Summary of Significant Accounting Policies

We are a life sciences company providing innovative genomic and genetic analysis solutions for the clinical research and molecular diagnostic markets through our two operating segments, our wholly owned subsidiary Sequenom Center for Molecular Medicine, LLC, or Sequenom CMM, now doing business as Sequenom Laboratories, formerly our Molecular Diagnostics segment, and Sequenom Bioscience, formerly our Genetic Analysis segment. We provide laboratory testing services with a focus principally on prenatal diseases and conditions through Sequenom Laboratories, and technologies and tools for translational research, oncology, agricultural genomics and clinical diagnostics through Sequenom Bioscience.

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 its wholly-owned subsidiaries, collectively referred to as Sequenom, or the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet at December 31, 2012 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.

In the opinion of management these quarterly financial statements reflect all adjustments, which are of a normal recurring nature, except for the restructuring costs described in footnote 8 to these condensed consolidated financial statements, 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). These 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, 2012, as filed with the Securities and Exchange Commission, or SEC, on April 2, 2013.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates and assumptions.

Revenue Recognition

Our revenues are generated primarily from the sale of products and providing services. Diagnostic services revenues from Sequenom Laboratories result from providing laboratory-developed tests, or LDTs, primarily for the detection of specific fetal abnormalities or other genetic conditions. Sequenom Bioscience product sales and services revenues primarily consist 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.

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. Revenues are deferred for fees received before earned.

Diagnostic services revenues earned by Sequenom Laboratories have been primarily recognized on a cash basis due to the lack of contractual reimbursement agreements with third-party payors for a significant portion of our services and limited collections experience. Sequenom Laboratories generally bills 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 Sequenom Laboratories bills the patient directly for these amounts in the form of co-pays and deductibles in accordance with their insurance carrier and health plans. Some payors may not cover Sequenom Laboratories' test as ordered by the physician under their reimbursement policies. Consequently, Sequenom Laboratories pursues 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 Sequenom Laboratories' LDTs. We record revenues and accounts receivable for billing directly to physician offices and international customers when the price is fixed and determinable and where we believe collectability is reasonably assured.

From time to time, we receive requests for refunds of payments made by third-party payors. Upon becoming aware of a refund request, we establish an accrued liability for tests covered by the refund request until we determine the amounts upon which a refund is due. Historically, these amounts have not been material.

Revenues from sales of MassARRAY systems and consumables are recognized upon shipment and transfer of 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 revenues on maintenance services for ongoing customer support over the maintenance period.

Royalty revenues are generally recorded on an accrual basis when earned.

Cost of Revenues

Cost of revenues includes the cost of materials, direct labor including laboratory, manufacturing and service personnel, equipment and infrastructure expenses associated with processing blood and other samples, quality control analyses, and shipping charges to transport samples and products, and license fees. Infrastructure expenses include allocated facility occupancy and information technology costs. Costs associated with performing Sequenom Laboratories' testing services are recorded as tests are processed. Costs recorded for sample processing and shipping charges represent the cost of all the tests processed during the period regardless of whether revenues were recognized with respect to that test. Royalties for licensed technology calculated as a percentage of product revenues and fixed annual payments relating to the launch and commercialization of Sequenom Laboratories' tests are recorded as license fees in cost of revenues at the time product revenues are recognized or in accordance with other contractual obligations.

Research and Development Expenses

Research and development expenses are comprised of costs incurred to develop technology and carry out clinical studies and include salaries and benefits, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services, and other outside costs. Research and development costs are expensed as incurred.

We also enter into collaboration and clinical study agreements with clinical collaborators and record these costs as research and development expenses. Accruals are recorded for estimated study costs comprised of work performed by our collaborators under contract terms. Advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as expense as the goods are delivered or the related services are performed.

Collaboration, Development and Licensing Agreements

Revenues. 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. Revenues are recognized for each element when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured.

Upfront fees received for license and collaborative agreements are recognized under the milestone method whereby they are recognized when earned, as evidenced by written acknowledgment from the collaborator or other persuasive evidence that the milestone has been achieved, provided that the milestone event is substantive. A milestone event is considered to be substantive if its achievability was not reasonably assured at the inception of the agreement and our efforts led to the achievement of the milestone or the milestone was due upon the occurrence of a specific outcome resulting from our performance. If both of these criteria are not met, the milestone payment is recognized over the remaining minimum period of our performance obligations under the agreement. We assess whether a milestone is substantive at the inception of each agreement. In the periods presented, there were no material revenues related to upfront fees under collaboration, development and licensing agreements.

Expenses. We enter into collaborative agreements with life sciences partners that provide us with rights to develop, produce, and market products using certain know-how, technology and patent rights maintained by these partners. Terms of the various collaboration agreements may require us to make milestone payments upon the achievement of certain product research and development objectives and pay royalties on future sales, if any, of commercial products resulting from the collaboration.

