Attached files
| file | filename |
|---|---|
| EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - SEQUENOM INC | ex321201310-ka.htm |
| EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - SEQUENOM INC | ex311201310-ka.htm |
| EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - SEQUENOM INC | ex312201310-ka.htm |
| EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - SEQUENOM INC | ex322201310-ka.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K/A
Amendment No. 1
____________________
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
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
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value
(Title of class)
The NASDAQ Stock Market, LLC
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
____________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | x |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company filer | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on June 30, 2013 as reported on The NASDAQ Global Select Market, was approximately $481.3 million. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 14, 2014, there were 116,298,000 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference information from the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission (the Commission) in connection with the solicitation of proxies for the registrant's annual meeting of stockholders to be held on June 10, 2014. Such definitive proxy statement will be filed with the Commission no later than 120 days after December 31, 2013.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A, or Form 10-K/A, amends the Annual Report on Form 10-K of Sequenom, Inc. for the fiscal year ended December 31, 2013 as originally filed with the Securities and Exchange Commission, or SEC, on February 27, 2014, or Original Filing. As used in this report, the words “we,” “us,” “our,” the “Company,” and “Sequenom” refer to Sequenom, Inc. and its wholly-owned subsidiaries, including Sequenom Center for Molecular Medicine, LLC, doing business as Sequenom Laboratories, on a consolidated basis, unless explicitly noted otherwise. This Form 10-K/A amends page 54 of Item 7 of Part II of the Original Filing to correct an error in the following statement: "With our recent U.S. Food and Drug Administration, or FDA, clearance through the Premarket 510(k) Notification process, or 510(k), for the Impact Dx System, which is a clinical laboratory version of our research use only MassARRAY System, we believe that the Sequenom Bioscience business is well positioned to benefit from additional investment in biomarker assay panels which can be used to perform tests in a clinical laboratory setting." As corrected by this Form 10-K/A, the sentence states: "With our recent U.S. Food and Drug Administration, or FDA, submission for clearance through the Premarket 510(k) Notification process, or 510(k), for the Impact Dx System, which is a clinical laboratory version of our research use only MassARRAY System, we believe that the Sequenom Bioscience business is well positioned to benefit from additional investment in biomarker assay panels which can be used to perform tests in a clinical laboratory setting."
In addition, this Form 10-K/A amends Item 15 of Part IV of the Original Filing to include new certifications by our principal executive officer and principal financial officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended.
Except for the amendment described above, we have not modified or updated disclosures presented in the Original Filing in this Form 10-K/A. Accordingly, this Form 10-K/A does not reflect events occurring after the filing of the Original Filing or modify or update those disclosures affected by subsequent events. Information not affected by this Form 10-K/A remains unchanged and reflects the disclosures made at the time the Original Filing was filed. Therefore, this Form 10-K/A should be read in conjunction with any documents incorporated by reference therein and our filings made with the SEC subsequent to the Original Filing.
PART II
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to such statements included elsewhere in this report. 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.
All references to 2013, 2012 and 2011 refer to our calendar years ended December 31, 2013, 2012 and 2011, respectively.
Overview
We are a life sciences company committed to improving healthcare by providing revolutionary genomic and genetic analysis solutions for the molecular diagnostic and clinical research markets. We develop and commercialize innovative molecular diagnostics testing services that target and serve molecular diagnostics markets, and also develop and commercialize research use genetic analysis products and services that target and serve discovery and clinical research markets. We offer our services and products in the United States and globally with international emphasis in countries in the European and Asia-Pacific regions. We conduct our business through our two operating segments, Sequenom Laboratories and Sequenom Bioscience.
Sequenom Laboratories provides molecular based, laboratory developed tests, or LDTs, with a focus principally on prenatal diseases and conditions and ophthalmological diseases and conditions. 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 developed, validated and exclusively offers LDTs branded under the names MaterniT21™ PLUS, HerediT™, SensiGene®, and RetnaGene™. These genetic tests, offered as a testing service to physicians for the benefit of their patients, provide early patient management information for obstetricians, geneticists, maternal fetal medicine specialists, and ophthalmologists and eye care specialists. Sequenom Laboratories’ LDTs are:
MaterniT21 PLUS LDT: a noninvasive prenatal test, or NIPT, to detect fetal chromosomal abnormalities by determining the relative amount of chromosomal material present in circulating cell-free DNA in a maternal blood sample. The test is intended and offered for use in pregnant women at increased risk for fetal chromosomal abnormalities, including abnormalities associated with trisomies 21, 18, and 13. Originally launched in October 2011, the test has been expanded and now includes detection of increased representation of chromosomes 21, 18 and 13 material (associated with trisomy 21, 18 and 13, respectively) and the presence of the Y chromosome, and if observed, chromosomal abnormalities associated with chromosomes 16, 22, sex chromosomes X and Y, and select microdeletions.
HerediT CF LDT: part of the prenatal menu, a carrier screen test to help identify individuals who may have an increased risk of having certain cystic fibrosis, or CF, genetic mutations. This test has been expanded to include screening for a broad set of phenotypically relevant genetic mutations selected from the leading Johns Hopkins CFTR2 database.
SensiGene RHD LDT: a NIPT to determine the presence or absence of fetal Rhesus D factor, or RHD by direct detection of the fetal RHD genotype in RhD negative mothers from a maternal blood sample.
RetnaGene AMD LDT: a genetic test to predict the risk of a patient with “dry” or early stage age-related macular degeneration, or AMD, progressing to “wet” or advanced choroidal neovascular disease within 2, 5, and 10 years.
Sequenom Bioscience provides technology and research use only tools (the MassARRAY System platform, chip and reagent consumables, software and biomarker assay panels) for genetic analysis and applications in translational research, clinical research, pharmacogenomics, oncology, and agricultural genomics. Sequenom Bioscience's proprietary MassARRAY System is a high-performance MALDI-TOF mass spectrometry-based DNA analysis platform that delivers reliable and specific data from biological samples and from genetic target material that is only available in trace amounts.
