may not and will not be offered, sold or delivered, nor may or will copies of this prospectus or any other documents relating to shares of our common stock or the offering be distributed in Italy other than to professional investors (operatori qualificati), as defined in Article 31, paragraph 2 of CONSOB Regulation No. 11522 of July 1, 1998, as amended, or Regulation No. 11522.

Any offer, sale or delivery of shares of our common stock or distribution of copies of this prospectus or any other document relating to shares of our common stock or the offering in Italy may and will be effected in accordance with all Italian securities, tax, exchange control and other applicable laws and regulations, and, in particular, will be: (i) made by an investment firm, bank or financial intermediary permitted to conduct such activities in Italy in accordance with the Legislative Decree No. 385 of September 1, 1993, as amended, or the Italian Banking Law, Legislative Decree No. 58 of February 24, 1998, as amended, Regulation No. 11522, and any other applicable laws and regulations; (ii) in compliance with Article 129 of the Italian Banking Law and the implementing guidelines of the Bank of Italy; and (iii) in compliance with any other applicable notification requirement or limitation which may be imposed by CONSOB or the Bank of Italy.

Any investor purchasing shares of our common stock in the offering is solely responsible for ensuring that any offer or resale of shares of common stock it purchased in the offering occurs in compliance with applicable laws and regulations.

This prospectus and the information contained herein are intended only for the use of its recipient and are not to be distributed to any third party resident or located in Italy for any reason. No person

99


resident or located in Italy other than the original recipients of this document may rely on it or its content.

In addition to the above (which shall continue to apply to the extent not inconsistent with the implementing measures of the Prospective Directive in Italy), after the implementation of the Prospectus Directive in Italy, the restrictions, warranties and representations set out under the heading "European Economic Area" above shall apply to Italy.

GERMANY

Shares of our common stock may not be offered or sold or publicly promoted or advertised by any underwriter in the Federal Republic of Germany other than in compliance with the provisions of the German Securities Prospectus Act (Wertpapierprospektgestz—WpPG) of June 22, 2005, as amended, or of any other laws applicable in the Federal Republic of Germany governing the issue, offering and sale of securities.

SPAIN

Neither the common stock nor this prospectus have been approved or registered in the administrative registries of the Spanish National Securities Exchange Commission (Comisión Nacional del Mercado de Valores). Accordingly, our common stock may not be offered in Spain except in circumstances which do not constitute a public offer of securities in Spain within the meaning of articles 30bis of the Spanish Securities Markets Law of 28 July 1988 (Ley 24/1988, de 28 de Julio, del Marcado de Valores), as amended and restated, and supplemental rules enacted thereunder.

SWEDEN

This is not a prospectus under, and has not been prepared in accordance with the prospectus requirements provided for in, the Swedish Financial Instruments Trading Act (lagen (1991:980) om handel med finasiella instrument) nor any other Swedish enactment. Neither the Swedish Financial Supervisory Authority nor any other Swedish public body has examined, approved, or registered this document.

SWITZERLAND

The common stock may not and will not be publicly offered, distributed or re-distributed on a professional basis in or from Switzerland and neither this prospectus nor any other solicitation for investments in our common stock may be communicated or distributed in Switzerland in any way that could constitute a public offering within the meaning of Articles 1156 or 652a of the Swiss Code of Obligations or of Article 2 of the Federal Act on Investment Funds of March 18, 1994. This prospectus may not be copied, reproduced, distributed or passed on to others without the underwriters' prior written consent. This prospectus is not a prospectus within the meaning of Articles 1156 and 652a of the Swiss Code of Obligations or a listing prospectus according to article 32 of the Listing Rules of the Swiss Exchange and may not comply with the information standards required thereunder. We will not apply for a listing of our common stock on any Swiss stock exchange or other Swiss regulated market and this prospectus may not comply with the information required under the relevant listing rules. The common stock offered hereby has not and will not be registered with the Swiss Federal Banking Commission and has not and will not be authorized under the Federal Act on Investment Funds of March 18, 1994. The investor protection afforded to acquirers of investment fund certificates by the Federal Act on Investment Funds of March 18, 1994 does not extend to acquirers of our common stock.

100



Legal matters

Goodwin Procter LLP, Boston, Massachusetts, has passed upon the validity of the shares of common stock offered hereby. Edmund R. Pitcher, Esq., a partner of Goodwin Procter LLP, currently beneficially owns 52,328 shares of our common stock. Dewey Ballantine LLP is representing the underwriters in this offering.


Experts

The consolidated financial statements as of December 31, 2005 and 2006 and for each of the three years in the period ended December 31, 2006 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.


Change in accountants

On November 30, 2006, with the approval of our audit committee, we dismissed BDO Seidman, LLP as our independent registered public accounting firm and engaged PricewaterhouseCoopers LLP as our independent registered public accounting firm.

During the years ended December 31, 2003, 2004 and 2005, and the subsequent period from January 1, 2006 through November 30, 2006, there were no disagreements with BDO Seidman, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO Seidman, LLP, would have caused it to make reference to the subject matter of the disagreements in its reports on our financial statements for such years.

During the period from May 9, 2003 (date of inception) through December 31, 2006, there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

BDO Seidman, LLP was provided with a copy of the above statements and we requested that it furnish a letter to the Securities and Exchange Commission stating whether or not it agrees with these statements. A copy of BDO Seidman, LLP's letter is included as an exhibit to this registration statement.

During the period from July 1, 2003 through November 30, 2006, neither we nor anyone on our behalf consulted PricewaterhouseCoopers LLP regarding either (1) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or (2) any matter that was a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K. PricewaterhouseCoopers LLP has reported on our consolidated financial statements for each of the fiscal years ended December 31, 2004, 2005 and 2006, and cumulatively for the period from May 9, 2003 (date of inception) through December 31, 2006 included in this registration statement.

101



Where you can find more information

We have filed with the SEC a registration statement on Form S-1 (File Number             ) under the Securities Act of 1933 with respect to the shares of common stock we are offering by this prospectus. This prospectus does not contain all of the information included in the registration statement. For further information pertaining to us and our common stock, you should refer to the registration statement and to its exhibits. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document.

Upon the closing of the offering, we will be subject to the informational requirements of the Securities Exchange Act of 1934 and will file annual, quarterly and current reports, proxy statements and other information with the SEC. You can read our SEC filings, including the registration statement, over the Internet at the SEC's website at www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Washington, D.C., 20549.

You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C., 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facility.

102



Helicos BioSciences Corporation (A development stage company)


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
  Page
Report of independent registered public accounting firm   F-2
Consolidated balance sheets as of December 31, 2005 and 2006   F-3
Consolidated statements of operations for the years ended December 31, 2004, 2005 and 2006 and the period from May 9, 2003 (date of inception) to December 31, 2006   F-4
Consolidated statements of redeemable convertible preferred stock and stockholders' equity (deficit) for the period from May 9, 2003 (date of inception) to December 31, 2003 and the years ended December 31, 2004, 2005 and 2006   F-5
Consolidated statements of cash flows for the years ended December 31, 2004, 2005 and 2006 and the period from May 9, 2003 (date of inception) to December 31, 2006   F-7
Notes to consolidated financial statements   F-8

F-1


Helicos BioSciences Corporation (a development stage company)


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Helicos BioSciences Corporation:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of redeemable convertible preferred stock and stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Helicos BioSciences Corporation and its subsidiary (a development stage enterprise) at December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 and, cumulatively, for the period from May 9, 2003 (date of inception) to December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation as of January 1, 2006.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 28, 2007

F-2


Helicos BioSciences Corporation (a development stage company)


CONSOLIDATED BALANCE SHEETS

(in thousands, except share per share data)

 
  December 31,

   
 
 
  Pro forma stockholders' equity at December 31,
2006

 
 
  2005

  2006

 

 
 
   
   
  (Unaudited)

 
Assets                    

Current assets

 

 

 

 

 

 

 

 

 

 
  Cash and cash equivalents   $ 8,566   $ 10,589        
  Short-term investments         795        
  Unbilled government grant receivable         159        
  Prepaids and other current assets     94     502        
   
 
       
    Total current assets     8,660     12,045        

Property and equipment, net

 

 

1,005

 

 

2,805

 

 

 

 
Restricted cash         450        
   
 
       
    Total assets   $ 9,665   $ 15,300        
   
 
       

Liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 
  Accounts payable   $ 644   $ 1,469        
  Accrued expenses and other current liabilities     395     1,299        
  Current portion of long-term debt         608        
   
 
       
    Total current liabilities     1,039     3,376        
Long-term debt, net of current portion         1,843        
Redeemable convertible preferred stock warrants         204        
Other long-term liabilities         455        
   
