Nature of the Business and Basis of Presentation

9 Months Ended

Sep. 30, 2011

Nature of the Business and Basis of Presentation

Nature of the Business and Basis of Presentation

1. Nature of the Business and Basis of Presentation

Helicos BioSciences Corporation (“Helicos” or the “Company”) is a life sciences company focused on innovative genetic analysis technologies. Helicos has developed a proprietary technology to enable the rapid analysis of large volumes of genetic material by directly sequencing single molecules of DNA or RNA. The Company’s tSMS approach differs from current methods of sequencing DNA or RNA because it analyzes individual molecules of DNA directly instead of analyzing a large number of copies of the molecule which must be produced through complex sample preparation techniques. The Company’s tSMS technology eliminates the need for costly, labor-intensive and time-consuming sample preparation techniques, such as amplification or cloning, which are required by other methods to produce a sufficient quantity of genetic material for analysis.

The Company’s Helicos® Genetic Analysis Platform is designed to obtain sequencing information by repetitively performing a cycle of biochemical reactions on individual DNA or RNA molecules and imaging the results after each cycle. The platform consists of an instrument called the HeliScope™ Single Molecule Sequencer, an image analysis computer tower called the HeliScope™ Analysis Engine, associated reagents, which are chemicals used in the sequencing process, and disposable supplies. The information generated from using our tSMS products may lead to improved drug therapies, personalized medical treatments and more accurate diagnostics for cancer and other diseases.

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 September 30, 2011, as defined by the Financial Accounting Standards Board (“FASB”). The Company’s fiscal year ends on December 31. The Company operates as one reportable segment. Helicos is a Delaware corporation and was incorporated on May 9, 2003.

The Company plans to deploy its limited resources by focusing on intellectual property monetization and selected research and development activities that are primarily related to grant-funded initiatives. In addition, the Company has  scaled-down other research and development efforts in targeted areas that were designed to achieve tangible proof-of-concept goals connected with potential partnership opportunities with companies interested in next-generation sequencing, or to pursue other funding and strategic alternatives. As of the date of this filing, the Company does not have adequate resources and will continue to need to generate additional funding from various sources including contract sequencing service projects and government grants. The Company plans to defend its intellectual property rights through licensing and enforcement strategies. In this regard, the Company took several actions. The Company filed a lawsuit against Pacific Biosciences of California, Inc., Illumina, Inc. and Life Technologies Corporation (collectively, the “Defendants”) for patent infringement. The lawsuit, filed in the United States District Court for the District of Delaware, accuses the Defendants of infringing several patents and seeks injunctive relief and monetary damages. The Company is seeking a permanent injunction enjoining the Defendants from further infringement as well as monetary and punitive damages, costs and attorneys’ fees, interest and other relief as determined by the Court.

In connection with the Bridge Debt Financing and the Senior Debt and as security for the Company’s obligations under our contingency fee arrangement with outside intellectual property litigation counsel relating to the patent infringement lawsuit the Company filed against Pacific Biosciences of California, Inc., Illumina, Inc. and Life Technologies Corporation, the Company entered into a subordinated security agreement with outside intellectual property litigation counsel. Pursuant to this agreement, the Company agreed to grant outside intellectual property litigation counsel a second priority security interest in the patent infringement lawsuit. Under the terms of the contingency fee arrangement, the Company is obligated to pay outside intellectual property litigation counsel up to 40% of the proceeds paid to the Company in connection with the settlement, judgment or other resolution of the Cause of Action (as defined in the contingency fee arrangement) or certain business transactions resulting from or relating to the patent infringement lawsuit. To date, the Company and those providing professional services in connection with this patent litigation on a contingent basis have expended significant resources in pursuit of this intellectual property monetization effort and are expected to continue to do so going forward. The Company believes that the net proceeds generated by this litigation, if the Company is successful, could be substantial. There is no assurance that the Company will be successful in this litigation, even in the event of a favorable outcome in this litigation there can be no assurance that there will be any proceeds remaining for common shareholders, as a result of various arrangements in place with professional service providers, bridge lenders, licensors and others. The Company also continues to pursue its technology licensing program for its Single Molecule Sequencing and Sequencing-by-Synthesis intellectual property.

In March 2005, the Company entered into an agreement (as amended, the “License Agreement”) with Arizona Technology Enterprises (“AZTE”) in which AZTE granted the Company a worldwide, exclusive, irrevocable, royalty-bearing license, with the right to grant sublicenses, under a family of specified patents and patent applications (the “Licensed Patents”) exclusively licensed by AZTE from the Arizona Board of Regents on behalf of Arizona State University within a specified field of use.  On August 26, 2011, the Company and AZTE entered into a First Amendment to the License Agreement (the “Amendment”).  The Amendment expanded the field under the License Agreement so that AZTE has now granted the Company the exclusive right and license under the Licensed Patents to the full extent of the entire scope of all claims within the Licensed Patents, in all fields of use.  AZTE’s license to the Company under the License Agreement (the “AZTE Licensed Rights”), which gives the Company rights to several issued patents covering sequencing-by-synthesis methods and a number of pending patent applications, now expressly includes detection methods that do not rely on the detection of optically-labeled nucleotides (the “Expanded Field”).  Under the terms of the Amendment, the Company will remain obligated to pay AZTE a specified percentage of income from Company-granted sublicenses or other transfers of the AZTE Licensed Rights, including as part of any sale of the Company or litigation settlement.  Amounts the Company owes to AZTE will be a percentage of the proportionate value of the AZTE Licensed Rights in any such transaction.  The Company has also agreed to make additional payments to AZTE for Company-granted sublicenses or other such transfers of the AZTE Licensed Rights within the Expanded Field.  The Company will retain its existing first right to initiate and pursue patent infringement suits involving the AZTE Licensed Rights.