We depend upon third-party payors to provide reimbursement for our tests. Accordingly, Sequenom Laboratories has and expects to continue to focus substantial resources on obtaining reimbursement coverage from third-party payors. In December 2012, the American Congress of Obstetricians and Gynecologists, or ACOG, and the Society for Maternal Fetal Medicine Specialists, or SMFM, issued a joint committee opinion on NIPT for fetal aneuploidy, which supported the use of circulating cell-free fetal DNA as a basis for NIPT in pregnant women at high risk of carrying a fetus with fetal aneuploidy. We believe these guidelines will drive further adoption of Sequenom Laboratories' MaterniT21 PLUS test and strengthen our efforts to
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obtain insurance reimbursement. Following the issuance of these guidelines, many third-party payors have adopted positive coverage policies for reimbursement of NIPT for high-risk pregnancies.
In the United States, 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 to bill and receive reimbursement for our diagnostic tests. Once the CPT code is established, the Centers for Medicare and Medicaid Services, or CMS, in turn establishes payment levels and coverage rules under Medicare, and private payors establish rates and coverage rules independently. Additionally, 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 implemented new codes beginning January 1, 2013 that did not include a specific code relevant to most of Sequenom Laboratories' LDTs. This coding change adopted by CMS and most third party payors has resulted in delayed payments and, in some cases, reduced payments from payors for services performed in 2013. Additionally, following the coding change, many state Medicaid programs have not included an appropriate test code in their fee schedule and, in some cases, are considering whether molecular diagnostic tests such as ours should be a covered benefit. Following the coding change, we are no longer receiving Medicare reimbursement for Sequenom Laboratories RetnaGene AMD LDT and have reduced our revenue expectations for that test for the foreseeable future, which resulted in a $0.7 million intangible asset impairment charge during 2013. As a result, our business model has evolved and our near-term expectations and our business arrangement with Nicox, Inc., are based primarily on a patient self-pay payment model, without reimbursement from third-party payors.
Sequenom Laboratories bills insurance companies and other third party payors for performance of the tests and bills patients for deductibles and copayment amounts. Sequenom Laboratories' diagnostic testing services revenues are primarily recognized on a cash basis. We expect to begin to transition to accrual accounting on a payor-specific basis when we can reliably estimate the amount that would be ultimately collected for our tests. Sequenom Laboratories continues to obtain contracts with additional payors and continues to work with other third-party payors, including state Medicaid programs, to adopt positive coverage policies for its tests. In some cases, such coverage decisions enable retroactive payment, however, in other cases, prior services may not be collectible. Due to the payment practices of many of the payors, we expect revenues will fluctuate until these factors are resolved.
Sequenom Laboratories performs its LDTs at three locations, San Diego, California, and Raleigh-Durham, North Carolina, for its MaterniT21 PLUS test, and Grand Rapids, Michigan, for its other LDTs. Sequenom Laboratories will continue efforts to ensure that office and laboratory space is adequate to accommodate the necessary capacity requirements to meet Sequenom Laboratories' current and future business needs.
Sequenom Laboratories does not believe that the District Court’s order ruling that the U.S. Patent No. 6,258,540, or the ’540 Patent, is invalid will materially impact the competitive landscape as Sequenom Laboratories has been competing in the marketplace without the benefit of the patent being recognized by competitors.
We have a history of recurring losses from operations and we expect to incur additional operating losses in 2014 as we continue to seek to improve reimbursement for our tests and work to develop additional products and tests, and incur legal fees to defend our patent position. The timing of becoming profitable is dependent upon a number of factors, including the timing of reimbursement payments from third-party payors; the timing and costs related to research and development projects; selling and marketing efforts; and administrative expenses to support our operations. Our capital requirements to sustain operations have been and will continue to be significant. As of December 31, 2013, we had available cash and cash equivalents and current marketable securities totaling $71.3 million and working capital of $51.9 million.
In September 2013, we announced that our board of directors authorized a review of potential strategic alternatives for our Sequenom Bioscience business segment, which includes the evaluation of a full range of strategic alternatives for this business, including, but not limited to, a possible sale of the business or joint venture involving the business. With our recent U.S. Food and Drug Administration, or FDA, submission for clearance through the Premarket 510(k) Notification process, or 510(k), for the Impact Dx System, which is a clinical laboratory version of our research use only MassARRAY System, we believe that the Sequenom Bioscience business is well positioned to benefit from additional investment in biomarker assay panels which can be used to perform tests in a clinical laboratory setting. Considering the amount of investment required, we believe that the business is best suited to be part of a larger company which would have the resources to invest and capitalize on available synergies. This would allow us to focus our investments exclusively in opportunities available for Sequenom Laboratories. We have engaged Jefferies Group LLC to review a full range of strategic alternatives for this business, including, but not limited to, possible sale or joint venture, to procure resources to invest and capitalize on available synergies.
Our strategic focus for 2014 will be to achieve break-even and positive cash flow for the fourth quarter of 2014 and to expand Sequenom Laboratories' NIPT menu with the development of a low cost fetal chromosomal abnormality LDT performed on an alternative platform by the end of 2014. We will focus on growing profitable volume in our diagnostic testing business, increasing our market penetration and cash collections and growing our revenues through obtaining contracts with
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payors to create a sustainable, profitable business model for the future. We will continue to expand our relationships with physicians who order our tests and invest in our research and development programs to develop additional or enhanced tests.
2013 Overview
• | Total revenues during 2013 increased $72.7 million, or 81%, to $162.4 million when compared to $89.7 million during 2012. |
◦ | Diagnostic services revenues during 2013 increased $73.1 million, or 157%, to $119.6 million when compared to $46.5 million during 2012. |
◦ | Bioscience product sales and services revenues during 2013 decreased $0.4 million, or 1%, to $42.9 million when compared to $43.2 million during 2012. |
• | Total accessions for all tests in our Sequenom Laboratories segment during 2013 increased 93,500, or 102%, to 185,500 when compared to 92,000 during 2012. |
• | As part of an overall cost reduction effort, in August 2013, we announced our reorganization plan which resulted in the release of 57 employees, a reduction in our estimate of future cash flows to be generated by our RetnaGene AMD LDT which resulted in an impairment of our licensed technology asset, and the exit of our lease on a facility in San Diego, which expires in July 2015. In connection with the reorganization, we recorded $6.0 million in facility exit costs, impairment expense and employee termination costs during 2013. |
Results of Operations
Revenues
Our revenues are primarily from LDTs and product sales and services related to our Bioscience products. We operate our business in two segments, Sequenom Laboratories, which comprises our diagnostic services business, and Sequenom Bioscience, which sells and services our MassARRAY System and related products and provides contract services to our customers.