Milestone and up-front payments are generally recorded as research and development expenses if the payments relate to products that have not yet been commercialized. Milestone and up-front payments made related to commercialized tests are generally capitalized as intangible assets and amortized to cost of goods sold over the estimated economic life of the product. Royalties paid are generally recorded in cost of revenues and are accrued for at the time the related revenues are recognized.

Concentration of Risks

Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents, marketable securities, and accounts receivable. We limit our exposure to credit loss by placing cash and investments with high credit quality financial institutions. Additionally, we have established guidelines regarding diversification of investments and their maturities, which are designed to maintain principal and maximize liquidity.

Concentration of credit risk with respect to accounts receivable related to product sales is limited due to our large and diverse customer base, which is dispersed over different geographic areas. Allowances are maintained for potential credit losses and such losses have historically been within our expectations.

We grant credit generally on an unsecured basis to our customers throughout North America, Europe, and Asia, except to customers in China which are granted credit on a secured basis until a collection history is established. To reduce credit risk, certain sales are secured by letters of credit from commercial banks.

We are dependent on our suppliers and contract manufacturers to provide raw materials and devices of appropriate quality and reliability and to meet applicable regulatory requirements. In certain cases we rely on single sources of supply. Consequently, in the event that supplies are delayed or interrupted for any reason, our ability to develop and produce our products and services could be impaired, which could have a material adverse effect on our business, financial condition and results of operations.

Fair Value Measurements

Our financial instruments consist principally of cash and cash equivalents, short-term marketable securities, accounts receivable, accounts payable, accrued expenses, long term debt and Convertible Senior Notes.

The carrying amounts of financial instruments such as cash equivalents, accounts receivable, accounts payable and accrued expenses approximate the related fair values due to the short-term maturities of these instruments. Marketable securities consist of available-for-sale securities that are reported at fair value.

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—Includes 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.

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. As of September 30, 2013, the fair value of our remaining lease liability on our vacated facility was measured using estimated net cash flows, discounted using a credit-adjusted risk-free rate, which are considered Level 3 inputs. As of December 31, 2012, we had no assets or liabilities measured at fair value within the Level 3 hierarchy.

Cash, Cash Equivalents, and Marketable Securities

Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less at the time of purchase.

Investments with an original maturity of more than three months at the time of purchase are considered marketable securities. All marketable securities have been classified by management as available-for-sale. Our available-for-sale securities are carried at fair value, with unrealized gains and losses, determined on a specific identification basis, reported as a component of other comprehensive income (loss) in stockholders' equity (deficit) until realized.

A decline in the market value of any marketable security below cost that is determined to be other-than-temporary will result in a revaluation of its carrying amount to fair value. The impairment would be included in other income or expense in the condensed consolidated statements of operations and a new cost basis for the security is established. There were no such declines in market value of any marketable security in the periods presented.

Accounts Receivable

We bill third-party payors for Sequenom Laboratories' 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 or self-pay patients as these revenues are currently recognized on a cash basis. We record revenue on an accrual basis for client bill arrangements, which are primarily international, upon delivery of test results to ordering physicians where we have contractual agreements for which collectability is reasonably assured.

We invoice our Sequenom Bioscience 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, customer 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.

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. If the historical data used to calculate the allowance provided for doubtful accounts does not reflect our future ability to collect outstanding receivables or if the financial condition of customers were to deteriorate, resulting in impairment of their ability to make payments, an increase in the provision for doubtful accounts may be required.

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.

Warranty Cost and Reserves

We provide a warranty provision related to the sales of our MassARRAY systems based on our historical experience of 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.

Property, Equipment and Leasehold Improvements

Property consists of a leased building which did not meet the sale-leaseback criteria and is recorded at its fair value at the date of the lease, less depreciation. The building is being depreciated over a period of 15 years equal to the term of the related lease and extensions. Equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets (generally 3 to 5 years). Leasehold improvements are stated at cost and amortized using the straight-line method over the estimated useful life of the improvement or the remaining term of the lease, whichever is shorter. The maximum estimated useful life of any leasehold improvement is 15 years from the completion of the improvement. Maintenance and repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating expense.

Intangible Assets

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. Intangible assets with finite lives are not material and are included in non-current other assets on our condensed consolidated balance sheets.

Goodwill

Goodwill represents the excess purchase price of net tangible and identifiable intangible assets acquired in business combinations over their estimated fair value. 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. Goodwill is deemed to have an indefinite life and, therefore, is not amortized.

We annually evaluate our goodwill at the reporting unit level during the fourth quarter each fiscal year, or more frequently if we believe indicators of impairment are present. If goodwill is considered to be impaired, the impairment recognized is the amount by which the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill.

Valuation of Long-Lived and Intangible Assets

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 and finite-lived intangible assets. We also review long-lived assets and finite-lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We annually evaluate our indefinite-lived intangible assets during the fourth quarter each fiscal year, or more frequently if we believe indicators of impairment are present. If an asset is considered to be impaired, the impairment recognized is the amount by which the carrying value of the asset exceeds its fair value.

