XNAS:SQNM Sequenom Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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SQNM 06.30.2012 10Q Q2

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________ 
FORM 10-Q
 ____________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to             
Commission File Number: 000-29101
____________________ 
SEQUENOM, INC.
(Exact name of registrant as specified in its charter)
____________________ 
DELAWARE
77-0365889
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
3595 John Hopkins Court San Diego, California
92121
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (858) 202-9000
____________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    x  Yes     o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes     o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of shares of the Registrant's Common Stock outstanding as of July 23, 2012, was 114,565,254.
 



 SEQUENOM, INC.
INDEX
 
 

2


PART I - FINANCIAL INFORMATION
Item  1.    Financial Statements
SEQUENOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share information)
 
 
June 30,
2012
 
December 31,
2011
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
60,156

 
$
28,926

Marketable securities
38,481

 
55,290

Restricted cash
204

 
66

Accounts receivable, net
7,577

 
6,972

Inventories
10,551

 
8,729

Other current assets and prepaid expenses
3,803

 
3,533

Total current assets
120,772

 
103,516

Equipment and leasehold improvements, net
27,178

 
19,629

Intangible assets, net
2,147

 
1,154

Goodwill
10,007

 
10,007

Other assets
950

 
1,241

Total assets
$
161,054

 
$
135,547

Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
17,512

 
$
8,435

Accrued expenses
14,223

 
15,743

Deferred revenue
2,247

 
2,137

Long-term debt and obligations, current portion
6,126

 
1,902

Other current liabilities
897

 
787

Total current liabilities
41,005

 
29,004

Deferred revenue, less current portion
565

 
780

Long-term debt and obligations, less current portion
14,162

 
13,273

Other long-term liabilities
3,299

 
1,102

Commitments and contingencies


 


Stockholders' equity:
 
 
 
Convertible preferred stock, par value $0.001; 5,000,000 shares authorized, no shares issued or outstanding at June 30, 2012 and December 31, 2011, respectively

 

Common stock, par value $0.001; 185,000,000 shares authorized, 114,565,254 and 99,348,623 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
115

 
99

Additional paid-in capital
947,858

 
883,006

Accumulated other comprehensive income
412

 
570

Accumulated deficit
(846,362
)
 
(792,287
)
Total stockholders' equity
102,023

 
91,388

Total liabilities and stockholders' equity
$
161,054

 
$
135,547

See accompanying notes.

3


SEQUENOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share information)
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
(Unaudited)
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Genetic analysis product sales and services
$
10,142

 
$
11,731

 
$
20,281

 
$
23,575

Diagnostic services
8,110

 
1,601

 
12,891

 
3,267

Total revenues
18,252

 
13,332

 
33,172

 
26,842

Cost of revenues:
 
 
 
 
 
 
 
Cost of genetic analysis product sales and services
2,964

 
3,316

 
5,571

 
6,774

Cost of diagnostic services
9,407

 
1,109

 
16,278

 
2,755

Total cost of revenues
12,371

 
4,425

 
21,849

 
9,529

Gross margin
5,881

 
8,907

 
11,323

 
17,313

Operating expenses
 
 
 
 
 
 
 
Selling and marketing
11,303

 
7,678

 
21,060

 
13,738

Research and development
13,870

 
17,146

 
26,533

 
27,777

General and administrative
9,949

 
5,038

 
17,299

 
9,876

Total operating expenses
35,122

 
29,862

 
64,892

 
51,391

Loss from operations
(29,241
)
 
(20,955
)
 
(53,569
)
 
(34,078
)
Interest income
22

 
49

 
44

 
5

Interest expense
(267
)
 
(18
)
 
(483
)
 
(45
)
Gain on marketable securities

 
2

 

 
2

Other (expense) income, net
(116
)
 
(4
)
 
(45
)
 
471

Loss before income taxes
(29,602
)
 
(20,926
)
 
(54,053
)
 
(33,645
)
Income tax (expense) benefit
(20
)
 
(12
)
 
(22
)
 
37

Net loss
$
(29,622
)
 
$
(20,938
)
 
$
(54,075
)
 
$
(33,608
)
Net loss per common share, basic and diluted
$
(0.26
)
 
$
(0.21
)
 
$
(0.48
)
 
$
(0.34
)
Weighted average number of shares outstanding, basic and diluted
114,549

 
99,083

 
112,531

 
99,012

Comprehensive loss
$
(29,807
)
 
$
(20,779
)
 
$
(54,233
)
 
$
(33,169
)
See accompanying notes.

