10-Q 1 sqnm201510-qq2.htm 10-Q SQNM 2015 10-Q 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, 2015
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
As of July 31, 2015, there were 118,467,915 shares of the registrant's Common Stock outstanding.
 




SEQUENOM, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2015
INDEX
 

 
 
Page No. 
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 

2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

SEQUENOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value)
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
56,152

 
$
63,309

Marketable securities, available-for-sale
30,614

 
30,588

Accounts receivable, net
5,793

 
9,131

Inventories
3,520

 
6,516

Other current assets and prepaid expenses
6,129

 
12,112

Total current assets
102,208

 
121,656

Property, equipment and leasehold improvements, net
12,482

 
15,348

Goodwill
10,007

 
10,007

Intangible assets, net
9,667

 
11,247

Other assets
2,254

 
2,813

Total assets
$
136,618

 
$
161,071

 
 
 
 
Liabilities and stockholders' deficit
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,054

 
$
6,089

Accrued expenses
15,127

 
22,155

Long-term debt and obligations, current portion
374

 
4,144

Other current liabilities
768

 
2,581

Deferred gain on pooled patents agreement

 
21,000

Total current liabilities
22,323

 
55,969

Long-term debt and obligations, less current portion
5,449

 
5,602

Convertible senior notes
128,931

 
130,000

Other long-term liabilities
961

 
664

Total liabilities
157,664

 
192,235

Commitments and contingencies


 


Stockholders' deficit:
 
 
 
Convertible preferred stock, par value $0.001; 5,000 shares authorized, no shares issued or outstanding at June 30, 2015 and December 31, 2014

 

Common stock, par value $0.001; 185,000 shares authorized, 118,134 and 117,434 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively
118

 
117

Additional paid-in capital
986,721

 
981,929

Accumulated other comprehensive income
140

 
87

Accumulated deficit
(1,008,025
)
 
(1,013,297
)
Total stockholders' deficit
(21,046
)
 
(31,164
)
Total liabilities and stockholders' deficit
$
136,618

 
$
161,071

See accompanying notes to unaudited condensed consolidated financial statements.

3


SEQUENOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except per share information)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Statements of Operations
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Diagnostic services, net
$
30,891


$
39,380

 
$
66,595

 
$
76,100

License
1,875

 
402

 
3,977

 
743

Total revenues
32,766


39,782

 
70,572

 
76,843

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
16,595

 
22,410

 
35,902

 
45,180

Selling and marketing
8,359

 
7,920

 
16,845

 
16,479

Research and development
5,652

 
7,087

 
11,520

 
13,876

General and administrative
8,511

 
14,590

 
17,186

 
27,070

Restructuring costs and other charges
656

 
975


656

 
1,885

Total costs and expenses
39,773

 
52,982

 
82,109

 
104,490

Gain on pooled patents agreement

 

 
21,000

 

Operating income (loss)
(7,007
)
 
(13,200
)
 
9,463

 
(27,647
)
Interest expense, net
(1,984
)
 
(2,055
)
 
(3,979
)
 
(4,132
)
Other income (expense), net
26

 
(37
)
 
(88
)
 
(58
)
Earnings (loss) from continuing operations before income taxes
(8,965
)
 
(15,292
)
 
5,396

 
(31,837
)
Income tax benefit (expense)
(48
)
 
6,928

 
(124
)
 
6,804

Earnings (loss) from continuing operations
(9,013
)
 
(8,364
)
 
5,272

 
(25,033
)
Discontinued operations:
 
 
 
 
 
 
 
Earnings from discontinued operations, net of tax

 
12,817

 

 
13,812

Net earnings (loss)
$
(9,013
)
 
$
4,453

 
$
5,272

 
$
(11,221
)
Net earnings (loss) per common share, basic
 
 
 
 
 
 
 
Continuing operations
$
(0.08
)
 
$
(0.07
)
 
$
0.04

 
$
(0.22
)
Discontinued operations
$

 
$
0.11

 
$

 
$
0.12

Net earnings (loss)
$
(0.08
)
 
$
0.04

 
$
0.04

 
$
(0.10
)
Weighted average number of shares outstanding, basic
118,120

 
116,454

 
117,930

 
116,260

Net earnings (loss) per common share, diluted
 
 
 
 
 
 
 
Continuing operations
$
(0.08
)
 
$
(0.07
)
 
$
0.04

 
$
(0.22
)
Discontinued operations
$

 
$
0.11

 
$

 
$
0.12

Net earnings (loss)
$
(0.08
)
 
$
0.04

 
$
0.04

 
$
(0.10
)
Weighted average number of shares outstanding, diluted
118,120

 
116,454

 
118,684

 
116,260

 
 
 
 
 
 
 
 
Statements of Comprehensive Income (Loss)
 
 
 
 
 
 
 
Net earnings (loss)
$
(9,013
)
 
$
4,453

 
$
5,272

 
$
(11,221
)
Other comprehensive income (loss):

 

 
 
 
 
Unrealized net gain on available-for-sale securities, net of taxes
18

 
18

 
57

 
18

Foreign currency gain on translation adjustment
19

 

 
47

 

Total other comprehensive income
37

 
18

 
104

 
18

Comprehensive income (loss)
$
(8,976
)
 
$
4,471

 
$
5,376

 
$
(11,203
)
See accompanying notes to unaudited condensed consolidated financial statements.

4


SEQUENOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Six Months Ended
 
June 30,
 
2015
 
2014
Operating activities
 
 
 
Net earnings (loss)
$
5,272

 
(11,221
)
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
 
 
 
Earnings from discontinued operations, net of tax

 
(13,812
)
Share-based compensation
3,407

 
6,467

Depreciation and amortization
5,716

 
6,363

Non-cash restructuring costs and other charges
386

 
1,885

Other non-cash items
576

 
568

Gain on pooled patents agreement
(21,000
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,338

 
(2,987
)
Inventories
2,996

 
6,592

Prepaid expenses and other assets
(475
)
 
(144
)
Accounts payable and accrued expenses
(7,047
)
 
(4,928
)
Other liabilities
(1,515
)
 
(6,969
)
Net cash used in operating activities of continuing operations
(8,346
)
 
(18,186
)
Investing activities
 
 
 
Purchases of property, equipment and leasehold improvements
(1,626
)
 
(551
)
Purchases of marketable securities
(14,996
)
 
(9,994
)
Maturities of marketable securities
15,000

 
14,158

Net cash received from sale of segment

 
29,853

Proceeds from pooled patents agreement
6,000

 

Change in restricted cash
500

 

Net cash provided by investing activities of continuing operations
4,878

 
33,466

Financing activities
 
 
 
Payments on term loan and capital lease obligations
(3,934
)
 
(3,814
)
Proceeds from common stock issued under employee stock plans
282

 
885

Net cash used in financing activities of continuing operations
(3,652
)
 
(2,929
)
Discontinued operations
 
 
 
Net cash provided by operating activities of discontinued operations

 
2,816

Net cash used in investing activities of discontinued operations

 
(164
)
Net cash provided by discontinued operations

 
2,652

Effect of exchange rate changes on cash and cash equivalents
(37
)
 

Net increase (decrease) in cash and cash equivalents
(7,157
)
 
15,003

Cash and cash equivalents at beginning of period
63,309

 
61,589

Cash and cash equivalents at end of period
$
56,152

 
$
76,592

See accompanying notes to unaudited condensed consolidated financial statements.

5


SEQUENOM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.         The Company and a Summary of Its Significant Accounting Policies
The Company
Sequenom, Inc., and its wholly owned subsidiary Sequenom Center for Molecular Medicine LLC, doing business as Sequenom Laboratories (collectively "the Company"), is a life sciences company committed to enabling healthier lives through the development of innovative products and services. The Company serves physicians by providing early patient management information. The Company develops and commercializes innovative molecular diagnostics testing services that serve women's health and oncology markets.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements of Sequenom, Inc. should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission.
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the interim statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements, which include all wholly owned subsidiaries, reflect all adjustments, consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. Interim results are not necessarily indicative of results for a full year or any other period(s).
Reclassifications
Certain amounts previously reported have been reclassified to conform to the current period presentation. The reclassification was made to change the statements of operations and comprehensive income (loss) presentation to provide the users of the financial statements additional information related to the revenues of the Company. The reclassification included reclassifying amounts previously included in diagnostic services revenue to license revenue. The reclassification had no effect on consolidated net earnings or consolidated assets and liabilities.
Discontinued Operations
On May 30, 2014, the Company sold its Bioscience business segment. As a result of the sale, the Company's Bioscience segment has been excluded from continuing operations for all periods herein and reported as discontinued operations. For additional information on the divestiture of the Company's Bioscience segment, see Note 3, Discontinued Operations.
Revenue Recognition
The Company generates revenue from diagnostic services from providing laboratory-developed tests, or LDTs, primarily for the detection of specific fetal abnormalities or other genetic conditions, as well as through the Pooled Patents Agreement (the “Pooled Patents Agreement”) with Illumina, Inc. (“Illumina”) and others who have licensed the Company's technology.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. The Company assesses whether the fee is fixed or determinable based on the nature of the fee charged for the services delivered, whether there are existing contractual arrangements, and historical payment patterns. In determining when to record revenue, the Company evaluates collectability and considers whether there is sufficient history to reliably estimate a payor's payment patterns. Revenue is deferred for fees received before earned.
Diagnostic service revenues are derived from providing testing services in the Company's laboratory, which are reimbursed through arrangements with third-party payors and amounts patients self-pay or through contractual arrangements (client bill). Diagnostic services revenue for third-party payors is recognized upon cash collection until a reliable estimate of the amount that would be ultimately collected for the test and the above criteria have been met, at which time revenue is recognized on an accrual basis. Third-party payors include commercial payors, such as health insurance companies, health maintenance organizations and government payors, such as Medicare and Medicaid in the United States. Client bill revenue is primarily recognized on an accrual basis and includes laboratories and customers with whom the Company has a contractual agreement

6


where they will pay for the test upon delivery of the test results to the ordering physicians. The Company generally bills third-party payors upon delivery of a test result to the ordering physician following completion of a test. Patients have responsibility for out-of-pocket costs for amounts not covered by their insurance carrier and the Company bills the patient directly for these amounts in the form of co-pays and deductibles in accordance with their insurance carrier and health plans. Revenue from patients, through co-payments or through cash based service offerings, are recognized on a cash basis. Some payors may not cover the test as ordered by the physician under their reimbursement policies. Consequently, the Company pursues reimbursement on a case-by-case basis.
From time to time, the Company receives requests for refunds of payments, generally due to overpayments made by third-party payors. Upon becoming aware of a refund request, the Company establishes an accrued liability for tests covered by the refund request until such time as the Company determines whether or not a refund is due.
License arrangements with third-party partners may involve multiple elements and the Company evaluates the agreements to determine whether each deliverable represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customer. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis. Consideration is allocated at the inception of the contract to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence ("VSOE") of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence exists, the Company uses its best estimate of the selling price for the deliverable. Such amounts are recognized as revenue when each unit is delivered.
If the delivered element does not have stand-alone value without one of the undelivered elements in the arrangement, the elements are combined and accounted for as a single unit of accounting. Such amounts are recognized as revenue when the last deliverable of the combined units is delivered.
Recurring revenue generated under license or royalty arrangements, including the Pooled Patents Agreement with Illumina, is recognized in the period reported by the partner or licensee and when the revenue recognition criteria have been met.
Cost of Revenues
Cost of revenues include the cost of materials, direct labor (including laboratory and service personnel), equipment and infrastructure expenses associated with processing blood and other samples, quality control analyses, shipping charges to transport samples, and license and test fees, including those owed to Illumina as specified in the Pooled Patents Agreement. Infrastructure expenses include allocated facility occupancy and information technology costs. Costs associated with performing 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 revenue is recognized with respect to that test. Royalties for licensed technology calculated on a per test basis or as a percentage of product revenue and fixed annual payments relating to the launch and commercialization of LDTs are recorded as license fees in cost of revenues at the time product revenue is recognized or in accordance with other contractual obligations.
Pooled Patents Agreement
On December 2, 2014, the Company entered into a Pooled Patents Agreement with Illumina, pursuant to which the parties pooled their intellectual property directed to noninvasive prenatal testing (“NIPT”). In accordance with the Pooled Patents Agreement, Sequenom and the Chinese University of Hong Kong (“CUHK”) entered into an agreement (the “CUHK Agreement”), pursuant to which certain license agreements by and between the Company and CUHK were amended and assigned to Illumina for inclusion in the patent pool, subject to the Pooled Patents Agreement. Illumina is responsible for paying all royalties to CUHK under the CUHK license agreements, and granted the Company a sublicense under each agreement to exploit laboratory-developed NIPT tests in accordance with the Pooled Patents Agreement. In connection with entering into the Pooled Patents Agreement, the Company also entered into an Amended and Restated Sale and Supply Agreement with Illumina (the “Supply Agreement”), pursuant to which the Company and its affiliates will purchase various products from Illumina for use in NIPT as well as for other clinical and research uses. Concurrently, with the execution of the Pooled Patents Agreement, the Company, Illumina, the Sequenom Center for Molecular Medicine, LLC (“SCMM ” a subsidiary of Sequenom Inc.), and Verinata Health, Inc., (“Verinata ” a subsidiary of Illumina) entered into a Settlement Agreement (the “Settlement Agreement”), pursuant to which the parties settled certain claims and released the other parties from potential liability.
The Company determined that the Pooled Patents Agreement, the Settlement Agreement, the Supply Agreement and the CUHK Agreement were all part of a single transaction with multiple elements as the various agreements were contemporaneously negotiated, contingent upon one another and negotiated with the same counterparties. As the agreements were considered to be part of one transaction with multiple elements, the Company followed the accounting guidance in ASC 605-25 to determine the separate units of account and the basis for allocating the consideration received. The Company evaluated all elements of the agreements and identified the following deliverables that had value; (1) the physical samples and

7


applicable study protocols, (2) transfer of in vitro diagnostic, or IVD, technology (3) settlement of claims and disputes between the Company and Illumina and (4) the $6.15 million upfront payment made to CUHK. The Company allocated consideration to the physical samples and transfer of IVD technology based on its best estimate of selling price for each of the deliverables, which were derived from Company models as well as through the use of a third-party valuation expert. The Company determined the value to be allocated to the settlement of claims and disputes based on the residual value method due to the complex nature of the litigation and the inability to make a reliable estimate of value for this component. Consideration allocated to each element was $21.0 million for each of (i) the physical samples and (ii) the transfer of IVD technology and $1.85 million for the settlement of claims and disputes. The $6.15 million payment made by the Company to CUHK was reflected as a reduction of the proceeds received from Illumina as this was primarily for the amendment of certain license agreements by and between Sequenom and CUHK, and the assignment of those agreements to Illumina for inclusion in the patent pool, and resulted in net consideration to be allocated by the Company of $43.85 million.
At December 31, 2014, the Company had recorded a $21.0 million deferred gain on the Pooled Patents Agreement, which was recognized as a gain during the three months ended March 31, 2015 following delivery and acceptance of the study related documents associated with the physical samples provided to Illumina.
Concentration of Risks
Financial instruments, which potentially are a concentration of credit risk, consist primarily of cash, cash equivalents, marketable securities, and accounts receivable. The exposure to credit loss is limited by placing cash, cash equivalents and marketable securities with US financial institutions. Additionally, the Company has established guidelines regarding diversification of investments and their maturities, which are designed to maintain principal and maximize liquidity. Credit risk with respect to accounts receivable is limited due to the Company's large and diverse customer base.
One customer represented more than 10% of total revenue during the three months ended June 30, 2015, accounting for $3.3 million, or 10.2%, of total revenue and a different customer represented more than 10% of total revenue during the six months ended June 30, 2015, accounting for $7.3 million, or 10.3%, of total revenue. One customer represented more than 10% of total revenue during the three and six months ended June 30, 2014, accounting for $6.9 million, or 17.4%, and $12.8 million, or 16.7%, of total revenue, respectively.
The Company requires raw materials and devices of appropriate quality and reliability and to meet applicable regulatory requirements that currently are available from a limited number of sources and in certain cases a single source of supply. Consequently, in the event that supplies are delayed or interrupted for any reason, it could impair the Company's ability to develop and produce services, which could have a material adverse effect on the Company's business, financial condition and results of operations.
Net Earnings (Loss) Per Share
Basic net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflects the net earnings, plus interest charges during the period applicable to the Company’s convertible senior notes, divided by the weighted-average number of common shares and potentially dilutive common shares from outstanding stock options, restricted shares, employee stock purchases, warrants and convertible senior notes. Potential dilutive common shares were calculated using the treasury stock method and represent incremental shares issuable upon exercise of the Company’s outstanding stock options, unvested restricted stock and warrants. Potential dilutive common shares for convertible senior notes were calculated using the if-converted method.
For periods in which the Company incurs losses, potentially dilutive shares are not considered in the calculation of net loss per share as their effect would be anti-dilutive. A summary of information used to compute basic and diluted net earnings (loss) per share is shown below (in thousands, except per share data):

8


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net earnings (loss) from continuing operations for basic and diluted earnings per share
$
(9,013
)
 
$
(8,364
)
 
$
5,272

 
$
(25,033
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
118,120

 
116,454

 
117,930

 
116,260

Dilutive effect of common share equivalents

 

 
754

 

Shares used in calculating diluted earnings per share
118,120

 
116,454

 
118,684

 
116,260

 
 
 
 
 
 

 
 
Net earnings (loss) from continuing operations per basic share
$
(0.08
)
 
$
(0.07
)
 
$
0.04

 
$
(0.22
)
Net earnings (loss) from continuing operations per diluted share
$
(0.08
)
 
$
(0.07
)
 
$
0.04

 
$
(0.22
)
Common stock equivalents, that could potentially reduce net earnings per common share in the future that were not included in the determination of diluted earnings (loss) per common share as their effects were antidilutive are as follows (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2015
 
2014
2015
 
2014
Shares underlying Convertible Senior Notes
28,088

 
28,088

28,088

 
28,088

Options to purchase common stock
9,714

 
14,299

8,850

 
14,080

Restricted stock units not yet vested and released
2,155

 
2,371

67

 
2,280

Warrants to purchase common stock
250

 
250

200

 
250

      Total
40,207

 
45,008

37,205

 
44,698

Recent Accounting Pronouncements
In May 2014, the FASB issued an accounting standards update that creates a single source of revenue guidance for companies in all industries. The new standard provides guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers, unless the contracts are within the scope of other accounting standards. It also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets. This guidance, as amended must be adopted using either a full retrospective approach for all periods presented or a modified retrospective approach and will be effective for fiscal years beginning after December 15, 2017, which will be the Company's fiscal year 2018. The Company has not yet evaluated the potential impact of adopting the guidance on the Company's consolidated financial statements.
In April 2015, the FASB issued Accounting Standard Update (ASU) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.  The ASU is the result of the FASB's simplification initiative intended to improve GAAP by reducing costs and complexity while maintaining or enhancing the usefulness of related financial statement information.  The ASU specifies that debt issuance costs related to a note shall be reported in the balance sheet as a direct reduction from the face amount of the note.  The ASU is effective for interim and annual periods beginning on or after January 1, 2016.  The ASU will require the Company to reclassify its capitalized debt issuance costs currently recorded as assets on the condensed consolidated balance sheets.  The ASU will have no effect on the Company's results of operations or liquidity.
Note 2.         Supplementary Financial Information
Marketable Securities, Available-for-sale (in thousands):
 
June 30, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
U.S. treasury securities
$
30,005

 
$
9

 
$

 
$
30,014

Certificates of deposit
48

 

 

 
48

Mutual funds
277

 
275

 

 
552

Total marketable securities
$
30,330

 
$
284

 
$

 
$
30,614


9


 
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
U.S. treasury securities
$
30,049

 
$

 
$
(29
)
 
$
30,020

Certificates of deposit
48

 

 

 
48

Mutual funds
277

 
243

 

 
520

Total marketable securities
$
30,374

 
$
243

 
$
(29
)
 
$
30,588

As of June 30, 2015 and December 31, 2014, gross unrealized losses on marketable securities were insignificant. There were no impairments considered other-than-temporary for the periods presented, as the Company has the intent and ability to hold the securities for a period of time sufficient to allow for recovery in the market value. As of June 30, 2015, all marketable securities were due within fifteen months.
Other Current Assets and Prepaid Expenses (in thousands):
 
June 30,
2015
 
December 31,
2014
Pooled patents agreement receivable
$

 
$
6,000

Other
6,129

 
6,112

Total
$
6,129

 
$
12,112

Inventories (in thousands):
 
June 30,
2015
 
December 31,
2014
Raw materials
$
3,277

 
$
6,165

Work in process
243

 
351

Total
$
3,520

 
$
6,516

Accrued Expenses (in thousands):
 
June 30,
2015
 
December 31,
2014
Accrued royalties, licenses, and collaboration payments
$
5,019

 
$
7,223

Accrued compensation and related taxes
4,756

 
7,606

Accrued professional fees and consulting
571

 
1,872

Other
4,781

 
5,454

Total
$
15,127

 
$
22,155

Note 3.         Discontinued Operations
The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the Bioscience business segment. The allocations do not include amounts related to general corporate administrative expenses or interest expense. Therefore, the results of operations from the Bioscience business segment do not necessarily reflect what the results of operations would have been had the business operated as a stand-alone entity. The Company completed the sale of the Biosciences segment on May 30, 2014.