 
       
    Total liabilities     1,039     5,878        
Redeemable convertible preferred stock: par value $0.001 per share; 28,182,246 shares authorized at December 31, 2005, 59,314,030 shares authorized at December 31, 2006; 28,182,246 and 43,686,122 shares issued and outstanding at December 31, 2005 and 2006, respectively (liquidation preference: $54,809 at December 31, 2006); no shares issued or outstanding pro forma (unaudited)     26,869     46,761      

Commitments and contingencies (Note 8, 9 and 10)

 

 

 

 

 

 

 

 

 

 

Stockholders' equity (deficit) Common stock: par value $0.001 per share; 40,000,000 shares authorized at December 31, 2005; 100,000,000 shares authorized at December 31, 2006; issued and outstanding: 7,014,091 and 9,230,751 shares issued and outstanding at December 31, 2005 and 2006, respectively; 52,916,873 issued and outstanding pro forma (unaudited)

 

 

7

 

 

9

 

 

53

 

Subscription receivable

 

 


 

 

(4

)

 

(4

)

Additional paid-in capital

 

 

279

 

 

1,765

 

 

48,686

 

Deficit accumulated during the development stage

 

 

(18,529

)

 

(39,109

)

 

(39,109

)
   
 
 
 
Total stockholders' equity (deficit)     (18,243 )   (37,339 ) $ 9,626  
   
 
 
 
    Total liabilities, redeemable convertible preferred stock and stockholders equity (deficit)   $ 9,665   $ 15,300        
   
 
       

The accompanying notes are an integral part of these consolidated financial statements

F-3


Helicos BioSciences Corporation (a development stage company)


CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 
  Year ended December 31,

  Period from
May 9, 2003 (date of
inception) through
December 31,

 
 
  2004

  2005

  2006

  2006

 

 
Grant revenue   $   $   $ 159   $ 159  

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 
  Research and development     4,194     8,411     14,382     26,987  
  General and administrative     3,164     2,870     6,917     13,504  
   
 
 
 
 
  Total operating expenses     7,358     11,281     21,299     40,491  
   
 
 
 
 
    Operating loss     (7,358 )   (11,281 )   (21,140 )   (40,332 )
  Interest income     294     363     766     1,429  
  Interest expense             (206 )   (206 )
   
 
 
 
 
    Net loss   $ (7,064 ) $ (10,918 ) $ (20,580 ) $ (39,109 )
   
 
 
 
 
Net loss per share—basic and diluted   $ (3.44 ) $ (2.80 ) $ (3.63 )      
   
 
 
       
  Weighted average number of shares used in computation—basic and diluted     2,053,156     3,894,100     5,662,970        
   
 
 
       

Pro forma net loss per share—basic and diluted (unaudited)

 

 

 

 

 

 

 

$

(0.44

)

 

 

 
               
       
Weighted average number of shares used in computation—basic and diluted (unaudited)                 46,842,986        
               
       

The accompanying notes are an integral part of these consolidated financial statements

F-4

Ended December 31, 2004, 2005 and 2006"
Helicos BioSciences Corporation (a development stage company)


CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

Period from May 9, 2003 (date of inception) to December 31, 2006

(in thousands, except share and per share data)

 
  Series A
Redeemable
Convertible
Preferred Stock

  Series B
Redeemable
Convertible
Preferred Stock

   
   
   
   
   
   
   
 
 
  Common Stock

   
   
   
   
   
 
 
  Additional
paid-in
capital

   
  Deficit
accumulated
during
development stage

  Other
accumulated
income
(loss)

  Total
stockholders'
equity
(deficit)

 
 
  Subscription
receivable

 
 
  Shares

  Amount

  Shares

  Amount

  Shares

  Amount

 

 
Balance at inception     $     $     $—   $   $   $   $   $  
Issuance of Series A redeemable convertible preferred stock in December 2003 for cash at $0.9555 per share, net of issuance costs of $59   27,815,946     26,469                                
Conversion of promissory note for shares of Series A redeemable convertible preferred stock in December 2003 at $0.9555 per share   366,300     350                                
Issuance of restricted common stock in October 2003 to a founder for cash               2,000,000   2                     2  
Issuance of restricted common stock in November and December 2003 to nonemployees               2,781,571   3         (3 )            
Issuance of common stock in December 2003 at $0.10 per share in exchange for intellectual property               209,314       20                 20  
Nonemployee stock-based compensation expense                     23                 23  
Net loss                             (547 )       (547 )
   
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2003   28,182,246     26,819         4,990,885   5     43     (3 )   (547 )       (502 )
Exercise of a stock warrant to purchase shares of common stock in January 2004               540,556                        
Cash received from investors in January 2004 for previously issued shares of Series A redeemable convertible preferred stock       50                                
Cash received from nonemployee in January 2004 for previously issued shares of restricted common stock                         3             3  
Issuance of restricted common stock in February, March and April 2004 to employees for cash at $0.10 per share               700,000   1                     1  
Issuance of restricted common stock in September 2004 to nonemployees for cash at $0.10 per share               53,500                        
Exercise of nonemployee stock options in December 2004 for cash of $0.10 per share               68,400       6                 6  
Nonemployee stock-based compensation expense                     136                 136  
Employee stock-based compensation expense                     2                 2  
Unrealized short-term loss                                 (17 )   (17 )
Net loss                             (7,064 )       (7,064 )
   
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2004   28,182,246     26,869         6,353,341   6     187         (7,611 )   (17 )   (7,435 )

The accompanying notes are an integral part of these consolidated financial statements

F-5


Helicos BioSciences Corporation (a development stage company)


CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

Period from May 9, 2003 (date of inception) to December 31, 2006 (Continued)
(in thousands, except share and per share data)

 
  Series A
Redeemable
Convertible
Preferred Stock

  Series B
Redeemable
Convertible
Preferred Stock

   
   
   
   
   
   
   
 
 
  Common Stock

   
   
   
   
   
 
 
  Additional
paid-in
capital

   
  Deficit
accumulated
during
development stage

  Other
accumulated
income
(loss)

  Total
stockholders'
equity
(deficit)

 
 
  Subscription
receivable

 
 
  Shares

  Amount

  Shares

  Amount

  Shares

  Amount

 

 
Balance at December 31, 2004   28,182,246     26,869         6,353,341     6     187         (7,611 )   (17 )   (7,435 )
Issuance of restricted common stock in March 2005 in exchange for intellectual property               400,000                          
Issuance of restricted common stock in July 2005 to employees for cash at $0.10 per share               250,000     1                     1  
Issuance of restricted common stock in April and December 2005 to nonemployees for cash at $0.10 per share               7,500         1                 1  
Exercise of employee stock options in June 2005 for cash at $0.10 per share               1,250                          
Exercise of nonemployee stock options in September 2005 for cash at $0.10 per share               2,000                          
Nonemployee stock-based compensation expense                       43                 43  
Employee stock-based compensation expense                       12                 12  
Vesting of previously issued shares of restricted common stock                       36                 36  
Change in unrealized short-term loss                                   17     17  
Net loss                               (10,918 )       (10,918 )
   
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2005   28,182,246     26,869         7,014,091     7     279         (18,529 )       (18,243 )
Issuance of restricted common stock in January 2006 to nonemployees for cash at $0.10 per share               5,000                          
Issuance of Series B redeemable convertible preferred stock in March 2006 for cash at $1.29 per share, net of issuance costs of $108         15,503,876     19,892                            
Issuance of common stock in July 2006 to employee for cash at $0.13 per share               200,000         247                 247  
Issuance of restricted common stock in September, November and December 2006 to employees for cash at $0.13 per share               1,775,000     2         (4 )           (2 )
Exercise of nonemployee stock options in November 2006 for cash at $0.13 per share               20,000         2                 2  
Exercise of employee stock options in January and December 2006 for cash at $0.10 per share               216,660         22                 22  
Nonemployee stock-based compensation expense                       605                 605  
Employee stock-based compensation expense                       453                 453  
Vesting of previously issued shares of restricted common stock                       157                 157  
Net loss                               (20,580 )       (20,580 )
   
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2006   28,182,246   $ 26,869   15,503,876   $ 19,892   9,230,751   $ 9   $ 1,765   $ (4 ) $ (39,109 ) $   $ (37,339 )
   
 
 
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements

F-6


Helicos BioSciences Corporation (a development stage company)


CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
   
   
   
  Period from
May 9, 2003
(date of
inception)
through
December 31,
2006

 
 
  Year ended December 31,

 
 
  2004

  2005

  2006

 