4


SEQUENOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Six months ended
June 30,
 
2012
 
2011
 
(Unaudited)
Operating activities
 
 
 
Net loss
$
(54,075
)
 
$
(33,608
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Stock-based compensation
6,113

 
6,120

Warrant issued for license

 
1,155

License fee payable

 
1,500

Depreciation and amortization
4,755

 
2,997

Deferred rent
1,561

 
(400
)
Other non-cash items
348

 
(78
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(679
)
 
357

Inventories
(1,842
)
 
(206
)
Prepaid expenses and other assets
499

 
(988
)
Accounts payable and accrued expenses
7,736

 
2,746

Deferred revenue
(79
)
 
175

Other liabilities

 
(15
)
Net cash used in operating activities
(35,663
)
 
(20,245
)
Investing activities
 
 
 
Purchases of equipment and leasehold improvements
(12,107
)
 
(6,896
)
Purchases of intangible assets
(1,300
)
 

Purchases of marketable securities
(10,329
)
 
(88,731
)
Proceeds from sales of marketable securities

 
9,997

Maturities of marketable securities
27,151

 
24,900

(Increase in) release of restricted cash
(139
)
 
1,330

Net cash provided by (used in) investing activities
3,276

 
(59,400
)
Financing activities
 
 
 
Payments on debt and obligations
(33
)
 
(1,755
)
Borrowings on term loan
5,000

 
5,000

Proceeds from private placement, net of issuance costs
58,161

 

Proceeds from exercise of warrants, stock options, and ESPP purchases
593

 
1,065

Net cash provided by financing activities
63,721

 
4,310

Net increase (decrease) in cash and cash equivalents
31,334

 
(75,335
)
Effect of exchange rate changes on cash and cash equivalents
(104
)
 
250

Cash and cash equivalents at beginning of period
28,926

 
116,647

Cash and cash equivalents at end of period
$
60,156

 
$
41,562

See accompanying notes.

5


SEQUENOM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
We are a molecular diagnostics testing and genetics analysis company committed to providing molecular diagnostics testing services, research use only products, services, applications, and genetic analysis products that translate the results of genomic science into solutions for biomedical research, translational research, molecular medicine applications, and other areas of research, including agricultural and livestock. Our development and commercialization efforts in various diagnostic areas include noninvasive women's health-related and prenatal diagnostics, ophthalmology, and other medical conditions such as oncology, infectious diseases, and autoimmunity.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, and include the accounts of Sequenom, Inc. and our wholly-owned subsidiaries located in the United States, Germany, the United Kingdom, Japan, India, and Hong Kong. All significant intercompany accounts and transactions have been eliminated in consolidation. These condensed statements do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management these statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results presented. Interim results are not necessarily indicative of results for a full year or any other period(s).
The condensed consolidated balance sheet at December 31, 2011, has been derived from the audited financial statements at that date, but does not include all of the information and disclosures required by GAAP for complete financial statements. Subsequent events were evaluated by management through the date of filing of this Form 10-Q.
These condensed financial statements should be read in conjunction with the audited financial statements and disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission, or SEC, on March 9, 2012.
Correction of Previously Reported Segment Disclosures
In connection with the preparation of the Condensed Consolidated Financial Statements for the three and six months ended June 30, 2012, our management determined that the amounts previously reported in our segment disclosure table for operating income (loss) allocated to our Molecular Diagnostics and Genetic Analysis segments and those Unallocated were incorrect due to an error in summarization of operating expense amounts related to our segments. These incorrect summaries resulted in an immaterial overstatement of operating expenses allocated to the Molecular Diagnostics and Genetic Analysis business segments, with an equal understatement reported as Unallocated, except for the three months ended March 31, 2012, where the operating expenses for the Genetic Analysis segment were understated, offset by the expenses reported as Unallocated. The error had no effect on our consolidated balance sheets, statements of operations and comprehensive loss, or statements of cash flows for each period presented. Revenues allocated to our operating segments were not impacted by this incorrect summarization. The amounts presented in the operating segment disclosure for the three months ended March 31, 2012, each year ended December 31, 2011, 2010, and 2009, the three months ended March 31, 2011, the three and six months ended June 30, 2011 and the three and nine months ended September 30, 2011, have been restated, as set forth in the following tables (in thousands):