10


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Discontinued Operations (in thousands)
2014
 
2014
Revenues:
 
 
 
Bioscience product sales and services
$
3,258

 
$
12,470

Cost of revenues:
 
 
 
Cost of bioscience product sales and services
895

 
4,235

Gross margin
2,363

 
8,235

Operating expenses:
 
 
 
Selling and marketing
3,027

 
6,237

Research and development
876

 
2,248

General and administrative
356

 
643

Restructuring costs

 
19

Total operating expenses
4,259

 
9,147

Loss from discontinued operations
(1,896
)
 
(912
)
Other income, net
10

 
81

Loss from discontinued operations before income taxes
(1,886
)
 
(831
)
Income tax benefit
308

 
248

Earnings from discontinued operations
$
(1,578
)
 
$
(583
)
In connection with the sale of the Bioscience segment, the Company also entered into other agreements designed to facilitate the orderly transfer of business operations to the purchaser of the Bioscience business. One agreement is a three year Supply Agreement with the purchaser of the Bioscience business where the Company may purchase consumables and systems for the laboratory business and for the first twelve months of the agreement had preferred pricing. Purchases made by the Company of consumables and systems for the three and six months ended June 30, 2015 were $0.1 million and $0.3 million, respectively. Purchases made by the Company of consumables and systems for the three and six months ended June 30, 2014 were $0.1 million and $0.1 million, respectively, and these sales have been eliminated from discontinued operations reported revenue in 2014 because the transaction was intra-entity.
Note 4.         Long-Term Obligations (in thousands, except percentages):
 
As of June 30, 2015
 
As of December 31, 2014
5.00% Convertible Senior Notes due October 2017 ($45,000) and January 2018 ($85,000), interest payable semi-annually in April and October
$
130,000

 
$
130,000

Unamortized debt discount on Convertible Exchange Senior Notes due January 2018
(1,069
)
 

Bank Loans due May 2015, principal and interest payable monthly, weighted-average effective interest rates of 5.5%, net of unamortized discount of $8 at December 31, 2014.

 
3,722

Obligation for building and improvements, effective interest rate of 5.2% as of June 30, 2015 and December 31, 2014, expiring October 2026
5,735

 
5,868

Capital lease liabilities, expiring January 2016, net of unamortized discounts of $7 and $17 at June 30, 2015 and December 31, 2014, respectively
88

 
156

Total long-term obligations
134,754

 
139,746

Less current portion
(374
)
 
(4,144
)
Non-current portion
$
134,380

 
$
135,602

Convertible Senior Notes
On September 17, 2012, the Company issued $130 million aggregate principal amount of Convertible Senior Notes (the "2017 Notes") in a private offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended. On June 4, 2015, the Company entered into separate privately negotiated agreements with certain holders of the 2017 Notes to exchange in a private placement in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) $85 million in aggregate principal amount of 2017 Notes, for $85 million in aggregate principal amount at maturity of new 5.00% Convertible Exchange Senior Notes due 2018 (the “2018 Notes”) of the Company (the “Exchange Transactions”). The 2018 Notes were issued on June 9, 2015.

11


The Company accounted for the Exchange Transactions as a debt modification and not a debt extinguishment under ASC 470-50, as the terms of the 2018 Notes were not substantially different from those of the exchanged 2017 Notes. The Company incurred approximately $1.6 million in fees directly related to the Exchange Transactions which were expensed as incurred during the quarter ended June 30, 2015. As noted above, the 2018 Notes term was extended for an additional three months and mature January 1, 2018. The extension of the term increased the fair value of the 2018 Notes embedded, unseparated conversion option by approximately $1.1 million, which was recorded as an increase in the debt discount of the convertible senior notes and corresponding increase in additional paid-in capital and will be amortized over the remaining 30 month term of the 2018 Notes using the effective interest rate method.
Following the closings of the Exchange Transactions, $45 million in aggregate principal amount of the 2017 Notes remained outstanding, with the terms unchanged.
2017 Notes
The 2017 Notes bear interest at a fixed rate of 5.00% per year, payable semiannually in arrears on April 1 and October 1 of each year. The 2017 Notes mature on October 1, 2017, unless earlier converted, redeemed, or repurchased. The 2017 Notes are convertible at any time prior to the third trading day immediately preceding the maturity date, at the option of the holders, into shares of common stock.
The 2017 Notes are convertible into a total of 9.7 million shares of common stock, which was equal to an initial conversion rate of 216.0644 shares of common stock per $1,000 principal amount of the 2017 Notes (equivalent to an initial conversion price of approximately $4.63 per share of common stock), and will be subject to adjustment upon the occurrence of certain events. The maximum conversion rate is 275.4821 shares of common stock per $1,000 principal amount of the 2017 Notes, which would result in a maximum issuance of 12.4 million shares of common stock if all holders converted at the maximum conversion rate. In addition, under certain circumstances the Company, in connection with a make-whole fundamental change (as defined in the indenture governing the 2017 Notes), may be required to increase the conversion rate for holders of the 2017 Notes. As of June 30, 2015, no change to the conversion rate has occurred on the 2017 Notes.
The Company may not redeem the 2017 Notes prior to October 1, 2015. On or after October 1, 2015, the Company may redeem for cash all, but not less than all, of the 2017 Notes if the last reported sale price of the common stock equals or exceeds 140% of the applicable conversion price for at least 20 trading days during the 30 consecutive trading day period ending on the trading day immediately prior to the date on which the notice of the redemption is delivered. The redemption price will equal 100% of the principal amount of the 2017 Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. In addition, if the 2017 Notes are called for redemption, a make-whole fundamental change will be deemed to occur. As a result, in certain circumstances, this would increase the conversion rate for holders who convert their 2017 Notes after a notice of redemption is delivered and on or prior to the close of business on the third business day immediately preceding the relevant redemption date. Upon a fundamental change, subject to certain exceptions, the holders may require that the Company repurchase some or all of their 2017 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2017 Notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
On September 17, 2012, the Company entered into an indenture with Wells Fargo Bank, National Association, as trustee, relating to the 2017 Notes. The 2017 Notes are senior, unsecured obligations and rank equal in right of payment with existing and future senior, unsecured indebtedness, and will be senior in right of payment to any future indebtedness that is expressly subordinated to the 2017 Notes. The 2017 Notes will be effectively subordinated to existing and future secured indebtedness to the extent of the assets securing such indebtedness and will be structurally subordinated to all indebtedness and other liabilities and commitments of subsidiaries, including trade payables and any guarantees that they may provide with respect to any existing or future indebtedness.
2018 Notes
The 2018 Notes bear interest at a fixed rate of 5.00% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning October 1, 2015. Interest on the New Notes accrues from April 1, 2015. The 2018 Notes will mature on January 1, 2018, unless earlier converted or repurchased.
The 2018 Notes are convertible at any time prior to the third trading day immediately preceding the maturity date, at the option of the holders, into shares of the Company’s common stock. Subject to compliance with certain conditions, the Company has the right to mandatorily convert the 2018 Notes if the last reported sales price of the Company's common stock is equal to or greater than 115% of the applicable conversion price of the 2018 Notes for at least 20 trading days during the 30 consecutive trading day period ending within five trading days immediately prior to the date on which the Company delivers a mandatory conversion notice.
The conversion rate is initially 216.0644 shares of common stock per $1,000 principal amount of 2018 Notes (equivalent to an initial conversion price of approximately $4.63 per share of common stock), and will be subject to adjustment upon the

12


occurrence of certain events. In addition, holders of the 2018 Notes who convert their 2018 Notes in connection with a make-whole fundamental change (defined in the indenture governing the 2018 Notes (the “Indenture”)), whose 2018 Notes are converted in connection with a mandatory conversion or who convert their 2018 Notes on a conversion date on which the last reported sales price of the Company's common stock equals or exceeds the then applicable conversion price are, under certain circumstances, entitled to an increase in the conversion rate.
The Company may not redeem the 2018 Notes prior to the maturity date. Upon a fundamental change (defined in the Indenture), subject to certain exceptions, the holders of the 2018 Notes may require that the Company repurchase some or all of their 2018 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2018 Notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The 2018 Notes will be the Company’s senior, unsecured obligations and rank equal in right of payment with the Company’s existing and future senior, unsecured indebtedness, including the 2017 Notes, and will be senior in right of payment to any future indebtedness that is expressly subordinated to the 2018 Notes. The 2018 Notes will be effectively subordinated to the Company’s existing and future secured indebtedness to the extent of the assets securing such indebtedness and will be structurally subordinated to all indebtedness and other liabilities and commitments of the Company’s subsidiaries, including trade payables and any guarantees that they may provide with respect to any of the Company’s existing or future indebtedness.
Bank Loans
In May 2011, the Company entered into a Loan and Security Agreement, or the Loan Agreement, with Silicon Valley Bank, or SVB, that allowed for term loans of up to $20.0 million to be borrowed through August 31, 2012, revolving cash borrowings of up to $10.0 million, as well as letters of credit all under a secured credit facility. All borrowings under the Loan Agreement were secured by substantially all of the Company's assets, except for intellectual property, and were subject to certain other exceptions. The Loan Agreement included limitations on the ability, among other things, to incur debt, to grant liens, to make certain investments, to make certain restricted payments such as dividend payments, and to dispose of assets, as well as requirements to meet a number of affirmative and negative covenants.
The Company borrowed under the term loans $5.0 million and $15.0 million during the years ended December 31, 2012 and 2011, respectively. Under the Loan Agreement, the term loans had accrued interest at the rate fixed on the date of funding equal to the U.S. treasury rate plus 3.25% per annum. The term loan borrowings were being repaid in 33 equal installments of principal, plus accrued interest which commenced on September 1, 2012. The final payment on the term loans of $1.3 million was made on the loan maturity date, May 1, 2015, and included a final payment of 3.5% of all advances made under the term loans, in addition to principal repayments.
Obligation for Building and Improvements
In November 2011, the Company entered into a lease agreement for a building in Raleigh-Durham, North Carolina, that is accounted for as a financing lease. The term of the lease and the obligation was initially 15 years through October 2026, including two 2-year extensions of the lease. Rent payments under the lease are allocated primarily between interest expense and a reduction to the long-term obligation. In the event the lease is terminated prior to the end of the 15-year period, any gain representing the amount by which the balance of the obligation exceeds the net book value of the related building and improvements would be recognized.
Note 5.         Commitments and Contingencies
Ariosa Litigation
In December 2011, the Company was named as a defendant in a complaint filed by plaintiff Aria Diagnostics, Inc., in the U.S. District Court for the Northern District of California ("District Court"). Since the complaint was filed, Aria changed its name to Ariosa Diagnostics, Inc., or Ariosa. In the complaint, the plaintiff seeks a judicial declaration that no activities related to the plaintiff's noninvasive, prenatal test using cell-free DNA circulating in the blood of a pregnant woman do or will infringe any claim of U.S Patent No. 6,258,540 entitled Noninvasive Prenatal Diagnosis, or the '540 Patent, which was exclusively in-licensed from Isis prior to September 30, 2014 when the Company purchased the patent from Isis. In March 2012, the Company filed an answer to the complaint and asserted counterclaims that Ariosa is infringing the '540 Patent and seeking unspecified damages and injunctive relief. In March 2012, Ariosa responded to the Company's answer and counterclaims and asserted affirmative defenses including invalidity of the '540 Patent under U.S. patent laws. In March 2012, the Company filed a motion against Ariosa for preliminary injunctive relief. On July 5, 2012, the Court denied the Company's motion for preliminary injunctive relief and on July 16, 2012 the Company filed a Notice of Appeal to the U.S. Court of Appeals for the Federal Circuit ("CAFC") from the order denying the preliminary injunction motion. On August 9, 2013, the CAFC vacated and remanded the District Court’s decision, ruling that the District Court incorrectly interpreted the claims of the '540 patent and improperly balanced factors regarding issuance of a preliminary injunction. On August 16, 2013, Ariosa filed a motion for summary judgment in favor of Ariosa on the Company's counterclaim for patent infringement on the ground that the claims of

13


the '540 Patent are invalid because they are not drawn to patent-eligible subject matter under the patent code. On October 16, 2013, the District Court issued its order on the interpretation of the claims of the patent. On October 30, 2013, the District Court issued its order granting Ariosa’s motion for summary judgment, finding that the '540 Patent is invalid. The Company disagrees with the Order and has appealed the decision to the CAFC. On June 12, 2015, the CAFC upheld the ruling of the District Court that the claims of the '540 patent are not patent eligible under the patent eligibility criteria established by the United States Supreme Court's Mayo Collaborative Services v. Prometheus Laboratories decision. On July 7, 2015, the Company filed a motion to extend the deadline to file a petition for a rehearing en banc at the CAFC to August 13, 2015. On July 13, 2015, the CAFC granted the petition to extend the deadline to August 13, 2015. The Company intends to file an appeal and, if the appeal is successful, the Company intends to vigorously defend against the judicial declarations sought by Ariosa in its complaint and intends to vigorously pursue the Company's claims against Ariosa for damages and injunctive relief. However, the Company cannot predict the outcome of this matter.
Ariosa Inter Partes Review
In addition, Ariosa has sought to invalidate the '540 Patent through a petition for inter parties review ("IPR") before the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office (“USPTO”). Trial of the IPR was held before the PTAB on January 24, 2014. The PTAB issued a Decision in the IPR on September 2, 2014 invalidating some claims but upholding the validity of other claims. Both the Company and Ariosa requested reconsideration of the PTAB decision. On March 24, 2015, the PTAB denied both parties’ requests for reconsideration. Ariosa has filed a notice of intention to appeal the PTAB decision to the CAFC and the Company filed a notice to appeal as well. In light of the CAFC decision in the Ariosa Litigation, on July 20, 2015, the Company and Ariosa jointly filed a petition to stay the appeal in the CAFC until any appeal in the Ariosa Litigation is finalized. The CAFC granted the petition to stay the appeal on July 22, 2015 and directed the parties to inform the CAFC within fourteen days of the final disposition of the Ariosa Litigation.
Natera Litigation
In January 2012, the Company was named as a defendant in a complaint filed by plaintiff Natera, a Delaware corporation, in the U.S. District Court for the Northern District of California ("District Court"). In the complaint, the plaintiff seeks a judicial declaration that (i) activities related to the plaintiff's noninvasive, prenatal paternity test do not directly or indirectly infringe any claim of the '540 Patent, and (ii) one or more claims of the '540 Patent are invalid for failure to comply with the requirements of the patent laws of the U.S. In April 2012, the Company filed an answer to the complaint and asserted counterclaims that Natera and DNA Diagnostics Center, Inc., or DDC, are infringing the '540 Patent based on their activities relating to noninvasive prenatal paternity testing and noninvasive prenatal aneuploidy testing and seeking unspecified damages and injunctive relief. On October 16, 2013, the District Court issued its order on the interpretation of the patent claims. Many of the '540 Patent claims asserted against Natera are the same claims that were invalidated by the same District Court on October 30, 2013 in the litigation involving Ariosa, set forth above, and the Company and Natera stipulated to final judgment on the '540 patent claims in this case and have appealed the patent invalidity determination to the CAFC, which has consolidated the Ariosa, Natera, and Verinata case appeals. On June 12, 2015, the CAFC upheld the ruling of the District Court that the claims of the '540 patent are not patent eligible under the patent eligibility criteria established by the United States Supreme Court's Mayo Collaborative Services v. Prometheus Laboratories decision. On July 7, 2015, the Company filed a motion to extend the deadline to file a petition for a rehearing en banc at the CAFC to August 13, 2015. On July 13, 2015, the CAFC granted the petition to extend the deadline to August 13, 2015. The Company intends to file an appeal and, if the appeal is successful, the Company intends to vigorously defend against the judicial declarations sought by Natera in its complaint and intends to vigorously pursue the Company’s claims against Natera for damages and injunctive relief. However, the Company cannot predict the outcome of this matter.
Verinata and Stanford Litigation
In February 2012, the Company was named as defendants in a complaint filed by plaintiffs Verinata Health, Inc., or Verinata, and The Board of Trustees of the Leland Stanford Junior University, or Stanford, in the U.S. District Court for the Northern District of California ("District Court"). Verinata was acquired by Illumina, Inc. in 2013. In the complaint (i) Verinata seeks a judicial declaration that activities related to its noninvasive prenatal test using cell-free DNA circulating in the blood of a pregnant woman do not directly or indirectly infringe any claim of the '540 Patent, which at the time was exclusively in-licensed from Isis but has since been purchased from Isis, (ii) Verinata seeks a judicial declaration that each claim of the '540 Patent is invalid for failure to comply with the requirements of the patent laws of the U.S., and (iii) Verinata and Stanford allege that the Company, by performing its noninvasive prenatal MaterniT21 test, has and continues to directly infringe U.S. Patents which have been exclusively licensed to Verinata by Stanford and seek unspecified damages. In March 2012, the Company filed an answer to the complaint and asserted counterclaims that Verinata is infringing the '540 Patent and seeking unspecified damages and injunctive relief. In June 2012, plaintiffs Verinata and Stanford amended their complaint and allege that the Company, by performing its noninvasive prenatal MaterniT21 PLUS test, has and continues to directly infringe on a patent which has been exclusively licensed to Verinata by Stanford and seek unspecified damages. In July 2012, the Company filed an answer to the complaint.