 
Cash flows from operating activities                          
Net loss   $ (7,064 ) $ (10,918 ) $ (20,580 ) $ (39,109 )
Adjustments to reconcile net loss to net cash used in operating activities:                          
  Depreciation and amortization     180     482     953     1,615  
  Amortization of lease incentive             (70 )   (70 )
  Common stock issued for licenses             127     147  
  Stock-based compensation expense     138     55     1,279     1,495  
  Interest expense recorded on warrants             137     137  
Changes in operating assets and liabilities                          
  Unbilled receivable             (159 )   (159 )
  Prepaids and other current assets     (203 )   118     (274 )   (368 )
  Accounts payable     159     398     825     1,469  
  Accrued expenses and other current liabilities     351     (149 )   819     1,150  
  Other long-term liabilities             411     411  
   
 
 
 
 
    Net cash used in operating activities     (6,439 )   (10,014 )   (16,532 )   (33,282 )
   
 
 
 
 
Cash flows from investing activities                          
Purchases of property and equipment     (822 )   (843 )   (2,753 )   (4,420 )
Increase in restricted cash             (450 )   (450 )
Purchases of short-term investments     (21,838 )   (5,438 )   (7,433 )   (34,709 )
Maturities of short-term investments     9,291     17,985     6,638     33,914  
   
 
 
 
 
Net cash (used in) provided by investing activities     (13,369 )   11,704     (3,998 )   (5,665 )
   
 
 
 
 
Cash flows from financing activities                          
Proceeds from long-term debt             2,473     2,473  
Deferred initial public offering costs             (89 )   (89 )
Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs     50         19,892     46,411  
Proceeds from bridge loan                 350  
Proceeds from issuance of common stock             26     26  
Proceeds from issuance of restricted common stock     79     27     227     335  
Proceeds from exercise of stock options     6         24     30  
   
 
 
 
 
Net cash provided by financing activities     135     27     22,553     49,536  
   
 
 
 
 
Net (decrease) increase in cash and cash equivalents     (19,673 )   1,717     2,023     10,589  
Cash and cash equivalents, beginning of period     26,522     6,849     8,566      
   
 
 
 
 
Cash and cash equivalents, end of period   $ 6,849   $ 8,566   $ 10,589   $ 10,589  
   
 
 
 
 
Supplemental disclosure of cash flow information                          
Cash paid during the year for:                          
Interest   $   $   $ 69   $ 69  

Noncash financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 
Issuance of redeemable convertible preferred stock warrants   $   $   $ 95   $ 95  
Conversion of bridge loan to equity   $   $   $   $ 350  

The accompanying notes are an integral part of these consolidated financial statements

F-7


Helicos BioSciences Corporation (a development stage company)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business Description

Helicos BioSciences Corporation ("Helicos" or the "Company") is a life sciences company developing innovative genetic analysis technologies for the research, drug discovery and clinical diagnostics markets. Helicos has developed a proprietary technology to enable ultra-high-throughput genetic analysis based on the direct sequencing of single molecules of DNA or single copies of RNA. Helicos is a Delaware Corporation and was incorporated on May 9, 2003.

The Company has had limited operations to date and its activities have consisted primarily of raising capital, conducting research and development and recruiting personnel. Accordingly, the Company is considered to be in the development stage at December 31, 2006, as defined in Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises." The Company's fiscal year ends on December 31. The Company operates as one reportable segment.

The Company expects to incur substantial expenditures in the foreseeable future for the research, development and commercialization of its product candidates. The Company will need additional financing to fund operating losses, and, if deemed appropriate, establish manufacturing, sales and marketing capabilities, which it will seek to raise through public or private equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to the Company on acceptable terms or at all. The Company's failure to raise capital as and when needed could have a negative impact on its financial condition and its ability to pursue its business strategies. If adequate funds are not available to the Company, the Company may be required to delay, reduce or eliminate research and development programs, reduce or eliminate commercialization efforts, obtain funds through arrangements with collaborators or others on terms unfavorable to the Company or pursue merger or acquisition strategies.

2. Summary of Significant Accounting Policies

Basis of presentation and consolidation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated.

Unaudited pro forma stockholders' equity

In February 2007, the board of directors authorized management to file a registration statement with the Securities and Exchange Commission for the Company to sell shares of its common stock to the public. If the initial public offering is completed under the terms presently anticipated, all of the Company's Series A and B redeemable convertible preferred stock as of December 31, 2006, will automatically convert into 43,686,122 shares of common stock and the warrants for redeemable convertible preferred stock will become warrants for common stock as of the closing of the offering. Pro forma redeemable convertible preferred stock and stockholders' equity (deficit), as adjusted for the assumed conversion of the redeemable convertible preferred stock and reclassification of the redeemable convertible preferred stock warrant liability to equity, is set forth on the accompanying consolidated balance sheet.

F-8


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 reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although the Company regularly assesses these estimates, actual results could differ from those estimates. Changes in estimates are recorded in the period in which they become known.

Cash and cash equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the time of acquisition to be cash equivalents. Cash equivalents, which include money market accounts, are stated at cost, which approximates fair market value.

Short-term investments

The Company classifies marketable securities as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These securities are carried at fair market value with unrealized gains and losses reported, if material, as a component of other comprehensive gain or loss in stockholders' equity (deficit). There were no gross unrealized gains and losses at December 31, 2005 and 2006. Gains or losses on securities sold are based on the specific identification method.

Concentration of credit risk

The Company has no significant off-balance sheet concentrations of credit risk such as foreign currency exchange contracts, option contracts or other hedging arrangements. Financial instruments that subject the Company to credit risk consist primarily of cash, cash equivalents and short-term investments. The Company places its cash and cash equivalents in an accredited financial institution.

Fair value of financial instruments

The carrying amounts of the Company's financial instruments, which include cash and cash equivalents, unbilled receivables, accounts payable, accrued expenses, debt and redeemable convertible preferred stock warrants approximate their fair value at December 31, 2005 and 2006.

Property and equipment

Property and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to expense while the costs of significant improvements are capitalized. Depreciation is provided using the straight-line method over the following estimated useful lives: Machinery and equipment—three years, office furniture and equipment—three years, leasehold improvements—the shorter of the economic useful life or life of lease. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the consolidated balance sheets and related gains or losses are reflected in the consolidated statements of operations. There have been no material retirements or sale of assets since May 9, 2003 (date of inception).

F-9


Long-lived assets

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair values less costs to sell.

Redeemable convertible preferred stock warrant

Freestanding warrants and other similar instruments related to shares that are redeemable are accounted for in accordance with SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" and Financial Accounting Standards Board ("FASB") Staff Position ("FSP") FAS 150-5, "Issuer's Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable." Under FSP FAS 150-5, the freestanding warrant that is related to the Company's redeemable convertible preferred stock is classified as a liability on the balance sheet as of January 1, 2006. The warrant is subject to re-measurement at each balance sheet date and any change in fair value is recognized as a component of interest expense. Fair value is measured using the Black-Scholes option pricing model. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrant or the completion of a liquidation event, including the completion of an initial public offering with gross cash proceeds to the Company of at least $50 million and a per share price of at least $3.87 (adjusted for stock splits, dividends and recapitalizations) ("Qualified IPO"), at which time all redeemable convertible preferred stock warrants will be converted into warrants to purchase common stock and, accordingly, the liability will be reclassified to equity.

Revenue recognition

Government research grants that provide for payments to the Company for work performed are recognized as revenue when the related expenses are incurred.

Research and development

Research and development expenditures are charged to the consolidated statement of operations as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, facilities costs, clinical trial and related supply costs, contract services, depreciation and amortization expense and other related costs.

Income taxes

The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company's consolidated financial statements contain certain deferred tax assets, which have arisen primarily as a result of operating losses, as well as other temporary differences between financial and tax accounting. SFAS No. 109 "Accounting for Income Taxes," requires the Company to establish a valuation allowance if the likelihood of realization of the deferred tax assets is reduced based on an evaluation of objective verifiable evidence. Significant management judgment is required in determining the Company's provision for income taxes, the Company's deferred tax assets and liabilities and any valuation

F-10


allowance recorded against those net deferred tax assets. The Company evaluates the weight of all available evidence to determine whether it is more likely than not that some portion or all of the net deferred income tax assets will not be realized.

