Summary of Significant Accounting Policies | 3 Months Ended |
Mar. 31, 2015 |
Accounting Policies [Abstract] | |
Summary of Significant Accounting Policies | 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 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 individual payment patterns. Revenue is deferred for fees received before earned. |
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 above criteria have been met, at which time revenue is recognized on an accrual basis. The Company generally bills third-party payors upon generation and delivery of a test result to the ordering physician following completion of a test. As such, the Company takes 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 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. 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 above revenue recognition criteria have been met. |
Cost of Revenue |
Cost of revenue includes 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, 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 revenue 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., a subsidiary of Illumina (“Verinata ”) 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 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 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 March 31, 2015, accounting for $5.6 million, or 14.8% of total revenue. For the three months ended March 31, 2014 one customer accounted for $5.9 million or 15.9% of total revenue. |
The Company requires raw materials and devices of appropriate quality, 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 ability to develop and produce services, which could have a material adverse effect on the business, financial condition and results of operations. |
Net Earnings (Loss) Per Share |
Basic net earnings per share is computed by dividing net earnings (loss) by the 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 per share is shown below (in thousands, except per share data): |
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| Three Months Ended March 31, |
| 2015 | | 2014 |
Net earnings (loss) for basic earnings per share | $ | 14,284 | | | $ | (15,674 | ) |
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Interest on convertible senior notes | 1,884 | | | — | |
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Earnings (loss) used in calculating diluted earnings per share | $ | 16,168 | | | $ | (15,674 | ) |
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Weighted-average common shares outstanding | 117,737 | | | 116,134 | |
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Dilutive effect of common shares equivalents | 28,905 | | | — | |
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Shares used in calculating diluted earnings per share | 146,642 | | | 116,134 | |
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Net earnings (loss) per basic share | $ | 0.12 | | | $ | (0.13 | ) |
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Net earnings (loss) per diluted share | $ | 0.11 | | | $ | (0.13 | ) |
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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): |
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| Three Months Ended March 31, | | |
| 2015 | | 2014 | | |
Shares underlying Convertible Senior Notes | — | | | 28,088 | | | |
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Options to purchase common stock | 9,032 | | | 14,608 | | | |
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Restricted stock units not yet vested and released | 41 | | | 2,893 | | | |
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Warrants to purchase common stock | 200 | | | 250 | | | |
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Total | 9,273 | | | 45,839 | | | |
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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. |