Annual Report (10-k)

Date : 02/18/2015 @ 8:32PM
Source : Edgar (US Regulatory)
Stock : Affymetrix, Inc. (AFFX)
Quote : 14.01  0.0 (0.00%) @ 1:00AM

Annual Report (10-k)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
(Mark One)
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
 OR
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 0-28218
 
AFFYMETRIX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
 incorporation or organization)
77-0319159
 (IRS Employer Identification Number)
 
 
3420 CENTRAL EXPRESSWAY
SANTA CLARA, CALIFORNIA
 (Address of principal executive offices)
95051
 (Zip Code)
(408) 731-5000
 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Common Stock, $0.01 par value
 Preferred Stock Purchase Rights
 
Name of Each Exchange on Which Registered
 
The Nasdaq Global Select Market
 The Nasdaq Global Select Market
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 ý
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 ý
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. Yes ý  No o
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). Yes ý  No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405) 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. ý
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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company 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 ý
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant at June 30, 2014, based on the closing price of such stock on The Nasdaq Global Select Market on such date, was approximately $646 million. The number of shares of the registrant's Common Stock outstanding on February 16, 2015 was 74,715,333.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Proxy Statement to be filed in connection with the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K where indicated.
 





AFFYMETRIX, INC.
FORM 10-K
DECEMBER 31, 2014
TABLE OF CONTENTS
Item No.
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I
ITEM 1.  BUSINESS
Forward-Looking Statements
All statements in this Annual Report on Form 10-K that are not historical in nature, are predicative in nature or that depend upon or refer to future events or conditions are "forward-looking statements" within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These include statements regarding our strategic initiatives, market expectations, integration of and synergies related to eBioscience, anticipated product and revenue growth, financial strength and regulatory environment, as well as all other "expectations," "beliefs," "hopes," "intentions," "strategies" and words of similar import and the negatives thereof. Such statements are based on our current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. We cannot assure you that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, those discussed in "Risk Factors" contained in Item 1A of this Annual Report on Form 10-K. These forward-looking statements speak only as of the date of this Form 10-K. Unless required by law, we do not undertake to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based.

Overview
Affymetrix is a provider of life science products and molecular diagnostic products that enable parallel analysis of biological systems at the gene, protein and cell level. We sell our products to genomic research centers, academic institutions, government and private laboratories, as well as pharmaceutical, diagnostic and biotechnology companies. Over 94,500 peer-reviewed papers have been published based on work using our products. We have approximately 1,100 employees worldwide and maintain sales and distribution operations across the United States, Europe, Latin America and Asia.
We were incorporated in California in 1992 and reincorporated in Delaware in 1998. Our principal executive offices are located at 3420 Central Expressway, Santa Clara, CA 95051. Our telephone number is (408) 731-5000.
Our Strategy
Our strategy has been to transform the company from one that is highly dependent on its GeneChip® Expression product line that faces intense competition in certain applications, to one with diversified revenue streams and a broad reach into the growing markets for translational medicine, molecular diagnostics and applied sciences, such as agricultural biotechnology ("AgBio").

Since 2011, under the leadership of Dr. Frank Witney, our President and Chief Executive Officer, we have executed on a strategy to realign our product portfolio, stabilize our business and return our company to growth and profitability. We expect this transformation to take place over three phases, two of which are now completed:

Phase 1 (2011-2012) –Portfolio Realignment. During this phase, we reorganized ourselves into business units to sharpen our focus based on target markets. We also launched CytoScan®, our cytogenetic microarray product line, and acquired eBioscience. Through eBioscience, we offer flow cytometry reagents and immunoassay products which, aligned with our new product introductions, have enabled us to broaden our reach into the translational medicine, applied, and molecular diagnostics markets. We believe these actions contributed to the stabilization of our business and the realignment of our product portfolio positioned us for growth.
Phase II (2013-2014) – Profitability, Strengthen Balance Sheet, Development of Newer Product Lines. In the beginning of 2013, we implemented a corporate restructuring which resulted in significant cost savings and accelerated our path to profitability. In addition, we reduced our senior secured debt to $23.0 million as of December 31, 2014. We grew total revenue by 9% in 2014 compared to 2013, after adjustment for the divestiture of our Anatrace product line (which was sold in 2013) and a one-time license payment in 2013. This growth was driven by strong sales of CytoScan and Axiom Genotyping products and services, along with eBioscience products. We trained and refocused our internal research and development, marketing, operations and regulatory teams along with our global commercial organization to expand our reach to customers in the translational medicine, molecular diagnostics and applied markets.

3



Phase III (2015 -2016) – Strategic Flexibility, Expansion of Product Lines, Growth. We enter Phase III of our transformation in 2015. In this phase, our goal is to leverage the work we have done in Phase I and II in order to have well established and growing franchises in: (1) translational medicine and molecular diagnostics (with a focus on reproductive health and oncology); (2) genotyping (both human and AgBio); and (3) single cell biology (the analysis of individual cells that comprise the population of cells typically studied by researchers). We intend to continue the growth that we demonstrated in Phase II, as well as improve our profitability. We strengthened our balance sheet in Phase II and are now in position to evaluate complimentary technology acquisitions that may enhance our positions in our target markets.
Our Principal Markets
We believe that the analysis of genetic variation and an understanding of the function and characteristics of single cells and sub-populations of cells are becoming increasingly important in disease research, drug development and the development of molecular tests. In addition to offering products in the basic research markets, we are making inroads into the translational medicine markets, the fast-growing molecular diagnostics market and applied markets such as AgBio.
Basic Research Markets
Basic research encompasses the study of differences between individual humans, animals and plants or seeks to understand the biological mechanisms underlying normal development and disease states. Funding for basic research comes from a variety of public and private sources, with the National Institute of Health in the United States historically representing one of the largest financing sources. The required technologies generally must enable large-scale and highly complex analysis of genetic variation and biological function. Our GeneChip products target large scale genotyping (determining the genetic make-up of a cell and differences between individuals), copy number variation and gene expression applications, while our eBioscience reagents for flow cytometry and immunoassays serve academic research centers, government agencies, and private research foundations engaged in protein and cell biology research. A primary end-point of the end users of our products for basic research is peer-reviewed scientific publications.
Translational Medicine Markets
Customers in the translational medicine markets are clinical researchers, molecular pathologists, oncologists and cytogeneticists, who have become increasingly engaged in applying genetic analysis technologies for the development of new clinical methods to be used in the diagnosis, monitoring and treatment of a wide variety of molecular based diseases. These end users are often located in diagnostic companies, commercial reference laboratories, clinical research departments within academic medical centers and major pharmaceutical and biotechnology companies. The required technology is typically used in a repetitive testing environment and must enable cost effective, robust data that has clinical utility. Our Axiom®, CytoScan®, Oncoscan®, ViewRNA in situ hybridization system and eBioscience® product lines target the needs of these users, who are focused on improving clinical outcomes and standard of care.
Molecular Diagnostic Markets
We believe that molecular diagnostics is the fastest growing segment of the broader diagnostics market. Such growth historically has been driven by infectious disease testing, but molecular diagnostics is expanding into new areas such as reproductive health and cancer diagnostics. The increasing efficacy of molecular diagnostics is driven by the continued discovery of genetic markers with proven clinical utility, the increasing adoption of genetic-based diagnostic tests, and the expansion of reimbursement programs to include a greater number of approved molecular diagnostic tests. Our CytoScan® product line seeks to serve this market by providing high resolution genome wide analysis of the chromosome complement of the cell in inherited and acquired diseases. We also partner with molecular diagnostics companies under our Powered by Affymetrix ("PbA") program to develop and commercialize molecular diagnostics tests for a variety of diseases, primarily cancers, using our GeneChip technologies. In addition, we have a variety of other products such as our OncoScan, View RNA and a large panel of Flow Cytometry Analyte Specific Reagents ("ASRs") for leukemia and lymphoma immunophenotyping aimed at the translational medicine and molecular diagnostics market. In the latter part of 2013, we launched our new OncoScan formalin fixed paraffin embedded, or FFPE assay kit which provides a powerful capability for whole genome copy number analysis from FFPE samples with short turnaround times, and we expect this to be an important tool in the molecular profiling of solid tumor samples. We are also seeing increased utility and adoption of our CytoScan® product line in blood cancer profiling.