 
For the three months ended,
 
 
 
 
 
March 31, 2012
 
 
 
 
 
Previously
 
 
 
 
 
 
 
 
 
 
 
Reported
 
Restated
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Molecular Diagnostics
$
4,780

 
$
4,780

 
 
 
 
 
 
 
 
Genetic Analysis
10,140

 
10,140

 
 
 
 
 
 
 
 
Total revenues
$
14,920

 
$
14,920

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Molecular Diagnostics
$
(17,242
)
 
$
(12,855
)
 
 
 
 
 
 
 
 
Genetic Analysis
2,701

 
2,279

 
 
 
 
 
 
 
 
Unallocated
(9,787
)
 
(13,752
)
 
 
 
 
 
 
 
 
Total operating loss
$
(24,328
)
 
$
(24,328
)
 
 
 
 
 
 
 
 

6


 
For the year ended,
 
For the year ended,
 
For the year ended,
 
December 31, 2011
 
December 31, 2010
 
December 31, 2009
 
Previously
 
 
 
Previously
 
 
 
Previously
 
 
 
Reported
 
Restated
 
Reported
 
Restated
 
Reported
 
Restated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Molecular Diagnostics
$
8,319

 
$
8,319

 
$
2,554

 
$
2,554

 
$
94

 
$
94

Genetic Analysis
47,588

 
47,588

 
44,905

 
44,905

 
37,769

 
37,769

Total revenues
$
55,907

 
$
55,907

 
$
47,459

 
$
47,459

 
$
37,863

 
$
37,863

 
 
 
 
 
 
 
 
 
 
 
 
Operating (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Molecular Diagnostics
$
(43,799
)
 
$
(38,596
)
 
$
(36,216
)
 
$
(32,847
)
 
$
(27,034
)
 
$
(27,034
)
Genetic Analysis
14,216

 
15,480

 
11,873

 
12,815

 
4,379

 
6,378

Unallocated
(44,681
)
 
(51,148
)
 
(96,676
)
 
(100,987
)
 
(48,067
)
 
(50,066
)
Total operating loss
$
(74,264
)
 
$
(74,264
)
 
$
(121,019
)
 
$
(121,019
)
 
$
(70,722
)
 
$
(70,722
)
 
For the three months ended,
 
For the three months ended,
 
For the three months ended,
 
March 31, 2011
 
June 30, 2011
 
September 30, 2011
 
Previously
 
 
 
Previously
 
 
 
Previously
 
 
 
Reported
 
Restated
 
Reported
 
Restated
 
Reported
 
Restated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Molecular Diagnostics
$
1,666

 
$
1,666

 
$
1,601

 
$
1,601

 
$
2,219

 
$
2,219

Genetic Analysis
11,844

 
11,844

 
11,731

 
11,731

 
11,362

 
11,362

Total revenues
$
13,510

 
$
13,510

 
$
13,332

 
$
13,332

 
$
13,581

 
$
13,581

 
 
 
 
 
 
 
 
 
 
 
 
Operating (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Molecular Diagnostics
$
(7,390
)
 
$
(6,618
)
 
$
(9,879
)
 
$
(9,025
)
 
$
(10,631
)
 
$
(9,714
)
Genetic Analysis
3,906

 
4,121

 
3,754

 
4,040

 
2,583

 
3,043

Unallocated
(9,639
)
 
(10,626
)
 
(14,830
)
 
(15,970
)
 
(10,210
)
 
(11,587
)
Total operating loss
$
(13,123
)
 
$
(13,123
)
 
$
(20,955
)
 
$
(20,955
)
 
$
(18,258
)
 
$
(18,258
)
 
For the six months ended,
 
For the nine months ended,
 
 
 
June 30, 2011
 
September 30, 2011
 
 
 