Stock-based compensation

Prior to January 1, 2006, the Company accounted for employee stock-based compensation arrangements in accordance with the provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Under the fair value recognition provisions of SFAS No. 123, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), "Share-Based Payment," using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in the year ended December 31, 2006 included: (a) the pro rata compensation cost for all share-based compensation granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) the pro rata compensation cost for all share-based payments granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). In accordance with the modified prospective transition method of SFAS No. 123(R), results for prior periods have not been restated, and the impact of adopting SFAS No. 123(R) was not material to the net loss or cash flows. For all grants, the amount of share-based compensation expense recognized has been adjusted for estimated forfeitures of awards for which the requisite service is not expected to be provided. Estimated forfeiture rates are developed based on the Company's analysis of historical forfeiture data. Prior to the adoption of the fair value recognition provisions of SFAS No. 123(R), share-based payment expense was adjusted for actual forfeitures as they occurred. The cumulative effect of the change in accounting for forfeitures is immaterial.

The Company accounts for stock-based compensation issued to non-employees in accordance with SFAS No. 123(R) and EITF No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or Services." The Company records the expense of such services based on the estimated fair value of the equity instrument using the Black-Scholes option pricing model. The value of the equity instrument is charged to earnings over the term of the service agreement.

Net loss per share

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. The Company's potential dilutive shares, which include outstanding common stock options, unvested restricted stock, redeemable convertible preferred stock and warrants have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share.

Other comprehensive income (loss)

SFAS 130, "Reporting Comprehensive Income," establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. For each of the years ended December 31, 2004, 2005, 2006 and the period from May 9, 2003 (date of

F-11


inception) to December 31, 2006, there was no material difference between the net loss and comprehensive loss.

Segment reporting

SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," establishes standards for reporting information about operating segments in annual financial statement and in interim financial reports issued to stockholders. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company believes that it operates in one segment.

Recent accounting pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" ("FIN No. 48"), which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. The provisions of FIN No. 48 are effective as of the beginning of the 2007 calendar year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company believes that FIN No. 48 will not have a material impact on its financial position, results of operations or its cash flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). This Statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in GAAP and expands disclosure related to the use of fair value measures in financial statements. SFAS No. 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. The Standard emphasizes that fair value is a market-based measurement and not an entity-specific measurement based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). SFAS No. 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity's own fair value assumptions as the lowest level. SFAS No. 157 is effective for our financial statements issued in 2008; however, earlier application is encouraged. The Company has not yet determined the impact that the adoption of SFAS No. 157 will have on its financial position, results of operations or its cash flows.

3. Short-Term Investments

During the years ended December 31, 2005 and 2006, the Company maintained short-term investments in corporate obligations with a maturity date no greater than twelve months to help meet liquidity objectives. The Company's investments in these corporate obligations at December 31, 2006 were $795,000 and were accounted for as available-for-sale. Accordingly, the Company recorded these investments at fair value which equals the cost basis. There were no gross unrealized gains or losses at December 31, 2005 and 2006. At December 31, 2005, the Company had no short-term investments.

F-12


4. Net Loss Per Share and Pro Forma Net Loss Per Share

Net loss per share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. The Company's potential dilutive shares, which include outstanding common stock options, unvested restricted stock, redeemable convertible preferred stock and warrants have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. Because the Company reported a net loss for the years ended December 31, 2004, 2005 and 2006, all potential common shares have been excluded from the computation of the dilutive net loss per share for all periods presented because the effect would have been antidilutive. Such potential common shares consist of the following:

 
  Year ended December 31,

 
  2004

  2005

  2006


Stock options   517,250   801,750   3,202,990
Unvested restricted stock   3,286,172   2,357,687   2,661,666
Warrants       81,184
Redeemable convertible preferred stock   28,182,246   28,182,246   43,686,122
   
 
 
    31,985,668   31,341,683   49,631,962
   
 
 

Unaudited pro forma net loss per share

The calculation of unaudited pro forma basic and diluted net loss per share assumes the conversion of all shares of Series A and B redeemable convertible preferred stock into shares of common stock using the as-if-converted method as of January 1, 2006, or the date of issuance, if later. The Company's shares used in pro forma net loss per share calculation are as follows (in thousands, except share data):

 
  Year ended
December 31,
2006

 

 
Numerator        
  Net loss   $ (20,580 )
   
 
Denominator for basic and diluted net loss per share     5,662,970  
   
 
Net loss per share—basic and diluted   $ (3.63 )
   
 
Net loss used to compute pro forma net loss per share   $ (20,580 )
   
 
Denominator for net loss per common share—basic and diluted     5,662,970  
Pro forma adjustment to reflect assumed weighted average effect of conversion of redeemable convertible preferred stock to common stock shares used to compute net loss per common share—basic and diluted     41,180,016  
   
 
Denominator for pro forma basic and diluted net loss per common share     46,842,986  
   
 
Pro forma net loss per share—basic and diluted   $ (0.44 )
   
 

F-13

5. Property and Equipment, net

Property and equipment, net consist of the following (in thousands):

 
  December 31,

 
 
  2005

  2006

 

 
Machinery and equipment   $ 1,391   $ 3,184  
Office furniture and equipment     210     425  
Leasehold improvements     66     747  
   
 
 
      1,667     4,356  
Less: accumulated depreciation and amortization     (662 )   (1,551 )
   
 
 
Property and equipment, net   $ 1,005   $ 2,805  
   
 
 

Depreciation and amortization charged to the consolidated statements of operations for the years ended December 31, 2004, 2005, 2006 and from May 9, 2003 (date of inception) to December 31, 2006 was $180,000, $482,000 $953,000 and $1,615,000, respectively.

During the year ended December 31, 2006, the Company retired and disposed of $64,000 of property and equipment, which was fully depreciated and no longer in use. There were no gains or losses on the disposal.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

 
  December 31,

 
  2005

  2006


Compensation and benefits   $ 78   $ 541
Professional fees     37     272
Deferred rent and lease incentives         154
License fees     134     66
Research consulting and collaborations     49     48
Other     97     218
   
 
Accrued expenses and other current liabilities   $ 395   $ 1,299
   
 

7. Income Taxes

There is no provision for income taxes because the Company has incurred operating losses since inception. The reported amount of income tax expense for the years differs from the amount that would result from applying domestic federal statutory tax rates to pretax losses primarily because of

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the changes in the valuation allowance. Significant components of the Company's deferred tax assets at December 31, 2005 and 2006 are as follows (in thousands):

 
  December 31,

 
 
  2005

  2006

 

 
Deferred tax assets:              
  Net operating loss carryforwards   $ 6,885   $ 14,029  
  Research and development credit carryforwards     862     1,764  
  Depreciation and amortization     333     441  
  Allowances and reserves     80     449  
   
 
 
      8,160     16,683  
  Less: Valuation allowance     (8,160 )   (16,683 )
   
 
 
Net deferred tax assets   $   $  
   
 
 

As of December 31, 2006, the Company has federal and state net operating losses ("NOL") of approximately $35.2 million and $35.5 million, respectively, as well as federal and state research and development credits of approximately $1.2 million and $0.9 million, respectively, which may be available to reduce future taxable income and taxes. Federal NOLs and research and development credits each begin to expire in 2024. State NOLs and research and development credits begin to expire in 2009 and 2024, respectively. As required by SFAS No. 109 "Accounting for Income Taxes," the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of NOLs. Management has determined that is it more likely than not that the Company will not recognize the benefits of the federal and state deferred tax assets and, as a result, a valuation allowance of $8.2 million and $16.7 million has been established at December 31, 2005 and 2006, respectively.

The Tax Reform Act of 1986 limits the annual utilization of net operating loss and tax credit carryforwards, following an ownership change of the Company. Should the Company undergo such an ownership change, utilization of its carryforwards may be limited.

A reconciliation of income tax expense (benefit) at the statutory federal income tax rate and income taxes as reflected in the financial statements is as follows:

 
  Year ended December 31,

 
  2004

  2005

  2006


Federal income tax at statutory federal rate   34.0%   34.0%   34.0%
Research and development credits   2.7%   7.1%   8.6%
Other   (0.7)%   (0.3)%   (0.9)%
Valuation allowance   (36.0)%   (40.8)%   (41.7)%
   
 
 
  Effective tax rate   0.0%   0.0%   0.0%
   
 
 

8. Commitments and Contingencies

License agreements and patents

In November 2003, the Company entered into a license agreement that provides the Company with rights under a certain U.S. patent and various U.S. and foreign patent applications expiring between

F-15


2017 and 2020. In connection with this agreement, the Company issued 209,314 shares of common stock, and recorded a charge of $20,000. In addition, the Company pays an annual license fee of $10,000 per year. The license fee payments are creditable against royalties based upon sales of products covered by patents licensed under the agreement. Royalties are calculated based on a percentage of defined net sales. Through December 31, 2006, no royalty payments have been made. All amounts paid to date and the value of the common stock issued have been expensed to research and development expense as technological feasibility had not been established and the technology had no alternative future use. The total expense recognized under this agreement for the years ended December 31, 2004, 2005 and 2006, and the period from May 9, 2003 (date of inception) through December 31, 2006 was $3,000, $10,000, $10,000 and $43,000, respectively.