4



Flow Cytometry Markets
Flow cytometry is a well-established technology used to count and examine physical and chemical parameters of particles, typically cells, in a high throughput mode. Fluorescently-labeled antibodies are typically used to measure these parameters in a population of cells, which are suspended in a fluid and passed through an electronic detection device. Measurable parameters of a cell include volume and morphology, DNA/RNA content, DNA copy number variation, protein expression and localization, intracellular antigens (e.g. cytokines, chemokines), enzymatic activity and cell viability. Flow cytometry is routinely used in basic and clinical research, including immunology, cell biology, and stem cell biology, as well as in the diagnosis of health disorders, especially blood cancers and HIV. Our eBioscience reagent products serve the flow cytometry market where we are the number two provider globally of flow reagents for the Research Use Only (RUO) market. We recently launched a new assy, PrimeFlow RNA, capable of simultaneous measurement of both RNA transcripts within cells, combined with cell protein markers on the surface, that enable analysis of millions of cells in a single experiment. This is a first of its kind assay in the flow cytometry market.
Applied Markets
Applied markets refer to a variety of other markets for which we provide products and services, including the AgBio market where we supply catalog and custom genotyping and expression array products to facilitate agricultural research and commercial improvement programs. We currently supply academic, industrial and government customers with SNP-based genotyping arrays for an expanding list of crops including wheat, barley, sunflower, strawberry and rice, for livestock such as cattle, buffalo and chicken and for aquaculture applications, such as salmon, catfish and carp. These genotyping products are used, among other things, in genomic selection for more rapid, accurate and efficient breeding of desired traits over traditional breeding methods. We believe that the AgBio market is growing rapidly and represents a significant business opportunity.
Factors Affecting Our Markets
We expect that the following factors, among others, will influence the size and development of the markets served by our technologies:
the availability of government funding for basic and disease-related research;
the amount of capital expenditures allocated to research and development by biotechnology, pharmaceutical and diagnostic companies;
the regulatory and reimbursement environment for our customers in the translational medicine and molecular diagnostics markets;
the application of gene, protein and cell analyses to new areas including molecular diagnostics, agriculture, human identity and consumer goods;
technological innovation that creates price competition and lowers the costs of life science research;
the development of new computational techniques to handle and analyze large amounts of life science search data; and
the availability of genetic markers and signatures of the human population that have clinical value or of other organisms that have commercial value, and novel binding agents (such as antibodies) to new protein markers.

5



Business Segments
We operate in two business segments: Affymetrix Core and eBioscience. Affymetrix Core focuses on the development, manufacture, and commercialization of systems for genetic analysis in the life sciences, AgBio, and diagnostic industry, while eBioscience primarily focuses on the development, manufacture, marketing and distribution of research products in the areas of flow cytometry, immunoassays, microscopic imaging and other protein-based analyses.
We report operating information on a business unit level to our chief operating decision-maker. Resource allocations and decision-making processes are also made at the business unit level by our chief operating decision-maker. Affymetrix Core accounted for approximately 73% of total revenue and eBioscience accounted for approximately 27% of total revenue during the year ended December 31, 2014.
Affymetrix Core is divided into four business units, with each business unit having its own strategic marketing and research and development groups to better serve customers and respond quickly to market needs. Affymetrix Core manufacturing operations are based on platforms that are used to produce various Affymetrix products that serve multiple applications and markets and similar customer and economic characteristics. Additionally, the business units share certain research and development and common corporate services that provide capital, infrastructure and functional support, including finance, legal and human resources. As such, we have concluded that the four business units represent one reportable operating segment. The following describes the four business units that form Affymetrix Core:

Expression: This business unit markets the Company's GeneChip® gene expression products and services;
Genetic Analysis and Clinical Applications: This business unit markets the Company's Axiom® genotyping product line, as well as products with clinical diagnostic and research applications including CytoScan® HD, OncoScan products, and the ViewRNA in-situ hybridization platform for clinical translational research. In addition, the business unit is responsible for managing the PbA clinical partnering and licensing program which enables third-party diagnostic companies to access and develop DNA and RNA-based diagnostic tests on Affymetrix technology platforms. This business unit also markets the CytoScan Dx product, the recently FDA approved microarray system for post natal diagnostics of children with developmental delays and intellectual disabilities;
Life Science Reagents: This business unit sells reagents, enzymes, purification kits and biochemicals used by life science researchers and other biological and health care manufacturers, including those developing and marketing Next Generation Sequencing (“NGS”) products and molecular diagnostics; and
Corporate: This business unit is comprised primarily of incidental revenue from royalty arrangements and field revenue from field-services provided to customers of the Company.
The eBioscience reporting segment operates with its own manufacturing, research and marketing groups. eBioscience does utilize certain Corporate functions such as finance, legal and human resources. This reportable segment specializes in the areas of flow cytometry reagents, immunoassays, microscopic imaging, other protein-based analyses, QuantiGene single and multiplex RNA solution assays (not including the View RNA in-situ hybridization platform) and the Procarta multiplex immunoassay product lines.

During 2014, the Genetic Analysis and Clinical Applications Business Unit began marketing the ViewRNA in-situ hybridization platform for clinical translational research of RNA in tissue sections, whereas these activities were previously part of the Expression Business Unit. In addition, eBioscience began integrating the development and marketing of the remaining QuantiGene (excluding the ViewRNA platform) and Procarta product lines during 2013 with full integration in 2014. These products were previously reported by the Expression Business Unit. Accordingly, segment information for prior periods has been restated to reflect these changes for purposes of comparability.

See Note 16. “Segment and Geographic Information” to our financial statements included elsewhere in this Annual Report Form 10-K for more information on our reportable operating segments.
Sales and Distribution
All of our business units sell their products through our Global Commercial Organization comprised of sales, field application and engineering support, and marketing personnel. We market and distribute our products directly to customers in North America, Japan and major European markets. In these markets, we have our own sales, service and application support personnel responsible for expanding and managing their respective customer bases. In other markets, such as Mexico, India,

6



Brazil, the Middle East and Asia Pacific, including China, we sell our products principally through third-party distributors that specialize in life science supply. We are selectively expanding our presence in the larger and more attractive markets, such as China. For certain molecular diagnostic and industrial opportunities, we supply our partners with arrays and instruments, which they incorporate into diagnostic products or other routine applications and assume the primary commercialization responsibilities.

