HELICOS BIOSCIENCES CORP

Notwithstanding these workforce reductions and despite the Company’s previous workforce reductions, restructurings, expense saving measures, the intellectual property sale and license discussed below and the bridge loan facility (the “Bridge Debt Financing”) contemplated by the Subordinated Secured Note Purchase Agreement (the “Note Purchase Agreement”) that the Company entered into in 2010 with investment funds affiliated with Atlas Venture and Flagship Ventures (the “Purchasers” or “Bridge Note Purchasers”), the Company does not generate sufficient funds to operate its business. The Company continues to require significant additional capital on a month-to-month basis in order to continue its operations beyond the $2,375,000 outstanding under the Bridge Debt Financing facility. Of this amount, $2,000,000 plus accrued interest is payable upon demand of the Purchasers on or after December 31, 2012 and $375,000 plus accrued interest matured on July 31, 2012. At maturity these notes converted into demand notes.  As of the date of this filing, the Purchasers have not made demand. If the Purchasers make a demand for payment, it is unlikely that the Company could repay these loans. No further commitments beyond the current outstanding notes have been made under the Bridge Debt Financing facility. The Company will require additional funding from 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. Existing funding is not sufficient to fund operations and related litigation expenses through the current planned September 2012 trial date and the ultimate resolution of the pending litigation with Illumina, Inc. (the “Patent Litigation”). The Company has discussed the possibility of additional short-term financing to support the Company’s continued operations with the Purchasers. The Company and the Purchasers, however, have not yet agreed on such financing and there can be no assurance that the Company will obtain such financing or any other sources of funding (including other asset sales) or that the Company can obtain any additional financing on terms favorable to the Company or in amounts sufficient to meet the

On May 8, 2012, we entered into a confidential settlement agreement with Pacific Biosciences, pursuant to which the litigation between us and Pacific Biosciences was dismissed. Substantially all of the proceeds from the settlement are payable to licensors, the Purchasers and litigation counsel. We recorded other income in the amount of $92,000 and a current liability in the amount of $468,000 for amounts that are due the Purchasers and litigation counsel at June 30, 2012. As of the date of this balance sheet June 30, 2012, $560,000 in settlement proceeds due to the Helicos, the Purchasers, and litigation counsel was held in escrow by our litigation counsel and recorded in other assets. We anticipate that the Purchasers will waive their rights to the current payout of the Risk Premium amount associated with this transaction and their rights will convert to a demand payment right with interest accruing on the amount due under the Risk Premium agreement at an annual rate of 10% beginning on the effective date of the modification of the Risk Premium Agreement referred to below.  As of the date of this filing, the Purchasers have not made a demand for payment of the amount due under the Risk Premium Agreement associated with this transaction.

On July 30, 2012, we entered into a non-exclusive license agreement with Intelligent Biosystems, Inc., pursuant to which we licensed certain patents related to nucleotides composition and light systems for analyzing nucleic acid samples (U.S. Patent Nos. 6,309,836, 6,639,088, 7,276,720, 7,279,563, 7,593,109, 7,948,625 and 8,094,312) to Intelligent Biosystems on a world-wide, non-exclusive basis in exchange for a one-time fee of $1.6 million. Pursuant to the Risk Premium Agreement, the Purchasers are entitled to 60% of the net proceeds from the sale of the Purchased assets, or $900,000. We anticipate that the Purchasers will waive their rights to the current payout of the Risk Premium amount associated with this transaction and their rights will convert to a demand payment right with interest accruing on the amount due under the Risk Premium agreement at an annual rate of 10% beginning on the effective date of the modification of the Risk Premium Agreement referred to below.  As of the date of this filing, the Purchasers have not made a demand for payment of the amount due under the Risk Premium Agreement associated with this transaction.

Product revenue.     We recognized $109,000 and $338,000 of product revenue during the three and six months ended June 30, 2011, respectively, and $159,000 and $280,000 of product revenue during the three and six months ended June 30, 2012, respectively. The $50,000 increase in product revenue for the three months period ending June 30, 2012 compared to the three month period ending June 30, 2011 is primarily due to the sale of product parts for use in a Heliscope that occurred in the three month period ending June 30, 2012.  The $58,000 decrease in product revenue for the six months period ending June 30, 2012 compared to the six month period ending June 30, 2011 is primarily due to the lower number of Helicos Systems operating in the field during this period in 2012 than 2011. Product revenue recognized during the three and six months ended June 30, 2011 and 2012 consists primarily of revenue from the sale of proprietary reagents and product parts to customers. As of December 31, 2011 and June 30, 2012, we had $8.0 million and $7.9 million in deferred revenue which primarily relates to six Helicos Systems for which all revenue recognition criteria have not been met. All cash receipts related to the amounts recorded in deferred revenue have been received, and future recognition of deferred revenue will not result in any further cash receipts. The $0.9 million costs for these deferred products is recorded in inventory. On March 21, 2012, we received an attorney demand letter from one of our major customers relating to certain product shipments reflected in deferred revenue. See Part II, Item 1, Legal Proceedings, for further information regarding the attorney demand letter

property portfolio of the Company, including payments received as a license or other settlement in patent infringement litigation brought by us ; (B) a merger of the Company in which there is a change of control; and (C) the sale or exclusive license by us of all or substantially all of our assets or intellectual property. We are currently in discussions with the Purchasers regarding a modification of the Risk Premium Agreement which is expected to enabled the Purchasers to waive their rights to a current payout of amounts due under the Risk Premium Agreement on a transaction by transaction basis and convert their payout right to a demand payment right with interest accruing at 10% per annum beginning on the date of the modification referred to herein.  The purpose of this modification is to allow us to use the Risk Premium portion of the proceeds from associated transactions for which the Purchasers have waived current rights to support its ongoing operations.  The Purchasers have provided us with verbal assurances that they are willing to enter into this modification and will not require current payment of amounts due under the existing Risk Premium Agreement prior to the execution of this modification.