In June 2004, the Company entered into a license agreement that provides the Company with rights under an issued U.S. patent. In connection with this agreement, the Company paid an upfront fee of $220,000 and committed to pay an annual license fee ranging from 10,000 to 40,000 Euros. As part of this agreement, the Company agrees to pay royalties based on a percentage of defined net sales. Through December 31, 2006, no royalty payments have been made. All amounts paid to date have been expensed to research and development expense as technological feasibility had not established and the technology had no alternative future use. The total expense recognized under this agreement for the years ended December 31, 2004, 2005 and 2006, and the period from May 9, 2003 (date of inception) through December 31, 2006 was $227,000, $16,000, $23,000 and $266,000, respectively.

In March 2005, the Company entered into a license agreement that provides the Company with an exclusive use and right to sublicense certain patents and the right to prosecute other patent applications on behalf of the third party. In connection with this license agreement, the Company paid an upfront fee of $350,000, committed to an annual license fee of $50,000, which will increase to $100,000 upon the successful issuance of a U.S. patent, committed to pay a three-year maintenance fee of $50,000, payable in equal annual installments beginning in March 2006, and issued 400,000 shares of restricted common stock, which vest in two equal installments upon the achievement of separate milestones. All amounts paid to date have been expensed to research and development expense as technological feasibility had not been established and the technology had no alternative future use. In May 2006, in accordance with the license agreement, due to the successful issuance of a U.S. patent, the committed annual license fee increased from $50,000 to $100,000 and 200,000 shares of the restricted common stock vested. The vesting of 200,000 shares of restricted common stock resulted in a charge to research and development expense of $127,000 based on the fair value of the Company's common stock at the time the milestone was achieved. The remaining 200,000 shares of restricted common stock will vest immediately upon the successful issuance of a second U.S. patent The total expense recognized under this agreement for the years ended December 31, 2004, 2005 and 2006, and the period from May 9, 2003 (date of inception) through December 31, 2006 was $0, $400,000, $229,000 and $629,000, respectively.

In June 2006, the Company entered into an agreement to acquire certain patents in the U.S. In connection with the agreement, the Company paid an upfront fee of $350,000, committed to a one-time payment of $250,000 once technological feasibility has been established, and committed to a one-time payment of $400,000 upon the first commercial sale of product. As part of the agreement, the Company agrees to pay royalties based on a percentage of defined net sales. Through December 31, 2006, no royalty payments have been made. All amounts paid to date have been expensed to research and development expense as technological feasibility had not established and the technology had no alternative future use. The total expense recognized under this agreement for the

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years ended December 31, 2004, 2005 and 2006, and the period from May 9, 2003 (date of inception) through December 31, 2006 was $0, $0, $350,000 and $350,000, respectively.

Operating leases

In January 2004, the Company entered into a sublease and a direct operating lease for office and laboratory space. The sublease expired on April 30, 2005. The direct lease commenced thereafter from May 1, 2005 and expired on December 31, 2005. As provided in the facility lease, the Company deposited $40,000 for the sublease and $30,000 for the direct lease in escrow for security. As of December 31, 2005 and 2006, the Company has $30,000 and $30,000, respectively, recorded in prepaid and other current assets for these security deposits. At December 31, 2006, the Company has no further obligations under this agreement.

In December 2005, the Company entered into an operating lease for new office and laboratory space. The lease expires in August 2009. In connection with this lease agreement, the Company entered into a letter of credit in the amount of $450,000, naming the Company's landlord as beneficiary. Per the lease agreement, the letter of credit can be reduced by $225,000 after one year. As of December 31, 2006, the Company has classified the $450,000 letter of credit as restricted cash on the consolidated balance sheet. Additionally, in connection with the lease agreement, the Company received lease incentives from the landlord of certain leasehold improvements. The Company recorded the lease incentives of $419,000 in other long-term liabilities and is amortizing them over the lease term as a reduction in rent expense. For the year ended December 31, 2006, the Company recorded a $70,000 reduction in rent expense for this amortization.

Future minimum lease payments under operating leases as of December 31, 2006 is as follows (in thousands):

2007   $ 828
2008     919
2009     624
Thereafter    
   
  Total minimum lease payments   $ 2,371
   

Total rent expense was $375,000, $232,000, $939,000 and $1,546,000 for the years ended December 31, 2004, 2005, 2006 and the period from May 9, 2003 (date of inception) through December 31, 2006, respectively. The Company records rent expense on a straight-line basis over the term. Accordingly, the Company has recorded a deferred liability at December 31, 2006 of $495,000, of which $154,000 is recorded in accrued expenses and other current liabilities and $341,000 is recorded in other long-term liabilities on the accompanying consolidated balance sheet.

In February 2007, the Company amended its existing operating lease for office and laboratory space to include additional office space in the same building, which will result in additional cash payments of approximately $200,000 per year for each of the years ending December 31, 2007, 2008 and 2009.

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9. Long-Term Debt

Line of credit facility and security agreement

In June 2006, the Company entered into a line of credit facility and security agreement (the "Credit Facility") with General Electric Capital Corporation ("GE Capital"). The Credit Facility provides that the Company may borrow up to $8,000,000 at an interest rate based on the Federal Reserve's 3 year Treasury Constant Maturities Rate. The end of the advance period is December 31, 2007. The proceeds of the Credit Facility may be used for the purchase of equipment, and is collateralized by specific equipment assets. Payments are required to be made on a monthly basis, of which, the first 6 months will be interest-only payments and then 30 months of principal and interest for each advance. The outstanding balance is collateralized by the equipment purchased with the proceeds from each equipment advance. As of December 31, 2006, advances on the Credit Facility were $2,473,000 at a weighted-average interest rate of 10.1%.

Loan payable payments are due as follows (in thousands):

2007   $ 838  
2008     1,124  
2009     929  
   
 
Total future minimum payments     2,891  
Less: amount representing interest     (418 )
Less: debt discount     (25 )
Add: amortization of debt discount     3  
   
 
Carrying value of debt     2,451  
Less: current portion     608  
   
 
  Long-term obligations   $ 1,843  
   
 

Redeemable convertible preferred stock warrant

In connection with the execution of the Credit Facility, the Company issued a warrant to GE Capital to purchase 62,016 shares of Series B redeemable convertible preferred stock. The warrants have an exercise price of $1.29 per share and expire on the earlier of (i) June 2013; or (ii) two years from the effective date of a Qualified IPO, as defined. In the event of a liquidation event, including the completion of an initial public offering, the warrants, if not exercised, will be converted into warrants to purchase common stock. The fair value of the warrants was estimated at $70,000 using the Black-Scholes valuation model with the following assumptions: expected volatility of 74%, risk free interest rate of 5.1%, expected life of seven years and no dividends. Expected volatility is based on the volatility of similar entities. The fair value of the warrants was recorded as a liability. Debt issuance costs of $70,000 are amortized to interest expense over the advance period of eighteen months. A total of $25,000 was amortized to interest expense during the year ended December 31, 2006.

In connection with the drawdowns under the Credit Facility in June and November 2006, the Company issued warrants to purchase 19,168 shares of Series B redeemable convertible preferred stock. The warrants have an exercise price of $1.29 per share and expire on the earlier of (i) dates ranging from June 2013 to November 2013; or (ii) two years from the effective date of a Qualified IPO, as defined. In the event of a liquidation event, including the completion of an initial public offering, the warrants, if not exercised, will be converted into warrants to purchase common stock.

F-18


The fair value of the warrant was estimated at an aggregate of $25,000 using the Black-Scholes valuation model with the following assumptions: expected volatility ranging from 73-74%, risk free interest rate ranging from 4.6%-5.1%, expected life of seven years and no dividends. The fair value of the warrant was recorded as a liability and a debt discount and is being amortized to interest expense using the over the loan term. A total of $3,000 was amortized to interest expense during the year ended December 31, 2006.

The warrants are classified as liabilities and are revalued each reporting period, with the resulting gains and losses recorded in interest expense. The change in carrying value of the warrants resulted in a charge of $109,000 for the year ended December 31, 2006.

10. Redeemable Convertible Preferred Stock

As of December 31, 2006, the Company has 59,314,030 authorized shares of preferred stock, of which 28,182,246 are designated as Series A redeemable convertible preferred stock and 31,131,784 are designated as Series B redeemable convertible preferred stock.