Scientific Background
Introduction to the Genome
Studying the genome helps humanity understand the inheritance of biological characteristics, developmental biology and normal and disease states of cells and organisms. Genetic variation accounts for many of the differences between individuals, such as eye color and blood group, and also affects a person's susceptibility to certain diseases such as cancer, heart disease or neuro-degenerative disorders. For example, many cancers are caused by genetic variations in individual cells. Genetic variation can also determine a person's response to drug therapies. We, and our customers, believe that a greater understanding of the genome will lead to a new healthcare paradigm where disease is understood at the molecular level, allowing patients to be diagnosed according to genetic information and then treated with drugs designed to work on specific molecular targets. This is commonly termed "Personalized Medicine", a clear trend in health care research.

The instructions required for every living cell to develop its characteristic form and function are believed to be represented within discrete regions of the genome known as genes. All known genomes, including the human genome, are composed of either deoxyribonucleic acid ("DNA") or ribonucleic acid ("RNA"). DNA molecules consist of two long complementary strands comprised of four different building blocks called nucleotides. The amount of RNA made from any given gene is a measure of the expression level of that gene. One type of RNA, the messenger RNA ("mRNA") is central to protein synthesis. There are RNAs with other roles, such as regulating gene expression, involvement in protein synthesis or comprise the genetic information of viruses.
Genotyping
Genotyping is the process of interrogating specific genomic variants of the DNA constitution of a cell, organism or individual in order to determine how it is specialized or differs from others in a group. Typically, each cell in an individual contains a complete copy of its genome. In a population, individuals vary from one another because of differences in genomic sequences which are inherited from each parent and sometimes through the introduction of sequence changes due to environmental damage or biological errors in processes like gene replication. Common forms of genetic variation include single-nucleotide polymorphisms, often called SNPs, and copy number variations, often called CNVs. A SNP is a variation in a single position in a DNA sequence and a CNV is a variation in the number of copies of a relatively large segment of the DNA, up to and including whole chromosomes.

By screening for these polymorphisms, researchers seek to identify those that might be implicated in specific diseases. Sometimes it is not a single SNP or CNV, but the combination of certain variations that leads to a disease state. For this reason, researchers look at the patterns of these polymorphisms in a large number of healthy and diseased individuals in order to correlate specific variants with specific diseases. Large scale genotyping can be used, for example, in studies designed to elucidate the genetic contributions to disease and, in the case of clinical trials, to drug response.

Gene Expression
Gene expression monitoring is the process of determining which genes are active in a specific cell or group of cells by measurement of the amount of RNA produced from any given gene. Timing and level of gene expression is an important mechanism by which the fate and function of cells are regulated. Although most cells contain an organism's full set of genes, each cell expresses only a subset of genes at any given time and the level of expression also varies with the state of that cell. The expression pattern or profile of genes can be correlated with many human diseases such as cancer, as well as with the effectiveness of treatment in specific patient populations. By identifying genes that are differentially expressed in particular diseases or patient populations, novel molecular targets and treatments may be identified and validated. In addition, gene expression signatures may be identified that provide early identification of a predisposition to disease or allow the selection of treatments optimized for an individual.

7



Our Principal Technologies
Array Technology
Our array technology leverages semiconductor-based photolithographic fabrication techniques, which enables us to synthesize a large variety of predetermined DNA sequences simultaneously in predetermined locations on a small glass chip called an "array." Photolithography is a technique which uses light to create exposure patterns on the glass chip and to direct chemical reactions. The function of each single-stranded sequence on our array, called a probe, is to bind to its complementary DNA or RNA from a biological sample thereby determining either the presence or absence and the amount of that sequence in the sample. Our technology allows millions of probe sequences to be arrayed at specified locations on a chip the size of a thumb nail. Our arrays permit analysis of all the genes or RNAs contained in a cell or tissue simultaneously.
The nucleic acid (DNA or RNA) to be tested is isolated from a sample, such as blood, saliva or biopsy tissue, amplified and prepared for hybridization, a process that enables the reaction of RNA or DNA targets in the sample to specific, pre-identified locations on the array. The test sample is then washed over the array, where the individual nucleic acid sequences that represent the genetic content or expressed genes of the sample hybridize to their complementary sequences bound on the array. The molecules in the test sample may be labeled with fluorescent dye either before or after hybridization. When analyzed by a laser in our scanner instrument, the test sample generates a fluorescent signal. The locations where a fluorescent signal is detected by an optical detection system on the scanner instrument correspond to sequences complementary to the test sample. Sequence variation, or the quantification of the amount of specific sequences of RNA or DNA sequences in the sample, can be determined by detecting the relative strength of these signals since the sequence and position of each complementary DNA probe on the GeneChip® is known.
The combination of a particular array, together with an optimized set of reagents and a user protocol describing how to carry out the procedure, is referred to as an "assay."
Branched Chain DNA ("bDNA") Technology
We offer customers our QuantiGene® line of assay products for a wide variety of low- to mid-plex genetic, protein and cellular analysis applications using branched chain DNA, or bDNA, technology. These assays measure RNA or DNA levels directly from samples, either in solution or in cells and tissues, using a signal amplification method without the need for RNA purification or amplification, providing customers with improved accuracy, scale and workflow relative to traditional methods based on the polymerase chain reaction, or PCR. An important feature of bDNA technology is the ability to measure RNA in clinically relevant samples such as formalin fixed paraffin embedded, or FFPE, which are used in retrospective cancer research, as well as cancer diagnostic applications. This technology also serves as the basis of ViewRNA, our innovative RNA in situ hybridization products for the detection of RNA biomarkers in tissue samples such as cancer biopsies.

Flow Cytometry and Immunoassay
Flow cytometry is a well-established technology used to count and examine physical and chemical parameters of particles, such as cells, in high throughput experiments. Fluorescently-labeled antibodies are generally used to measure these parameters in a population of cells, which are suspended in a fluid and passed through an electronic detection device. Measurable parameters of a cell include volume and morphology, DNA/RNA content, DNA copy number variation, protein expression and localization, intracellular antigens (e.g. cytokines, chemokines), enzymatic activity and cell viability.

Flow cytometry is routinely used in basic and clinical research, including immunology, cell biology, and stem cell biology, as well as in the diagnosis of health disorders, especially blood cancers and HIV. It is one of the primary methods for rapid single cell analysis and is extensively used for numerous applications in life sciences such as examining gene and protein profiles, metabolic studies, stem cell research, and screening markers for gene expression.
Immunoassays allow research scientists to measure the presence and quantity of proteins produced by cells in model systems and disease processes.
Our Products
Overview
We offer a comprehensive line of products for the parallel analysis of biological systems at the gene, RNA, protein and cell level.