Previously
 
 
 
Previously
 
 
 
 
 
 
 
Reported
 
Restated
 
Reported
 
Restated
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Molecular Diagnostics
$
3,267

 
$
3,267

 
$
5,494

 
$
5,494

 
 
 
 
Genetic Analysis
23,575

 
23,575

 
34,929

 
34,929

 
 
 
 
Total revenues
$
26,842

 
$
26,842

 
$
40,423

 
$
40,423

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Molecular Diagnostics
$
(17,270
)
 
$
(15,645
)
 
$
(28,080
)
 
$
(25,538
)
 
 
 
 
Genetic Analysis
7,660

 
8,160

 
10,236

 
11,196

 
 
 
 
Unallocated
(24,468
)
 
(26,593
)
 
(34,492
)
 
(37,994
)
 
 
 
 
Total operating loss
$
(34,078
)
 
$
(34,078
)
 
$
(52,336
)
 
$
(52,336
)
 
 
 
 
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ materially from those estimates and assumptions.
Revenue Recognition
Our revenue is generated primarily from the sale of products and providing services. Genetic analysis product sales and services revenue primarily consists of sales of MassARRAY systems and consumables used in genetic analysis, including extended warranty services associated with the MassARRAY systems, as well as other amounts earned under contract research agreements. Diagnostic services revenues consist of providing the following laboratory-developed tests, or LDTs: MaterniT21 PLUS LDT for fetal trisomy 21, 18, and 13, SensiGene Cystic Fibrosis Carrier Screening, or SensiGene CF LDT, SensiGene Fetal Rhesus D genotyping, or SensiGene RHD LDT, and the RetnaGene age-related macular degeneration, or RetnaGene AMD LDT.
Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collectability is reasonably assured. Revenue is deferred for fees received before earned. Revenue from sales of MassARRAY systems and consumables are recognized upon shipment and transfer of

7


title to the customer and when all revenue recognition criteria are met. Our contracts do not contain refund or cancellation clauses. Revenues from the sale or licensing of our proprietary software are recognized upon transfer of title to the customer. We recognize revenue on maintenance services for ongoing customer support over the maintenance period.
 
When a collaboration arrangement or sales arrangement contains multiple elements we allocate revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence, or VSOE, if available, third-party evidence, or TPE, if VSOE is not available, or estimated selling price, if neither VSOE nor TPE is available. We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations, or subject to customer-specified return or refund privileges. We generally allocate revenue to each element based on our best estimate of the selling price, which is established considering internal factors such as historical selling prices, pricing practices and controls, and customer segment pricing strategies.
We evaluate deliverables in a multiple-element arrangement to determine whether each represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value to the customer and there are no customer-negotiated refund or return rights for the delivered elements. Items are considered to have standalone value when they are sold separately by any vendor or when the customer could sell the item on a standalone basis. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered elements and the allocation of the arrangement consideration and revenue recognition is determined for the combined unit as a single unit. Allocation of the consideration is determined by management at the arrangement inception on the basis of each unit's relative selling price.
Diagnostic services revenues from the Sequenom Center for Molecular Medicine, or Sequenom CMM, have been primarily recognized on a cash basis due to the lack of contractual reimbursement agreements with third-party payors and limited collections experience. We generally bill third-party payors upon generation and delivery of a test result to the ordering physician following completion of a test. As such, we take assignment of benefits and risk of collection with the third-party payor. Patients have out-of-pocket costs for amounts not covered by their insurance carrier and we bill the patient directly for these amounts in the form of co-pays and deductibles. Some payors may not cover our test as ordered by the physician under their reimbursement policies. Consequently, we pursue reimbursement on a case-by-case basis. We will recognize diagnostic services revenues upon cash collection until we can reliably estimate the amount that would be ultimately collected for each of our LDTs.
 