Our revenues and accessions were as follows:
Year Over Year Increase (Decrease) | |||||||||||||||||||||||
Years ended December 31, | 2013 from 2012 | 2012 from 2011 | |||||||||||||||||||||
(dollars in thousands) | 2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | ||||||||||||||||
Diagnostic services | $ | 119,556 | $ | 46,457 | $ | 8,319 | $ | 73,099 | 157% | $ | 38,138 | 458% | |||||||||||
Bioscience product sales and services | 42,870 | 43,240 | 47,588 | (370 | ) | (1)% | (4,348 | ) | (9)% | ||||||||||||||
Total revenues | $ | 162,426 | $ | 89,697 | $ | 55,907 | $ | 72,729 | 81% | $ | 33,790 | 60% | |||||||||||
% of Total Revenues: | |||||||||||||||||||||||
Diagnostic services | 74 | % | 52 | % | 15 | % | |||||||||||||||||
Bioscience product sales and services | 26 | % | 48 | % | 85 | % | |||||||||||||||||
Total | 100 | % | 100 | % | 100 | % | |||||||||||||||||
# Change | % Change | # Change | % Change | ||||||||||||||||||||
Total accessions (for all Sequenom Laboratories tests) | 185,500 | 92,000 | 23,300 | 93,500 | 102% | 68,700 | 295% | ||||||||||||||||
Diagnostic Services
Diagnostic services revenues are derived primarily from payments for providing testing services for Sequenom Laboratories' LDTs and are primarily recognized on a cash basis as payments are received. We will continue to account for these revenues on a cash basis until further experience and third-party contracts are gained and we are able to demonstrate that we can make a reasonable estimate of collectible amounts before moving to the accrual method of accounting on a payor by payor basis. Revenues from diagnostic services performed on behalf of patients outside the United States, based on fixed fee contracts with our international partners, are recorded on an accrual basis and amounted to 10% and 5% of diagnostic services revenues for the years ended December 31, 2013 and 2012, respectively.
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
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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 seven or fewer business days from the date of accession. Revenues for diagnostic services are generated primarily from customers located within the United States. Our international customers collect and ship patient specimens to the laboratory, and Sequenom Laboratories processes the specimens in its laboratory in the United States. We also have royalty agreements with international customers to whom we have licensed our technology in certain countries.
The $73.1 million, or 157%, and the $38.1 million, or 458%, increases in diagnostic services revenues during 2013 and 2012, respectively, are primarily attributable to the increase in the number of accessions and collections for accessions billed in prior periods. Sequenom Laboratories has experienced delays in the receipt of payments as a result of coding changes adopted as of January 1, 2013 by CMS and most third party payors which also, in some cases, reduced payments from payors, particularly government payors, for services performed in 2013.
Our revenues are impacted by the number and type of tests billed, the number of tests which are reimbursed by third-party payors and patients, and the rate paid per test. The number of tests billed has increased consistent with the increase in the number of accessions. The average rate received per MaterniT21 PLUS test reimbursed declined modestly by about 12% during 2013 to approximately $1,200 per test as a result of competition, additional contracting and the effect of the coding change as described above.
The following is a summary of diagnostic services revenues for the quarters in 2013 and 2012:
2013 | 2012 | ||||||||||||||||||||||||||||||
(in millions) | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||||||||
Collections and revenues recorded for diagnostic services billed in the quarter | $ | 16.2 | $ | 15.0 | $ | 12.0 | $ | 10.2 | $ | 9.5 | $ | 8.7 | $ | 6.0 | $ | 3.7 | |||||||||||||||
Collections and revenues for diagnostic services billed in prior quarters | 16.5 | 18.3 | 12.5 | 18.9 | 11.5 | 3.8 | 2.1 | 1.1 | |||||||||||||||||||||||
Diagnostic services revenues | $ | 32.7 | $ | 33.3 | $ | 24.5 | $ | 29.1 | $ | 21.0 | $ | 12.5 | $ | 8.1 | $ | 4.8 | |||||||||||||||
Collections for services in prior periods 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 and patients for prior period claims. Collections recorded as revenue on the cash basis during 2013 for services performed prior to 2013 totaled $26.4 million.
As of December 31, 2013, 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 our accrual revenue recognition criteria were not met and the amounts had not been collected, range from approximately $46 million to $51 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.
Two payors represented over 10% of diagnostic services revenues during 2013: one commercial payor accounted for $25.0 million and $6.7 million in revenues, or 21% and 14% of diagnostic revenues, during 2013 and 2012, respectively, and payments from a second commercial payor accounted for $12.6 million and $2.2 million in revenues, or 11% and 5% of diagnostic revenues, during 2013 and 2012, respectively.
The increases in the number of accessions during 2013 and 2012 of 102% and 295%, respectively, are primarily attributable to the increased market adoption of the MaterniT21 PLUS test which was introduced domestically in the fourth quarter of 2011 and internationally in the first quarter of 2012, and expansion of Sequenom Laboratories' prenatal sales force medical liaisons' and its advisory board's efforts to expand the awareness of the clinical utility of this test. International revenues accounted for $11.6 million and $2.1 million of diagnostic services revenues during 2013 and 2012, respectively.