8



Affymetrix Core. Through its Expression and Genetic Analysis and Clinical Applications business units, Affymetrix Core sells integrated systems in three principal applications: whole genome cytogenetics, genotyping and gene expression. Consumables including GeneChip® arrays, molecular biology reagents and detection chemistry for these applications run on our various microarray scanner instruments. We have three families of systems, GeneChip®, GeneTitan® and GeneAtlas® that include (1) instruments, (2) consumables and (3) software. Our GeneChip® instruments run arrays packaged in cartridges and our GeneTitan® and GeneAtlas® instruments run multiple arrays simultaneously as they are packaged in various plate or strip formats for automated high throughput processing. The QuantiGene® lines of assays for the measurement of RNA, DNA or protein levels in low- to mid-plex assays are now included with the Genetic Analysis & Clinical Applications business unit and eBioscience segment, as discussed previously. The Life Science Reagents business unit offers reagents, enzymes, purification kits and biochemicals used by life science researchers. In addition, this business unit supplies other companies in our industries with products that are incorporated as part of their products.

eBioscience. Our eBioscience business segment offers an extensive portfolio of antibodies and reagents for use in flow cytometry and immunoassays, as well as a broad range of QuantiGene (RNA and DNA assays) and Procarta Plex (protein assays) assays for low to mid-plex experiments.
GeneChip®
Our GeneChip® system provides an integrated solution for gene expression, cytogenetic and genotyping analysis. It consists of instruments and consumables that provide for the robust preparation and analysis of samples using our GeneChip® cartridge arrays. The components of the GeneChip® system include (1) disposable probe arrays containing genetic information on a chip, (2) reagents for extracting, amplifying and labeling target nucleic acids, (3) a fluidics station for introducing the test sample to the probe arrays, (4) a hybridization oven for optimizing the binding of samples to the probe arrays, (5) a scanner to read the fluorescent image from the probe arrays, and (6) software to analyze and manage the resulting genetic information.
GeneTitan®
Our GeneTitan® instrument system runs genotyping and gene expression array plates in high throughput formats. The GeneTitan® provides a hands-free, automated solution for monitoring gene expression and genome-wide SNP genotyping.
QuantiGene® Line of Low- to Mid-plex Products
We also offer our QuantiGene® line of single plex and multiplex assays to serve customers in the research and translational medicine markets. Multiplex assays measure many different targets from the same sample. These products enable drug target identification through analysis of gene silencing, cell signaling and biomarker validation. Our QuantiGene® line of products is based on bDNA technology and delivers quantitative gene expression or DNA copy number analysis. These products are compatible with a wide variety of samples and tissues. We also serve the growing needs of the molecular pathology market by enabling the highly sensitive measurement of RNA molecules in individual cells in tissue samples through our QuantiGene View RNA products.
Life Science Reagents
We offer researchers an extensive line of reagent kits, enzymes and biochemicals. Our reagents are complementary to our array portfolio, thus enabling us to provide our customers with whole product solutions. In addition, they can be applied to a broad variety of emerging technologies. Our reagents include:
ExoSAP-IT® For PCR Product Clean-Up, a reagent for the rapid clean-up of PCR products used in downstream applications, such as DNA sequencing or SNP analysis.
HotStart-IT® line of PCR reagents, reagents that utilize a novel primer binding protein to inhibit primer dimer formation, which results in sensitive and consistent amplification for real-time PCR assays.
eBioscience Products
eBioscience offers an extensive portfolio of antibodies and reagents for use in flow cytometry - where we are the number two provider globally - and immunoassays.   eBioscience is also a leading provider of multi-color flow cytometry reagents, a fast growing subsector of the of the global flow cytometry market. The significance of multi-color flow is that it provides the scientist with the ability to characterize a variety of targets simultaneously in a single cell, allowing a much more

9



detailed picture of health and diseased cells than is possible when measuring a single target. Within the immunoassays market, eBioscience offers a broad portfolio of simple, easy-to-use immunoassays kits for the quantitative measurement of either secreted or intracellular protein levels in biological samples, such as cell lysates or serum. These assays are in a variety of single analyte and multiplex formats, including our rapidly growing Procarta Plex product line for multiplex immunoassays. eBioscience also now develops and markets the QuantiGene® line of low-to-mid-plex RNA and DNA measurement products, with the exception of the ViewRNA platform which is aligned with the Genetic Analysis and Clinical Applications business unit.

Understanding biology at the single cell level, rather than as a population of cells, is critical to the future of diagnostics. Our flow cytometry reagents, as well as other of our gene expression products, are essential tools in this rapidly growing area of research.
Our Services
We offer high-throughput genotyping services for customers using our genotyping products. Our projects range in size from a few hundred samples to well over 100,000 samples. We serve customers requiring quick turnaround times and suitably priced solutions to their large-scale academic and consortia genotyping studies. For example, our service lab is currently engaged in a 500,000 sample genotyping study for the UK Biobank, the largest global study of its kind to date.
Our Collaborative Partners
We collaborate with our partners to expand the applications of our technology and to acquire access to complementary technologies and resources. We work with our partners to develop and supply certain components of the user work flow that fall outside of our core competencies, but are important to our customer’s application. These companies include Danaher Corporation, Luminex Corporation, CapitalBio Corporation, Life Technologies Corporation, Genisphere LLC, Hamilton Robotics (a division of Hamilton Company), Takara Bio Inc. and New England Biolabs, Inc.
Through our PbA Program, we permit commercial entities to license our technologies in order to develop custom product solutions based upon our arrays, instrumentation and software. Our PbA partners include F. Hoffman-La Roche Ltd., Veracyte Inc. GenomeDx, Ariosa Diagnostics, Skyline Diagnostics and Lineagen, amongst others that are in varying stages of product development, ranging from early phase to full commercialization. We provide our PbA partners with custom arrays and expertise in assay development. Our partners subsequently package these arrays into kits, often seek regulatory approval and reimbursement for their diagnostic use, and sell them into the diagnostic markets using their sales channels. An example is the gene expression array used by Veracyte, marketed as their Affirma test for differential diagnosis of abnormal thyroid cytology. In addition, in 2014 we established a partnership with Ariosa (now part of F. Hoffman-La Roche Ltd.) to offer an array-based approach to the Non-Invasive Prenatal Testing (NIPT) market. The Ariosa Harmony assay provides an inexpensive and safe blood test for common fetal chromosomal abnormalities such as trisomies 21 (Down’s syndrome), 18 and 13 that delivers accurate results early in pregnancies. Tests using arrays are differentiated from competing tests based on next generation sequencing because they offer the benefits of simplicity, cost and accuracy.
We also collaborate with certain academic, government, and commercial research groups to develop and validate new applications of our technologies. These include the Massachusetts Institute of Technology, Massachusetts General Hospital, Centers for Disease Control and Prevention, the National Genome Research Institute and UK Biobank.

Manufacturing and Raw Materials
We manufacture our Affymetrix Core consumables, including our arrays and the majority of our reagents, and contract with third parties to manufacture some of our instruments. We manufacture most of our reagents in our Cleveland, Ohio facility and our arrays and GCS3000 instruments in our Singapore facility.
Our array manufacturing process involves wafer preparation, probe synthesis, dicing of synthesized wafers into chips, assembly of chips and quality control. We have developed software programs that extensively automate the design of photolithographic masks used in array manufacturing and that control the array manufacturing lines. Glass wafers are prepared for synthesis through the application of chemical coatings. Arrays are synthesized on the wafers using our proprietary, combinatorial photolithographic process. The completed wafers are diced into chips. The chips can be packaged individually, in our cartridge format, in our strip format for analysis on the Gene Atlas, or in our 96 or 384 array plate format for analysis on the Gene Titan.