Accounts Receivable
We invoice our genetic analysis product sales and services as orders are shipped and/or services provided and any other contractual obligations are met. Our contracts typically require payment within 30 to 60 days of the date of invoice. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We specifically analyze accounts receivable and historical bad debts, client credit, current economic trends, and changes in customer payment trends when evaluating the adequacy of the allowance for doubtful accounts. Account balances are charged-off against the allowance when it is probable the receivable will not be recovered. Allowance for doubtful accounts was $758,000 and $771,000 at June 30, 2012 and December 31, 2011, respectively.
We bill third-party payors for our LDTs upon delivery of test results to ordering physicians and we take assignment of benefits and the risk of collection with these payors. We do not record accounts receivable for billings to third-party payors as these revenues are currently recognized on a cash basis.
We cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers. We consider all available information in our assessments of the adequacy of the reserves for uncollectible accounts. For billings directly to physician offices or to uninsured patients, we primarily recognize revenue on a cash basis.
 
Collaboration, Development and Licensing Agreements
We enter into license agreements and collaborative research and development arrangements with life sciences partners that may involve multiple deliverables. Our arrangements may contain one or more of the following elements: upfront fees, milestone payments, royalties, and license fees. Each deliverable in the arrangement is evaluated to determine whether it meets the criteria to be accounted for as a separate unit of accounting or whether it should be combined with other deliverables.
Upfront fees received for license and collaborative agreements are recognized ratably over our expected performance period under the arrangement. We make our best estimate of the period over which we expect to fulfill our performance

8


obligations. Given the uncertainties of research and development collaborations, significant judgment is required to determine the duration of the performance period.
Under the milestone method of revenue recognition, contingent consideration received from the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved, which we believe is more consistent with the substance of our performance under our various license and collaboration agreements. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity's performance or on the occurrence of a specific outcome resulting from the entity's performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and (iii) that would result in additional payments being due to the entity. A milestone is substantive if the consideration earned from the achievement of the milestone is consistent with our performance required to achieve the milestone or the increase in value to the collaboration resulting from our performance, relates solely to our past performance, and is reasonable relative to all of the other deliverables and payments within the arrangement.
Shipping and Handling Costs
Shipping and handling costs are included within cost of revenues on the statements of operations and comprehensive loss.
Cash, Cash Equivalents, and Marketable Securities
Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less when purchased. Investments with an original maturity of more than three months are considered marketable securities and have been classified by management as available-for-sale. Such investments are carried at fair value, with unrealized gains and losses recorded as a component of comprehensive loss and stockholders' equity.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activities, therefore requiring an entity to develop its own assumptions. As of June 30, 2012 and December 31, 2011, we had no assets or liabilities measured at fair value on a recurring basis within the Level 3 hierarchy.
We value our cash equivalents and marketable securities using quoted market prices or alternative pricing sources and models utilizing observable market inputs and, as such, classify our cash equivalents and marketable securities within Level 1 or Level 2.
The following tables summarize our fair value hierarchy for assets and liabilities measured at fair value on a recurring basis (in thousands):
 
As of June 30, 2012
Description 
Total
 
Level 1
 
Level 2
Money Market Funds
$
48,474

 
$
48,474

 
$

Government and agency-backed debt securities
1,012

 

 
1,012

Mutual funds
351

 
351

 

Certificates of deposit
7,362

 

 
7,362

U.S. treasury securities
29,996

 
29,996

 

Total
$
87,195

 
$
78,821

 
$
8,374

 

9


 
As of December 31, 2011
Description 
Total 
 
Level 1 
 
Level 2 
Money Market Funds
$
13,097

 
$
13,097

 
$

Government and agency-backed debt securities
5,072

 

 
5,072

Mutual funds
323

 
323

 

Certificates of deposit
5,384

 

 
5,384

U.S. treasury securities
44,986

 
44,986

 

Total
$
68,862

 
$
58,406

 
$
10,456

 
There were no transfers in or out of Level 1, Level 2, or Level 3 investments during the six months ended June 30, 2012 or during the year ended December 31, 2011.
Restricted Cash
Restricted cash relates to cash that is pledged as collateral for letters of credit issued by us, primarily in connection with performance guarantees.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market value (net realizable value). We estimate the recoverability of our inventory by reference to our internal estimates of future demands and product life cycles, including expiration. During the six months ended June 30, 2012 we used $1.1 million of inventory with no related charge to cost of goods sold, as these items were previously reserved for as excess. We recorded a charge for obsolete and excess inventory of $1.0 million against cost of revenues during the six months ended June 30, 2012 to reserve for inventories we expect to scrap upon conversion to a new version of our MaterniT21 PLUS LDT. Inventories are shown net of obsolete and excess reserves of $1.6 million and $1.8 million at June 30, 2012 and December 31, 2011, respectively.
 