14


On October 16, 2013, the District Court issued its order on the interpretation. Many of the '540 Patent claims asserted against Verinata are the same claims that were invalidated by the same District Court on October 30, 2013 in the litigation involving Ariosa, set forth above, and the Company and Verinata stipulated to final judgment on the '540 patent claims in this case and have appealed the patent invalidity determination to the U.S. Court of Appeals for the Federal Circuit. The District Court set trial beginning February 23, 2015. On December 2, 2014, the Company and Verinata reached a settlement that resolved litigation between them, and all litigation between the Company and Verinata related to these patents is now dismissed. As part of that settlement, the patents and pending applications are now pooled under a Pooled Patents Agreement between the Company and Illumina (who acquired Verinata). The Company and Verinata are now licensees to the patent rights that are pooled under the Pooled Patents Agreement.
Verinata Patent Interference I
On March 12, 2013, the USPTO declared a patent interference between Verinata's patent, which Verinata had asserted against us in the litigation, and the Company's then in-licensed (from CUHK) pending patent application. Two related patent interferences were declared by the USPTO between patent applications related to the patent and application. On April 7, 2014, the USPTO concluded the interferences, ruling that Verinata’s patent lacked sufficient disclosure to meet the written description requirement for the patent claims, and entered judgment canceling all four of the patent claims in the interference and the involved claims of the related patent application. Verinata has appealed the USPTO’s decision to the U.S. District Court for the Northern District of California. The District Court had set trial beginning February 23, 2015 on the appeal but has stayed the trial indefinitely. On December 2, 2014, the involved patents and applications were added to the patent pool. The Company is not a party to the District Court proceedings.
Verinata Patent Interference II
On May 3, 2013, the USPTO declared a patent interference between Verinata's patent, which Verinata has asserted against us in the litigation, and the Company's then in-licensed (from CUHK) pending patent application. On April 7, 2014, the USPTO ruled that the pending patent application has sufficient disclosure to meet the written description requirement for the patent claims and ordered the interference to proceed to the priority phase to determine which inventors were the first to invent the subject matter of the interference and entitled to a patent on that subject matter. The Company also separately challenged the validity of Verinata’s Patent in an inter partes review proceeding before the USPTO. The USPTO recently issued a decision in the Interference and the patent IPR upholding the validity of the patent. Pursuant to the terms of its settlement with Verinata, the Company will not appeal these decisions.
EU Opposition Proceedings
On September 29, 2014, and October 1, 2014, two unknown third parties initiated Opposition Proceedings against a European Patent. This patent was previously in-licensed by the Company from CUHK but has since been added to the patent pool under the Pooled Patents Agreement. The Company has rights to this patent under the patent pool but no longer controls efforts to defend this patent in the Opposition Proceedings.
Premaitha Litigation
On March 13, 2015, Illumina and its wholly-owned subsidiary Verinata filed a patent infringement lawsuit against Premaitha Health (UK). The lawsuit was filed in the High Court of Justice, Chancery Division, Patents Court in the United Kingdom. The lawsuit alleges that Premaitha’s Iona test for fetal aneuploidy infringes two pooled patents: European Patent No. EP 0 994 963 B2 (the “ ‘963 B2 Patent”) and European Patent No. EP 1 981 995 B1. The ‘963 B2 Patent is owned by the Company. The Company is named as a plaintiff and is participating in the lawsuit as the owner of the ‘963 B2 Patent. In its Defense and Counterclaim filed on April 29, 2015, Premaitha Health denies infringement and alleges that both asserted patents are invalid.
Other
In addition, from time to time, the Company may be involved in litigation relating to employment, intellectual property and contractual matters as well as claims arising out of the Company's operations in the normal course of business, including claims related to the Company's products, tests, and services, including LDT services. These other matters are, in the opinion of management, immaterial with respect to the Company's consolidated financial position, liquidity, or results of operations.
Claim estimates that are probable and can be reasonably estimated are reflected as liabilities. Because of the uncertainties related to the Company's pending litigation, investigations, inquiries or claims, management is currently unable to predict the ultimate outcome of any litigation, investigation, inquiry or claim, determine whether a liability has been incurred, or make an estimate regarding the possible loss or range of loss that could result from an unfavorable outcome. It is reasonably possible that some of the matters, which are pending or may be asserted, could be decided unfavorably to us. An adverse ruling or outcome in any lawsuit involving us could materially affect the Company's business, liquidity, consolidated financial position or results of operations, the ability to sell one or more of the Company's products or could result in additional competition. In

15


view of the unpredictable nature of such matters, the Company cannot provide any assurances regarding the outcome of any litigation, investigation, inquiry or claim to which the Company is a party or the impact on us of an adverse ruling of such matters.
Note 6.         Stock Compensation Plans
Equity Incentive Plans
The following table summarizes stock option activity of the Company during the six months ended June 30, 2015 (shares in thousands):
 
Shares Subject to Options (in thousands)
 
Weighted-Average Exercise Price per Share
As of December 31, 2014
11,116
 
$4.96
Granted
1,801
 
$3.61
Exercised
(123)
 
$2.83
Forfeitures and cancellations
(805)
 
$5.20
Outstanding at June 30, 2015
11,989
 
$4.76
Options exercisable at June 30, 2015
8,141
 
$5.38

The following table summarizes activity related to restricted stock awards and restricted stock units of the Company during the six months ended June 30, 2015:
 
Number of Shares (in thousands)
 
Weighted-Average
Grant Date
Fair Value
Outstanding at December 31, 2014
1,674
 
$2.99
Grants and awards
1,297
 
$3.56
Vested and released
(521)
 
$3.43
Forfeitures and cancellations
(186)
 
$3.31
Outstanding at June 30, 2015
2,264
 
$3.19
Issuances of Common Stock
In the six months ended June 30, 2015, the Company issued a total of 158,404 shares of common stock under the employee stock purchase plan (ESPP) and 123,461 shares from the exercise of stock options, resulting in proceeds of $0.8 million.
Stock-Based Compensation Expense
Following are the weighted-average underlying assumptions used to determine the fair value of stock option award grants and for stock purchase rights under the ESPP for the periods indicated:
 
Six Months Ended
 
June 30,
Stock Option Grants
2015
 
2014
Risk-free interest rate
1.8
%
 
2.2
%
Volatility
91.8
%
 
93.8
%
Dividend yield
%
 
%
Expected life (years)
7.1

 
7.1

Weighted-average grant date fair value
$
2.87

 
$
1.98


16


 
Six Months Ended
 
June 30,
ESPP Stock Purchase Rights
2015
 
2014
Risk-free interest rate
0.14
%
 
0.09
%
Volatility
55.7
%
 
74.2
%
Dividend yield
%
 
%
Expected life (years)
0.5

 
0.5

Weighted-average grant date fair value
$
1.07

 
$
0.77

Note 7.         Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables summarize the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis (in thousands):
 
Fair Value Measurements at Reporting Date Using
As of June 30, 2015
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
Cash equivalents:
 
 
 
 
 
Money market funds
$
48,904

 
$
48,904

 
$

Total cash equivalents
48,904

 
48,904

 

Marketable securities:
 
 
 
 
 
U.S. treasury securities
30,014

 
30,014

 

Certificates of deposit
48

 

 
48

Mutual funds
552

 
552

 

Total marketable securities
30,614

 
30,566

 
48

Total
$
79,518

 
$
79,470

 
$
48

 
Fair Value Measurements at Reporting Date Using
As of December 31, 2014
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
Cash equivalents:
 
 
 
 
 
Money market funds
$
50,359

 
$
50,359

 
$

Total cash equivalents
50,359

 
50,359

 

Marketable securities:
 
 
 
 
 
U.S. treasury securities
30,020

 
30,020

 

Certificates of deposit
48

 

 
48

Mutual funds
520

 
520

 

Total marketable securities
30,588

 
30,540

 
48

Total
$
80,947

 
$
80,899

 
$
48

There were no transfers in or out of Level 1, Level 2, or Level 3 investments during the six months ended June 30, 2015.
For fair values determined by Level 1 inputs, which utilize quoted prices in active markets for identical assets, the level of judgment required to estimate fair value is relatively low. The value of investments in money market funds, U.S. treasury securities and mutual funds was determined using Level 1 inputs. Fair values determined by Level 2 inputs, which utilize data points that are observable such as quoted prices, interest rates and yield curves. Investments in certificates of deposit are valued using Level 2 inputs.

17


Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, approximate fair value due to their short-term nature.
The carrying amounts and fair values the 2017 Notes and 2018 Notes are as follows (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Convertible Senior Notes
$
128,931

 
$
126,288

 
$
130,000

 
$
134,227

At June 30, 2015 and December 31, 2014, the fair values of the Notes were based on quoted market prices in an active market for the Notes (Level 1).
Note 8.         Restructuring Costs and Other Charges
Restructuring costs and other charges consisted of the following (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Impairment of property and equipment
$
386

 
$

 
$
386

 
$

Employee termination cost
270

 
2

 
270

 
(29
)
Facility exit costs

 
973

 

 
1,914

Restructuring costs and other charges
$
656

 
$
975

 
$
656

 
$
1,885

As part of an overall cost reduction effort, in August 2013, the Company exited a leased facility in San Diego, California, which was available for sublease until the lease expired in July 2015.
In connection with the restructuring, the Company recorded $2.4 million in facility exit costs, and $1.7 million of impairment expense for tenant improvements associated with the vacated facility, in addition to other restructuring charges during the year ended December 31, 2013.
In 2014, based on the shortened period where the facility could be subleased and in consideration of other new information, management reassessed the remaining liabilities in connection with the restructuring and recorded an additional $1.9 million of restructuring expense related to the vacated facility. The restructuring cost is for the lease obligation and costs to operate the facility through the lease expiration date in July 2015.
In May 2015, the Company decommissioned one of its research and development laboratories as part of the Company's plan to move certain general and administrative functions into the Company's corporate headquarters facility. As part of the decommissioning of the laboratory the Company recognized an impairment charge of $0.4 million on certain laboratory assets which it deemed would no longer be used.
Additionally, in May 2015, the Company committed to a plan to consolidate its Grand Rapids facility to its facility located in North Carolina. In connection with the plan the Company recognized $0.3 million in employee terminations costs during the three and six months ended June 30, 2015.
The following table provides a rollforward of the amounts recorded as liabilities within the condensed consolidated balance sheet (in thousands):
 
December 31, 2014
 
Accruals
 
Payments
 
June 30, 2015
Employee termination costs
$

 
$
270

 
$

 
$
270

Facility exits costs
1,195

 

 
(1,022
)
 
173

Total
$
1,195

 
$
270

 
$
(1,022
)
 
$
443

The facility exit costs of $0.2 million is included in other current liabilities on the condensed consolidated balance sheet as of June 30, 2015
Note 9.        Income Taxes

18


The Company’s income tax expense is primarily due to statutory tax liabilities resulting from state and foreign operations and deferred income tax expense related to amortization of indefinite lived intangibles.
The Company’s income tax expense 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 the Company establishes or reduces the valuation allowance against deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. As of June 30, 2015 and December 31, 2014, the Company maintained valuation allowances against U.S. and foreign deferred tax assets the Company 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 may result in a change in the estimated annual effective tax rate.
Note 10.        Subsequent Events

On August 3, 2015, Sequenom Laboratories entered into an Asset Purchase Agreement with Immucor GTI Diagnostics, Inc. (“Immucor”) pursuant to which Sequenom Laboratories sold certain assets and assigned certain agreements relating to the Grand Rapids facilities to Immucor effective August 3, 2015. In consideration for the transferred assets, Sequenom Laboratories received a one-time cash payment of $0.8 million.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
All statements in this report that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “may,” “will,” “intend,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,” “continue,” “opportunity,” “goals,” or “should,” the negative of these words or words of similar import. Similarly, statements that describe our future plans, strategies, intentions, expectations, objectives, goals, or prospects are also forward-looking statements. These forward-looking statements are or will be, as applicable, based largely on our expectations and projections about future events and future trends affecting our business, and so are or will be, as applicable, subject to risks and uncertainties including but not limited to the risk factors discussed in this report, that could cause actual results to differ materially from those anticipated in the forward-looking statements. We caution investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements. Our views and the events, conditions and circumstances on which these future forward looking statements are based, may change. All forward-looking statements are qualified in their entirety by this cautionary statement and we undertake no obligation to revise or update any such statements to reflect events or circumstances after the date hereof.
SEQUENOM®, MaterniT21®, HerediT®, SensiGene® and Nextview® are registered trademarks and Sequenom Laboratories™, and VisibiliT™ are trademarks of Sequenom, Inc. This report may also refer to trade names and trademarks of other organizations.
Sequenom, Inc. was incorporated in 1994 under the laws of the State of Delaware. As used in this report, the words “we,” “us,” “our,” the “Company,” and “Sequenom” refer to Sequenom, Inc. and its wholly-owned subsidiaries on a consolidated basis, unless explicitly noted otherwise.
This following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included in this report and our Annual Report on Forms 10-K for the fiscal year ended December 31, 2014. This discussion and analysis may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth under the heading “Risk Factors,” and elsewhere in this report.
Overview
We are a life sciences company committed to enabling healthier lives through the development of innovative products and services. We serve patients and physicians by providing early patient management information. We offer our services in the U.S. and globally with international emphasis in countries in the European and Asia-Pacific regions.

19


Our wholly-owned subsidiary, Sequenom Laboratories™, provides molecular based laboratory developed tests, with a focus principally on prenatal testing and development of tests for use in oncology. Sequenom Laboratories is a CAP (College of American Pathologists) accredited and CLIA (Clinical Laboratory Improvements Amendment of 1988, as amended) certified molecular diagnostics laboratory that develops, validates and exclusively offers tests branded under the names MaterniT21® PLUS, HerediT®, HerediT® UNIVERSAL, SensiGene® and VisibiliT™. These genetic tests, offered as a testing service to physicians for the benefit of their patients, provide early patient management information for obstetricians, geneticists, and maternal fetal medicine specialists.
On May 30, 2014, we completed the sale of our Bioscience business to BioSciences Acquisition Company which purchased substantially all of the assets used in what we previously reported as our Bioscience business segment. With this divestiture, we now operate in a single business segment.
As a result of the Bioscience segment sale, we have retrospectively revised the condensed consolidated statements of operations and cash flows for the three and six months ended June 30, 2014, to reflect the financial results from the Bioscience business segment as discontinued operations.
Second Quarter of 2015
Total accessions for all Sequenom Laboratories tests during the three months ended June 30, 2015 decreased by 5,700, or 11%, to 44,400 when compared to 50,100 during the same period in the prior year. The decline primarily reflects the strategic shift of business by a licensee to the patent pool in the second quarter of 2015.
Diagnostic services revenue for three months ended June 30, 2015 was $30.9 million, compared to $39.4 million for the same period in the prior year.
License revenue increased for the three months ended June 30, 2015 to $1.9 million, compared to $0.4 million for the same period in the prior year.
Net cash used in operating activities was $8.3 million for the six months ended June 30, 2015, compared to $18.2 million in the same period in the prior year.
There are now 32 participants in the patent pool, including the Company and Illumina. Many of those licensees are in the process of developing and validating a noninvasive prenatal test to be performed in their own laboratories.
The Company made significant progress in its oncology program and remains on track to launch a liquid biopsy test for research use in the second half of 2015.
Results of Operations
Accessions
The following is a summary of accessions Sequenom Laboratories received for the first two quarters of 2015 and the four quarters of 2014:
 
2015
 
2014
(accessions in thousands)
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
Accessions by quarter
44.4

 
52.8

 
50.9

 
46.6

 
50.1

 
49.9

Each test performed relates to a patient specimen collected by a health care professional, and received by the laboratory. Such specimen encounter is commonly referred to as an “accession” in the laboratory sector. Although accessions are not billed until the test is complete and results are reported to the ordering physician, we believe that the number of accessions received is useful to understand the volume of Sequenom Laboratories' business. These tests are typically completed within approximately five business days from the date of accession.
For the three months ended June 30, 2015, the number of accessions decreased 5,700, or 11%, when compared to the same period in 2014, which is primarily attributable to test services performed for international (client bill) customers who converted to licensee status.
For the six months ended June 30, 2015, the number of accessions decreased 2,800, or 3%, when compared to the same period in 2014, which is primarily attributable to test services performed for international (client bill) customers who converted to licensee status. We believe that our NIPT accession volume will be affected as other companies license our technologies through the patent pool with Illumina and elect to perform their own NIPT.