10



Our Singapore, Ohio, San Diego and Vienna facilities have been certified to ISO 13485 standards. All facilities operate under the strict standards of our corporate quality plan. Third parties who manufacture our instruments have to meet our quality standards as part of the qualification process.

eBioscience manufactures its flow cytometry reagents in San Diego, California, and most of its immunoassays, including the Procarta Plex line in Vienna, Austria.
Key parts of our product lines, such as our GeneTitan® instrument and hybridization ovens, are procured from single sources. Likewise, certain raw materials or components used in the synthesis of arrays or the assembly of instrumentation are currently available only from a single source or limited sources. In addition, we are dependent on our vendors to provide components of appropriate quality and reliability, and to meet applicable regulatory requirements. We take what we believe are appropriate measures to prevent the delay or interruption of supplies from these vendors and to ensure the appropriate quality for our customers, since any delay or interruption could delay our ability to deliver products to our customers.

Research and Development
Our research and development effort is divided into basic research, product development, assay development, and manufacturing technology development. Our efforts are focused primarily on the design of new arrays, assays and reagent products, improving the overall performance of our assays, developing new applications and simplifying highly complex assays. We are also actively engaged in development aimed at enhancing the manufacturing process currently employed in the production of our arrays and reagent products.

Our research and development expenses for the years ended December 31, 2014, 2013 and 2012 were $50.2 million, $47.7 million and $57.9 million, respectively.
Intellectual Property
We rely on a combination of patent, copyright, and trade secret laws, know-how and licensing opportunities to establish and protect our proprietary technologies and products. Our success depends in part on our ability to obtain patent protection for our products and processes, to preserve our copyrights and trade secrets, to operate without infringing the proprietary rights of third parties and to acquire licenses related to enabling technology or products used with our technology. We are pursuing a patent strategy designed to facilitate our research and development program and the commercialization of our current and future products.
There are a significant number of United States and foreign patents and patent applications in our areas of interest, and we believe that there will continue to be litigation in the industry regarding patent and other intellectual property rights. Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. It may be necessary for us to enter into litigation to defend against or assert claims of infringement, to enforce patents issued to us, to protect trade secrets or know-how owned by us or to determine the scope and validity of the proprietary rights of others. From time to time, to determine the priority of inventions, it may be necessary for us to participate in interference proceedings declared by the United States Patent and Trademark Office. Litigation or patent administrative proceedings could result in substantial costs to and distraction from our core business and our efforts with respect to such proceedings may not be successful. For further information regarding intellectual property litigation involving us, see "Item 8. Financial Statements and Supplementary Data—Note 14. Legal Proceedings" in this Annual Report on Form 10-K.
We also rely upon copyright and trade secrets to protect our confidential and proprietary information. We seek to protect our proprietary technology and processes by confidentiality agreements with our employees and certain consultants and contractors. These agreements may be breached, we may not have adequate remedies for any breach and our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees or our consultants or contractors use intellectual property owned by others in their work for us, disputes may also arise as to the rights in related or resulting know-how and inventions.
We are party to various option, supply and license agreements with third parties which grant us rights to use certain aspects of our technologies. We take such measures as we believe are appropriate to maintain rights to such technology under these agreements. In addition, our academic collaborators have certain rights to publish data and information in which we have rights. There is considerable pressure on academic institutions to publish discoveries in the genetics and genomics fields. We take such steps as we believe are appropriate to ensure that such publication will not adversely affect our ability to obtain patent protection for information in which we may have a commercial interest.

11



Competition
The markets for our products are characterized by rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition, new product introductions and strong price competition. We face significant competition as existing companies develop new or improved products, and as companies enter the market with new technologies, such as NGS.
In the highly multiplexed genotyping and gene expression markets, existing competitive technologies include DNA sequencing (NGS), which we do not offer and is offered by companies such as Illumina, Inc. and Thermo Fisher, amongst others with existing products or emerging technologies. Other companies developing or marketing competitive DNA and RNA array technology include Illumina, Agilent Technologies, Inc., and NuGEN Technologies, Inc (for reagents), some of which offer products that compete directly with our microarrays or reagents.
In the low to mid-plex gene expression markets, much of the existing competition comes from suppliers of real time PCR products, including Thermo Fisher, which has a dominant position, Roche Diagnostics, and Bio-Rad Laboratories, Inc. In addition, there are new mid plex technologies being offered by Fluidigm Corporation, Sequenom, Inc., High Throughput Genomics, Inc., NanoString Technologies and Thermo Fisher. In order to compete against existing and emerging technologies, we will need to demonstrate that our products have superior throughput, cost and accuracy advantages over competing products.
In the flow cytometry and immunoassay markets, we compete with Becton, Dickinson and Company and Danaher as well as a number of smaller companies. In order to compete effectively, we have to differentiate ourselves through superior product quality, speed to market and well regarded customer service functions.
In the molecular diagnostic field, competition comes from established diagnostic companies, companies developing and marketing DNA probe tests for genetic and other diseases, and other companies conducting research on new technologies to ascertain and analyze genetic information. The market for molecular diagnostic products derived from gene discovery is highly competitive and has high barriers of entry, with several large corporations already having significant market share. Established diagnostic companies such as Danaher, Becton, Dickinson and Company, bioMérieux, Johnson & Johnson, Hologic and Roche Diagnostics have the strategic commitment to diagnostics, the financial and other resources to invest in new technologies, substantial intellectual property portfolios, significant experience in new product development, regulatory expertise, manufacturing capabilities and the distribution channels to deliver products to customers. Established diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which are not compatible with our system and could slow acceptance of our products. In addition, these companies have formed alliances with genomics companies which provide them access to genetic information that may be incorporated into their diagnostic tests. Our CytoScan HD and Dx products for cytogenetic analysis compete primarily with offerings from Agilent and Illumina, amongst other smaller companies.

We will face increased competition in existing and potential markets as the cost of new technologies such as sequencing and other technologies improves. In addition, pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs themselves. We have significantly expanded our network of approved service providers in America, Japan, Europe, and China. While these companies expand the reach of Affymetrix technology and make its analytical power available to a wider base of users, they may act as a substitute for outright purchase of instruments and arrays by those end users. In addition, we have several other third-party licensees that could offer products that compete with our product offerings.

Government Regulation
Many of our products are labeled “for research use only”. Products labeled “for research use only” are not subject to premarket clearance or approval by the U.S. Food and Drug Administration ("FDA"), but are subject to limited, specific regulation with respect to their labeling. Merely including a labeling statement that a product is intended for research use only will not necessarily render the product exempt from the FDA’s clearance, approval, or other requirements (e.g., establishment registration, device listing, medical device reporting, Quality System Regulations). FDA may look to the totality of the circumstances surrounding the distribution of the product to determine whether the manufacturer intends for its product to be offered for clinical diagnostic use (versus for research use only). Written or verbal statements in any labeling, advertising or promotion, including performance claims, instructions for clinical interpretation, clinical information, and statements that suggest a clinical laboratory can validate a test through its own procedures and subsequently offer it for clinical use, the manufacturer’s provision of technical support for clinical applications, and solicitation of business from clinical laboratories may be considered by FDA as evidence of intended uses that conflict with research use only labeling.