Warranty Cost and Reserves
We provide a warranty provision related to the sales of our MassARRAY systems based on our historical experience of returns and repairs required under the warranty period. We generally provide a one-year warranty on our MassARRAY system and related equipment. We establish an accrual for estimated warranty expenses associated with system sales based on historical amounts, which is recorded as a component of cost of product revenue. Changes in our warranty liability during the six months ended June 30, 2012 were as follows (in thousands):
Balance as of December 31, 2011
$
201

Additions charged to cost of revenues
26

Repairs, replacements, and reductions in liability requirements
(15
)
Balance as of June 30, 2012
$
212

Goodwill and Purchased Intangible Assets
Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of the identified net tangible and intangible assets of acquired businesses. The allocation of purchase price for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. Additionally, we must determine whether an acquired entity is considered to be a business or a set of net assets, because a portion of the purchase price can only be allocated to goodwill in a business combination.
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. The amounts and useful lives assigned to intangible assets that have finite useful lives, which consist of purchased patent rights and license and lab accreditation costs, requires the use of estimates and the exercise of judgment. These intangible assets are being amortized over the expected economic use of the asset.
On April 6, 2012, we entered into an asset purchase agreement with Helicos Biosciences Corporation, pursuant to which we purchased certain U.S. patent applications and proprietary materials related thereto for the purchase price of $1.3 million. These U.S. patent applications describe and claim methods of using sequencing to detect fetal abnormalities. As such, we believe they complement and supplement the other patents and patent applications in our patent portfolio that relate to the detection of fetal aneuploidies. These assets will be amortized over their expected economic useful life of 13 years.


10


We annually evaluate our goodwill and purchased intangibles at the reporting unit level during the fourth quarter each fiscal year, or more frequently if we believe indicators of impairment are present. We periodically re-evaluate the original assumptions and rationale utilized in the establishment of the carrying value and estimated lives of our long-lived assets. The criteria used for these evaluations include management's estimate of the asset's continuing ability to generate income from operations and positive cash flows in future periods as well as the strategic significance of any intangible assets in our business objectives. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets.
 
Research and Development Costs
Research and development costs are expensed as incurred. These costs include personnel expenses, fees paid to collaborators, laboratory supplies, facilities, miscellaneous expenses, and allocation of corporate costs. These expenses are incurred during internal research and development activities, as well as providing services under collaborative research agreements.
Foreign Currency Translation and Transactions
The financial statements of our subsidiaries in Germany, United Kingdom, and Japan are measured using, respectively, the Euro, Great British Pound, and Japanese Yen, as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the average daily rate of exchange during the reporting period. Resulting remeasurement gains or losses are recognized as a component of other comprehensive income (loss) in the statements of operations and comprehensive loss and equity. Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in income as unrealized (based on period-end translations) or realized upon settlement of the transaction. Transaction gains or losses were not material for the three and six months ended June 30, 2012 and 2011.
Income Taxes
Our provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction by jurisdiction basis, and includes a review of all available positive and negative evidence. When we establish or reduce the valuation allowance against deferred tax assets, our provision for income taxes will increase or decrease, respectively, in the period such determination is made. As of June 30, 2012 and December 31, 2011, we maintained a valuation allowance against U.S. and foreign deferred tax assets that we concluded had not met the “more likely than not” threshold. Changes in the valuation allowance when they are recognized in the provision for income taxes are included as a component of the estimated annual effective tax rate.
We recognize excess tax benefits associated with stock-based compensation to stockholders' equity only when realized. When assessing whether excess tax benefits relating to stock-based compensation have been realized, we follow the with-and-without approach, excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to stock-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to us.
We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.
Stock-based Compensation
We measure and recognize compensation expense for all stock-based payments made to employees, directors, and consultants based on estimated fair value, net of an estimated forfeiture rate. These stock-based awards include stock options, stock purchase rights under the 1999 Employee Stock Purchase Plan, or ESPP, and restricted stock and stock units. We estimate the fair value of stock options granted and stock purchases under our ESPP using the Black-Scholes-Merton, or BSM, option-pricing model. The fair value of our restricted stock units is based on the market price of our common stock on the date of grant. The determination of fair value of stock-based awards using the BSM pricing model requires the use of certain estimates and highly judgmental assumptions that affect the amount of stock-based compensation expense recognized in our condensed consolidated statements of operations and comprehensive loss. These include estimates of the expected volatility of our stock