Financing Lease

Because the terms of our facility lease agreement for our North Carolina laboratory site required our extensive involvement in the construction of the building, we are deemed to be the owner of the building for accounting purposes only. Accordingly, we recorded assets representing the fair value of the building based on the assessed value and the total costs of the improvements, including the costs paid by the lessor (the legal owner of the building), with an associated long-term obligation. Upon completion of construction of the building, we did not meet the sale-leaseback criteria for de-recognition of the building assets and obligation. Therefore the lease is accounted for as a long-term financing obligation. At the end of the lease term, including exercise of any renewal options, the net remaining financing obligation over the net carrying value of the fixed assets will be recognized as a non-cash gain on sale of the property. We report rent expense only on the land portion of the property but not for the building which is owned by us for accounting purposes. Rather, building rental payments under the lease are recognized as a reduction of the financing obligation and interest 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, restricted stock and restricted stock units, and stock purchase rights under our employee stock purchase plan. We estimate the fair value of stock options granted and stock purchase rights using the Black-Scholes-Merton, or BSM, option-pricing model, which requires the use of estimates such as stock price volatility and expected option lives, as well as expected option forfeiture rates, to value employee stock-based compensation at the date of grant. The fair value of our restricted stock awards and units is based on the market price of our common stock on the date of grant.

We recognize stock-based compensation cost on a straight-line basis over the requisite service period of the award or, in the case of performance-based awards, over the period from the date that the performance milestone achievement is reasonably assured to the estimated achievement date. Stock-based compensation expense is recognized only for those awards that are ultimately expected to vest. We estimate forfeitures at the time of grant and revise the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.

Due to our net loss position, no tax benefits for stock-based compensation 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 in fair value recognized as expense in the statement of operations and comprehensive loss.

Restructuring Costs

Restructuring costs are comprised of estimated remaining facility lease and tenant improvement construction liabilities, asset impairments resulting from the exit of the related facility, reduced estimate of future cash flows related to our age-related macular degeneration, or AMD, LDTs, and employee termination costs based on executed agreements. Restructuring charges are recorded upon approval of a formal management plan and are included in the operating results of the period in which the plan is approved and the expense becomes estimable. To estimate restructuring costs, management utilizes assumptions regarding the number and related costs that would be incurred relative to involuntarily terminated employees and future costs to complete and operate excess facilities until eventually completely vacated, including construction costs, rent, utilities, insurance, property taxes, and broker's commissions, offset by estimated sublease rental income. Estimated restructuring expenses may change as management executes the approved plan.

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 September 30, 2013 and December 31, 2012, 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 we believe 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.

Foreign Currency Translation and Transactions

The financial statements of our subsidiaries in Germany, United Kingdom (dissolved as of December 31, 2012), and Japan are measured using the Euro, British Pound, and Japanese Yen, respectively, as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange in effect at the respective balance sheet dates. Income and expense items are translated at the average monthly rate of exchange during the reporting period. Net unrealized gains or losses resulting from the translation of foreign financial statements are reported as a component of accumulated other comprehensive income (loss).

Monetary assets and liabilities denominated in currencies other than the respective functional currencies are initially recorded using the foreign currency exchange rates at the time such transactions arise. The value of these receivables and payables is subject to changes in currency exchange rates from the point at which the transactions are originated until the settlement in cash. Subsequent remeasurement at each balance sheet date is recognized as transaction gains and losses in income as unrealized or realized upon settlement of the transaction. Foreign currency transaction gains or losses were not significant for the periods presented.

Net Loss Per Share

Basic and diluted net loss per common share for the periods presented is computed by dividing net loss by the weighted-average number of common shares outstanding during the respective periods, without consideration of common stock equivalents. Common stock equivalents that could potentially reduce net income per common share in the future that were not included in the determination of diluted loss per common share as their effects were antidilutive are as follows (in thousands):



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Shares underlying Convertible Senior Notes	28,088	3,969	28,088	1,323
Options to purchase common stock	13,988	11,544	13,929	10,762
Restricted stock units not yet vested and released	1,534	797	1,586	829
Restricted stock awards issued, but unvested	13	7	20	10
Options to purchase shares under the Employee Stock Purchase Plan	136	97	143	89
Warrants to purchase common stock	250	250	250	250
	44,009	16,664	44,016	13,263

Recently Adopted Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2013-02, "Comprehensive Income." This update requires an entity to present information about amounts reclassified out of accumulated other comprehensive income and their corresponding effect on the respective line items in net income in one place, and in some cases, cross-references to related footnote disclosures. The adoption of this update did not have a material impact on our consolidated financial statements.

In July 2013, the FASB issued an accounting standards update that provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option of early adoption. We intend to adopt this guidance at the beginning of our first quarter of fiscal year 2014, and do not believe the adoption of this standard will have a material impact on our financial position, results of operations or related financial statement disclosures.