As of December 31, 2005, redeemable convertible preferred stock consists of:

 
  Number of
shares
authorized

  Number of
shares issued and
outstanding

  Carrying value

  Liquidation
preference
per share


 
   
   
  (in thousands)

   
Series A   28,182,246   28,182,246   $26,869   $ 0.9555
   
 
 
     

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

 
  Number of
shares
authorized

  Number of
shares issued and
outstanding

  Carrying value

  Liquidation
preference
per share


 
   
   
  (in thousands)

   
Series A   28,182,246   28,182,246   $26,869   $ 0.9555
Series B   31,131,784   15,503,876   $19,892   $ 1.29
   
 
 
     
    59,314,030   43,686,122   $46,761      
   
 
 
     

In October 2003, the Company entered into a $350,000, one-year promissory note with a co-founder of the Company ("Promissory Note"). Interest accrued on the Promissory Note at an annual rate of 3%, compounding monthly. In December 2003, the Company sold 27,815,946 shares of Series A redeemable convertible preferred stock, at a price of $0.9555 per share, resulting in net proceeds of approximately $26.5 million, net of $59,000 of issuance costs. As part of the sale of Series A redeemable convertible preferred stock, in accordance with the agreement, the Promissory Note was converted into an additional 366,300 shares of Series A redeemable convertible preferred stock.

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

F-19

In January 2007, the Company sold an additional 15,503,876 shares of Series B redeemable convertible preferred stock, at a price of $1.29 per share, resulting in proceeds of approximately $20.0 million. This issuance of Series B redeemable convertible preferred stock contains a beneficial conversion feature as the estimated fair value of the Company's common stock is in excess of the $1.29 per share conversion price.

As of December 31, 2006, the rights, preferences and privileges of the Company's redeemable convertible preferred stock are listed below:

Conversion

Each share of redeemable convertible preferred stock is convertible, at the option of the holder, into common stock of the Company based on a defined conversion rate, adjustable for certain standard antidilution adjustments. At December 31, 2006, the conversion rate for the Series A and Series B redeemable convertible preferred stock would result in a 1-for-1 exchange. Each share of the redeemable convertible preferred stock will automatically convert into common stock at the then appropriate conversion rate upon the closing of an initial public offering of the Company's common stock from which aggregate net proceeds to the Company exceed $50.0 million and the per share offering price is at least $2.8665 for the Series A redeemable convertible preferred stock to automatically convert and at least $3.87 for the Series B redeemable convertible preferred stock to automatically convert. Additionally, at any time, the holders of at least two-thirds of the outstanding shares of redeemable convertible preferred stock may elect to convert all of the shares into common stock.

Dividends

The redeemable convertible preferred stockholders are entitled to receive 8% cumulative dividends. Dividends shall accrue and shall be cumulative, provided, however, that the Company shall be under no obligation to pay such dividends unless so declared by the Board of Directors or upon liquidation. As of December 31, 2006, the Board of Directors has not declared a payment of dividends.

Voting rights

The redeemable convertible preferred stockholders generally vote together with all other classes and series of stock as a single class on all matters and are entitled to a number of votes equal to the number of shares of common stock into which each share of such preferred stock is convertible. With respect to the number of directors, the holders of the Series A and Series B redeemable convertible preferred stock are entitled to elect five directors of the Company.

Liquidation preferences

In the event of liquidation, dissolution, merger, sale or winding-up of the Company, the holders of the Series A and Series B redeemable convertible preferred stock are entitled to receive, prior to and in preference of the holders of common stock, an amount equal to the greater of (i) $0.9555 and $1.29 per share (subject to certain standard antidilution adjustments), respectively, plus any accrued but unpaid dividends; or (ii) such amount per share that would have been payable had each such share been converted to common stock.

If upon any such liquidation, dissolution, merger, sale or winding-up of the Company the remaining assets of the Company available for distribution to its stockholders shall be insufficient to pay the

F-20


holders of shares of preferred stock the full amount to which they shall be entitled, the assets of the Company shall be distributed ratably amongst the holders of Series A and Series B redeemable convertible preferred stock.

After the payment of all preferential amounts required to be paid to the holders of Series A and Series B redeemable convertible preferred stock upon the liquidation, dissolution, merger, sale or winding-up of the Company, the holders of Series A and Series B redeemable convertible preferred stock shall have no further participation in the distribution of assets of the Company and shall have no further rights of conversion to common stock. All remaining net assets of the Company available for distribution shall be distributed ratably among the holders of common stock.

The Series A and Series B redeemable convertible preferred stock are not subject to mandatory redemption; however, there are circumstances outside the control of the Company that could result in the holders of the Series A or Series B redeemable convertible preferred stock being redeemed upon certain deemed liquidation events in limited circumstances. Accordingly, the Series A and Series B preferred stock has been classified as redeemable convertible preferred stock. The Series A and Series B redeemable convertible preferred stock are not being accreted and the dividends are not being accrued because the conditions to cause these deemed liquidation events are not considered to be probable.

11. Common Stock

As of December 31, 2006, the Company had 100,000,000 shares of common stock authorized and 9,230,751 shares issued and outstanding. As of December 31, 2006, the Company has reserved 59,314,030 shares of common stock for issuance to redeemable convertible preferred stockholders upon the conversion of the redeemable convertible preferred stock, 3,202,990 shares of common stock for future issuance upon exercise of common stock options, and 81,184 shares of common stock for future issuance upon exercise of redeemable convertible preferred stock warrants.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company's stockholders. Common stockholders are not entitled to receive dividends unless declared by the Company's Board of Directors.

In November 2003, the company issued a warrant to an investor enabling the holder to purchase 540,556 shares of common stock for $0.001 per share, upon the closing of an equity financing. The warrant was exercised in full during 2004. The value of the warrant was not deemed material at the date of issuance.

12. Stock-Based Compensation

In 2003, the Company's Board of Directors adopted the 2003 Stock Option and Incentive Plan (the "2003 Stock Plan"). The 2003 Stock Plan provides for the granting of incentive and non-qualified stock options, restricted stock and other equity awards to employees, officers, directors, consultants and advisors of the Company. Provisions such as vesting, repurchase and exercise conditions and limitations are determined by the Board of Directors on the grant date. The maximum number of shares of common stock that may be issued pursuant to the 2003 Stock Plan is 14,076,382. As of December 31, 2006, 2,992,511 shares of common stock are available for issuance under the 2003 Stock Plan.

Prior to January 1, 2006, the Company accounted for employee stock-based compensation arrangements in accordance with the provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Under the fair value recognition provisions of SFAS No. 123, stock-based

F-21


compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), "Share-Based Payment," using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in the year ended December 31, 2006 included: (a) the pro rata compensation cost for all share-based compensation granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) the pro rata compensation cost for all share-based payments granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).

The Company accounts for stock-based compensation issued to non-employees in accordance with SFAS No. 123(R) and EITF No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or Services." The Company records the expense of such services based on the estimated fair value of the equity instrument using the Black-Scholes option pricing model. The value of the equity instrument is charged to earnings over the term of the service agreement.

Stock options

During the years ended December 31, 2004, 2005 and 2006, the Company granted 480,000, 234,000 and 2,617,900 stock options, respectively to certain employees. The vesting of these awards is time-based and the restrictions typically lapse 25% after one year and monthly thereafter for the next 36 months.

During the years ended December 31, 2004, 2005 and 2006, the Company granted 288,400, 60,500 and 30,000 stock options, respectively to certain nonemployees in exchange for certain consulting services. Vesting on these awards is time-based and the vesting periods range from immediate vesting on grant date to a four-year period. The Company recorded a stock-based compensation charge on these awards following the guidance of Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services", and the accelerated vesting method as described in FIN 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans—an Interpretation of APB Opinion No. 15 and 25."

The exercise price of each stock option shall be specified by the Board of Directors at the time of grant. The vesting period for each stock option is specified by the Board of Directors at the time of grant and is generally over a four-year period. The stock options expire ten years after the grant date.

The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The expected life assumption is based on the expected life assumptions of similar entities. Expected volatility is based on volatility of similar entities. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the

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expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock option grants is as follows:

 
  Year ended December 31,

 
 
  2004

  2005

  2006

 

 
Weighted average risk-free interest rate   2.4 % 4.0 % 4.8 %
Expected life in years   8.1   7.6   7.0  
Expected volatility   80.0 % 80.0 % 75.7 %
Expected dividends   0.0 % 0.0 % 0.0 %

A summary of stock option activity for the year ended December 31, 2006 is as follows:

 
  Number of
shares

  Weighted
average
exercise
price

  Weighted
average
remaining
contractual
term (in years)

  Aggregate
intrinsic value as of December 31 2006 (in thousands)


Outstanding:                    
  Balance at December 31, 2005   801,750   $ 0.10          
  Granted   2,647,900   $ 0.13          
  Exercised   (236,660 ) $ 0.10          
  Forfeited   (10,000 ) $ 0.12          
   
               
  Balance at December 31, 2006   3,202,990   $ 0.12   9.1   $ 7,480
   
               
Exercisable   203,151   $ 0.10   8.4   $ 479

From May 9, 2003 (date of inception) through December 31, 2006, there were 3,710,800 stock options granted, of which 308,310 were exercised through December 31, 2006 and 199,500 were forfeited through December 31, 2006. The weighted average exercise prices of stock option grants, exercises and forfeitures from May 9, 2003 (date of inception) through December 31, 2006 was $0.12 per share, $0.10 per share and $0.10 per share, respectively.