11


price, expected life of an award, expected dividends, and the risk-free interest rate. We amortize the fair value of stock-based compensation on a straight-line basis over the requisite service periods of the awards. Our net loss included the following compensation expense related to our stock-based compensation awards (in thousands):
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
Selling and marketing expense
$
933

 
$
1,003

 
$
1,785

 
$
1,717

Research and development expense
1,138

 
1,357

 
2,278

 
2,382

General and administrative expense
1,160

 
1,158

 
2,050

 
2,021

 
$
3,231

 
$
3,518

 
$
6,113

 
$
6,120

Cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) are classified as cash inflows from financing activities and cash outflows from operating activities. Due to our net loss position, no tax benefits have been recognized in the condensed consolidated statements of cash flows.
We have not recognized, and do not expect to recognize in the near future, any tax benefit related to stock-based compensation cost as a result of the full valuation allowance of our net deferred tax assets and our net operating loss carryforwards.
The fair value of options granted to non-employees is estimated at the measurement date using the BSM pricing model and remeasured at each reporting date to fair value, with changes recorded in the statement of operations and comprehensive loss in the current period. Stock-based compensation for options granted to non-employees was not significant for all periods presented.
Comprehensive Loss
Comprehensive loss and its components encompasses all changes in equity other than those with stockholders and includes net loss, unrealized gains and losses on our available-for-sale marketable securities, and foreign currency translation gains and losses.
 
Net Loss Per Share
Basic and diluted net loss applicable to common stock per share is computed using the weighted-average number of common shares outstanding during the period. In a period of a net loss position, basic and diluted weighted-average shares are the same. Shares used in calculating basic and diluted net loss per common share exclude as antidilutive the following common share equivalents:  
 
As of June 30,
 
2012
 
2011
Options to purchase common stock
5,637,039

 
4,311,276

Restricted stock not yet vested and released
837,294

 
1,111,994

Warrants to purchase common stock
250,000

 
259,035

 
6,724,333

 
5,682,305

Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2011–05, Presentation of Comprehensive Income. The guidance requires an entity to present items of net income and other comprehensive income, or OCI, and total comprehensive income either in a single continuous statement of comprehensive income or two separate but continuous statements. We are no longer allowed to present OCI in the statement of stockholders' equity. Earnings per share will continue to be based on net income. The adoption of this update did not have a material impact on our condensed consolidated financial statements.
In May 2011, the FASB issued ASU 2011–04, Amendments to Achieve Common Fair Value Measurements and Disclosures Requirements in U.S. GAAP and IFRSs, which clarified and amended the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The FASB also clarified the intent of existing fair value measurement requirements. The adoption of this update did not have a material impact on our condensed consolidated financial statements.


12



2. Other Financial Information
The following table provides information regarding our genetic analysis product sales and services revenues (in thousands):
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
Product sales
$
8,329

 
$
10,011

 
$
16,784

 
$
19,919

Maintenance services
1,378

 
1,229

 
2,612

 
2,467

Contract research
435

 
491

 
885

 
1,189

Total genetic analysis product sales and services revenues
$
10,142

 
$
11,731

 
$
20,281

 
$
23,575

 
The following is a summary of our marketable securities (in thousands):
 
June 30, 2012
 
Amortized
Cost 
 
Gross
Unrealized
Gains 
 
Gross
Unrealized
Losses 
 
Estimated
Fair Value 
Government and agency-backed debt securities
$
1,011

 
$
1

 
$

 
$
1,012

Mutual funds
224

 
127

 

 
351

Certificates of deposit
7,114

 
13

 
(5
)
 
7,122

U.S. treasury securities
29,993

 
3

 

 
29,996

Total marketable securities
$
38,342

 
$
144

 
$
(5
)
 