We believe that our diagnostic services revenues will continue to be affected by our current revenue recognition policy of generally recognizing revenues upon cash collection, the overall acceptance and demand for our new and existing commercial products and services, the adoption rates of Sequenom Laboratories' existing LDTs and any future LDTs we may develop, and payment patterns of third-party payors and patients. Following the coding changes adopted as of January 1, 2013, many state Medicaid programs have not included the appropriate test code in their fee schedule and, in many cases, are considering whether molecular diagnostic tests such as ours should be a covered benefit. As a result, revenues from government payors have declined during 2013 from $2.3 million during the first quarter of 2013 to $1.4 million during the fourth quarter of 2013. We continue to pursue collection for our tests with third-party payors, including Medicare and Medicaid where appropriate. Diagnostic services revenues collected from government payors during 2013 and 2012 were $6.2 million and $6.7 million, or 5% and 15%, respectively, of our diagnostics services revenues.
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Bioscience Product Sales and Services
Our bioscience product sales and services revenues were as follows:
Year Over Year Increase (Decrease) | |||||||||||||||||||||||
Years ended December 31, | 2013 from 2012 | 2012 from 2011 | |||||||||||||||||||||
(dollars in thousands) | 2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | ||||||||||||||||
System sales | $ | 14,630 | $ | 14,132 | $ | 14,765 | $ | 498 | 4% | $ | (633 | ) | (4)% | ||||||||||
Consumables | 20,934 | 21,726 | 24,944 | (792 | ) | (4)% | (3,218 | ) | (13)% | ||||||||||||||
Maintenance services | 5,142 | 5,277 | 5,227 | (135 | ) | (3)% | 50 | 1% | |||||||||||||||
Contract research and other | 2,164 | 2,105 | 2,652 | 59 | 3% | (547 | ) | (21)% | |||||||||||||||
Total | $ | 42,870 | $ | 43,240 | $ | 47,588 | $ | (370 | ) | (1)% | $ | (4,348 | ) | (9)% | |||||||||
Bioscience product sales and services revenues are derived from sales of research use only consumables, including our SpectroCHIP miniaturized array chip used with our iPLEX assay and other assays, MassARRAY Systems, research use only panels, maintenance agreements, sales and licensing of our proprietary software, and contract research services. Revenues for bioscience products and services are generated from customers primarily located in North America, and customers and distributors located in Europe and Asia.
The $0.4 million, or 1%, decrease in our bioscience product sales and services revenues during 2013, when compared to 2012, is primarily attributable to the decrease in consumables revenue orders from our customers in the translational research and agricultural biology markets, partially offset by an increase in MassARRAY System placements during 2013.
The $4.3 million, or 9%, decrease in our bioscience product sales and services revenues during 2012, when compared to 2011, is primarily attributable to the decrease in consumables revenue orders from our customers in the translational research and agricultural biology markets, fewer MassARRAY System placements during 2012, the effects of foreign currency exchange rates, which reduced revenues by $1.1 million in 2012, and lower contract research revenues.
Our revenues have historically fluctuated from period to period and, we believe, will likely continue to fluctuate substantially in the future based upon the unpredictable sales cycle for the MassARRAY System and consumables, general economic conditions, and the overall acceptance and demand for our new and existing commercial products and services.
Cost of Revenues and Gross Margins
Cost of revenues consists of material, direct labor of our laboratory, manufacturing and service personnel, outside laboratory costs, royalties and overhead. Gross margin consists of our revenues less cost of revenues.
Our costs of revenues and gross margins were as follows:
Year Over Year Increase (Decrease) | |||||||||||||||||||||||
Years ended December 31, | 2013 from 2012 | 2012 from 2011 | |||||||||||||||||||||
(dollars in thousands) | 2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | ||||||||||||||||
Cost of Revenues | |||||||||||||||||||||||
Diagnostic services | $ | 87,302 | $ | 47,283 | $ | 10,031 | $ | 40,019 | 85% | $ | 37,252 | 371% | |||||||||||
Bioscience product sales and services | 15,436 | 15,025 | 16,360 | 411 | 3% | (1,335 | ) | (8)% | |||||||||||||||
Total | $ | 102,738 | $ | 62,308 | $ | 26,391 | $ | 40,430 | 65% | $ | 35,917 | 136% | |||||||||||
Gross Margin | |||||||||||||||||||||||
Diagnostic services | $ | 32,254 | $ | (826 | ) | $ | (1,712 | ) | $ | 33,080 | 4,005% | $ | 886 | 52% | |||||||||
Bioscience product sales and services | 27,434 | 28,215 | 31,228 | (781 | ) | (3)% | (3,013 | ) | (10)% | ||||||||||||||
Total | $ | 59,688 | $ | 27,389 | $ | 29,516 | $ | 32,299 | 118% | $ | (2,127 | ) | (7)% | ||||||||||
Gross Margin as a % of Revenues | |||||||||||||||||||||||
Diagnostic services | 27% | (2)% | (21)% | ||||||||||||||||||||
Bioscience product sales and services | 64% | 65% | 66% | ||||||||||||||||||||
Total | 37% | 31% | 53% | ||||||||||||||||||||
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Diagnostic Services
Cost of diagnostic services revenues represents the cost of materials, direct labor, equipment and infrastructure expenses associated with accessioning patient specimens (including quality control analyses and shipping charges to transport patient specimens), royalties, and license fees. 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 revenues were recognized with respect to that test. Royalties for licensed technology calculated as a percentage of revenues are recorded as license fees in cost of revenues at the time revenues are recognized or in accordance with other contractual obligations. While license fees are generally calculated as a percentage of revenues, the percentage increase in license fees does not correlate exactly to the percentage increase in revenues because certain agreements contain provisions for fixed annual payments and other agreements have tiered rates and payments that may be capped at annual minimum or maximum amounts. License fees represent a significant component of our cost of revenues and are expected to remain so for the foreseeable future. License fees as a percentage of diagnostic services cost of revenues were 14%, 15% and 20% during 2013, 2012 and 2011, respectively.
The increases in cost of diagnostic services revenues during 2013 when compared to 2012, and during 2012 when compared to 2011, are primarily attributable to increased labor, materials and royalties associated with increased test volumes, including additional costs to support increased production capacity, including our additional site in Raleigh-Durham, North Carolina, which became operational in 2013.
