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As Helicos Navigates Bankruptcy Process, Details Emerge on Disputes with Creditors and Customers

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Helicos will be able to use cash collateral, at least on an interim basis, to continue funding its operations as it navigates its way through the bankruptcy process and attempts to sell off its intellectual property, according to an order issued last month from the US Bankruptcy Court for the District of Massachusetts Eastern Division.

Helicos filed for Chapter 11 bankruptcy protection last month after the loss of a key IP suit on which it had pinned its hopes for financial recovery. A final hearing on the cash collateral motion is scheduled for Jan. 8, 2013.

Helicos' lenders, which include Applied Genomic Technology Capital Fund, AGTC Advisors Fund, Atlas Venture Fund, and Newcogen, agreed that the company could use collateral that may be subject to their own security interests. The intellectual property law firm Brown Rudnick has objected to Helicos' request to fund its operations through collateral because the company owes it around $1 million in patent licensing fees.

Documents filed with the bankruptcy court have revealed a number of details about the company's remaining assets, disputes related to creditors, and its patent litigation cases.

Helicos has been struggling financially for the last several years as it failed to make a significant dent in the next-generation sequencing market with its HeliScope single molecule sequencer. In 2010, it stopped production of the systems with the intention of focusing on developing molecular diagnostics (IS 5/18/2010), however, eventually it abandoned those plans as well due to diminishing resources.

The company next sought to raise cash through an aggressive "technology licensing program" that ultimately led it to file suit against Pacific BioSciences, Life Technologies, and Illumina over several of its patents related to its sequencing technology (IS 10/19/2010). It settled its suit with PacBio in May of this year, dropped the suit against Life Tech in July, and in September, the court declared its remaining patent in the suit against Illumina invalid (IS 9/4/2012).

Following that ruling, the company was left with limited options and dwindling cash, and in November filed for Chapter 11 bankruptcy.

In documents filed with the US Securities Exchange Commission at the time, Helicos said that the board determined that "continued operation of the company outside of bankruptcy protection is not possible due to its lack of cash resources and no available funding operations."

As of Sept. 30, Helicos had assets of $3.5 million and debts of $15.5 million. It has cash of around $1.4 million, including the $1 million that Brown Rudnick claims it is owed.

According to documents filed with the bankruptcy court, the company's 20 largest creditors include GE Healthcare Bio-Sciences, which is owed $75,000; Roche Diagnostics, which is owed $50,869; Stanford University, which is owed $81,200; and the California Institute of Technology, which is owed $10,000.

Additional creditors include Pacific Biosciences, PerkinElmer, Sequenom, Intelligent Bio-Systems, and the National Institutes of Health.

Some of these cases are related to patent licensing deals. For instance, in 2007, Helicos licensed rights from PerkinElmer to produce and commercialize reagents based on PerkinElmer's chemistry in exchange for a "single digit percentage" of net revenues from sales of those reagents, according to documents filed with the SEC.

In its bankruptcy filings, Helicos also cites several customers, such as Riken and Leiden University Medical Center, as creditors. In 2009, Riken purchased multiple HeliScope sequencing instruments and reagent kits. Helicos warranted the products and agreed to provide post-sale support including supplies for them. In March 2012, Riken wrote a letter to Helicos, alleging breach of contract with respect to the reagent and supply agreements, as well as breach of warranty and a failure of Helicos to provide necessary customer service and maintenance (IS 4/3/2012).

In the letter, Riken requested $5 million in the absence of an amicable settlement. However, Helicos asserted that it has met its obligations and is responsible only for supplying Riken with reagent kits upon request.

According to the bankruptcy documents, Riken in August requested delivery of the remaining 46 reagent kits it had previously ordered, stating that if the kits were not delivered within 10 days, it would cancel the order. In September, Riken said the order had been canceled and it requested a refund of 19,950,000 JPY ($237,982) "for kits it alleged should have been complimentary."

Riken also said it was entitled to offset 11,520,000 JPY ($137,421) it owed the company, leaving $105,375 due from Helicos to Riken.

Helicos is also facing demands from its primary intellectual property law firm, Brown Rudnick, of more than $1 million. The law firm is asserting "first priority attorney's lien" on Helicos' patents and the proceeds of any patents or patent licenses. In the bankruptcy documents, Helicos said that it believes the claim has been "substantially overstated."

Brown Rudnick objected to Helicos' motion to use cash collateral to support its bankruptcy proceedings, claiming that Helicos "refused to honor its payment obligations," despite recently monetizing some of its patents and "triggering events under the fee deferral agreement," such as the licensing of patents to Intelligent Bio-Systems for $1.6 million and the resolution of its patent lawsuit with Pacific Biosciences.

The law firm added that the use of cash collateral in the bankruptcy proceedings will result in "further erosion" of Helicos' assets and, as such, Helicos will be "unable to provide adequate protection of Brown Rudnick's interest in patents, patent applications and their proceeds, and therefore should not be authorized to use the related cash collateral."

Brown Rudnick also secured a temporary restraining order against Helicos that prevents "dissipation of amounts subject to" the lien and a "trustee process attachment" of the $1 million it claims it is owed against amounts held by Helicos from the Massachusetts Superior Court.

While the objection was temporarily overruled and Helicos will be allowed to use cash collateral on an interim basis, a final hearing is scheduled for Jan. 8, 2013.

Additionally, earlier this month, Pricewaterhouse Cooper resigned as its public accounting firm.

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