12



We also seek regulatory approval for certain products. Our GeneChip® Scanner 3000Dx is cleared by the FDA to measure fluorescence signals of labeled DNA and RNA targets hybridized to GeneChip® arrays. In January 2014, we received 510(k) clearance from FDA to market our CytoScan Dx Assay® intended for the postnatal detection of copy number variants associated with developmental delay, intellectual disability, congenital anomalies, and dysmorphic features, in genomic DNA obtained from peripheral whole blood in patients referred for chromosomal testing based on clinical presentation. Our GeneChip® Scanner 3000Dx is also cleared by China's State Food and Drug Administration for in vitro diagnostic use.
We also offer ASRs aimed at the translational medicine and molecular diagnostics market. Most ASRs are exempt from the premarket clearance and approval requirements. In our role as an ASR manufacturer, we are, however, subject to certain regulatory requirements that apply to manufacturers of medical devices in general (e.g., establishment registration, device listing, medical device reporting, labeling, and Quality System Regulations).
We will continue to develop diagnostic products ourselves or with our collaborative partners that may require regulatory clearance or approval by governmental agencies. Commercially available in vitro diagnostic test kits and the reagents and instrumentation used to perform in vitro diagnostic tests are regulated as medical devices and may be subject to pre-market review requirements by the FDA in the U.S. and by other regulatory agencies in other countries. The FDA's Quality System Regulations also apply in connection with our manufacture of arrays and systems as components for use in diagnostic products distributed outside of the research environment. Obtaining these clearances or approvals and complying with the additional requirements for device manufacturers may require the expenditure of substantial resources over a significant period of time, and we cannot assure you that the clearances or approvals we seek will be granted on a timely basis, if at all. Once granted, a clearance or approval may place substantial restrictions on how a device may be marketed or labeled. In addition, various federal, state and foreign statutes and regulations govern or influence the manufacturing, safety, and storage of our products and components of our products as well as our record keeping.
The FDA, the Centers for Medicare & Medicaid Services (“CMS”) (in its role as the agency that administers the Clinical Laboratory Improvement Amendments of 1988), state authorities, and foreign government regulators are increasingly focused on genetic analysis tools, including the use of microarrays labeled for research use only, by clinical laboratories in tests that are developed and validated by a laboratory for its own use (“laboratory-developed tests” or “LDTs”). Historically, the FDA has exercised enforcement discretion with respect to most LDTs and has not required laboratories that furnish LDTs to comply with the agency’s requirements for medical devices. In recent years, however, the FDA has stated it intends to end its policy of general enforcement discretion and regulate certain LDTs as medical devices. To this end, on October 3, 2014, the FDA issued two draft guidance documents, entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs)”, respectively, that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. The FDA has indicated that it does not intend to modify its policy of enforcement discretion until the draft guidance documents are finalized, and even then, the new regulatory requirements are proposed to be phased-in consistent with the schedule set forth in the guidance (in as little as 12 months after the draft guidance is finalized for certain high-priority LDTs). Nevertheless, the FDA may decide to regulate certain LDTs on a case-by-case basis at any time.
Legislative proposals addressing the FDA’s oversight of LDTs have been introduced in previous Congresses, and we expect that new legislative proposals will be introduced from time-to-time. The likelihood that Congress will pass such legislation and the extent to which such legislation may affect the FDA’s plans to regulate certain LDTs as medical devices is difficult to predict at this time.
We cannot predict the nature of future regulatory requirements with respect to the sale and use of arrays that clinical laboratories may use for the development of LDTs, or the extent to which such requirements may impact our business.
Our failure to comply with governmental rules and regulations related to our products could cause us to incur significant adverse publicity, or subject us to investigations, notices of non-compliance, fines, injunctions, civil penalties, recall or seizure of products, operating restrictions, partial suspension or total shutdown of production, denial of or challenges to applications for premarket clearance or approval, restrictions on labeling and promotion of our products, or criminal prosecution.
Medical device laws and regulations are also in effect in many countries, including countries in the European Union and Asia Pacific, ranging from comprehensive device approval requirements to requests for product data or certifications. The number and scope of these requirements are increasing. We may not be able to obtain regulatory approvals in such countries or may incur significant costs in obtaining or maintaining our foreign regulatory approvals and complying with other foreign regulatory requirements. In addition, the export by us of certain of our products which have not yet been cleared for domestic commercial distribution may be subject to FDA or other export restrictions.

13



We have agreed to sell certain products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with government entities. Our failure to comply with these requirements might result in suspension of these contracts or administrative or other penalties, and could have a material adverse effect on our ability to compete for future government grants, contracts and programs.

Reimbursement
The financial health of our customers that are clinical laboratories depends on the extent to which third-party payers (e.g., Medicare, Medicaid, and commercial insurers) reimburse laboratories for diagnostic services. To the extent that our products may be used in clinical laboratory services billed to payors, the market for our products for use in such services may be affected by changes in reimbursement rules and policies for clinical laboratory services. Under the Affordable Care Act, expansion in healthcare coverage expand the market for clinical diagnostic testing while at the same time, various policies aimed at reducing costs or bundling care may reduce the rates paid for such services; the net impact of these factors on the market for our products is not clear. In April 2014, Congress passed the Protecting Access to Medicare Act of 2014, which included substantial changes to the way in which clinical laboratory services will be paid under Medicare. Beginning in 2017, Medicare payments for clinical laboratory services will be paid based upon private payor rates as reported by clinical laboratories across the United States in contrast to the current system, which is based upon fee schedules derived from historical charges for tests from approximately 30 years ago. We cannot predict the impact of the new payment system on rates for tests that may use our products. It is possible that the new system could reduce payment rates for health care products and services, adversely affect the profits of our customers and collaborative partners and thus reduce our royalties and product sales.

Environmental Matters
We are dedicated to compliance and protection of the environment and individuals. Our operations require the use of hazardous materials (including biological materials) which subject us to a variety of federal, state and local environmental and safety laws and regulations. Some of the regulations under the current regulatory structure allow for "strict liability," holding a party potentially liable without regard to fault or negligence. We could be held liable for damages and fines as a result of our, or others', business operations should contamination of the environment or individual exposure to hazardous substances occur. We cannot predict how changes in these laws or development of new regulations will affect our business operations or the cost of compliance.

Employees
As of December 31, 2014, we had approximately 1,100 full-time employees. The employee group includes chemists, engineers, computer scientists, mathematicians and molecular biologists with experience in the diagnostic products, medical products, semiconductor, computer software and electronics industries. None of our employees is represented by a collective bargaining agreement, nor have we experienced work stoppages. Our success depends in large part on our ability to attract and retain skilled and experienced employees.
Seasonality
Customer demand for products is typically highest in the fourth quarter of the calendar year as customers spend unused budget allocations before the end of the year.
Backlog
In general, orders are shipped in the quarter in which they are received. Order backlog represents orders we believe to be firm but were not shipped for reasons including production constraints, supply chain limitations, customer shipping schedules, and pending credit reviews. In addition, backlog may not result in sales because of cancellation of orders or other factors. We believe that order backlog is not a reliable indicator of future business prospects. As of December 31, 2014 and 2013, order backlog was not significant.