20


Revenue
Revenues are derived from diagnostic services and license revenue and for the three and six months ended June 30, 2015 and 2014 were as follows:
 
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
June 30,
 
Change
 
June 30,
 
Change
(in thousands)
 
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Diagnostic services revenue
 
$
30,891

 
$
39,380

 
$
(8,489
)
 
(22)%
 
$
66,595

 
$
76,100

 
$
(9,505
)
 
(12)%
License revenue
 
1,875

 
402

 
1,473

 
366%
 
$
3,977

 
$
743

 
$
3,234

 
435%
Total revenue
 
$
32,766

 
$
39,782

 
$
(7,016
)
 
(18)%
 
$
70,572

 
$
76,843

 
$
(6,271
)
 
(8)%
Diagnostic Services Revenue
Diagnostic services revenues are derived from providing testing services in our labs, which are reimbursed through arrangements with third-party payors or through contractual arrangements (client bill) and through amounts patients self-pay. Diagnostic services revenue is recognized upon cash collection until a reliable estimate of the amount that would be ultimately collected for the test and the other revenue criteria have been met, at which time revenue is recognized on an accrual basis. Third-party payors include commercial payors, such as health insurance companies, health maintenance organizations and government payors, such as Medicare and Medicaid in the United States. Client bill revenue is primarily recognized on an accrual basis and includes labs and customers with whom we have a contractual agreement where they will pay for the test upon delivery of the test results to ordering physicians. Revenue from patients, through co-payments or through cash based services offerings are recognized on a cash basis.
Diagnostic services revenue decreased $8.5 million, or 22%, during the three months ended June 30, 2015, when compared to the same period in the prior year.
Diagnostic services revenue decreased $9.5 million, or 12%, during the six months ended June 30, 2015, when compared to the same period in the prior year.
The following is a summary of diagnostic service revenues for the first two quarters of 2015 and the four quarters of 2014:
 
2015
 
2014
(in millions)
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
Diagnostic Services Revenue:
 
 
 
 
 
 
 
 
 
 
 
Revenue recorded on accrual basis
$
10.9

 
$
13.8

 
$
14.4

 
$
11.0

 
$
10.2

 
$
4.3

Cash basis revenue for diagnostic services performed in the quarter
5.4

 
5.7

 
4.6

 
6.2

 
8.5

 
11.2

Cash basis revenue for diagnostic services performed in prior quarters
14.6

 
16.2

 
16.1

 
20.1

 
20.7

 
21.2

Total diagnostic services revenue
$
30.9

 
$
35.7

 
$
35.1

 
$
37.3

 
$
39.4

 
$
36.7

Revenue recorded on an accrual basis during the three months ended June 30, 2015 increased $0.7 million, or 7%, compared to the same period in 2014. The increase can be attributed to the Company transitioning additional third-party payors from cash to accrual accounting in the second half of 2014, and an increased volume of tests performed under client bill arrangements during the second quarter of 2015, which are accounted for on an accrual basis.
Revenue recorded on a cash basis for services performed in the second quarter of 2015 was $5.4 million, a decrease of $3.1 million, or 36%, compared to the same period in 2014. The decrease is due to the use of accrual accounting for additional payors in 2015 and changes in payor mix.
Diagnostic services performed in prior quarters but recorded as revenue on a cash basis in the quarter ended June 30, 2015 was $14.6 million, a decrease of $6.1 million, or 29%, compared to the same period in 2014. The reduction was due primarily to the higher payments received in 2014 for prior services; whereas the amount of such payments was not as significant in 2015 due to the reduced level of unrecorded accounts receivable available to collect.
Collections for services have been volatile, and we expect collections to continue to fluctuate depending upon the results of our efforts to collect payment from third-party payors. As of June 30, 2015, amounts outstanding for tests delivered, net of estimated write-downs and adjustments, which were not recognized as revenue upon delivery of the test result because accrual revenue recognition criteria was not met and the amounts had not been collected, range from approximately $27.0 million to $30.0 million, depending upon the ultimate reimbursement received for outstanding claims. We cannot provide any assurance as to when, if ever, and to what extent these amounts will be collected but we continue to pursue collection for our tests, where appropriate.

21


We believe that our diagnostic services revenue will continue to be affected by our current revenue recognition policy of generally recognizing revenue upon cash collection, the overall acceptance and demand for our new and existing commercial products and services, the adoption rates of our existing LDTs and any future LDTs we may develop, the effect of competition on pricing, and payment patterns of third-party payors and patients. We also believe that our diagnostic services revenue will be affected as other companies license our technologies and other patent rights through the patent pool with Illumina, for which we will receive a test fee.
License Revenue
License revenues are derived from direct license agreements with domestic and international customers to whom we have licensed our technology in certain countries. We also derive license revenues through a sharing of test fees under the Pooled Patents Agreement with Illumina. License revenue is recognized in the period reported by our partner or Illumina and in certain cases can result in a lag of revenue of up to one quarter from the period in which the test was performed.
The following is a summary of license revenue for the first two quarters of 2015 and the four quarters of 2014:
 
2015
 
2014
(in millions)
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
Total license revenue
$
1.9

 
$
2.1

 
$
1.7

 
$
0.6

 
$
0.4

 
$
0.3

Total license revenue for the three months ended June 30, 2015 was $1.9 million, a 366% increase from the same period in 2014. The increase is primarily attributable to the Pooled Patents Agreement that took effect in December 2014, and includes our share of test fees reported to us by our licensees and test fees reported to us by Illumina.
Total license revenue for the six months ended June 30, 2015 was $4.0 million, a 435% increase from the same period in 2014. The increase is primarily attributable to the Pooled Patents Agreement that took effect in December 2014, and includes our share of test fees reported to us by our licensees and test fees reported to us by Illumina. Additionally, we delivered the last element for certain license arrangements during the first quarter of 2015 and recognized $0.8 million of revenue in that period.
Costs and Expenses
Our costs and expenses were as follows:
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30,

Change
 
June 30,
 
Change
(dollars in thousands)
2015

2014

$

%
 
2015
 
2014
 
$
 
%
Cost of revenues
$
16,595

 
$
22,410

 
(5,815
)
 
(26)%
 
$
35,902

 
$
45,180

 
$
(9,278
)
 
(21)%
Selling and marketing
$
8,359


$
7,920


439


6%
 
$
16,845

 
$
16,479

 
$
366

 
2%
Research and development
$
5,652


$
7,087


(1,435
)

(20)%
 
11,520

 
13,876

 
(2,356
)
 
(17)%
General and administrative
$
8,511


$
14,590


(6,079
)

(42)%
 
17,186

 
27,070

 
(9,884
)
 
(37)%
Restructuring costs
$
656

 
$
975

 
(319
)
 
(33)%
 
656

 
1,885

 
(1,229
)
 
(65)%
Cost of Revenues
Cost of revenues includes the cost of materials, direct labor, equipment, outside laboratory costs, royalties, infrastructure expenses associated with accessioning patient specimens (including quality control analyses and shipping charges to transport patient specimens) and license and test fees, including those owed to Illumina as specified in the Pooled Patents Agreement. Infrastructure expenses include allocated facility occupancy and information technology costs. Costs associated with performing tests are recorded as tests are processed. Costs recorded for patient specimen processing represent the cost of all the tests processed during the period regardless of whether revenue is recognized with respect to that test. Royalties for licensed technology calculated as a percentage of revenue are recorded as license fees in cost of revenues at the time revenues are recognized or in accordance with other contractual obligations. License fees represent a significant component of our cost of revenues and are expected to remain so for the foreseeable future.
The $5.8 million, or 26%, reduction in cost of revenues during the three months ended June 30, 2015, when compared to the same period in 2014, is primarily attributable to lower test volume and lower cost of materials and labor.
The $9.3 million, or 21%, reduction in cost of revenues during the six months ended June 30, 2015, when compared to the same period in 2014, is primarily attributable to lower test volume and lower cost of materials and labor.

22


We continue to look for ways to reduce our costs per test but expect the overall cost of revenues to fluctuate with test volume.
Selling and Marketing Expenses
Selling and marketing expenses consists primarily of compensation and related departmental expenses for sales and marketing, customer support, and business development personnel.
Selling and marketing expenses during the three months ended June 30, 2015, increased 6% when compared with the three months ended June 30, 2014. The increase can be attributed to increased headcount and marketing expenses associated with product launches and competitive selling efforts.
Selling and marketing expenses during the six months ended June 30, 2015, were consistent with the six months ended June 30, 2014.
We expect our selling and marketing expenses to fluctuate in future periods as new products are introduced.
Research and Development Expenses
Research and development expenses consists primarily of compensation and related personnel expenses, product development costs, quality and regulatory costs, and expenses relating to licensing costs and work performed under research and development contracts.
The $1.4 million, or 20%, decrease in research and development expenses during the three months ended June 30, 2015, when compared to the three months ended June 30, 2014, is from lower supply costs due to the timing of certain internal research and development project activity.
The $2.4 million, or 17%, decrease in research and development expenses during the six months ended June 30, 2015, when compared to the six months ended June 30, 2014, is from lower supply costs due to the timing of certain internal research and development project activity and lower labor costs in the first half of 2015 as compared to the same period in 2014.
We expect our research and development expenses to increase in future periods as we continue to invest in our product pipeline and other molecular diagnostic areas, including projects to develop oncology testing services as a new market for the Company.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation and related departmental expenses for executive, legal, accounting, finance, non-allocated information technology and human resource personnel and outside professional fees.
The $6.1 million, or 42%, decrease in general and administrative expenses during the three months ended June 30, 2015, when compared to the three months ended June 30, 2014, is primarily related to a $5.0 million reduction in litigation costs, lower labor, share-based compensation and overhead costs, offset by costs incurred related to the convertible note exchange in the current quarter of $1.6 million.
The $9.9 million, or 37%, decrease in general and administrative expenses during the six months ended June 30, 2015, when compared to the six months ended June 30, 2014, is primarily related to a $8.7 million reduction in litigation costs and lower labor and share-based compensation offset by costs incurred related to the convertible note exchange in the current quarter of $1.6 million.
We expect to continue to realize lower general and administrative expenses due primarily to lower patent related litigation costs.
Restructuring Costs and Other Charges
During the three and six months ended June 30, 2015, we recognized a $0.4 million impairment related to the decommissioning of a research and development laboratory at our corporate headquarters as we consolidated certain general and administrative personnel into our corporate headquarters. Additionally, we recognized $0.3 million in employee termination costs related to the consolidation of our Grand Rapids facility to our North Carolina facility.
As part of an overall cost reduction effort, in August 2013, we communicated to our employees a plan to reduce our workforce. The restructuring resulted in the release of 57 employees, a reduction in our estimate of future cash flows to be generated by our AMD test which resulted in an impairment of our licensed technology asset, and the subsequent decision to exit our lease of a facility in San Diego, which expired in July 2015. In connection with the restructuring, we reassessed the costs that had been previously recorded for facility exit costs. During the three months ended June 30, 2014, we recorded an additional $1.0 million, and for the six months ended June 30, 2014, we recorded an additional $1.9 million as we revised our estimates related to the exited facility.

23


Gain on Pooled Patents Agreement
The $21.0 million gain recognized on the Pooled Patents Agreement during the first half of 2015 relates to the delivery and acceptance of the remaining study related documents associated with the physical samples transferred to Illumina during the fourth quarter of 2014. The delivery of the study related documents satisfied the remaining deliverable in the arrangement for recognition of the $21.0 million deferred gain on the Pooled Patents Agreement reported on the condensed consolidated balance sheet as of December 31, 2014.
Other Income and Expense, and Income Tax Expense
 
Three Months Ended
 
 
 
Six Months Ended
 
 
 
June 30,
 
 
 
June 30,
 
 
(dollars in thousands)
2015
 
2014
 
$ Change
 
2015
 
2014
 
$ Change
Interest (expense), net
$
(1,984
)
 
$
(2,055
)
 
$
71

 
$
(3,979
)
 
$
(4,132
)
 
$
153

Other (expense), net
26

 
(37
)
 
63

 
(88
)
 
(58
)
 
(30
)
Income tax benefit (expense)
$
(48
)
 
$
6,928

 
$
(6,976
)
 
(124
)
 
6,804

 
(6,928
)
Income Tax Benefit (Expense)
Our income tax expense during all periods is primarily due to statutory tax liabilities resulting from our state and foreign operations and the deferred income tax expense related to amortization of indefinite lived intangibles.
Liquidity and Capital Resources
We have a history of recurring losses from operations and an accumulated deficit. Our capital requirements to sustain operations, including commercialization of Sequenom Laboratories' tests, research and development projects, and litigation have been and will continue to be significant. As of June 30, 2015 and December 31, 2014, we had working capital of $79.9 million and $65.7 million, respectively.
We consider the material drivers of our cash flow to be testing volumes and collections of billed tests for our diagnostic testing services, our share of test fees and royalties from the Pooled Patents Agreement, working capital, inventory management, and operating expenses. Our principal sources of liquidity are our cash, cash equivalents, and marketable securities, collections of our accounts receivable, collections from our commercialized tests and services and collections of test fees from the Pooled Patents Agreement. We have also financed our operating and capital requirements during the last three years with proceeds from the sale of our Bioscience segment, funds received from the Pooled Patents Agreement entered into with Illumina in 2014, issuance of our Convertible Senior Notes and the public offering of our common stock during 2012.
We have expanded the operations of our laboratories following commercialization of the MaterniT21 PLUS test, including research and development activities related to improvements to current tests and expansion of our diagnostic testing menu.
As of June 30, 2015, cash, cash equivalents, and current marketable securities totaled $86.8 million, compared to $93.9 million at December 31, 2014. The $7.1 million decrease is due primarily to cash used in operating activities of $8.3 million, and the final payment of $1.3 million on term loans, offset by $6.0 million cash received from the Pooled Patents Agreement. Our cash equivalents and marketable securities are held in a variety of securities that include U.S. government treasuries, certificates of deposits, and money market funds that have ratings of AA+/AA1, or are fully guaranteed by the U.S. government, and mutual funds.
We expect that our cash, cash equivalents and current marketable securities are sufficient to provide for our operating needs through at least the next twelve months.
Operating Activities
Cash used in operations during the six months ended June 30, 2015, was $8.3 million, compared to $18.2 million for the six months ended June 30, 2014. The improvement in cash used in operations was primarily a result of our lower operating expenses.
Investing Activities
Net cash provided by investing activities was $4.9 million during the six months ended June 30, 2015, compared to $33.5 million during the six months ended June 30, 2014. Investing activities during the six months ended June 30, 2015 included $6.0 million received from the proceeds from the Pooled Patents Agreement, offset by purchases of property and equipment of $1.6 million. Investing activities during the six months ended June 30, 2014, primarily reflects the $29.9 million cash received from the sale of our Bioscience business segment and cash provided from marketable securities maturing of $4.2 million, net of purchases.

24


Financing Activities
Net cash used by financing activities during the six months ended June 30, 2015 was $3.7 million, compared to $2.9 million during the six months ended June 30, 2014. Financing activities during the six months ended June 30, 2015 include payments on debt obligations of $3.9 million, partially offset by $0.3 million in net proceeds from the exercise of stock options and employee stock plan purchases.
Contractual Obligations/Off-Balance Sheet Arrangements
We have no significant contractual obligations not fully recorded on our condensed consolidated balance sheets or fully disclosed in the notes to our condensed consolidated financial statements or in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. We have no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii).
Additional information regarding our financial commitments at June 30, 2015, is provided in the notes to our condensed consolidated financial statements. See “Notes to Condensed Consolidated Financial Statements, Note 5 - Commitments and Contingencies."
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect amounts reported in the accompanying condensed consolidated financial statements and related notes. There has been no material change in the Company’s "Critical Accounting Policies and Estimates" since its presentation set forth in Item 7, in the Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation set forth in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in the Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2015 to provide reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (b) such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2015 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become

25



inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

26



PART II - OTHER INFORMATION
Item 1.    Legal Proceedings
Our material legal proceedings are disclosed in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2014, which we strongly encourage you to review.
For a description of developments that have occurred since December 31, 2014, with respect to the legal proceedings in which we are involved, please refer to Note 5 “Commitments and Contingencies” of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 1A.
Risk Factors
Before deciding to invest in our company or deciding to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the SEC. The risks and uncertainties described below and in our other filings are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose your investment.
The risk factors in this report have been revised to incorporate changes to our risk factors from those included in our annual report on Form 10-K for the year ended December 31, 2014. The risk factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes, including any material changes, from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC.
* We may not be able to continue to generate significant revenue from any of the tests we have commercialized including the MaterniT21 PLUS test or any test that we may develop in the future.
Our business is substantially dependent on our ability to develop and launch and obtain reimbursement for our diagnostic tests, including the MaterniT21 PLUS test. We have committed significant research and development resources for the development and validation of tests and we have likewise invested significant research and development resources for its potential future diagnostic products. There is no guarantee that we will successfully maintain our current revenues or generate additional revenues or significant revenues from any of our testing services, including the MaterniT21 PLUS test, or any other testing services that we plan to launch in the future. We have launched testing services for prenatal fetal chromosomal abnormalities, CF carrier screening, universal carrier screening, noninvasive prenatal Rhesus D genotyping, and risk assessment of a patient with “dry” or early stage AMD progressing to “wet” or advanced choroidal neovascular disease within 2, 5, and 10 years. The MaterniT21 PLUS test, which was originally launched in October 2011, detects fetal chromosomal abnormalities. The VisibiliT test, launched in 2014, is a risk score assay for the detection of increased representation of chromosomes 21 and 18. The HerediT UNIVERSAL test, launched in 2015, is a test that detects over 250 genetic disorders across more than 1,700 mutations. We discontinued the AMD test in the first quarter of 2015. If we, or our partners, are not able to continue to successfully market or sell noninvasive prenatal diagnostic tests or successfully market or sell other tests we may develop for any reason, including the failure to obtain significant reimbursement from payors, or failure to obtain or maintain any required regulatory approvals, we will not generate or maintain significant revenues from the sale of such tests or testing services. A number of factors could impact our ability to continue to sell noninvasive prenatal diagnostic tests or other tests we have developed or may develop in the future or generate significant revenues from the sale of such tests or testing services, including the following:
the availability of alternative and competing tests or products, such as those using targeted sequencing based or single nucleotide polymorphism (SNP) based approaches for NIPT to detect fetal chromosomal aneuploidies, or other approaches that may have a lower cost of goods and/or be less expensive to perform compared to the MaterniT21 PLUS test or our other tests, and which in turn may result in lower prices offered by competitors;
technological innovations or other advances in medicine that cause our technologies to be less competitive;
pricing pressures, lower prices offered by competitors, or changes in third-party payor, government payor or private insurer reimbursement policies including potential delays or refusals to pay and uncertainty related to changes in CPT codes and uncertainty regarding payor adoption of and reimbursement rates for new gene sequencing related CPT codes that took effect in January 2015;
payors and/or patients may not pay for services;
payors may seek to reduce the use of our services by ordering physicians;