The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company's common stock on December 31, 2006 of $2.46 per share and the exercise price of the underlying options.

The weighted-average grant-date fair value of grants of stock options was $0.08 per share, $0.08 per share and $0.63 per share for the years ended December 31, 2004, 2005 and 2006, respectively.

The total intrinsic value of stock options exercised was $0, $0 and $285,000 for the years ended December 31, 2004, 2005 and 2006, respectively.

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The following table summarizes information about stock options outstanding at December 31, 2006:

Options outstanding

  Options exercisable

Weighted
average
exercise
price

  Number of
stock options

  Weighted
average
remaining
life (years)

  Number of
stock
options

  Weighted
average
exercise
price

  Weighted
average
remaining life (years)


$ 0.10   580,090   8.2   180,501   $ 0.10   8.3
$ 0.13   2,622,900   9.3   22,650   $ 0.13   9.7
     
     
         
$ 0.12   3,202,990   9.1   203,151   $ 0.10   8.4
     
     
         

Restricted stock

During the years ended December 31, 2004, 2005 and 2006, and the period from May 9, 2003 (date of inception) to December 31, 2006, the Company granted 700,000, 250,000, 1,775,000 and 4,725,000 shares of restricted stock, respectively to certain employees. The vesting of these awards is time-based and the restrictions typically lapse 25% after one year and monthly thereafter for the next 36 months.

During the years ended December 31, 2004, 2005 and 2006, and the period from May 9, 2003 (date of inception) to December 31, 2006, the Company granted 53,500, 7,500, 5,000 and 2,847,571 shares of restricted stock, respectively to certain nonemployees in exchange for certain consulting services. Vesting on these awards is time-based and the vesting periods range from immediate vesting on grant date to a four-year period. The Company recorded a stock-based compensation charge on these awards following the guidance of Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services", and the accelerated vesting method as described in FIN 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans—an Interpretation of APB Opinion No. 15 and 25."

For each of these employee and nonemployee restricted stock awards, the employee or nonemployee paid the Company cash in an amount up to the fair market value of the award. If the employee ceases employment with the Company, or if the nonemployee terminates the service arrangement, the employee or nonemployee is automatically entitled to be refunded the cash paid for any unvested awards. At the time the cash is received, the Company records the cash as subscription payable in the consolidated balance sheet, and the amount is reclassified to additional paid-in capital over the vesting period. At December 31, 2005, the Company had $64,000 recorded as subscription payable in accrued expenses and other current liabilities. At December 31, 2006, the Company had $263,000 recorded as subscription payable, of which $149,000 was recorded to accrued expenses and other current liabilities and $114,000 was recorded to other long-term liabilities.

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A summary of restricted stock activity during the year ended December 31, 2006 is as follows:

 
  Number of
shares

  Weighted
average
grant date fair value

  Weighted
average
remaining
contractual term (in years)

  Aggregate
intrinsic value as of December 31, 2006 (in thousands)


Balance of outstanding restricted stock at December 31, 2005   1,957,687   $ 0.03          
Granted   1,780,000   $ 1.26          
Vested   (1,276,021 ) $ 0.02          
   
               
Balance of outstanding restricted stock at December 31, 2006   2,461,666   $ 0.92   8.0   $ 5,789
   
               

From May 9, 2003 (date of inception) through December 31, 2006, there were 7,572,571 shares of restricted stock granted, at a weighted average grant date fair value of $0.31, of which 5,110,905 were fully vested at December 31, 2006, with a weighted average grant date fair value of $0.01.

The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company's common stock on December 31, 2006 of $2.46 per share and the estimated fair value of the Company's common stock at the date of grant.

The total intrinsic value of restricted stock vested was $145,000, $122,000 and $1,387,000 for the years ended December 31, 2004, 2005 and 2006, respectively.

In July 2006, the Company sold 200,000 shares of fully vested common stock to an executive for cash at a price of $0.13 per share. The fair value of the Company's common stock at the time of grant was $1.24 per share, resulting in an intrinsic value of $1.11 per share. During the year ended December 31, 2006, the Company recorded a charge to general and administrative expenses of $221,000 relating to the grant of these shares of common stock.

For equity awards granted after January 1, 2006, the Company's management determined the fair value of the Company's common stock by obtaining, from an independent valuation firm, a contemporaneous valuation and two retrospective valuations. The Company recorded stock-based compensation expense to the extent that the fair value of the Company's common stock at the date of the grant exceeded the exercise price of the equity awards.

The Company recognized stock-based compensation expense on all employee and nonemployee awards as follows (in thousands):

 
   
   
   
  Period from May 9, 2003 (date of inception) to December 31, 2006

 
  Year ended December 31,

 
  2004

  2005

  2006


General and administrative expense   $ 136   $ 43   $ 1,180   $ 1,382
Research and development expense     2     12     99     113
   
 
 
 
    $ 138   $ 55   $ 1,279   $ 1,495
   
 
 
 

F-25

Total unrecognized stock-based compensation expense for all stock-based awards was approximately $2.9 million at December 31, 2006, of which $905,000 will be recognized in 2007, $844,000 in 2008, $785,000 in 2009 and $405,000 thereafter. This results in these amounts being recognized over a weighted-average period of 3.5 years.

In February 2007, the Company initiated an offer to amend all unvested stock options granted during the year ended December 31, 2006, which have an exercise price of $0.13 per share, to an exercise price of $0.40 per share with respect to stock options granted through October 31, 2006, and to an exercise price of $1.97 per share with respect to stock options granted in November and December 2006. This transaction will be accounted for in accordance with SFAS No. 123(R) and is not expected to have a material impact on the Company's financial position, statement of operations or cash flows.

13. Related Party Transactions

In June 2003, the Company entered into two agreements with a founder of the Company: 1) a services agreement providing for the rendering of certain administrative, management and development services and 2) a license agreement allowing for the use of a portion of leased premises. Under these agreements, the Company paid this founder $30,000 during the year ended December 31, 2004. The license agreement was terminated in February 2004.

In September 2003, the Company entered into a consulting arrangement with a board member and scientific founder of the Company. Under this agreement, the Company paid this board member and scientific founder $120,000 and $120,000 for the years ended December 31, 2004 and 2005, respectively. At December 31, 2005, this arrangement was discontinued and the board member and scientific founder resigned from the Board of Directors.

In September 2006, the Company loaned $28,000 to an officer, of which $4,000 remains outstanding at December 31, 2006 and is recorded as subscription receivable in the stockholders' equity (deficit) section of the consolidated balance sheet. The $4,000 was repaid to the Company in January 2007.

14. 401(k) Plan

The Company has a 401(k) income deferral plan (the "Plan") for employees. According to the terms of the Plan, the Company may make discretionary matching contributions to the Plan. The Company made no discretionary contributions during the years ended December 31, 2004, 2005 and 2006.

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LOGO



Part II
Information not required in prospectus

Item 13. Other expenses of issuance and distribution.

The following table sets forth the costs and expenses, other than the underwriting discount, payable by us in connection with the sale of common stock being registered. All amounts are estimated except the SEC registration fee and the NASD filing fee.

 
  Amount to be paid
SEC registration fee   $ 3,070
National Association of Securities Dealers Inc. fee   $ 10,500
NASDAQ Global Market listing fee   $ 100,000
Printing and mailing      
Legal fees and expenses      
Accounting fees and expenses      
Directors and officers insurance      
Miscellaneous      

Item 14. Indemnification of directors and officers.

Section 145(a) of the Delaware General Corporation Law provides, in general, that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), because he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.

Section 145(b) of the Delaware General Corporation Law provides, in general, that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor because the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made with respect to any claim, issue or matter as to which he or she shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, he or she is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or other adjudicating court shall deem proper.

Section 145(g) of the Delaware General Corporation Law provides, in general, that a corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against

II-


any liability asserted against such person and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify the person against such liability under Section 145 of the Delaware General Corporation Law.