Gross margin as a percentage of diagnostic services revenues is also affected by our current revenue recognition policy of generally recognizing revenues upon cash collection, which may result in costs being incurred in one period that relate to revenues recognized in a later period. Favorable gross margin during 2013 when compared to a negative gross margin during 2012 is attributable to higher collections for accessions and lower average per test costs as a result of the increased volume of tests accessioned during 2013.
We expect that gross margin for our diagnostic services will continue to fluctuate and be affected by the adoption rates of Sequenom Laboratories' LDTs, our revenue recognition policy, the levels of reimbursement, and payor and other contracts we may enter into for our tests.
We expect the cost of revenues to increase in future periods to the extent Sequenom Laboratories processes more tests, and to reflect the expanded capacity within Sequenom Laboratories, including its site in Raleigh-Durham, North Carolina. Sequenom Laboratories currently has the physical capacity to conduct 300,000 MaterniT21 PLUS tests per year with minimal additional capital investment. Additionally, the Raleigh-Durham, North Carolina, site can be expanded if, and when, additional capacity is needed.
Bioscience Product Sales and Services
Gross margin as a percentage of bioscience product sales and services revenues remained relatively flat when comparing 2013 to 2012, and 2012 to 2011.
We expect that gross margin for our bioscience product sales and services will fluctuate on a quarterly basis and be affected by, among other things, the selling price for MassARRAY Systems and consumables, consumable sales per MassARRAY System sold, the mix of product sales and the type of services, competitive conditions, sales volumes, discounts offered, sales through distributors, as well as our manufacturing costs, inventory reserves and obsolescence charges required, and royalty payment obligations on in-licensed technologies.
Operating Expenses
Our operating expenses were as follows:
Year Over Year Increase (Decrease) | |||||||||||||||||||||||
Years ended December 31, | 2013 from 2012 | 2012 from 2011 | |||||||||||||||||||||
(dollars in thousands) | 2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | ||||||||||||||||
Selling and marketing | $ | 51,360 | $ | 48,587 | $ | 28,224 | $ | 2,773 | 6% | $ | 20,363 | 72% | |||||||||||
Research and development | $ | 46,532 | $ | 50,525 | $ | 53,313 | $ | (3,993 | ) | (8)% | $ | (2,788 | ) | (5)% | |||||||||
General and administrative | $ | 54,166 | $ | 41,090 | $ | 22,185 | $ | 13,076 | 32% | $ | 18,905 | 85% | |||||||||||
Restructuring costs | $ | 6,037 | $ | — | $ | — | $ | 6,037 | |||||||||||||||
Selling and marketing expenses
Selling and marketing expenses consist primarily of compensation and related departmental expenses for sales and marketing, customer support, and business development personnel.
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The $2.8 million, or 6%, increase in selling and marketing expenses during 2013, when compared to 2012, is primarily due to the expansion of our Sequenom Laboratories sales force, including the costs of labor, travel and commissions.
The $20.4 million, or 72%, increase in selling and marketing expenses during 2012, when compared to 2011, was primarily related to increased headcount to support our Sequenom Laboratories operations resulting in higher labor and related costs of $13.0 million, increased facilities and other expenses of $2.2 million related to the increase in headcount, increased personnel and travel expenses of $3.2 million and third-party marketing of $1.4 million attributable to promoting the MaterniT21 PLUS LDT.
We expect selling and marketing expenses to be reduced in 2014 as a result of our efforts to reduce spending and improve productivity.
Research and development expenses
Research and development expenses consisted 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 $4.0 million, or 8%, decrease in research and development expenses during 2013, when compared to 2012, is due primarily to $2.0 million in reduced headcount and lower supplies and other expenses primarily related to fewer Sequenom Bioscience research projects during 2013 resulting from completion of our FDA 510(k) notification for the Impact Dx System during 2013 and our restructuring in August 2013, $1.2 million in lower supplies and overhead due primarily to the completion of the validation of the Raleigh-Durham, North Carolina laboratory location during 2013, and decreases in discretionary and stock-based compensation expenses of $0.7 million and $0.1 million, respectively.
The $2.8 million, or 5%, decrease in research and development expenses during 2012, when compared to 2011, was primarily related to a $5.5 million decrease in research-related intellectual property licensing and collaboration costs and a decrease of $0.9 million in clinical study costs due to the completion of certain research and development projects, partially offset by increased headcount to support our research and development efforts resulting in higher labor costs of $0.8 million and an increase of $3.0 million in facilities and other business expenses related to expansion of Sequenom Laboratories' laboratory facilities.
We expect our research and development expenses to be lower in future periods. Validation of Sequenom Laboratories' additional laboratory site was completed in 2013 and we expect to benefit from our restructuring efforts. Investments will continue in our product pipeline and alternative platform for prenatal testing and other molecular diagnostic areas, along with investment in research use only biomarker assay panels and potential clinical applications of our MassARRAY Systems.
General and administrative expenses
General and administrative expenses consist primarily of compensation and related departmental expenses for executive, legal, finance, non-allocated information technology and human resource personnel and outside professional fees.
The $13.1 million, or 32%, increase in general and administrative expenses during 2013, when compared to 2012, is primarily related to increased legal costs of $9.1 million, associated primarily with patent litigation, increased billing costs of $2.4 million due to our growth in diagnostic services collections and increased headcount to support our operations resulting in higher labor and related costs of $1.6 million.
The $18.9 million, or 85%, increase in general and administrative expenses during 2012, when compared to 2011, was primarily related to increased legal costs of $11.3 million, primarily associated with patent litigation, increased headcount to support our operations resulting in labor costs of $3.5 million, increased third-party billing costs of $1.9 million due to an increase in the number diagnostic tests performed and collected, an increase in corporate, travel, and other expenses of $1.0 million, and higher audit and tax fees of $0.5 million associated with our increase in operations.
We expect general and administrative expenses to decrease in future periods as we obtain efficiencies from our restructuring and reduce our legal costs.
Restructuring Costs
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 RetnaGene AMD LDT 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 expires in July 2015. In connection with the restructuring, we recorded $2.4 million in facility exit costs, $1.7 million of impairment expense for tenant improvements associated with the vacated facility, $0.7 million of impairment expense for intangible assets and prepaid royalties related to our RetnaGene AMD LDT licensed technology, and $1.2 million in employee termination costs during 2013.