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our ability to establish and maintain sufficient intellectual property rights in our products, including our ability to overturn the U.S. District Court for the Northern District of California’s order ruling our '540 Patent to be invalid, and our ability to ultimately enforce the '540 Patent in the future against competitors and obtain injunctive relief and/or monetary damages from competitors;
parties infringing our intellectual property rights or operating outside our intellectual property rights;
the ability to implement and maintain controls and risk management measures as appropriate;
reliance on Sequenom Laboratories, which is subject to routine governmental oversight and inspections for continued operation pursuant to CLIA to process tests ordered by physicians;
our ability to establish and maintain adequate infrastructure to support the continued commercialization of the MaterniT21 PLUS test, the VisibiliT test, the HerediT UNIVERSAL test and other testing services, including establishing adequate laboratory space, information technology infrastructure, sample collection and tracking systems including the laboratory information management system, or LIMS, electronic ordering and reporting systems and other infrastructure and hiring adequate laboratory and other personnel;
compliance with federal, state and foreign regulations governing laboratory testing on human specimens;
the marketing and sale of research use only or other tests;
the accuracy rates of such tests, including rates of false negatives and/or false positives;
concerns regarding the safety and effectiveness or clinical validity of noninvasive prenatal or other tests;
changes in the regulatory environment affecting health care and health care providers, including changes in laws regulating laboratory testing and any laws regulating prenatal testing;
the extent and success of our sales and marketing efforts and ability to drive continued adoption of our testing services, including the MaterniT21 PLUS test , the VisibiliT test and the HerediT UNIVERSAL test;
the extent to which payors and health care providers may limit or deny the addition of new laboratory-developed test service providers to their programs;
general changes or developments in the market for women's and/or prenatal health diagnostics, or diagnostics in general;
ethical and legal issues concerning the appropriate use of the information resulting from noninvasive prenatal diagnostic tests or other tests;
the refusal by women to undergo such tests for moral, religious or other reasons, or based on perceptions about the safety or reliability of such tests;
our ability to provide effective customer support; and
our ability to license and protect our patented technologies and our other technologies.
* We may not be able to collect all or any of the estimated range of $27 million to $30 million of amounts outstanding for tests completed which have not been recognized as revenue upon delivery of the test results.
Our business is substantially dependent on our ability to obtain reimbursement for our LDTs, including the MaterniT21 PLUS test. Collections for services performed have been volatile, and we expect collections to continue to fluctuate depending upon the results of our efforts to collect payment from third-party payors. As of June 30, 2015, amounts outstanding for tests completed, net of estimated write-downs and adjustments, which were not recognized as revenue upon delivery of the test result because our accrual revenue recognition criteria were not met and the amounts had not been collected, range from approximately $27 million to $30 million, depending upon the ultimate reimbursement received for these outstanding claims. A number of factors could impact our ability to collect payment on these outstanding claims and impact the amount and timing of any payments, and we cannot provide any assurance as to when, if ever, and to what extent these amounts may be collected. If we are unsuccessful in collecting such outstanding amounts, it will adversely affect our financial position.
* Claims by other companies that we infringe their intellectual property rights could adversely affect our business.
From time to time, companies have asserted, and may again assert, patent, copyright or other intellectual proprietary rights against our tests or tests using our technologies, and/or against our customers (licensees and commercial partners). These claims have resulted and may in the future result in lawsuits being brought against us and/or our customers, and could negatively affect demand for our tests, particularly the MaterniT21 PLUS test, and our ability to maintain existing, or enter into new, agreements with customers. We may not prevail in any lawsuits alleging patent infringement given the complex technical issues and inherent uncertainties in intellectual property litigation. If any of our tests, technologies or activities, in particular our

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tests (including the MaterniT21 PLUS test, the VisibiliT test and the HerediT UNIVERSAL test) from which we derive and expect to continue to derive almost all of our revenues, were found to infringe on another company's intellectual property rights, we could be subject to an injunction that would force the removal of such test from the market or we could be required to redesign such test, which could be costly. We could also be ordered to pay damages or other compensation, including punitive damages and attorneys' fees to such other company. A negative outcome in any such litigation could also severely disrupt the use of our technologies by our customers and licensees or their customers, which in turn could harm our relationships with our customers, our market share and our revenues. Even if we are ultimately successful in defending any intellectual property litigation, such litigation is expensive and time consuming to address, will divert our management's attention from our business and may harm our reputation.
* Our ability to compete in the market may decline if we lose some of our intellectual property rights, if patent rights that we rely on are invalidated, or if we are unable to obtain other intellectual property rights.
Our success will depend on our ability to obtain, protect, and maintain the validity of patents on our technology, to protect our trade secrets, and to maintain our rights to licensed intellectual property or technologies. Such patent rights include U.S. Patent No. 6,258,540 or the '540 Patent, ruled invalid by the U.S. District Court for the Northern District of California, a ruling that was upheld by the U.S. Court of Appeals for the Federal Circuit, and foreign equivalents, which we have purchased from Isis for noninvasive prenatal diagnostics and noninvasive prenatal gender determination testing. Such patent rights also include U.S. patents and patent applications, and their foreign equivalents, which we have rights to under the Pooled Patents Agreement with Illumina. Such patent rights also include U.S. and foreign patents and patent applications in-licensed from the Chinese University of Hong Kong, or CUHK, or in-licensed from other third-party entities.
Our patent applications or those of our licensors may not result in the issuance of patents in the U.S. or other countries. Our patents or those of our licensors may not afford meaningful protection for our technology and products. While we do not believe that the District Court’s order ruling that the '540 Patent is invalid will impact the competitive landscape (as we have been competing in the marketplace without the benefit of the patent being recognized by competitors), if we are unable to overturn that ruling, it will impact our potential ability in the future to obtain injunctive relief against competitors and/or money damages from competitors. Others may challenge our patents or those of our licensors by proceedings such as interference, oppositions, inter partes review, and reexaminations or in litigation seeking to establish the invalidity of our patents. In the event that one or more of our patents are challenged, the USPTO or a court may invalidate the patent(s) or determine that the patent(s) is not enforceable, which could harm our competitive position. If one or more of our patents are invalidated or found to be unenforceable, or if the scope of the claims in any of these patents is limited by the USPTO or a court decision, we could lose certain market exclusivity afforded by patents owned or in-licensed by us and potential competitors could more easily bring tests or products to the market that directly compete with our own, including the MaterniT21 PLUS test. Such adverse decisions may negatively impact our revenues. See Item 1 of this Report for a discussion of legal proceedings affecting our patents and patent applications.
Competitors may develop products or tests similar to ours that do not conflict with our patents or patent rights. Others may develop products, technologies or methods, including noninvasive prenatal tests or other diagnostic tests in violation of our patents or those of our licensors, or by operating around our patents or license agreements, which could reduce or remove our noninvasive prenatal and other diagnostic commercialization opportunities. To protect or enforce our patent rights, we have initiated interference and inter partes review proceedings, and we may initiate oppositions, reexaminations, or litigation against others. However, these activities are expensive, take significant time and divert management's attention from other business concerns. We may not prevail in these activities. If we are not successful in these activities, the prevailing party may obtain superior rights to our claimed inventions and technology, which could adversely affect our ability to successfully market and commercialize any of our tests that are dependent upon such technologies, including the MaterniT21 PLUS test. The patent position of biotechnology companies generally is highly uncertain and involves complex legal and factual questions that are often the subject of litigation. In 2013, the U.S. Supreme Court decided the case Association for Molecular Pathology v. Myriad Genetics, 133 S. Ct. 2107 (2013) (No. 12-398), a case that held that, “A naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated, but cDNA is patent eligible because it is not naturally occurring.” This Supreme Court decision, and other Supreme Court and lower Federal Court decisions interpreting and/or limiting the scope of patentable subject matter under 35 U.S.C. § 101, as well as the new examination guidelines from the U.S. Patent and Trademark Office issued in 2014 (i.e., the 2014 Interim Guidance on Patent Subject Matter Eligibility (Interim Eligibility Guidance) for USPTO personnel to use when determining subject matter eligibility under 35 U.S.C. 101 in view of recent decisions by the U.S. Supreme Court), have made it more difficult for patentees to obtain and/or maintain patent claims in the United States that are directed to biotechnology-related subject matter, as claims to that subject matter are often perceived to recite or involve Laws of Nature/Natural Principles, Natural Phenomena, and/or Natural Products. No consistent policy has emerged from the USPTO, the offices of foreign countries or the courts regarding the breadth of claims allowed or the degree of protection afforded under biotechnology patents. There is a substantial backlog of biotechnology patent applications at the USPTO and of the equivalent offices around the world and the approval or rejection of patent applications may take several years.

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If we breach any of the terms of our license or supply agreements, or these agreements are otherwise terminated or modified, the termination or modification of such agreements could result in our loss of access to critical components and could delay or suspend our commercialization efforts, and we may compete with our suppliers which may adversely affect our business.
We have sourced or licensed components of our technology from other parties. Our failure to maintain continued supply of such components, particularly in the case of sole suppliers, or the right to use these components would seriously harm our business, financial condition, and results of operations. In the event of any adverse developments with these vendors, Sequenom Laboratories’ testing services may be interrupted, which would have an adverse impact on our business. Changes to or termination of our agreements or inability to renew our agreements with these parties or enter into new agreements with other suppliers could result in the loss of access to these aspects of our technology or other intellectual property rights or technologies that we may acquire from time to time and could impair, delay, or suspend our commercialization efforts, including efforts to market and commercialize the MaterniT21 PLUS test. While we negotiate for agreement periods or notice of termination periods that provide us reasonable periods of time to secure alternative supplies, and require that such agreements may not be terminated without advance notice arbitrarily or without good reason, such as uncured breach or insolvency, these negotiations are often unsuccessful or such provisions may not provide us with adequate time to secure alternative supplies, provide us with access to alternative technologies on commercially acceptable terms, or otherwise provide us with adequate protection.
For example, Illumina, is the sole supplier of sequencers and certain consumables for Sequenom Laboratories' MaterniT21 PLUS test. The supply of sequencers and consumables to Sequenom Laboratories is provided under the Supply Agreement, pursuant to which we and our affiliates will purchase various products from Illumina, which we and they will be able to use for NIPT as well as for other clinical and research uses. The Supply Agreement has a term of five years. Upon the expiration of the Supply Agreement, we face risk and uncertainty regarding our ability to renew the supply agreement or to enter into a new supply agreement with Illumina, if at all, and on financial terms that are acceptable to us. Our failure to maintain continued supply of such sequencers and consumables would seriously harm our business, financial condition, and results of operations.
* We depend on third-party products and services and limited sources of supply to develop and perform our tests. We also depend on third-party service providers to perform some of our tests.
We rely on outside vendors to supply certain products, components and materials used in our test services. Illumina is the sole supplier of sequencers and certain consumables for the MaterniT21 PLUS and the VisibiliT test and those products have lead times of several months. Among other risks, using a platform provided by another party presents potential manufacturing supply and reliability, quality compliance, and intellectual property infringement risks. For example, we have no control over the manufacture of the Illumina sequencers and consumables that we are using for the MaterniT21 PLUS and the VisibiliT test, including whether such sequencers and consumables will meet their quality control requirements to ensure quality and reliability for the sequencers and consumables, and can give no assurance that we will be able to obtain a reliable supply of the sequencers and consumables that we need for our tests. In the event that demand for our tests declines or does not meet our forecasts, we could have excess inventory or increased expenses or our margins could decrease which could have an adverse impact on our financial condition and business. In addition, the HerediT UNIVERSAL test is performed by Recombine, Inc. and its affiliates (collectively, “Recombine”). We have no control over the operations or laboratory processes conducted by Recombine.
Many other products, components and materials, including blood collection tubes for the MaterniT21 PLUS and the VisibiliT test and components of the MassARRAY System that is currently used for the CF carrier screen and fetal Rhesus D genotyping test, are obtained from a single supplier or a limited group of suppliers and some also have lead-times of several months.
These suppliers and service providers may be subject to regulation by the FDA and other regulatory agencies and would therefore need to comply with federal regulations related to the manufacture and distribution of regulated products and the performance of laboratory developed tests. Because we cannot ensure the actual production or manufacture of such critical equipment and materials, or the ability of our suppliers or service providers to comply with applicable legal and regulatory requirements, we may be subject to significant delays caused by interruption in production or manufacturing.
In the event of any adverse developments with these suppliers or service providers, our test supply may be interrupted and obtaining substitute components could be difficult or require us to re-design our tests which would have an adverse impact on our business.

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Certain of our LDTs, including the MaterniT21 PLUS test, may not be eligible for reimbursement by payors or may become ineligible for reimbursement, or reimbursement may be significantly delayed, due to changes in CPT codes, or otherwise, which may limit the demand for these tests by physicians and their patients.
Certain of our current LDTs, or future tests which we intend to launch as a testing service, may not be deemed medically necessary or may otherwise not be subject to reimbursement by payors, which could affect demand for such tests by physicians.
CMS, a federal agency within the Department of Health and Human Services (HHS), establishes reimbursement payment levels and coverage rules for Medicare. State Medicaid plans and third-party payors establish rates and coverage rules independently. As a result, the coverage determination process is often a time-consuming and costly process that requires us to provide scientific and clinical validity for the use of our tests to each payor separately, with no assurance that approval will be obtained. If CMS or other third-party payors decide not to cover our tests, place significant restrictions on the use of our tests, or offer inadequate payment amounts, our ability to generate revenues from our tests could be limited.
Even a payor that covers our tests may reduce utilization or stop or lower reimbursement at any time, which could reduce our revenues. We are currently considered a “non-contracting provider” by many third-party payors because we have not entered into a specific contract to provide our specialized testing services to their insured patients at specified rates of reimbursement. Without such contracts, we may not be able to obtain reimbursement for our tests at acceptable rates, which could also reduce our revenues. In cases where we have contracts in place, some payors continue to challenge the medical necessity of certain of our tests or have other objections that result in delay or non-payment to us.
Reimbursement for diagnostic tests furnished to Medicare beneficiaries generally is made based on a fee schedule set by CMS using a statutory formula. In recent years, payments under these fee schedules have decreased and may decrease more. In addition, Medicare fee schedules are impacted by the billing codes selected for reporting services, and changes to certain laboratory billing codes for diagnostic tests are being considered which may affect payment levels. We cannot predict whether or when additional third-party payors will cover our tests or offer adequate reimbursement to make them commercially attractive or whether existing payors will reduce utilization or stop or lower reimbursement. Clinicians or patients may decide not to order our tests if third-party reimbursement is inadequate, especially if ordering the test could result in financial liability for the patient, and reduced or discontinued purchases of our products would cause our revenues to decline.
Levels of reimbursement may continue to decrease in the future, and future legislation, regulation or reimbursement policies of third-party payors may harm the demand for and reimbursement available for our products, which in turn, could harm pricing and sales. The payment amounts under the Medicare clinical laboratory fee schedule are important not only for our reimbursement under Medicare, but also because the schedule often establishes the payment amounts set by other third-party payors. For example, state Medicaid programs are prohibited from paying more than the Medicare fee schedule limit for clinical laboratory services furnished to Medicaid recipients. As a result, in light of reductions in the clinical laboratory fee schedule, certain third-party payors may also reduce reimbursement amounts.
In the U.S. the AMA generally assigns specific billing codes for laboratory tests under a coding system known as Current Procedure Terminology, or CPT, codes, which are necessary for us, and our customers, to bill and receive reimbursement for our diagnostic tests. Once the CPT code is established, CMS in turn establishes payment levels and coverage rules under Medicare, and private payors establish rates and coverage rules independently. We cannot guarantee that any of our tests are or will be covered by the CPT codes that we believe may be applied to them or that any of our tests or other products will be approved for coverage or reimbursement by Medicare, Medicaid or any third-party payor. Our tests and the CPT codes we use may not qualify for Medicaid reimbursement in any or all of the 50 states.
In addition, payors have initiated efforts to develop a more specific set of billing codes for laboratory tests so that the particular laboratory test is more precisely identified. CMS has established a new molecular diagnostic code for next generation sequencing tests specific for fetal aneuploidy, code 81420, was implemented on January 1, 2015. We cannot guarantee that this new code will help facilitate the reimbursement process or reduce the time required for third-party payors to process claims. When CMS recommends new codes typically the gap fill process is used in establishing a new code rate; however we cannot guarantee that such process will be used. These coding changes and lack of a CMS fee schedule have negatively affected and may continue to negatively affect our product pricing and the amount of and timing of payor reimbursement. We cannot guarantee that the issuance of the new code will improve our product pricing or the amount of and timing of payor reimbursement.
Under the Pooled Patents Agreement, if Illumina is not able to license additional laboratories, collect test fees or develop in-vitro diagnostic kits for NIPT, our revenues, net earnings, cash flow and profitability could be negatively affected.
Under the Pooled Patents Agreement, Illumina has exclusive worldwide rights to license the pooled patent rights to third-party laboratories to develop and sell their own laboratory-developed NIPT tests. We, Illumina and our respective licensees will pay a per-test fee into the pool for laboratory-developed NIPT tests, which will be shared between Illumina and us. We cannot guarantee that Illumina will be successful in licensing the pooled intellectual property to additional third-party laboratories and

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generating additional test fees. Also, we have no control over how many laboratory-developed NIPT tests Illumina will sell or over Illumina’s collection of test fees from its licensees. To the extent Illumina is unsuccessful in selling its own laboratory-developed NIPT tests, obtaining additional third-party licensees under the pooled patent rights and/or collecting a test fee from such licensees, our revenues, net income, cash flow and profitability could be negatively affected.
In addition, under the Pooled Patents Agreement, Illumina has exclusive worldwide rights under the pooled patent rights to develop and sell in-vitro diagnostic kits for NIPT and to license others to do so. Illumina will pay royalties to us for sales of in-vitro diagnostic kits for NIPT by Illumina and such licensees. We have no control over when, if ever, Illumina will develop and sell in-vitro diagnostic kits for NIPT or license others to do so. If Illumina and its licensees fail to develop and sell in-vitro diagnostic kits for NIPT, we will not collect any royalties from Illumina which could negatively affect our revenues, net income, cash flow and profitability.
Under the Pooled Patents Agreement, if Illumina fails to effectively control prosecution, maintenance and enforcement of the pooled patent rights, the value of the pooled patent rights may be diminished and/or we may need to incur significant unexpected legal costs which may adversely impact our financial condition.
Under the Pooled Patents Agreement, Illumina will control prosecution, maintenance and enforcement of the pooled patent rights, and we will be responsible for paying a portion of the costs thereof. We have no control over these costs. We will continue to control, at our sole cost, the prosecution, maintenance and enforcement of the patents we purchased from Isis Innovation including the '540 patent. If Illumina fails to prosecute, maintain and/or enforce any of the pooled patent rights, the scope and value of the pooled patent rights may be diminished, and the revenues that we receive from our share of the test fees may be reduced. We have the right to assume control of the enforcement of certain of the pooled patent rights if Illumina fails to do so. If we do assume control of enforcement of any of the pooled patent rights, we cannot guarantee that we will be successful in our efforts and the scope and value of the pooled patent rights may be diminished. In addition, our assumption of such control of enforcement of any of the pooled patent rights will cause us to incur significant unexpected legal costs which may adversely impact our financial condition.
The minimum payments we expect to receive under the Pooled Patents Agreement may be reduced which could negatively impact our cash flow and profitability.
Under the Pooled Patents Agreement, we are entitled to receive certain minimum annual payments from Illumina. In certain circumstances, the amount of these minimum payments may be reduced. These circumstances include a reduction in the average amount of the test fees collected, Illumina’s enforcement of the pooled patents and the impairment or diminution in value of the pooled patent rights. We have no control over these circumstances and, should such circumstances occur, it could have a negative impact on our cash flow and profitability.
Our failure to establish enrollment in and obtain favorable payment policies from state Medicaid programs could result in a substantial portion of our services being unreimbursed and adversely affect our results of operations and financial condition.
We have established enrollment in many state Medicaid programs. However, even though we are enrolled in many state Medicaid programs, we are not receiving reimbursement or are receiving lower than expected reimbursement in most of those states. In mid-2013 it became apparent that most states still did not have appropriate procedure codes incorporated into their payment system for reimbursement for molecular tests, and we initiated efforts to reduce the volume of Medicaid tests from those states. At the same time, we increased our efforts to put reimbursement pathways in place with each state, and work with the AMA to get a specific CPT code for the MaterniT21 PLUS test. CMS has established a new molecular diagnostic code for next generation sequencing tests specific for fetal aneuploidy, code 81420, which was implemented on January 1, 2015, however it is not exclusive to the MaterniT21 PLUS test. In those states where we are not enrolled in the Medicaid system, we do not receive reimbursement for our tests. If we are unable to receive reimbursement, or adequate reimbursements under state Medicaid programs, our opportunity for future revenues would be reduced, which would adversely affect our results of operations and financial condition.
Billing complexities associated with obtaining payment or reimbursement for our tests may negatively affect our revenues, cash flow and profitability. We may incur additional financial risk related to collections and reimbursement in connection with the commercialization of our molecular diagnostic tests.
Billing for clinical laboratory testing services is complex. We generally bill third-party payors for our testing services and pursues case-by-case reimbursement where policies are not in place for a particular test. We may also face an increased risk in our collection efforts, including potential write-offs of doubtful accounts and long collection cycles for accounts receivable related to our testing service, which could adversely affect our business, results of operations and financial condition. We began internal billing operations on May 1, 2013. Among the factors complicating our billing of third-party payors are:
disputes among payors as to which party is responsible for payment;