14



Financial Information About Geographic Areas
Our total revenue from customers outside of the United States for the years ended December 31, 2014, 2013 and 2012 was $136.3 million, $128.1 million and $124.4 million, or approximately 39%, 39% and 42%, respectively, of our total revenue. A summary of revenues from external customers attributed to each of our geographic areas for the years ended December 31, 2014, 2013 and 2012 is included in Note 16. "Segment and Geographic Information" to our financial statements included elsewhere in this Annual Report on Form 10-K.
Available Information
Our internet address is www.affymetrix.com. Information included on our website is not part of this Form 10-K. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. In addition, copies of our annual reports are available free of charge upon written request. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.
ITEM 1A. RISK FACTORS
Risks Related to Our Business
Risks Related to the Growth of Our Business
If we do not continually develop and commercialize new or enhanced products and services, our business may not grow.
Our success depends in large part on our continual, timely development and commercialization of new or enhanced products and services that address evolving market requirements and are attractive to customers. The life science and clinical diagnostic research markets are characterized by rapid and significant technological changes, frequent new product introductions and enhancements, evolving industry standards and changing customer needs. Standardization of tools and systems for genetic research is still ongoing and we cannot assure you that our products will emerge as the standard for genetic research. Other companies may introduce new technologies, techniques, products or services that render our products or services obsolete or uneconomical. If we do not appropriately innovate and invest in new technologies, then our technologies will become dated and our customers could move to new technologies offered by our competitors.
As a result, we are continually looking to develop, license or acquire new or enhanced technologies, products and services to further broaden and deepen our offerings. Some of the factors affecting market acceptance of our products and services include:
availability, quality and price as compared to competitive technologies, products and services;
the functionality of new and existing products and services, and whether they address market requirements;
the timing of introduction of our technologies, products and services as compared to competitive technologies, products and services;
the existence of product defects;
scientists' and customers' opinions of the utility of our products and services and our ability to incorporate their feedback into future products and services;
citation of our products in published research; and
general trends in life science and clinical diagnostics research and life science informatics software development.
Our new or enhanced technologies, products or services may not be accepted by customers in our target markets. For example, once we have developed or obtained a new technology, we may fail to successfully commercialize new products and services based on that technology, particularly to the extent that our new products and services compete with established technologies or the products and services of more established competitors. Risks relating to product adoptions include the

15



inability to accurately forecast demand and difficulties in managing different sales and support requirements due to the type or complexity of the new products.
Further, many of our current and potential customers have limited budgets. Accordingly, we cannot assure you that the successful introduction of new or enhanced products or services will not adversely affect sales of our current products and services or that customers which currently purchase our products or services will increase their aggregate spending as a result of the introduction of new products and services.
Emerging opportunities in molecular diagnostics may not develop as quickly as we expect and we depend, in part, on the efforts of our partners to be successful.
The clinical applications of our technologies for diagnosing and enabling informed disease management options in the treatment of disease is an emerging opportunity in molecular diagnostics. At this time, we cannot be certain that molecular diagnostic markets will develop as quickly as we expect. Although we believe that there will be clinical applications of our technologies that will be utilized for diagnosing and enabling informed disease management options in the treatment of disease, there can be no certainty of the technical or commercial success our technologies will achieve in such markets.
Our success in the molecular diagnostics market depends, in part, on our collaborative relationships and the ability of our collaborative partners to achieve regulatory approval for such products in the United States and in overseas markets and successfully market and sell products using our technologies.
Our growth depends, in part, on our ability to acquire new businesses and technologies and successfully integrate acquisitions, which may absorb significant resources and may not be successful.
As part of our strategy to develop and identify new technologies, products and services, we have acquired and may continue to acquire new businesses and technologies. Our integration of the operations of acquired businesses requires significant efforts, including the coordination of information technologies, research and development, sales and marketing, operations, manufacturing and finance. Our efforts to successfully integrate acquisitions may result in additional expenses and divert significant amounts of management's time from other projects.
Our failure to manage successfully and coordinate the growth of the combined company could also have an adverse impact on our business. In addition, there is no guarantee that businesses we acquire will become profitable or remain so. If our acquisitions do not meet our initial expectations, we may record impairment charges.
Factors that will affect the success of our acquisitions include:
our ability to retain key employees of the acquired company;
the performance of the acquired business, technology, product or service;
our ability to integrate operations, financial and other systems;
the ability of the combined company to achieve synergies among its constituent companies, such as increasing sales of the combined company's products and services, achieving expected cost savings and effectively combining technologies to develop new products and services;
any disruption in order fulfillment or loss of sales due to integration processes, including relationships with suppliers or distributors;
the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies;
any decrease in customer and distributor loyalty and product orders caused by dissatisfaction with the combined companies' product lines and sales and marketing practices, including price increases; and
our assumption of known contingent liabilities that are realized, known liabilities that prove greater than anticipated, or unknown liabilities that come to light, to the extent that the realization of any of these liabilities increases our expenses or adversely affects our business or financial position.

16



Any difficulties and costs associated with the integration of eBioscience could negatively affect our results of operations and ability to execute our strategy.
Risks Related to our Indebtedness
Our indebtedness could materially adversely affect our business, financial condition and results of operations.
As of December 31, 2014, we had an aggregate of $128.0 million of outstanding indebtedness, of which $23.0 million is outstanding under our Senior Secured Credit Facility and $105.0 million is outstanding under our 4.00% Notes. Our indebtedness could materially adversely affect us, including by decreasing our business flexibility and increasing our borrowing costs. Refer to Note 12. "Long Term Debt Obligations" in the financial statements included in this Annual Report on Form 10-K for further information regarding our Senior Secured Credit Facility and 4.00% Notes. Increased levels of indebtedness may reduce funds available for our investment in product development as well as capital expenditures and other activities, increase our borrowing costs and create competitive disadvantages for us relative to other companies with lower debt levels.
In addition, our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive, regulatory, legal and other known and unknown factors beyond our control. There can be no assurance we can manage these risks successfully. If we are unable to generate cash flow sufficient to service our debt, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt 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. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
In addition, despite our current consolidated debt levels, we and our subsidiaries may be able to incur substantial additional debt in the future, subject to the restrictions contained in our debt instruments, including our Senior Secured Credit Facility.

We may not be able to finance future needs or adapt our business plan to changes because of restrictions placed on us by the Senior Secured Credit Facility and future instruments governing our indebtedness.
The terms of our Senior Secured Credit Facility include various covenants that limit our ability, and that of our subsidiaries, to, among other things:
incur additional debt, including guarantees by us or our subsidiaries;

make investments, pay dividends on our capital stock, redeem or repurchase our capital stock, redeem or repurchase the notes or any subordinated obligations;

create liens;

make capital expenditures;

dispose of assets;

make acquisitions;

create or permit restrictions on the ability of our subsidiaries to pay dividends or make other distributions to us;

engage in transactions with affiliates;

engage in sale and leaseback transactions; and

consolidate or merge with or into other companies or sell all or substantially all of our assets.

Our ability to comply with covenants contained in the Senior Secured Credit Facility and any future agreements governing other indebtedness to which we are or may become a party may be affected by events beyond our control, including prevailing economic, financial, regulatory and industry conditions. The Senior Secured Credit Facility requires us to comply with financial performance covenants, including, without limitation, a minimum interest coverage ratio and maximum senior leverage multiple. Any additional indebtedness we incur in the future may subject us to further covenants.