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Other income and expense, and income tax
Year Over Year Increase (Decrease) | |||||||||||||||||||
Years ended December 31, | 2013 from 2012 | 2012 from 2011 | |||||||||||||||||
(dollars in thousands) | 2013 | 2012 | 2011 | $ Change | $ Change | ||||||||||||||
Interest expense, net | $ | (8,443 | ) | $ | (3,318 | ) | $ | (330 | ) | $ | 5,125 | $ | 2,988 | ||||||
Other (expense) income, net | $ | (255 | ) | $ | (1,167 | ) | $ | 497 | $ | (912 | ) | $ | (1,664 | ) | |||||
Income tax (expense) benefit | $ | (301 | ) | $ | 269 | $ | (95 | ) | $ | (570 | ) | $ | (364 | ) | |||||
Interest expense, net
The increase in interest expense, net, during 2013 is attributable to the issuance of our 5.00% Convertible Senior Notes due 2017, or Convertible Senior Notes, in September 2012 and higher outstanding balances on our term loan.
The increase in interest expense, net, during 2012 is attributable to the issuance of our Convertible Senior Notes in September 2012 and higher outstanding balances on our term loan during 2012, partially offset by an increase in interest income in 2012 due to the increase in investment securities held during 2012 following completion of financing activities.
Other (expense) income, net
Other expense, net, during 2013 primarily relates to net foreign currency transaction gains and losses recognized during the year. Other expense, net, during 2012 primarily relates to the write-off of the cumulative translation loss as a result of the liquidation of our investment in our U.K subsidiary upon its dissolution of $1.0 million. Other income, net, during 2011 includes the receipt of a research and development grant from the U.S. government of $0.2 million, landlord reimbursements related to property loss of $0.1 million, and net gains on marketable securities of $42,000.
Income tax benefit (expense)
Our income tax expense during 2013 and 2011 is primarily due to statutory tax liabilities resulting from our state and foreign operations and tax expense related to indefinite-lived intangible assets which cannot be used as a source of income when assessing the need for a valuation allowance on deferred tax assets.
In 2012, we recorded a benefit of $0.5 million for the realization of research and development credits taken on prior year tax returns, which we believe are more likely than not sustainable upon examination.
Segment Results
Segment performance assessment is based on revenues and operating income (loss) exclusive of certain unallocated costs, including corporate general and administrative expenses, litigation expense, certain other costs, impairment and facility exit costs, and other indirect costs, which are not allocated to our segments for performance assessment by our chief operating decision maker. Unallocated operating expenses excluded from our segments for performance assessment represent expenses that do not reflect, according to criteria established by us, operating expenses associated with our reportable segment activities. No allocation of resources is done by our chief operating decision maker in consideration of discrete segment assets and we do not discretely allocate assets to our operating segments. Intersegment revenues and transfers are immaterial. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
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The following table sets forth our revenues and operating income (loss) from our Sequenom Laboratories and Sequenom Bioscience segments:
Year Over Year Increase (Decrease) | |||||||||||||||||||||||
Years ended December 31, | 2013 from 2012 | 2012 from 2011 | |||||||||||||||||||||
(dollars in thousands) | 2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | ||||||||||||||||
Revenues: | |||||||||||||||||||||||
Sequenom Laboratories | $ | 119,556 | $ | 46,457 | $ | 8,319 | $ | 73,099 | 157% | $ | 38,138 | 458% | |||||||||||
Sequenom Bioscience | 42,870 | 43,240 | 47,588 | (370 | ) | (1)% | (4,348 | ) | (9)% | ||||||||||||||
Total revenues | $ | 162,426 | $ | 89,697 | $ | 55,907 | $ | 72,729 | 81% | $ | 33,790 | 60% | |||||||||||
Operating income (loss): | |||||||||||||||||||||||
Sequenom Laboratories | $ | (46,875 | ) | $ | (72,242 | ) | $ | (48,111 | ) | $ | 25,367 | (35)% | $ | (24,131 | ) | 50% | |||||||
Sequenom Bioscience | 5,519 | 3,104 | 7,448 | 2,415 | 78% | (4,344 | ) | (58)% | |||||||||||||||
Unallocated | (57,051 | ) | (43,675 | ) | (33,543 | ) | (13,376 | ) | 31% | (10,132 | ) | 30% | |||||||||||
Total | $ | (98,407 | ) | $ | (112,813 | ) | $ | (74,206 | ) | $ | 14,406 | (13)% | $ | (38,607 | ) | 52% | |||||||
Sequenom Laboratories
Sequenom Laboratories introduced new LDTs during 2011 and since that time has significantly expanded its commercial sales force to drive adoption of its LDTs. Sequenom Laboratories is continuing its efforts to obtain reimbursement for all of its tests, however many payors initially denied coverage for the MaterniT21 PLUS test as they had considered the test investigational and experimental. With the publication of the American Congress of Obstetrics and Gynecology and the Society for Maternal-Fetal Medicine joint committee opinion on NIPT for fetal aneuploidy in late 2012, the test is no longer considered investigational and experimental. We recognize Sequenom Laboratories revenues primarily on a cash basis; however we record costs to perform the tests as those costs are incurred. Laboratory operating costs have increased as the number of tests processed continues to increase.
Operating losses for Sequenom Laboratories during 2013 when compared to 2012 decreased $25.4 million due primarily to the improved gross margin of $33.1 million, $1.3 million in lower supplies and overhead due primarily to the completion of the validation of the Raleigh-Durham, North Carolina laboratory location during 2013, and a decrease in discretionary and stock-based compensation expense of $0.3 million. These decreases in operating loss were partially offset by $4.0 million in higher costs incurred for the expansion of our Sequenom Laboratories sales force, $2.4 million in higher billing costs due to increased revenues and the additional billing effort required following the coding change on January 1, 2013, $1.5 million in increased headcount and related costs to support our diagnostic services operations, and $1.3 million in employee termination costs and impairment expense.