Article VII of our Amended and Restated Certificate of Incorporation, as amended to date (the "Charter"), provides that no director of our company shall be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to us or our stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) in respect of unlawful dividend payments or stock redemptions or repurchases, or (4) for any transaction from which the director derived an improper personal benefit. In addition, our Charter provides that if the Delaware General Corporation Law is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of our company shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.

Article VII of the Charter further provides that any repeal or modification of such article by our stockholders or an amendment to the Delaware General Corporation Law will not adversely affect any right or protection existing at the time of such repeal or modification with respect to any acts or omissions occurring before such repeal or modification of a director serving at the time of such repeal or modification.

Article V of our Amended and Restated By-Laws, as amended to date (the "By-Laws"), provides that we will indemnify each of our directors and officers and, in the discretion of our board of directors, certain employees, to the fullest extent permitted by the Delaware General Corporation Law as the same may be amended (except that in the case of an amendment, only to the extent that the amendment permits us to provide broader indemnification rights than the Delaware General Corporation Law permitted us to provide prior to such the amendment) against any and all expenses, judgments, penalties, fines and amounts reasonably paid in settlement that are incurred by the director, officer or such employee or on the director's, officer's or employee's behalf in connection with any threatened, pending or completed proceeding or any claim, issue or matter therein, to which he or she is or is threatened to be made a party because he or she is or was serving as a director, officer or employee of our company, or at our request as a director, partner, trustee, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust, employee benefit plan, foundation, association, organization or other legal entity, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of our company and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. Article V of the By-Laws further provides for the advancement of expenses to each of our directors and, in the discretion of our board of directors, to certain officers and employees.

In addition, Article V of the By-Laws provides that the right of each of our directors and officers to indemnification and advancement of expenses shall be a contract right and shall not be exclusive of any other right now possessed or hereafter acquired under any statute, provision of the Charter or By-Laws, agreement, vote of stockholders or otherwise. Furthermore, Article V of the By-Laws authorizes us to provide insurance for our directors, officers and employees, against any liability, whether or not we would have the power to indemnify such person against such liability under the Delaware General Corporation Law or the provisions of Article V of the By-Laws.

In connection with this offering, we are entering into indemnification agreements with each of our directors. These agreements provide that we will indemnify each of our directors and such entities to the fullest extent permitted by law.

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We also maintain a general liability insurance policy which covers certain liabilities of directors and officers of our company arising out of claims based on acts or omissions in their capacities as directors or officers.

In any underwriting agreement we enter into in connection with the sale of common stock being registered hereby, the underwriters will agree to indemnify, under certain conditions, us, our directors, our officers and persons who control us within the meaning of the Securities Act of 1933, as amended, against certain liabilities.

Item 15. Recent sales of unregistered securities.

In the three years preceding the filing of this registration statement, we have issued the following securities that were not registered under the Securities Act:

(a)    Issuances of capital stock.

In March 2006 and January 2007, we issued and sold an aggregate of 31,007,752 shares of our Series B redeemable convertible preferred stock to 30 investors for an aggregate purchase price of $40.0 million.

No underwriters were used in the foregoing transactions. All sales of securities described above were made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act (and/or Regulation D promulgated thereunder) for transactions by an issuer not involving a public offering. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act.

(b)    Grants and exercises of stock options; awards of restricted stock.

Since inception, we granted stock options to purchase an aggregate of 5,114,627 shares of our common stock, with exercise prices ranging from $0.10 to $2.46 per share, to employees, directors and consultants pursuant to our stock option plans. Since inception, we issued and sold an aggregate of 327,710 shares of our common stock upon exercise of stock options granted pursuant to our stock plans for an aggregate consideration of $33,953. In addition, since inception, we issued and sold an aggregate of 7,172,571 shares of our common stock, with purchase prices ranging from $0.001 to $0.13 per share, to employees in connection with awards of restricted stock pursuant to our option plans for an aggregate consideration of $284,882. The issuance of common stock upon exercise of the options and the issuance of common stock in connection with awards of restricted stock were exempt either pursuant to Rule 701, as a transaction pursuant to a compensatory benefit plan, or pursuant to Section 4(2), as a transaction by an issuer not involving a public offering. The common stock issued upon exercise of options and in connection with awards of restricted stock are deemed restricted securities for the purposes of the Securities Act.

(c)    Issuance of Warrants.

In June and November 2006, we issued redeemable convertible preferred warrants to General Electric Capital Corporation to purchase up to an aggregate of 81,184 shares at an exercise price of $1.29 per share in connection with a equipment loan agreement entered into with General Electric Capital Corporation. This issuance was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act (or Regulation D promulgated thereunder) for transactions by an issuer not involving a public offering. The common stock issued upon exercise of the warrant are deemed restricted securities for the purposes of the Securities Act.

II-3


Item 16. Exhibits.

    (a)
    See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this registration statement on Form S-1, which Exhibit Index is incorporated herein by reference.

    (b)
    Financial Statement Schedules

All other schedules have been omitted because they are not applicable.

Item 17. Undertakings.

The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by the controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1)
For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2)
For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

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Signatures

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cambridge, Commonwealth of Massachusetts, on February 28, 2007.

    HELICOS BIOSCIENCES CORPORATION

 

 

By:

/s/  
STANLEY N. LAPIDUS      
Stanley N. Lapidus
President and Chief Executive Officer

SIGNATURES AND POWER OF ATTORNEY

We, the undersigned directors and/or officers of Helicos BioSciences Corporation (the "Company"), hereby severally constitute and appoint Stanley N. Lapidus and Louise A. Mawhinney and each of them singly, our true and lawful attorneys, with full power to any of them, and to each of them singly, to sign for us and in our names in the capacities indicated below the registration statement on Form S-1 filed herewith, and any and all pre-effective and post-effective amendments to said registration statement, and any registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in connection with the registration under the Securities Act of 1933, as amended, of equity securities of the Company, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of them might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their substitute or substitutes, shall do or cause to be done by virtue of this Power of Attorney.

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on February 28, 2007:

Signature
  Title

 

 

 
/s/ Stanley N. Lapidus
Stanley N. Lapidus
  President, Chief Executive Officer and Director (Principal Executive Officer)

/s/ Louise A. Mawhinney

Louise A. Mawhinney

 

Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

/s/ Noubar B. Afeyan, PhD

Noubar B. Afeyan, PhD

 

Chairman of Board of Directors
     

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/s/ Brian G. Atwood

Brian G. Atwood

 

Director

/s/ Peter Barrett, PhD

Peter Barrett, PhD

 

Director

/s/ Robert F. Higgins

Robert F. Higgins

 

Director

/s/ Steven St. Peter, MD

Steven St. Peter, MD

 

Director

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Exhibit index

Number

  Description
1.1 * Form of Underwriting Agreement

3.1

*

Third Amended and Restated Certificate of Incorporation of the Registrant

3.2

*

Amended and Restated By-laws of the Registrant

3.3

*

Form of Fourth Amended and Restated Certificate of Incorporation of the Registrant

4.1

*

Specimen Stock Certificate

5.1

*

Opinion of Goodwin Procter
LLP

10.1

 

Warrant by and between the Registrant and General Electric Capital Corporation, dated June 9, 2006

10.2

 

Warrant by and between the Registrant and General Electric Capital Corporation, dated November 30, 2006

10.3

 

Master Loan Agreement by and between the Registrant and General Electric Capital Corporation, dated June 9, 2006

10.4

*

Lease Agreement by and between the Registrant and Lincoln Property Company, dated December 30, 2005.

10.5

 

Lease Agreement by and between the Registrant and Cummings Properties, LLC, dated February 1, 2006.

10.6

 

2003 Stock Option and Incentive Plan and forms of agreements thereunder

10.7


License Agreement between the Registrant and California Institute of Technology, dated November 30, 2003

10.8


License Agreement between the Registrant, Roche Diagnostics GMBH and Roche Diagnostics Corporation, dated April 29, 2005

10.9


License Agreement between the Registrant and Arizona Technology Enterprises, dated March 15, 2005

10.10

 

Form of Indemnification Agreement

10.11

 

Amended and Restated Investor Rights Agreement by and among the Registrant and the Investors named therein, dated as of March 1, 2006

16.1

 

Letter from BDO Seidman, LLP regarding change in certifying accountant

21.1

 

Subsidiary of the Registrant

23.1

 

Consent of PricewaterhouseCoopers LLP

23.2

 

Consent of Goodwin Procter
LLP (included in Exhibit 5.1)

24.1

 

Power of Attorney (included in page II-5)

*
To be filed by amendment

Confidential treatment has been requested for certain provisions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act.