Although the Company believes that the HeliScope Sequencer has unique utility across a broad array of molecular diagnostic (“MDx”) tests, due to significant financial and resource constraints and a lack of any significant improvement to the financial outlook of the Company, the Company has further delayed its efforts to bring high-value MDx tests based on its technology to the market through a Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) laboratory partnership. Nevertheless, the Company still believes that diagnostic applications may benefit from the specific features of the Helicos System, including the platform’s ability to sequence non-amplified natural DNA and RNA directly, quantitative accuracy, high throughput, ability to use small sample quantities in simple and cost effective preparation methods, as well as a lack of biases typically seen with sample amplification. However, there can be no assurance that the Company will be able to deploy MDx tests or its technology through a CLIA laboratory, out-licensing or through its own efforts.

In order to further conserve its limited resources, during the second quarter of 2011, the Company further reduced its workforce by phasing out six business and research positions. These six positions were phased out during the third quarter of 2011 and ultimately reduced the Company’s total headcount to ten positions. In addition, during the third quarter of 2011, the Company entered into a new lease reducing the size and associated expense of its leased facility in Cambridge, Massachusetts which will house the Company’s headquarters and scientific laboratory. The Company did not incur or pay out severance charges or lease exit costs in connection with the implementation of these measures. Notwithstanding these most recent workforce reductions and despite the Company’s previous reductions, restructurings, expense saving measures, and the Senior Debt and the Bridge Debt Financing (see Note 7 of the Notes to the Consolidated Financial Statements), the Company does not have sufficient funds to pursue its business priorities. The Company will require significant additional capital by December 2011 to continue its operations beyond the existing $2,000,000 committed portion of the Bridge Debt. As of the date of this filing, $666,667 has been drawn against this committed facility and $1,333,333 remains available to support ongoing operations. Potential sources of additional funding may include funding from the $2,000,000 uncommitted portion of the Bridge Debt Financing facility and/or from other sources that have not yet been identified, but there can be no assurance that any such funding will be available on reasonable terms, if at all. As a result, the Company is no longer able to remain current in making payments to trade vendors and other unsecured creditors when such payments are due and, despite the restructuring of its Senior Debt, this inability to remain current increases the likelihood that the Lenders could declare a default under the Senior Debt in the near-term, including with regard to solvency. For the period from November 2010 through April 2011, the Company made interest only payments on amounts outstanding on the Senior Debt. Beginning in May 2011, the Company resumed making monthly principal payments of approximately $0.25 million on its Senior Debt. Workforce reductions, as well as curtailed financial resources, will further impact the Company’s ability to implement its business priorities. In addition, these constraints have caused the Company to significantly scale back service support and reagent supply to its current installed base. The Company has also significantly curtailed collaborative activities with other parties. The Company believes that these actions will provide additional time to execute its business priorities.

In November 2010, the Company’s securities were delisted from the NASDAQ Global Market and the trading of its common stock was suspended before the opening of business on November 16, 2010, and a Form 25-NSE was subsequently filed with the Securities and Exchange Commission on January 21, 2011 which removed the Company’s securities from listing and registration on The NASDAQ Stock Market. The Company’s securities are currently traded under the symbol “HLCS” on the OTCQB which is a market tier for OTC-traded companies that are registered and reporting with the SEC.

The Company’s future capital requirements will depend on many factors and it may require additional capital beyond its currently anticipated amounts. Any such required additional capital may not be available on reasonable terms, if at all, given the Company’s prospects, the current economic environment and restricted access to capital markets. The continued depletion of its resources may make future funding more difficult or expensive to obtain. Additional equity financing may be dilutive to the Company’s stockholders; debt financing, if available, may involve significant cash payment obligations and covenants that restrict its ability to operate as a business; and strategic partnerships may result in royalties or other terms which reduce its economic potential from any adjustments to its existing long-term strategy. If the Company is unable to execute its operations according to its plans or to obtain additional financing, the Company may be forced to cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amount of reclassification of liabilities, or any adjustment that might be necessary should the Company be unable to continue as a going concern.

Since inception, the Company has incurred losses and has not generated positive cash flows from operations. The Company expects its losses to continue for a considerable period of time. These losses, among other things, have had and will continue to have an adverse effect on its working capital, total assets and stockholders’ equity/(deficit). As of September 30, 2011 and November 1, 2011, the Company had $550,000 and $275,000, respectively, in cash and cash equivalents. The Company will require significant additional capital in December 2011 to continue its operations beyond the existing $2,000,000 committed portion of the Bridge Debt. As of the date of this filing, $666,667 has been drawn against this committed facility and $1,333,333 remains available to support ongoing operations. Potential sources of additional funding may include funding from the $2,000,000 uncommitted portion of the Bridge Debt Financing facility and/or from other sources that have not yet been identified, but there can be no assurance that any such funding will be available on reasonable terms, if at all. Including $1,333,333 of the available Bridge Debt facility, the Company has $1,608,333 in total available resources as of November 1, 2011 and owes approximately $250,000 in monthly principal payments for each of December 2011 and January 2012 as well as a final $800,000 payment on the Senior Debt due in January 2012. If the Company is unable to execute its operations according to its plans or to obtain additional financing, the Company may be forced to cease operations. The Company’s present capital resources are not sufficient to fund its planned operations for a twelve month period as of the date of this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011.Accordingly, the Company’s current financial resources raise substantial doubt about its ability to continue as a going concern.

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates because of different assumptions or conditions. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by GAAP. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated.

It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K.