$
38,481

 
 
December 31, 2011
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Government and agency-backed debt securities
$
5,067

 
$
5

 
$

 
$
5,072

Mutual funds
224

 
100

 
(1
)
 
323

Certificates of deposit
4,901

 
11

 
(3
)
 
4,909

U.S. treasury securities
44,971

 
15

 

 
44,986

Total marketable securities
$
55,163

 
$
131

 
$
(4
)
 
$
55,290

As of June 30, 2012, we had certain marketable securities in a gross unrealized loss position, which had been in such position for less than twelve months. There were no unrealized losses due to credit issues for the periods presented. There were no impairments considered other-than-temporary, as it is management's intention and ability to hold the securities until maturity or a recovery of the cost basis or recovery of fair value. The following table shows the fair values and the gross unrealized losses of our marketable securities that were in an unrealized loss position as of June 30, 2012 and December 31, 2011 aggregated by investment category (in thousands):
 
 
June 30, 2012
 
December 31, 2011
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value 
 
Gross
Unrealized
Losses 
Government and agency-backed debt securities
$

 
$

 
$
1,011

 
$
(1
)
Certificates of deposit
4,787

 
(5
)
 
3,701

 
(3
)
Total
$
4,787

 
$
(5
)
 
$
4,712

 
$
(4
)
Realized gains and losses are determined based on the specific identification method and are reported in other income (loss), net, in the condensed consolidated statements of operations and comprehensive loss. Gross realized gains and losses on sales of marketable securities were immaterial for all periods presented. As of June 30, 2012, all of our marketable securities were due within one year.
 

13


The components of inventories were as follows (in thousands):
 
June 30,
2012
 
December 31,
2011
Raw materials
$
8,988

 
$
7,069

Work in process
530

 
113

Finished goods
1,033

 
1,547

Total
$
10,551

 
$
8,729

Equipment and leasehold improvements and related accumulated depreciation and amortization were as follows (in thousands):
 
June 30,
2012
 
December 31,
2011
Laboratory equipment
$
38,413

 
$
32,864

Leasehold improvements
10,991

 
6,819

Office furniture and equipment
17,605

 
15,486

 
67,009

 
55,169

Less accumulated depreciation and amortization
(39,831
)
 
(35,540
)
Total
$
27,178

 
$
19,629

3. Acquisitions
SensiGen, LLC
In February 2009, we completed a taxable acquisition of certain assets and assumption of certain liabilities of SensiGen, LLC, or SensiGen. The acquisition of the SensiGen assets provided us with intellectual property related to certain molecular diagnostics for women's health and cancer. The acquisition resulted in the recognition of goodwill at the time of purchase of $7.0 million and is now part of our wholly-owned subsidiary Sequenom CMM. Under the terms of the asset purchase agreement (the Agreement), we acquired certain assets related to SensiGen's business in gene-based molecular diagnostic tests relating to cervical cancer, head and neck cancer, chronic kidney disease, and lupus. We paid SensiGen cash consideration of $1.9 million and issued common stock valued at $1.9 million. An additional $1.3 million was contingently payable to SensiGen upon the completion of certain triggering events occurring prior to the end of the agreement period in February 2012 with either cash or shares of our common stock. We satisfied certain of the triggering events related to the Agreement with aggregate cash payments of $650,000 and the Agreement expired in February 2012.
4. Segment Reporting
We operate our business on the basis of two reportable segments, Molecular Diagnostics (including Sequenom CMM) and Genetic Analysis. A further description of the operations of these segments is below.

For the three months ended June 30, 2012 we generated 44.4% of our revenues from our Molecular Diagnostics segment, which were primarily derived from providing diagnostic testing services for Sequenom CMM's MaterniT21 PLUS LDT, SensiGene CF LDT, SensiGene RHD LDT, and RetnaGene AMD LDT. For the three months ended June 30, 2011 we generated 12.0% of our revenues from our Molecular Diagnostics segment, which were primarily derived from providing diagnostic testing services for Sequenom CMM's SensiGene CF LDT, and to a much lesser extent the SensiGene RHD LDT and the RetnaGene AMD LDT. For the six months ended June 30, 2012 we generated 38.9%

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