Operating losses for Sequenom Laboratories during 2012 when compared to 2011 increased $24.1 million due primarily to the increase in headcount and expansion of facilities to support our diagnostic services operations. Selling and marketing costs increased by $20.4 million due to the increase in the field sales force personnel dedicated to the prenatal and ophthalmology markets to drive adoption of the LDTs.
Sequenom Bioscience
Operating income for Sequenom Bioscience during 2013 when compared to 2012 increased $2.4 million due primarily to $2.2 million in reduced headcount and lower supplies and other expenses primarily related to fewer research projects and marketing expenses during 2013 resulting from the completion of our FDA 510(k) notification for the Impact Dx System during 2013 and our restructuring in August 2013, and a decrease in discretionary and stock-based compensation expenses of $1.3 million. These improvements were partially offset by a lower gross margin of $0.8 million and employee termination costs of $0.3 million during 2013.
Operating income for Sequenom Bioscience during 2012 when compared to 2011 decreased $4.3 million due to a lower gross margin of $3.0 million plus an increase in research and development expenses of $1.0 million in our Sequenom Bioscience business.
Unallocated
Unallocated costs during 2013 when compared to 2012 were higher by $13.4 million due primarily to additional legal expenses of $9.1 million and restructuring costs of $4.5 million, partially offset by a decrease in discretionary and stock-based compensation expenses of $0.3 million.
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Unallocated costs during 2012 when compared to 2011 were higher by $10.1 million due primarily to additional legal expenses of $11.8 million and additional labor costs of $3.2 million due to increased headcount to support operations. These increases were partially offset by the higher costs in 2011 related to the nonrecurring license fees paid to the Chinese University of Hong Kong, or CUHK, and the value of the warrant issued to CUHK aggregating $4.2 million.
Liquidity and Capital Resources
We have a history of recurring losses from operations and had an accumulated deficit of $1,014.3 million as of December 31, 2013. Our capital requirements to sustain operations, including Sequenom Laboratories' billed but unpaid tests, research and development projects, and litigation have been and will continue to be significant. As of December 31, 2013 and 2012, we had working capital of $51.9 million and $146.2 million, respectively. These amounts do not include our unrecorded accounts receivable (due to our cash basis accounting), which are discussed below.
We consider the material drivers of our cash flow to be testing volumes and collections of billed tests for our diagnostic testing services, sales volumes of our bioscience products and services, working capital, inventory management, and operating expenses. Our principal sources of liquidity are our cash, cash equivalents, and marketable securities, collections for our commercialized tests and product sales and services, and $10.0 million available at December 31, 2013 under our revolving line of credit facility. We have also financed our operating and capital requirements during the last three years with proceeds from the issuance of our Convertible Senior Notes and the public offering of our common stock during 2012, and the public and private offerings of our common stock which occurred in 2010.
We have expanded the operations of Sequenom Laboratories following commercialization of the MaterniT21 PLUS test, including research and development activities related to improvements to current tests and expansion of Sequenom Laboratories' diagnostic testing menu.
As of December 31, 2013, 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 our accrual revenue recognition criteria were not met and the amounts had not been collected, range from approximately $46 million to $51 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.
As of December 31, 2013, cash, cash equivalents, and current marketable securities totaled $71.3 million, compared to $175.9 million at December 31, 2012. The $104.7 million decrease is due primarily to our cash used in operating activities of $85.6 million, purchases of equipment and leasehold improvements of $12.7 million, and repayment on our term loan of $7.6 million. Our cash equivalents and current marketable securities are held in a variety of securities that that include U.S. government treasuries, certificates of deposits, and money market funds that have ratings of AA or better, or are fully guaranteed by the U.S. government, and mutual funds.
At our current and anticipated level of operating loss, we expect to continue to incur net operating cash outflows until the fourth quarter of 2014, when we expect that reimbursement for our tests will be sufficient to achieve positive cash flow for the quarter and annually thereafter. We expect that our December 31, 2013 balances of cash and marketable equity securities are sufficient to provide for our operating needs through at least the end of 2014.
Operating Activities
Cash used in operations during 2013 was $85.6 million, compared to $78.0 million during 2012. Our use of cash was primarily a result of the net loss of $107.4 million during 2013 compared to $117.0 million for 2012. Changes in operating assets and liabilities during 2013 used net cash of $8.0 million, which includes increased inventories of $6.2 million and higher accounts receivable balances of $2.3 million, partially offset by higher current liability balances of $0.7 million. We invested in additional diagnostic inventory during 2013 for safety stock to support expanded test capacity and to provide a sufficient supply of certain reagents.
Investing Activities
Net cash provided by investing activities of $29.4 million during 2013, primarily reflects net proceeds from maturities of marketable securities net of purchases of $42.6 million, partially offset by purchases of capital equipment and leasehold improvements of $12.7 million.
Financing Activities
Net cash used by financing activities during 2013 was $6.1 million, compared to net proceeds of $186.8 million during 2012. Financing activities during 2013 include payments on debt obligations of $7.6 million, cash paid for the repurchase of common stock of $0.5 million in satisfaction of tax withholding obligations in connection with the vesting of restricted stock
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units, partially offset by $1.9 million in cash proceeds from the exercise of stock options and employee contributions under our employee stock purchase plan.
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 31, 2013 (in thousands):
Contractual obligations | Total | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
Long-term obligations(1) | $ | 147,451 | $ | 7,684 | $ | 4,494 | $ | 130,725 | $ | 4,548 | ||||||||||
Research and development collaboration and licensing agreements(2) | 15,239 | 2,033 | 3,731 | 2,796 | 6,679 | |||||||||||||||
Operating leases | 15,105 | 8,534 | 6,571 | — | — | |||||||||||||||
Purchase obligations(3) | 10,083 | 4,000 | 6,083 | — | — | |||||||||||||||
Total contractual obligations | $ | 187,878 | $ | 22,251 | $ | 20,879 | $ | 133,521 | $ | 11,227 | ||||||||||
(1) | Long-term obligations include our Convertible Senior Notes, which are convertible at any time prior to the third trading day immediately preceding their maturity date in October 2017, at the option of the holders, into shares of our common stock at specified conversion rates, our bank loans due May 2015, and our financing obligation for building and improvements recorded in connection with our Raleigh-Durham, North Carolina, location. |
(2) | Research and development collaboration and licensing agreements primarily consist of minimum required payments for royalties and contract maintenance fees under agreements with institutions to conduct sponsored research and clinical study agreements. The expected timing of payments included in the table above is estimated based on current information. Timing of payment and actual amounts paid may differ depending on the timing of receipt of services and/or achievement of milestones. |
(3) | Purchase obligations are those that are unconditional and have a remaining term in excess of one year. |
Off-Balance Sheet Arrangements
We have no significant contractual obligations not fully recorded on our consolidated balance sheets or fully disclosed in the notes to our consolidated financial statements.