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disparity in coverage among various payors;
disparity in information and billing requirements among payors; and
incorrect or missing billing information, which is required to be provided by the prescribing physician.
These billing complexities, and the related uncertainty in obtaining payment for our tests, could negatively affect our revenues, cash flow and profitability.
Our failure to comply with governmental payor regulations could result in our being excluded from participation in Medicare, Medicaid or other governmental payor programs, which would decrease our revenues and adversely affect our results of operations and financial condition.
The Medicare program is administered by CMS, which, like the states that administer their respective state Medicaid programs, imposes extensive and detailed requirements on diagnostic services providers, including, but not limited to, rules that govern how we structure our relationships with physicians, how and when we submit reimbursement claims and how we provide our specialized diagnostic services. Our failure to comply with applicable Medicare, Medicaid and other governmental payor rules could result in our inability to participate in a governmental payor program, our returning funds already paid to us, civil monetary penalties, criminal penalties and/or limitations on the operational function of our laboratory. If we were unable to receive reimbursement under a governmental payor program, a substantial portion of our revenues would be lost, which would adversely affect our results of operations and financial condition.
Continued evolution of the U.S. health care reform law could adversely affect our business, profitability and stock price and prevent the commercial success of the MaterniT21 PLUS test.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, or PPACA. At this time, it remains unclear whether there will be any further changes made to PPACA, whether in part or in its entirety.
The PPACA includes expansions of health care fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for noncompliance. As discussed below, enforcement of any of these laws against our company could harm our business.
It is unclear whether and to what extent, if at all, other anticipated developments resulting from health care reform, such as an increase in the number of people with health insurance and an increased focus on preventive medicine, may provide us additional revenue. Extending coverage to a large population could substantially change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices. These structural changes could entail modifications to the existing system of third-party payors and government programs, such as Medicare and Medicaid, the creation of additional government-sponsored health care insurance sources, or some combination of both, as well as other changes. Restructuring the coverage of medical care in the U.S. could impact the reimbursement for diagnostic tests like ours, including the MaterniT21 PLUS test. If reimbursement for our diagnostic tests is substantially less than we or our clinical laboratory customers expect, or rebate obligations associated with them are substantially increased, our business could be materially and adversely impacted.
Any health care reform measures adopted by the U.S. government and other governments could cause significant pressure on the pricing of health care products and services, including the MaterniT21 PLUS test, in the U.S. and internationally, as well as the amount of reimbursement available from governmental agencies or other third-party payors. The continuing efforts of the U.S. and foreign governments, insurance companies, managed care organizations and other payors to contain or reduce health care costs may compromise our ability to set prices at commercially attractive levels for our tests, including the MaterniT21 PLUS test, and other diagnostic tests that we may develop. Changes in health care policy, such as the creation of broad limits for diagnostic products, could substantially diminish the sale of or inhibit the utilization of future diagnostic tests, increase costs, divert management's attention and adversely affect our ability to generate revenues and achieve profitability.
New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, relating to health care availability, methods of delivery or payment for diagnostic products and services, or sales, marketing or pricing, may also limit our potential revenues, and we may need to revise our research and development or commercialization programs. The pricing and reimbursement environment may change in the future and become more challenging for a number of reasons, including policies advanced by the U.S. government, new health care legislation or fiscal challenges faced by government health administration authorities. Specifically, in both the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory proposals and initiatives to change the health care system in ways that could affect our and Sequenom Laboratories' ability to sell our diagnostic tests, including the MaterniT21 PLUS test, profitably. Some of these proposed and implemented reforms could result in reduced utilization or reimbursement rates for our diagnostic products.

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If our laboratory facilities are damaged, our business would be seriously harmed.
We operate laboratory facilities in San Diego, California and Raleigh-Durham, North Carolina. Damage to our facilities due to war, fire, natural disaster, earthquake, power loss, communications failure, terrorism, unauthorized entry, or other events could prevent us from conducting our business for an indefinite period, could result in a loss of important data or cause us to cease development and processing of our test services. We cannot be certain that our limited insurance to protect against business interruption would be adequate or would continue to be available to us on commercially reasonable terms, or at all.
We must comply with stringent CLIA requirements to operate, and have limited capacity and infrastructure. Our ability to successfully develop and commercialize tests and to generate revenues will depend on our ability to successfully operate our CLIA-certified laboratory, establish and maintain necessary capacity, and maintain required regulatory licensures.
Sequenom Laboratories, a CLIA-certified and CAP-accredited laboratory, has developed, validated and commercialized five laboratory-developed tests to date. For future tests, if we are unable to successfully develop and validate any new tests that we intend to commercialize we may not be able to successfully commercialize such tests on the anticipated timelines or at all. Although we have invested substantially in our infrastructure, and believe that we have sufficient infrastructure and capacity for near-term demand, it is possible that we may not have adequate infrastructure and capacity in place to meet longer term future demand for our currently launched testing services or for the demand of future tests that we develop. Our ability to successfully develop and validate tests will depend on our ability to successfully operate and maintain required regulatory licensure and we cannot provide assurances that we will have sufficient resources to continue our operations and maintain our licenses. We currently perform the MaterniT21 PLUS test in our San Diego, California, and Raleigh-Durham, North Carolina, facilities. We face risk in relying upon two laboratory locations to meet demand for, perform, and generate revenues from the MaterniT21 PLUS test. Reliance upon two facilities presents risk to our operations in the event that one or both facilities' capacity is exceeded, or one or both facilities experiences production problems or delays.
CLIA requirements are designed to ensure the quality and reliability of clinical laboratories by mandating specific standards in the areas of personnel qualifications, administration and participation in proficiency testing, patient test management, quality control, quality assurance and inspections. Potential sanctions for failure to comply with CLIA requirements may be suspension, revocation or limitation of a laboratory's CLIA certificate, which is necessary to conduct business, as well as significant fines and/or criminal penalties. Laboratories must undergo on-site surveys at least every two years, which may be conducted by the Federal CLIA program or by a private CMS approved accrediting agency, such as CAP, among others. Sequenom Laboratories is also subject to regulation of laboratory operations under state clinical laboratory laws as will be any new CLIA-certified laboratory that we establish or acquire. State clinical laboratory laws may require that laboratories and/or laboratory personnel meet certain qualifications, specify certain quality controls or require maintenance of certain records. Certain states, such as California, Florida, Maryland, New York, Pennsylvania and Rhode Island, require that laboratories obtain licenses to test specimens from patients residing in those states and additional states may require similar licenses in the future. If we are unable to obtain and maintain licenses from states where required, we will not be able to process any samples from patients located in those states. Only Washington and New York States are exempt under CLIA, as these states have established laboratory quality standards at least as stringent as the CLIA requirement's. Potential sanctions for violation of these statutes and regulations include significant fines and the suspension or loss of various licenses, certificates and authorizations, which could adversely affect our business and results of operations.
If we fail to maintain compliance with the CLIA requirements, CMS or state agencies could require us to cease our testing services, including the MaterniT21 PLUS test. Even if it were possible for us to bring our laboratory back into compliance after failure to comply with such requirements, we could incur significant expenses and potentially lose revenues in doing so.
Failure to establish, and perform to, appropriate quality standards to assure that the highest level of quality is observed in the performance of our testing services could adversely affect the results of our operations and adversely impact our reputation.
The provision of clinical testing services, including the MaterniT21 PLUS test, and related services, and the marketing of those services involve certain inherent risks. The services that we provide are intended to provide information for health care providers in providing patient care. Therefore, users of such services may have a greater sensitivity to errors than the users of services that are intended for other purposes, such as research.
Performance defects, incomplete process controls, unexpected failure modes, unanticipated use of Sequenom Laboratories' services, or inadequate disclosure of information (including associated risks or limitations) relating to the use of the services can lead to injury or other adverse events, including laboratory operation disruptions, delays, or incorrect clinical testing results. These events could lead to safety alerts relating to our services (either voluntary or required by governmental authorities) and could result, in certain cases, in the removal of services from the market. Any removal of services could result in significant costs as well as negative publicity that could reduce demand for our test services. Personal injuries relating to the use of our services can also result in product liability claims being brought against us.

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* Our operating results may fluctuate significantly.
Our revenues and results of operations may fluctuate significantly, depending on a variety of factors, including the following:
our success in developing, marketing, and selling, and changes in demand for our diagnostic testing services, including the MaterniT21 PLUS test, the VisibiliT test and the HerediT UNIVERSAL test, and the level of reimbursement and collection obtained for these tests;
the pricing of our diagnostic testing services, and the timing and pricing of new diagnostic testing service offerings, and those of our competitors;
the ability of Illumina to add additional licensees under the Pooled Patents Agreement;
our ability to manage costs and expenses and effectively implement our business strategy;
our ability, if necessary, to raise additional capital;
the amount of royalties that we are required to pay to third parties in connection with the sale of certain of our testing services;
our success in collecting payments from third-party payors, customers, and collaborative partners, variations in the timing of these payments and the recognition of these payments as revenues;
our success in responding to customer complaints effectively and managing relationships with our customers;
our ability to identify and develop in a cost-efficient manner new services, such as noninvasive prenatal and other diagnostic technologies, our ability to improve current services to increase demand for such services and the success of such products and improvements;
our ability to establish and maintain sufficient intellectual property rights including our ability to overturn the U.S. District Court for the Northern District of California’s order ruling the '540 Patent to be invalid, and our ability to ultimately enforce the '540 Patent in the future against competitors and obtain injunctive relief and/or monetary damages from competitors;
the potential need to acquire licenses to new technology, including genetic markers that may be useful in diagnostic applications, or to use our technology in new markets, which could require us to pay unanticipated license fees and royalties in connection with licenses we may need to acquire;
our research and development progress, including our ability to develop and validate improved or new tests, , particularly in our expanded field of oncology, and how rapidly we are able to achieve technical milestones;
the cost, quality and availability of the hardware platforms and consumables, including reagents and related components and technologies, used by us to perform our tests;
material developments in our customer and supplier relationships, including our ability to successfully transition to new technologies and/or alternative suppliers; and
the amount of any legal expenses, settlement payments, fines or damages arising from patent litigation or any future litigation.
The absence of or delay in reimbursement for our testing services and generating revenues has had, and will continue to have, a significant adverse effect on our operating results from period to period and will result in increased operating losses unless and until such reimbursement is established, at sufficient levels to cover our costs. Our internationally derived revenues and operating results are also difficult to predict because they depend upon the activities of our licensees and distributors, and licensees under the Pooled Patents Agreement, in numerous countries.
We believe that period-to-period comparisons of our financial results will not necessarily be meaningful. You should not rely on these comparisons as an indication of our future performance. If our operating results in any future period fall below the expectations of securities analysts and investors, our stock price may decline.
* Our increased leverage as a result of our issuance of the 5.00% Convertible Senior Notes due 2017 and the 5.00% Convertible Exchange Senior Notes due 2018 may harm our financial condition and results of operations.
Our total consolidated long-term debt and obligations as of June 30, 2015, which includes the 5.00% Convertible Senior Notes due 2017 and the 5.00% Convertible Exchange Senior Notes Due 2018, or collectively, the Convertible Senior Notes, was $134.8 million and represented approximately 119% of our total capitalization as of that date.
Our level of indebtedness could have important consequences on our future operations, including:     

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making it more difficult for us to meet our payment and other obligations under the Convertible Senior Notes and our other outstanding debt;
resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements, which could result in all of our indebtedness becoming immediately due and payable;
reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;
limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industries in which we operate and the general economy;
placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged and that, therefore, may be able to take advantage of opportunities that our debt levels or leverage prevent us from exploiting; and
limiting our ability to obtain additional financing.
Each of these factors may have a material and adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the Convertible Senior Notes and our other indebtedness.
* We may not be able to generate enough cash flow from our operations to service our indebtedness.
We have a significant amount of indebtedness. In September 2012, we completed the sale of $130.0 million of our Convertible Senior Notes and, in June 2015, we entered into privately negotiated agreements to exchange $85 million in aggregate principal amount of the Convertible Senior Notes for new Convertible Senior Notes due 2018. Our ability to make payments on, and to refinance, our indebtedness, including the Convertible Senior Notes, and to fund planned commercialization efforts, research and development efforts, working capital and other general corporate purposes depends on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond our control. Historically, our business has generated losses and we may never become profitable. If we are unable to generate the necessary cash flow, we may be required to adopt one or more alternatives, such as selling assets, refinancing or restructuring indebtedness or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. If we raise additional debt, it will increase our interest expense, our leverage and our operating and financial costs. In addition, the terms of the indenture governing the Convertible Senior Notes restricts our ability to incur additional debt, and the agreements governing our other existing or future indebtedness may restrict us from adopting any of these alternatives. We may not be able to execute any of these actions on commercially reasonable terms or at all.
The Convertible Senior Notes also include a provision whereby upon a “fundamental change”, which is defined in the indenture related to the Convertible Senior Notes, holders of the Convertible Senior Notes may require us to repurchase, for cash, all or a portion of their Convertible Senior Notes. We may not have sufficient funds to pay the interest or repurchase price when due. In addition, the terms of any borrowing agreements which we may enter into from time to time may require early repayment of borrowings under circumstances similar to those constituting a “fundamental change”. These agreements may also make our repurchase of Convertible Senior Notes an event of default under the agreements.
If we fail to make any required payments under our indebtedness, or otherwise breach the terms of our indebtedness, including the Convertible Senior Notes, all or a substantial portion of our indebtedness could be subject to acceleration. In such a situation, it is unlikely we would be able to repay the accelerated debt, which would have a material adverse impact on our business, results of operations and financial condition.
* If we fail to generate enough cash flow from our operations or otherwise obtain the capital necessary to fund our operations, our financial results, financial condition and our ability to continue as a going concern will be adversely affected and we will have to cease or reduce further commercialization efforts or delay or terminate some or all of our diagnostic testing services or other product development programs.
We expect to continue to incur losses and may have to raise additional cash to fund our planned operations.
Our cash, cash equivalents, and current marketable securities were $86.8 million as of June 30, 2015. Based on our current plans, we believe our cash, cash equivalents and current marketable securities and collections from our commercialized testing services and income from the Pooled Patents Agreement will be sufficient to fund our operating expenses and capital requirements through the next twelve months. We are continuing to expand our operations following commercialization of the MaterniT21 PLUS test, the VisibiliT test, the HerediT UNIVERSAL test and our research and development activities related to improvements to current tests and expansion of our test menu, particularly in our expanded field of oncology, may require raising additional funds. In addition, there can be no assurances that these commercialization or research and development activities will be successful. We cannot be certain that our efforts to obtain reimbursement for our tests will be successful. Our

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current sales and marketing operations may not be sufficient to maintain or increase the level of market awareness and sales required for us to retain significant commercial success for the MaterniT21 PLUS test, the VisibiliT test, the HerediT UNIVERSAL test. If we are not able to successfully implement our marketing, sales commercialization, and reimbursement strategies, we may not be able to expand geographically, increase sales of the MaterniT21 PLUS test, the VisibiliT test, the HerediT UNIVERSAL test or successfully commercialize any future tests or products that we may develop and therefore may not be able to generate revenues sufficient to fund operations. If we are not able to generate revenues sufficient to fund operations, we may need to raise additional funds through financing or other means. The actual amount of funds that we will need and the timing of any such investment will be determined by many factors, some of which are beyond our control.
We may need to raise additional funds in the future to support expanding commercialization of the MaterniT21 PLUS test, the VisibiliT test, the HerediT UNIVERSAL test and continued development and commercialization of our proprietary technology, particularly in our expanded field of oncology. We may need to sell equity or debt securities to raise significant additional funds. However, it may be difficult for us to raise additional capital through the sale of equity or debt securities.
The amount of additional funds we may need depends on many factors, including:
the degree to which our costs and expenses exceed our revenues;
our success selling, marketing and generating revenues from the MaterniT21 PLUS test, the VisibiliT test and/or the HerediT UNIVERSAL test and the level of reimbursement and collections from third-party payors;
our success in selling, marketing and generating revenues from our testing services for CF carrier screening and fetal Rhesus D genotyping, and the level of reimbursement and collections from third-party payors for these and future tests;
the level of our selling, general, and administrative expenses;
our obligation to pay royalties to third parties in connection with the sale of our tests;
our success and the extent of our investment in the research, development and commercialization of diagnostic technology, including molecular diagnostics, noninvasive prenatal diagnostic technology, oncology and the acquisition and/or licensing of third-party intellectual property rights;
our success in obtaining sufficient quantities and quality of patient samples;
our success in obtaining regulatory clearance or approval, if applicable, to market any of our testing services in various countries, including the U.S.;
our success in validating additional laboratory-developed tests and the levels of clinical performance achieved;
our success either alone or in collaboration with our partners in launching and selling additional diagnostic testing services, particularly in our expanded field of oncology;
the extent to which we enter into, maintain, and derive revenues from licensing agreements, including agreements to out-license our noninvasive prenatal analysis technology, research and other collaborations, joint ventures and other business arrangements;
the level of our legal expenses and any damages or settlement payments arising from ongoing or new patent related litigation;
the amount of any legal expenses, settlement payments, fines or damages arising from any future litigation or demand and the extent to which any of the foregoing is not covered by insurance;
the dilution from any issuance of securities, whether in connection with future capital-raising or merger or acquisition transactions, the settlement of litigation, or otherwise;
the extent to which we acquire, and our success in integrating, technologies or companies;
compliance with corporate governance and regulatory developments or initiatives;
regulatory changes by the FDA, CMS and other worldwide regulatory authorities; and
technological developments in our markets.
Additional financing may not be available in amounts or on terms satisfactory to us or at all. General market conditions, the market price of our common stock, our financial condition, uncertainty about the successful commercialization and development of diagnostic tests, particularly in our expanded field of oncology, regulatory developments, the uncertainty regarding the results of ongoing litigation matters, the status and scope of our patent rights or other factors may not support capital raising transactions. In addition, our ability to raise additional capital may depend upon obtaining stockholder approval.

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There can be no assurance that we will be able to obtain stockholder approval if it is necessary. If we are unable to obtain sufficient additional funds on a timely basis or on terms favorable to us, we may be required to cease or reduce further commercialization of our testing services, to cease or reduce certain research and development projects, to sell, license or otherwise dispose of some or all of our technology or assets, to merge all or a portion of our business with another entity or we may not be able to continue as a going concern. If we raise additional funds by selling shares of our capital stock (or otherwise issue shares of our capital stock or rights to acquire share of our capital stock), the ownership interest of our current stockholders will be diluted.
The development of new, more cost-effective tests that can be performed by our customers or by patients, or the internalization of testing by hospitals or physicians, could negatively impact our testing volume and revenues.
Advances in technology may lead to the development of more cost-effective tests that can be performed outside of a commercial clinical laboratory such as point-of-care tests that can be performed by physicians in their offices, esoteric tests that can be performed by hospitals in their own laboratories or home testing that can be performed by patients in their homes. Although CLIA compliance makes it cost prohibitive for many physicians to operate clinical laboratories in their offices, manufacturers of laboratory equipment and test kits could seek to increase their sales by marketing point-of-care test equipment to physicians. Diagnostic tests cleared or approved by the FDA for home use are automatically deemed to be exempt under CLIA and may also be performed in physician office laboratories with minimal regulatory oversight under CLIA. Test kit manufacturers could seek to increase sales to both physicians and patients of test kits cleared or approved by the FDA for point-of-care testing or home use. Development of such technology and its use by our customers could reduce the demand for Sequenom Laboratories' testing services and negatively impact our revenues. Our future success will depend on our ability to keep pace with the evolving needs of our customers on a timely and cost-effective basis and to pursue new market opportunities that develop as a result of technological and scientific advances.
Quarterly revenues may be difficult to predict.
We may be unable to accurately predict quarterly revenues relating to the MaterniT21 PLUS test and our other tests due to relatively recent changes in billing codes and adoption and implementation of billing codes by payors and uncertainties related to the PPACA. If our quarterly or year-end revenues fall below the expectations of securities analysts and investors, our stock price may decline.
Uncertainty regarding the development of new tests, including our plans to develop tests in the field of oncology, could materially adversely affect our business, financial condition, and results of operations.
We are continuing to focus research and development efforts on tests, in addition to improvements and additions to current tests, including the MaterniT21 PLUS test. We will look to develop an oncology testing service based on our research and technology capabilities to be used initially for research and potential future clinical studies. Our plans for 2015 are to continue to research, develop and commercialize tests for prenatal genetic disorders and diseases, women's health-related disorders and diseases, and for oncology. The launch of any other test will require the completion of certain clinical development and commercialization activities, and may include the efforts of collaborative partners on which we sometimes rely, and the expenditure of additional cash resources. We can give no assurance that we will be able to successfully complete the clinical development of any other test or diagnostic test or that we will be able to establish or maintain the collaborative relationships (if any collaborators are involved) that are essential to our clinical development and commercialization efforts. We have limited experience in the field of oncology and we cannot guarantee that our research and development activities will be successful in developing any marketable oncology testing service. We also can give no assurance that we will be able to reduce our expenditures sufficiently or otherwise mitigate the risks associated with our business to raise enough capital to complete clinical development or commercialization activities. Clinical development requires large numbers of patient specimens and we may not be able to use prior collected specimens or collect a sufficient number of appropriate specimens in a timely manner in the future to complete clinical development for any planned test. Patient specimens for clinical development for noninvasive prenatal tests may be unavailable or available only in limited quantities due to an increased number of competitive parties seeking such specimens. Also, as noninvasive testing increases in demand and invasive testing (such as amniocentesis) potentially declines over time, less patient specimens for clinical development become available that include confirmatory data from an invasive procedure such as amniocentesis. Failure to possess or to collect a sufficient number of appropriate specimens in a timely manner could prevent or significantly delay our ability to research, develop, complete clinical development and validation, obtain FDA clearance or approval as may be necessary, or launch any of our planned tests. Any failure to complete on-going clinical studies for our planned tests could have material adverse effects on our business, operating results or financial condition.
We may not successfully obtain, or maintain, regulatory approval of any noninvasive prenatal or other product which we or our licensing or collaborative partners develop.
Products we or our collaborators develop in the noninvasive prenatal diagnostic or other markets depending on their intended use, may be regulated as medical devices by the FDA and other worldwide regulatory authorities. In the U.S., our tests

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may require either a Premarket 510(k) Notification or a Premarket Approval Application to be submitted to the U.S. FDA prior to marketing in interstate commerce. The Premarket 510(k) Notification process usually takes from three to nine months from submission to clearance, but can take significantly longer. The PMA approval process is much more costly, lengthy, uncertain and generally takes from nine to eighteen months or longer from submission to approval. In addition, commercialization of any diagnostic or other product that we or our licensees or collaborators develop would depend upon successful completion of non-clinical (bench) testing and clinical studies. Non-clinical bench testing and clinical studies can be long, expensive, and uncertain processes and we do not know whether we, our licensees, or any of our collaborators, would be permitted or able to undertake clinical studies of any potential products. It may take us or our licensees or collaborators many years to complete any such testing, and failure could occur at any stage. Results from preliminary studies do not necessarily predict final results, and acceptable results in early studies may not be repeated in later studies. A number of companies in the diagnostics industry, including biotechnology companies, have suffered significant setbacks in clinical studies, even after promising results in earlier studies. Delays or rejections of potential products may be encountered based on changes in regulatory policy for product approval during the period of product development and regulatory agency review. If our projects reach clinical studies, we or our licensees or collaborators could decide to discontinue development of any or all of these projects at any time for commercial, scientific, or other reasons.
The FDA currently regulates IVD devices under the authority of Section 201(h) of the Federal Food, Drug, and Cosmetic Act. To date, the FDA has exercised its regulatory enforcement discretion to not regulate LDTs as a medical device and exempted from regulation LDTs created and used within a single laboratory. However, at a July 2010 FDA public meeting on oversight of tests, the FDA stated that it was reconsidering its enforcement discretion policy. The FDA commented that regulation of LDTs may be warranted because of the growth in the volume and complexity of testing services utilizing LDTs. On July 31, 2014 the FDA notified the U.S. Congress of its intent to issue draft guidance on regulation of LDTs based on risk to patients rather than whether they were made by a conventional manufacturer or a single laboratory. This draft guidance includes pre-market review for higher-risk LDTs, like those used to guide treatment decisions, including companion diagnostics that have entered the market as LDTs. In addition, under the draft guidance, the FDA would continue to exercise enforcement discretion for LDTs used solely for forensic purposes and LDTs used in CLIA-certified high complexity histocompatibaility labs for transplantation, among others. The final regulation would be phased in over many years. On September 30, 2014, the FDA posted on its website draft guidance on regulation of LDTs, maintaining a ‘risk-based’ approach outlined in its notice to U.S. Congress on July 31, 2014. The published draft guidance is identical to the congressional notification. On October 3, 2014, the FDA published notices in the Federal Register formally announcing the release of the draft guidance and the beginning of a 120-day public comment period, with final guidance potentially issued in the March-April 2015 timeframes. Our revenues from testing services utilizing LDTs comprise almost all of our total revenues.
In addition to the potential regulation of LDTs by FDA as mentioned above, certification of the laboratory is required under CLIA to ensure the accuracy and reliability of all laboratory testing, except research, on human specimens through a quality assurance program, which includes standards in the areas of personnel qualifications, administration and participation in proficiency testing, patient test management and quality control procedures. In addition, state laboratory licensing and inspection requirements may also apply.
We cannot predict the extent of the FDA's final guidance on regulation of LDTs in general or with respect to our LDTs in particular. If we are unable to comply with the FDA's final guidance on regulation of LDTs, we may have to cease our testing services which could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, if we are unable to successfully launch any additional LDTs or if we are otherwise required to obtain FDA premarket clearance or approval prior to commercializing any of our products or are not able to comply with any other regulatory requirements that the FDA may impose on LDTs, our ability to generate revenues from providing such products may be delayed and we may never be able to generate significant revenues from providing diagnostic products.
The results of preclinical and clinical studies are not necessarily predictive of future results, and our current diagnostic tests and product candidates may not have favorable results in later studies.
We intend to publish results of certain of our studies, and have published studies of our tests, and there can be no assurance that such results when published will be viewed favorably by clinicians, patients or investors. In addition, our scientific collaborators and other third parties may also publish results relating to their own studies. There can be no assurance that the results of their studies when published will be viewed favorably. If such results are not viewed favorably after publication, it could have a negative impact on the perception of our technology and its tests.
Performance achieved in published studies may not be repeated in later studies that may be required to obtain either FDA premarket clearance or approval. Limited results from earlier-stage verification studies may not predict results from studies in larger numbers of subjects drawn from more diverse populations over a longer period of time. Unfavorable results from ongoing preclinical and clinical studies could result in delays, modifications or abandonment of ongoing or future clinical studies, or abandonment of a product development program or may delay, limit or prevent regulatory approvals or commercialization.

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We and our licensees and collaborators may not be successful in developing or commercializing diagnostic products or tests, including noninvasive prenatal diagnostic products or tests, or other products or tests using technologies, services, or discoveries.
Development of products or tests by us, our licensees, or our collaborators are subject to risks of failure inherent in the development and commercial viability of any such product or test, such as demand for such product or test. These risks further include the possibility that such product or test would:
be found to be ineffective, unreliable, inadequate or otherwise fail to receive regulatory clearance or approval or be subject to new or additional regulatory requirements;
be difficult or impossible to manufacture or perform on a commercial scale;
be uneconomical to market or otherwise not be effectively marketed;
fail to be successfully commercialized if adequate reimbursement from government health administration authorities, private health insurers, and other organizations for the costs of such product is unavailable;
be impossible to commercialize because such product or test infringes on the proprietary rights of others or competes with products marketed by others that are superior;
fail to be commercialized prior to the successful marketing of similar products or tests by competitors; or
be subject to competitive price erosion that makes it uneconomical to market effectively.
If a licensee discovers or develops diagnostic or other products or tests or we or a collaborator, discover or develop diagnostic or other products or tests using our technology, products, services, or discoveries, we may rely on that licensee or collaborator, referred to as partner, for product or test development, regulatory approval, manufacturing, and marketing of those products or tests before we can realize revenues and some or all of the milestone payments, royalties, or other payments we may be entitled to under the terms of the licensing or collaboration agreement. If we or our partners fail to develop successful products or tests, we will not earn the revenues contemplated and we could lose license rights to intellectual property that are required to commercialize such products or tests. Our agreements may allow our partners significant discretion in electing whether to pursue any of these activities. We cannot control the amount and timing of resources our partners may devote to our programs or potential products or tests. As a result, we cannot be certain that our partners will choose to develop or commercialize any products or tests or will be successful in doing so. In addition, if a partner is involved in a business combination, such as a merger or acquisition, or changes its business focus, its performance under its agreement with us may suffer and, as a result, we may not generate any revenues or only limited revenues from the royalty, milestone, and similar payment provisions contained in our agreement with that partner.
* We may not be able to form and maintain the collaborative relationships or the rights to third-party intellectual property and technologies that our business strategy requires and such relationships may lead to disputes over technology rights or product revenue, royalties, or other payments.
We form research collaborations and licensing arrangements with collaborators to operate our business successfully. To succeed, we will have to maintain our existing relationships and establish additional collaborations and licensing arrangements. Our current strategy includes pursuing partnering opportunities with companies interested in or involved in the development of pharmaceutical and diagnostic products and tests. Our strategy also includes obtaining ownership of, or licenses to third-party intellectual property rights and technologies to potentially expand our product and testing portfolio and generate additional sources of revenue. Disputes may arise in connection with these collaborations and licensing arrangements, which may result in liability to us or may result in the loss of acquired technology that may adversely affect our business.
We cannot be sure that we will be able to establish any additional research collaborations, licensing arrangements, or other partnerships necessary to develop and commercialize products or that we can do so on terms favorable to us. If we are unable to establish these collaborations or licensing arrangements, we may not be able to successfully generate any milestone, royalty, or other revenues from sales of these products or applications. If our collaborations or licensing arrangements are not successful or we are not able to manage multiple collaborations successfully, our programs will suffer and we may never generate any revenues or only generate limited revenues from sales of products based on licensed rights or technologies or under these collaborative or licensing arrangements. If we increase the number of collaborations or licensing agreements, it will become more difficult to manage the various relationships successfully and the potential for conflicts among the collaborators and licensees or licensors will increase. Conflicts with our collaborators, licensees or licensors, or other factors may lead to disputes over technology or intellectual property rights or product revenue, royalties, or other payments, which may adversely affect our business, including our ability to generate revenues from the MaterniT21 PLUS test, the VisibiliT test, the HerediT UNIVERSAL test and/or other tests we may launch in the future.

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In addition, our government grants provide the government certain license rights to inventions resulting from funded work. Our business could be harmed if the government exercises those rights.
The agreements and rights we rely upon to protect the intellectual property underlying our tests and technology may not be adequate, which could enable others to use our technology and reduce our ability to compete with them.
We require our employees, consultants, advisors, and collaborators to execute confidentiality agreements and in certain cases, assignment or license agreements. We cannot guarantee that these agreements will provide us with adequate intellectual property ownership or protection against improper or unauthorized use or disclosure of confidential information or inventions. In some situations, these agreements may conflict with or be subject to the rights of others with whom our employees, consultants, advisors, or collaborators have prior employment or consulting relationships. In some situations these types of agreements or relationships are subject to foreign law, which provides us with less favorable rights or treatment than under U.S. law. Others may gain access to our inventions, trade secrets or independently develop substantially equivalent proprietary materials, products, information, and techniques.
Our business and industry are subject to complex and costly regulation and if government regulations are interpreted or enforced in a manner adverse to us, we may be subject to enforcement actions, penalties, exclusion, and other material limitations on our operations.
We are subject to various federal, state and local laws targeting fraud and abuse in the health care industry, including anti-kickback and false claims laws. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal health care program, such as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value, including, for example, gifts, discounts, the furnishing of free supplies, equipment or services, credit arrangements, payments of cash and waivers of payment. Several courts have interpreted the statute's intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The PPACA, among other things, amends the intent requirement of the federal Anti-Kickback Statute and certain criminal health care fraud statutes to provide that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act or the civil monetary penalties statute, which imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the health care industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congress authorized the HHS Office of Inspector General, or OIG, to issue a series of regulations, known as “safe harbors.” These safe harbors set forth requirements that, if met in their entirety, will assure health care providers and other parties that they most likely will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal, or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other healthcare programs. Many states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for health care items or services reimbursed by any payor, not only the Medicare and Medicaid programs, and do not contain identical safe harbors. Government officials have brought cases against numerous companies and certain sales and marketing personnel for allegedly offering unlawful inducements to potential or existing customers in an attempt to procure their business.
In addition to the Anti-Kickback Statute, we are also subject to the physician self-referral laws, commonly referred to as the Stark law, which generally prohibits physicians from referring Medicare patients to providers of “designated health services,” including clinical laboratories, with whom the physician or the physician's immediate family member has an ownership interest or compensation arrangement, unless an applicable exception applies. The Stark law is a strict liability statute, meaning that a violation may occur regardless of the parties' intent. Moreover, many states have adopted or are considering adopting similar laws, some of which extend beyond the scope of the Stark law to prohibit the payment or receipt of remuneration for the prohibited referral of patients for designated health care services and physician self-referrals, regardless of the source of the payment for the patient's care. Penalties for violations of the Stark law include denial of payment, refund of payment, imposition of up to $15,000 in civil monetary penalties for each claim submitted in violation of the law, up to $100,000 in civil monetary penalties for each “arrangement or scheme” that violates the law, a civil monetary penalty of three times the amount claimed, and exclusion from participation in the Medicare program and/or other government health programs.