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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 consolidated financial statements and related notes. In preparing our financial statements we make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management considers relevant. Because future events and their effects cannot be determined with certainty, actual results could differ materially from our assumptions and estimates. Our senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors.
We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our revenues are generated primarily from providing services and the sale of products. Diagnostic services revenues from Sequenom Laboratories result from providing LDTs primarily for the detection of specific fetal abnormalities or other genetic conditions.
Revenues are 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. We assess whether the fee is fixed or determinable based on the nature of the fee charged for the products or services delivered and whether there are existing contractual arrangements. When evaluating collectability, we consider whether we have sufficient history to reliably estimate a payor's individual payment patterns.
Diagnostic services revenues earned by Sequenom Laboratories have been primarily recognized on a cash basis because the above criteria have not been met at the time the test results are delivered. Sequenom Laboratories generally bills third-party payors upon generation and delivery of a test result to the ordering physician following completion of a test. As such, we take assignment of benefits and risk of collection with the third-party payor. Patients have out-of-pocket costs for amounts not covered by their insurance carrier and Sequenom Laboratories bills the patient directly for these amounts in the form of co-pays and deductibles in accordance with their insurance carrier and health plans. Some payors may not cover Sequenom Laboratories' test as ordered by the physician under their reimbursement policies. Consequently, Sequenom Laboratories pursues reimbursement on a case-by-case basis. We will continue to recognize diagnostic services revenues upon cash collection until we can reliably estimate the amount that would be ultimately collected for Sequenom Laboratories' LDTs. In order to begin to record revenue on an accrual basis, we expect to use at least several months of payment history, and review the number of tests paid against the number of tests billed and the payor's outstanding balance for unpaid tests to determine whether payments are being made for a consistently high percentage of tests billed and at appropriate amounts given the contracted or historical payment amount. We record revenues and accounts receivable for billing directly to physician offices and international customers, with whom we have contracts, when the price is fixed or determinable and where we believe collectability is reasonably assured. As of December 31, 2013, 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 our accrual revenue recognition criteria were not met and the amounts had not been collected, range from approximately $46.0 million to $51.0 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.
From time to time, we receive requests for refunds of payments made by third-party payors. Upon becoming aware of a refund request, we establish an accrued liability for tests covered by the refund request until we determine the amounts upon which a refund is due. Accrued refunds were $1.7 million and $0.8 million at December 31, 2013 and 2012, respectively.
Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair values determined by Level 3 inputs, which utilize unobservable data points supported by little or no market activities, require the exercise of judgment and use of estimates, that if changed, could significantly affect our statement of financial position and results of operations.
In connection with our restructuring in August 2013, and the decision to exit our operating lease on a facility in San Diego, California, which expires in July 2015, we determined the fair value of our remaining lease liability as of the cease-use date as the present value of the remaining payments due under the lease and ancillary costs, reduced by estimated sublease rental income that could be reasonably obtained from the property, discounted using a credit-adjusted risk-free interest rate (Level 3
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inputs). We based our estimated future payments, net of estimated future sublease payments, on current rental rates available in the local real estate market, and our evaluation of our ability to sublease the facility. The fair value was recorded as a liability at the cease-use date with a corresponding expense of $2.4 million recognized during 2013 in restructuring costs in the consolidated statement of operations. The fair value of our remaining lease liability as of December 31, 2013 of $1.3 million may change significantly if the ultimate outcome of any sublease is significantly different from our original evaluation of our ability to sublease the facility.
Recently Adopted Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2013-02, "Comprehensive Income." This update requires an entity to present information about amounts reclassified out of accumulated other comprehensive income and their corresponding effect on the respective line items in net income in one place, and in some cases, cross-references to related footnote disclosures. The adoption of this update did not have a material impact on our consolidated financial statements.
In July 2013, the FASB issued an accounting standards update that provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option of early adoption. We intend to adopt this guidance at the beginning of our first quarter of fiscal year 2014, and do not believe the adoption of this standard will have a material impact on our financial position, results of operations or related financial statement disclosures.
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PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) | Financial Statements |
No financial statements are filed with this Amendment No. 1 on Form 10-K/A. These items were included as part of the Original Filing.
(a)(2) | Financial Statement Schedules |
No financial statement schedules are filed with this Amendment No. 1 on Form 10-K/A. These items were included as part of the Original Filing.
(a)(3) | Exhibits |
The exhibits listed in the Original Filing are required by Item 601 of Regulation S-K. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report has been identified. A list of the exhibits filed with this Amendment No. 1 on Form 10-K/A is provided below.
Exhibit Number | Description of Document | |
31.1 | Certification of Principal Executive Officer pursuant to Rule13a-14(a) and Rule 15d-14(a) of the Securities and Exchange Act, as amended. | |
31.2 | Certification of Principal Financial Officer pursuant to Rule13a-14(a) and Rule 15d-14(a) of the Securities and Exchange Act, as amended. | |
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 28, 2014
SEQUENOM, INC. | ||
By: | /S/ HARRY F. HIXSON, JR., PH.D. | |
Harry R. Hixson, Jr., Ph.D. Chief Executive Officer | ||
By: | /S/ PAUL V. MAIER | |
Paul V. Maier Chief Financial Officer | ||
By: | /S/ CAROLYN D. BEAVER | |
Carolyn D. Beaver Vice President and Chief Accounting Officer | ||
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