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If it is determined that certain of our practices or operations violate the Stark law or similar statutes, the imposition of any such penalties could harm our business.
Another development affecting the health care industry is the increased use of the federal civil False Claims Act and, in particular, actions brought pursuant to the False Claims Act's “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought by private individuals has increased dramatically. In addition, various states have enacted false claim laws analogous to the False Claims Act. Many of these state laws apply where a claim is submitted to any third-party payor and not merely a federal health care program. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of $5,500 to $11,000 for each separate false claim. There are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federal government. The False Claims Act has been used to assert liability on the basis of, among other things, inadequate care, kickbacks and other improper referrals, improper use of Medicare numbers when detailing the provider of services, and allegations as to misrepresentations with respect to the services rendered. Our activities relating to the sale and marketing of our products may be subject to scrutiny under these laws. Also, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, created several new federal crimes, including health care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including private third-party payors. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. We are unable to predict whether we would be subject to actions under the False Claims Act or a similar state law, or under the federal crimes created by HIPAA, or the impact of such actions. However, the costs of defending such claims, as well as any sanctions imposed, could significantly adversely affect our financial performance.
Federal law prohibits any entity from offering or transferring to a Medicare or Medicaid beneficiary any remuneration that the entity knows or should know is likely to influence the beneficiary's selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services, including waivers of copayments and deductible amounts (or any part thereof) and transfers of items or services for free or for other than fair market value. Entities found in violation may be liable for civil monetary penalties of up to $10,000 for each wrongful act. Although we believe that our sales and marketing practices are in material compliance with all applicable federal and state laws and regulations, relevant regulatory authorities may disagree, and violation of these laws or our exclusion from such programs as Medicaid and other governmental programs as a result of a violation of such laws could have a material adverse effect on our business, results of operations, financial condition and cash flows.
*Ethical, privacy, or other concerns about the use of genetic information could reduce demand for our products and services.
Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons, governmental authorities may limit or otherwise regulate the use of genetic testing, including the MaterniT21 PLUS test, the VisibiliT test and the HerediT UNIVERSAL test, or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Such concerns may lead individuals to refuse to use genetics tests even if permitted and may lead to negative public relations. Any of these scenarios could reduce the potential markets for our products and services, which would seriously harm our business, financial condition, and results of operations.
If the validity of an informed consent from a subject was to be challenged, we could be forced to stop using some of our resources, which would hinder our diagnostic product development efforts.
We have measures in place to ensure that all clinical data and genetic and other biological samples that we receive from our clinical collaborators have been collected from subjects who have provided appropriate informed consent for the data and samples provided for purposes which extend to include commercial diagnostic product and test development activities. We have measures in place to ensure that data and samples that have been collected by our clinical collaborators are provided to us on a subject de-identified manner. We also have measures in place to ensure that the subjects from whom our data and samples are collected do not retain or have conferred on them any proprietary or commercial rights to the data or any discoveries derived from them. Our clinical collaborators are based in a number of different countries, and, to a large extent, we rely upon our clinical collaborators for appropriate compliance with the subject's informed consent provided and with local law and international regulation. That our data and samples come from and are collected by entities based in different countries results in complex legal questions regarding the adequacy of informed consent and the status of genetic material under a large number of different legal systems. The subject's informed consent obtained in any particular country could be challenged in the future, and those informed consents could prove invalid, unlawful or otherwise inadequate for our purposes. Any findings against us,

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or our clinical collaborators, could deny us access to or force us to stop using some of our clinical samples, which would hinder our diagnostic product and test development efforts. We could become involved in legal challenges, which could consume our management and financial resources.
If we cannot obtain licenses to patented genetic markers and genes relevant to our diagnostic areas of interest, we could be prevented from obtaining significant revenues or becoming profitable.
The USPTO has issued patents claiming single SNP and gene discoveries and their related associations and functions. The law is evolving and the validity of those types of patents has been and continues to be unclear. If certain SNPs and genes are patented, the validity of such patents is unclear and it is uncertain whether we may need to obtain rights to those SNPs and genes to develop, use, and sell related assays and other types of products or services utilizing such SNPs and genes. Required licenses may not be available on commercially acceptable terms. If we were to fail to obtain licenses to certain patented SNPs and genes claimed under valid patents, we might never achieve significant revenues from our diagnostic product development.
We may not be able to successfully adapt or maintain our products for commercial applications.
A number of potential applications of our technology and potential products and tests, including diagnostic applications for noninvasive prenatal and other molecular testing, may require significant enhancements in our core technology or the in-licensing of intellectual property rights or technologies. In connection with developing new products and applications, we may not effectively deploy our research and development efforts in a cost-efficient manner or otherwise in a manner that leads to the successful commercialization and scale-up of such products and applications. If we are not successful enhancing our technology or the in-licensing of technology our products or tests may not achieve or maintain a significant level of market acceptance, and our business, financial condition and results of operations could be seriously harmed.
We may not be able to successfully compete in the diagnostic industry.
The diagnostic industry is highly competitive. We expect to compete with a broad range of companies in the U.S. and other countries that are engaged in the development and production of products, tests, applications, services, and strategies to develop and commercialize diagnostic, noninvasive prenatal diagnostic, oncology and other products and tests for customers in the molecular medicine fields as well as diagnostic service laboratories and customers in other markets. They include:
biotechnology, diagnostic, and other life science companies;
academic and scientific institutions;
governmental agencies; and
public and private research organizations.
Some of our competitors and/or potential competitors have greater financial, technical, research, marketing, sales, distribution, operations, service, and other resources than we do. Our competitors may offer broader product lines and services and have greater name recognition than we do. Several companies are currently offering, making, or developing products and tests that compete with our tests. Our competitors may develop or market technologies, tests or products that are more effective or commercially attractive than our current or future tests or products that may render our technologies or products or tests obsolete or that have superior intellectual property rights. We have limited experience in the field of oncology and we cannot guarantee that our research and development activities will be successful in developing any marketable oncology testing service.
If we do not effectively manage our business as it grows and evolves, it could affect our internal operations as well as our ability to pursue opportunities and expand our business.
As our development and commercialization plans and strategies develop, we expect to expand our employee base for managerial, operational, sales, marketing, financial and other resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure and may impact our ability to maintain effective internal controls for financial reporting. In addition, evolution in our business, particularly our transition to developing and commercializing molecular diagnostic tests, has placed and may continue to place a significant strain on our personnel, facilities, management systems, information technology infrastructure, disclosure controls, internal controls and resources. If we fail to effectively manage the evolution of our business and the transition to also being a provider of diagnostic products and tests, or fail to take other necessary action to maintain close coordination among our various departments, our ability to execute on our business plan, maintain our credibility, pursue business opportunities, maintain and expand our business, and sell our products and tests in new markets may be adversely affected.

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We may not successfully complete the sale, or acquisition of, or merger, or joint venture with businesses that we desire to acquire, merge, or partner with.
We may acquire additional businesses or technologies, merge or form joint ventures with other businesses, or enter into other strategic transactions. Managing and completing future acquisitions, mergers, joint ventures, sales, or other strategic transactions entails numerous operational and financial risks, including:
the inability to retain key employees of any acquired or merged businesses or hire enough qualified personnel to staff any new or expanded operations;
the impairment of relationships with key customers of acquired or merged businesses due to changes in management and ownership of the acquired or merged businesses;
the inability to sublease on financially acceptable terms excess leased space or terminate lease obligations of acquired or merged businesses that are not necessary or useful for the operation of our business;
the exposure to federal, state, local and foreign tax liabilities in connection with any acquisition or merger or the integration of any acquired or merged businesses;
the exposure to unknown liabilities or disputes with the former stakeholders or management or employees of acquired or merged businesses;
higher than expected acquisition or merger and integration expenses that would cause our quarterly and annual operating results to fluctuate;
increased amortization expenses if an acquisition or merger results in significant intangible assets;
combining the operations and personnel of acquired businesses with our own, which would be difficult and costly;
disputes over rights to acquired or accessed technologies or with licensors or licensees of those technologies; and
integrating or completing the development and application of any acquired or accessed technologies, which would disrupt our business and divert management's time and attention.
We may also attempt to acquire businesses or technologies, merge businesses or form joint ventures, or attempt to enter into strategic transactions that we are unable to complete. If we are unable to complete such transactions, we may expend substantial resources and ultimately not successfully complete the transaction. Such transactions may also distract management and result in other adverse effects on our business and operations. These transactions may also involve the issuance of shares of our capital stock, which may result in dilution to our stockholders.
We may potentially compete with our customers or licensees, which may adversely affect our business.
We have entered into diagnostic test services agreements and license agreements, for the MaterniT21 PLUS test, substantially similar tests, and other test services. Some of these contractual partners send patient samples to Sequenom Laboratories for test services and other partners perform the testing in their own laboratory or plan to do so in the future. In addition, we expect more third-party laboratories will license the pooled intellectual property created as a result of the Pooled Patents Agreement. Although there are many potential business opportunities, our customers and licensees may seek diagnostic testing service business from clients or potential clients that we already have as clients or have chosen to pursue. In such cases we will likely compete against our customers or licensees. Competition from our customers or licensees may adversely affect our business or our ability to successfully commercialize our diagnostic testing services.
If we cannot attract and retain highly-skilled personnel, our growth might not proceed as rapidly as we intend and our business may be adversely affected.
The success of our business will depend on our ability to identify, attract, hire, train, retain, maintain, and motivate highly skilled personnel, particularly sales, scientific, medical, laboratory, CLIA laboratory, and technical personnel, for our future success. Competition for highly skilled personnel is intense, in particular for licensed laboratory technicians in the state of California, and we might not succeed in attracting and retaining these employees. If we cannot attract and retain the personnel we require, we would not be able to expand our business as rapidly as we intend. When we seek to hire personnel to fill open positions, we may be unable to hire qualified replacements for the positions that we need to fill, and there may be significant costs associated with the recruiting, hiring and retention of officers and employees for the open positions. The market price of our common stock has decreased over time, which has reduced the retention value of many of our prior equity awards made to our employees and officers. If we lose key employees, officers, scientists, physician collaborators or if our management team is not able to effectively manage us through these events, our business, financial condition, and results of operations may be adversely affected. We do not carry “key person” insurance covering any of our officers or other employees.

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Our success is dependent on the performance of our executive officers and key employees, and any accident or disability suffered by an executive officer or key employee could adversely impact our business.
Our business and operations are substantially dependent on the performance of our executive officers and key employees. If an executive officer is incapacitated or disabled by accident, sickness or otherwise so as to render such individual mentally or physically incapable of performing the services and duties required to be performed by such individual, it may adversely impact our results of operations and financial condition.
We incur significant costs as a result of operating as a public company and our management expects to continue to devote substantial time to public company compliance programs.
As a public company, we incur significant legal, accounting and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC and The NASDAQ Stock Market. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There is significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that have required the SEC to adopt additional rules and regulations in these areas. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact (in ways we cannot currently anticipate) the manner in which we operate our business. Our management and other personnel devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations and, as a result of the new corporate governance and executive compensation related rules, regulations and guidelines prompted by the Dodd-Frank Act and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These rules and regulations will continue to cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.
* We are subject to risks associated with our foreign business activities.
We expect that a portion of our sales will continue to be made outside the U.S. Revenues from our international licensees and distributors increased during the six months ended June 30, 2015. A successful international effort will require us to develop relationships with international customers and collaborators, including distributors. We may not be able to identify, attract, retain, or maintain suitable international customers or collaborators. Illumina has primary responsibility for identifying and adding additional licensees under the Pooled Patents Agreement and it may not be able to identify, attract, retain, or maintain such licensees. Expansion into international markets may require us to hire additional personnel to develop relationships with foreign customers, collaborators and distributors and maintain good relations with our foreign customers, collaborators and distributors. International business activities include many of the same risks to our business that affect our domestic operations, but also involve a number of risks not typically present in domestic operations, including:
currency fluctuation risks;
changes in regulatory requirements;
licenses, tariffs, and other trade barriers;
political and economic instability and possible country-based boycotts;
potentially adverse tax consequences;
compliance with the Foreign Corrupt Practices Act and other countries’ anti-corruption laws;
the burden of complying with a wide variety of complex foreign laws and treaties; and
different rules, regulations, and policies governing intellectual property protection and enforcement.
Our international business is subject to additional laws and regulations that could result in increased operational costs and risk. For example, the European Union, or EU, is currently in the midst of reviewing updates to the EU Privacy Directive that would result in additional requirements and costs if passed, such as the appointment of a dedicated privacy officer and increased civil and criminal penalties in the event of any loss or unauthorized disclosure of private information related to any resident of the EU.
We must be in compliance with state and federal security and privacy regulations, which may increase our operational costs.
The privacy and security regulations under HIPAA establish comprehensive federal standards with respect to the uses and disclosures of protected heath information, or PHI, by health plans and health care providers, in addition to setting standards to

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protect the confidentiality, integrity and availability of electronic PHI. The regulations establish a complex regulatory framework on a variety of subjects, including, without limitation:
the circumstances under which uses and disclosures of PHI are permitted or required without a specific authorization by the patient, including but not limited to treatment purposes, to obtain payments for services and health care operations activities;
a patient's rights to access, amend and receive an accounting of certain disclosures of PHI;
the content of notices of privacy practices for PHI; and
administrative, technical and physical safeguards required of entities that use or receive PHI electronically.
The Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, which became effective on February 17, 2010, makes HIPAA's privacy and security standards directly applicable to “business associates”-independent contractors or agents of covered entities that have access to protected health information in connection with providing a service on behalf of a covered entity. We are a covered entity and also a business associate of our covered entity customers. Among other things, HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney's fees and costs associated with pursuing federal civil actions.
As we expand our business we must continue to implement policies and procedures related to compliance with the HIPAA privacy and security regulations, as required by law, which may increase our operational costs. Furthermore, the privacy and security regulations provide for significant fines and other penalties for wrongful use or disclosure of PHI, including potential civil and criminal fines and penalties. We have evaluated the security of our computer networks and determined that appropriate measures are in place to safeguard PHI contained on such networks. However, no security system is invulnerable to breach, and unauthorized persons may in the future be able to exploit weaknesses in the security systems of our computer networks and gain access to such PHI. Additionally, we share PHI with third-party contractors who are contractually obligated to safeguard and maintain the confidentiality of PHI. Unauthorized persons may be able to gain access to PHI stored in such third-party contractors' computer networks. Any wrongful use or disclosure of PHI by us or our third-party contractors, including disclosure due to data theft or unauthorized access to our or our third-party contractors' computer networks, could subject us to fines or penalties that could adversely affect our business and results of operations. Although the HIPAA statute and regulations do not expressly provide for a private right of damages, we also could incur damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private personal information by us or our third-party contractors.
In addition, different states and foreign nations, such as the EU, also impose certain requirements on the collection of all types of personal information. For example, the European Union Privacy Directive requires that we adhere to certain “safe harbor” requirements with respect to any personal information of a European resident or customer while various states in the U.S. have implemented equally restrictive requirements, such as 201 CMR 17.00, which requires that any company that obtains personal information of any resident of the Commonwealth of Massachusetts implement and maintain a security program that adequately protects such information from unauthorized use or disclosure. As a business that operates both internationally and across all fifty states, any wrongful use or disclosure of personally identifiable information, even if it does not constitute PHI, by us or our third-party contractors, including disclosure due to data theft or unauthorized access to our or our third-party contractors' computer networks, could subject us to fines or penalties that could adversely affect our business and results of operations, including the cost of providing credit monitoring and identity theft prevention services to affected consumers and loss of EU Safe harbor certification.
Security threats to our IT infrastructure and/or our physical buildings could expose us to liability, and damage our reputation and business.
It is essential to our business strategy that our technology and network infrastructure and our physical buildings remain secure and are perceived by our customers and corporate partners to be secure. Despite security measures, however, any network infrastructure may be vulnerable to cyber-attacks by hackers and other security threats. As a leader in the field of molecular diagnostic testing and genetics analysis, we may face cyber-attacks that attempt to penetrate our network security, including our data centers, to sabotage or otherwise disable our research, products and services, misappropriate our or our customers' and partners' proprietary information, which may include personally identifiable information, or cause interruptions of our internal systems and services. Despite security measures, we also cannot guarantee security of our physical buildings. If successful, physical building penetration or any cyber-attacks could negatively affect our reputation, damage our network infrastructure and our ability to deploy our products and services, and harm our relationship with customers and partners that are affected, and expose us to financial liability. We maintain cyber security risk insurance coverage, however any uncovered claim or a claim in excess of our insurance coverage would have to be paid out of our cash reserves, which could have a

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detrimental effect on our financial condition. It is difficult to determine whether we have sufficient insurance coverage to cover potential claims. Also, we may not be able to procure or maintain insurance policies with desirable levels of coverage on commercially acceptable terms, or at all. We can provide no assurance that we will be able to avoid significant claims, which could hurt our reputation and our financial condition.
We may not have adequate insurance if we become subject to product liability or other claims.
Our business exposes us to potential product liability and other types of claims and our exposure will increase as we and Sequenom Laboratories and our partners and collaborators expand commercialization of our tests including the MaterniT21 PLUS test. We have product and general liability insurance that covers us against specific product liability and other claims up to an annual aggregate limit of $30.0 million and $2.0 million, respectively. Any claim in excess of our insurance coverage would have to be paid out of our cash reserves, which would have a detrimental effect on our financial condition. It is difficult to determine whether we have obtained sufficient insurance to cover potential claims. Also, we cannot assure you that we can or will maintain our insurance policies on commercially acceptable terms, or at all. We can provide no assurance that we will be able to avoid significant product liability claims, which could hurt our reputation and our financial condition.
Responding to claims relating to improper handling, storage or disposal of hazardous chemicals, and radioactive and biological materials that we use could be time consuming and costly.
We use controlled hazardous and radioactive materials in the conduct of our business, as well as biological materials that have the potential to transmit disease. The risk of accidental contamination or injury from these materials cannot be completely eliminated. If an accident with these substances occurs, we could be liable for any damages that result, which could seriously harm our business. Additionally, an accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs. Such damage and any expense resulting from delays, disruptions, or any claims may not be covered by our insurance policies.
Hostile takeover bids and unsolicited offers could adversely impact our value and cause the trading price of our common stock to fall.
The current economic environment may encourage potential acquirers to make unsolicited and underpriced offers to acquire our business. If we are the target of a hostile takeover bid or unsolicited offer that undervalues our company, such hostile takeover bid or unsolicited offer may adversely impact public perception of the value of our company, which could cause the trading price of our common stock to fall. In addition, such hostile takeover bids or unsolicited offers may distract management and result in other adverse effects on our business and operations.
Our stock price has been and may continue to be volatile, and your investment could suffer a decline in value.
The trading price of our common stock has been volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including but not limited to:
our ability to generate cash flow and continue as a going concern;
actual or anticipated variations in quarterly and annual operating results;
announcements regarding technological innovations, intellectual property rights, the outcome of patent litigation, research and development progress or setbacks, or product launches by us or our competitors;
our success in entering into, and the success in performing under, licensing and product and test development and commercialization agreements with others;
the success of validation studies for tests under development and our ability to continue to publish study results in peer-reviewed journals;
our success in and the expenses associated with researching, developing, commercializing, and obtaining reimbursement for diagnostic products and tests, alone or in collaboration with our partners and obtaining any required regulatory approval for those products and tests;
the status of litigation against us; and
securities analysts' earnings projections or recommendations, third-party research recommendations, or general market conditions.
The stock market in general, The NASDAQ Global Select Market, and the market for life sciences companies in particular, have experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of the listed companies. These price fluctuations may be rapid and severe and may leave investors little time to react. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may expose us to potential securities class-action litigation.

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We have in the past identified material weaknesses in our internal control over financial reporting which could, if not effectively remediated, result in additional material misstatements in our financial statements.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. As disclosed in Item 9A of our 2012 Annual Report on Form 10-K, management identified material weaknesses in our internal control over financial reporting. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of these material weaknesses in conjunction with the 2012 Annual Report, our management concluded at that time that our internal control over financial reporting was not effective based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-An Integrated Framework. In 2013, we implemented a remediation plan designed to address these material weaknesses. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and legal fees.




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Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3. Defaults Upon Senior Securities
None.

Item 4.   Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.
 



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Item 6.    Exhibits
Exhibit Number
 
Description of Document 
 
 
 
   3.1(1)
 
Restated Certificate of Incorporation of the Registrant.
 
 
 
   3.2(2)
 
Certificate of Amendment to Restated Certificate of Incorporation.
 
 
 
   3.3(3)
 
Restated Bylaws of Registrant, as amended.
 
 
 
   3.4(4)
 
Registrant's Certificate of Designation of Series A Junior Participating Preferred Stock.
 
 
 
   4.1(1)
 
Specimen common stock certificate.
 
 
 
   4.2(4)
 
Rights Agreement dated as of March 3, 2009, between the Registrant and American Stock Transfer and Trust Company, LLC.
 
 
 
   4.3(4)
 
Form of Right Certificate.
 
 
 
   4.4(5)
 
Warrant dated May 3, 2011, issued to the Chinese University of Hong Kong Foundation Limited.
 
 
 
   4.5(6)
 
Indenture dated as of September 17, 2012 by and between the Registrant and Wells Fargo Bank, National Association, as trustee.
 
 
 
4.6
 
Form of 5.00% Convertible Senior Notes due 2017 (included in Exhibit 4.5).
 
 
 
   4.7(7)