17




Our failure to comply with these covenants could result in a default under the agreements governing the relevant indebtedness. In addition, unless cured or waived, the default could result in acceleration under our other instruments that contain cross-acceleration or cross-default provisions, including our 4.00% Notes, which could require us to repay or repurchase indebtedness, together with accrued interest, prior to the date it otherwise is due and that could adversely affect our financial condition. We may not be able to repay all amounts due in the event these amounts are declared due upon any event of default. Upon a default or cross-default the lenders under the Senior Secured Credit Facility could foreclose against the collateral.
 
Risks Related to Our Sales
We face significant competition, and our failure to compete effectively could adversely affect our sales and results of operations.
We compete with companies that develop, manufacture and market genetic analysis tools for the life science and clinical healthcare markets. We face significant competition as our competitors and new companies develop new, improved or more economical products, services and technologies.
The market for our products and services is highly competitive, has high barriers to entry and has several other large companies with significant market share. For example, companies such as Illumina, Agilent Technologies and Life Technologies have products for genetic analysis that are directly competitive with certain of our products. In addition, Illumina, Life Technologies and BGI-Shenzhen also offer DNA sequencing technology which we do not offer. As the costs of DNA sequencing fall, we will face increased competition in certain of our existing and potential markets. We also face competition from established diagnostic companies such as Danaher, Becton, Dickinson and Company, bioMérieux, Celera Diagnostics, Johnson & Johnson, Hologic and Roche Diagnostics, which have made strategic commitments to diagnostics, have financial and other resources to invest in new technologies, and have substantial intellectual property portfolios, substantial experience in new product development and regulatory expertise. In addition, our collaborative partners may compete with us.
Many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do. In addition, many current and potential competitors have greater name recognition, more extensive customer bases and access to proprietary genetic content.
Our eBioscience segment competes in the life science research market with companies such as Becton, Dickinson and Company, BioLegend Inc., Abcam plc, Thermo Fisher, Danaher, as well as some smaller companies. A number of competitors employ bundled arrangements in which customers pay for consumable products (such as reagent test kits), services and the related instruments under a single arrangement, including arrangements where the customer commits to purchase a minimum volume of consumable products annually. Since we do not currently produce instruments for this market, and bundled arrangements can allow competitors to offer lower prices for competing products, customer demand for these bundled arrangements could lead to loss of market share or force us to supply products at a discount.
Reduction or delay in research and development budgets and government funding may adversely impact our sales.
We expect that our revenue in the foreseeable future will be derived from products and services provided to pharmaceutical and biotechnology companies, as well as a number of academic, governmental and other research institutions. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers.
Factors that could affect the spending levels of our customers include:
changes in government programs, including available funding, which support research and development expenditures by companies and research institutions;
weakness in the global economy and changing market conditions that affect our customers;
changes in the extent to which the pharmaceutical industry may use genetic information and genetic testing as a methodology for drug discovery and development;
changes in the regulatory environment affecting life science companies and life science research;

18



impact of consolidation within the pharmaceutical industry; and
cost reduction initiatives of customers.
Budgets in the research-use-only market have been particularly challenged in recent periods, which we believe has had an adverse effect on us. A significant or prolonged change in research funding, particularly with respect to the U.S. National Institutes of Health, including funding reductions that may result from scheduled automatic federal budget sequestration provisions, could have an adverse impact on future revenues and results of operations.
As we implement our strategy to expand into new markets, the size and structure of our current sales, marketing and technical support organizations may limit our ability to sell our products and services.
As we implement our strategy to expand into new markets, we may not be able to establish a sales, marketing and technical support organization sufficient to sell, market and support all of our new products, or to cover all of the regions that we target globally. To assist our sales and support activities, we have entered into distribution agreements through certain distributors, principally in markets outside of North America and Europe. In addition, we may enter into distribution arrangements with respect to some of our products that we believe will be better served in such arrangements than our current sales and marketing organizations. We have less control over other third parties on whom we rely for sales, marketing and technical support. In addition, these third parties may decide to develop and sell competitive products or otherwise become our competitors, which could harm our business.
Consolidation trends in both our market and many of our customers' markets have increased competition.
There has been a trend toward industry consolidation in our markets for the past several years. We expect this trend toward industry consolidation to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in operating results and could harm our business.
Additionally, there has been a trend toward consolidation in many of the customer markets we sell to, in particular the pharmaceutical industry. Consolidation in our customer markets results in increased competition for important market segments and fewer available accounts, and larger consolidated customers may be able to exert increased pricing pressure on companies in our market.
If we are unable to maintain our relationships with collaborative partners and licensors, we may have difficulty developing and selling our products and services.
Our commercial success depends, in part, on our ability to develop and maintain collaborative relationships and licenses with key companies as well as with key academic researchers. In particular, we depend on third parties for in-licensed technology and components for a variety of our product lines. We collaborate with a number of instrumentation and reagent companies, including Danaher Corporation, CapitalBio, Genisphere, Hamilton Robotics, Thermo Fisher, Luminex, Siemens Medical Solutions Diagnostics, Takara Bio Inc., New England Biolabs, and Qiagen. Some of these collaborators, like Thermo Fisher, Takara Bio, New England Biolabs, and Luminex, are currently sole suppliers of components of some of our reagent kits but they are also our competitors. Relying on our collaborative relationships is risky to our future success because:
our partners may develop technologies or components competitive with our products and services;
our existing collaborations may preclude us from entering into additional future arrangements or impact the integration of acquired businesses and technologies;
our partners may not obtain regulatory approvals necessary to continue the collaborations in a timely manner;
some of our agreements may terminate prematurely due to disagreements between us and our partners or licensors;
our partners may not devote sufficient resources to the development and sale of our products and services;
our partners may be unable to provide the resources required for us to progress in the collaboration on a timely basis;

19



our collaborations may be unsuccessful; or
some of our agreements have expired and we may not be able to negotiate future collaborative arrangements or renew current licenses on acceptable terms.
The ability to retain and gain access to technologies necessary to develop new products will depend, in part, on our ability to convince third parties that our combined company can successfully commercialize the technologies we seek to license. The inability to maintain or to acquire any third-party licenses, or integrate the related third-party technologies into these products, could result in delays in our product developments and enhancements. There can be no assurance that we will be able to continue to successfully identify new products developed by others in the life science research and clinical healthcare markets or otherwise and, if identified, to negotiate license agreements on commercially reasonable terms, if at all.
Risks Related to the Manufacturing of Our Products
We depend on a limited number of suppliers. We will be unable to launch or commercialize our products in a timely manner if our suppliers are unable to meet our requirements or if shipments from these suppliers are delayed or interrupted.
We outsource the manufacturing of our instruments to a limited number of suppliers. Some of our instruments and other key parts of our product lines, including components of our manufacturing equipment and certain raw materials used in the manufacture of our products are currently only available from a single supplier. Therefore, we depend on our suppliers to supply our instruments, or components of our products, in required volumes, at appropriate quality and reliability levels, and in compliance with regulatory requirements on a timely basis. If supplies from these vendors do not meet our requirements, or were delayed or interrupted for any reason, we would not be able to commercialize our products successfully or in a timely fashion, and our business could be adversely impacted.
Our business is dependent on our ability to forecast our needs for components and products in our product lines and our suppliers' ability to deliver such components and products in time to meet critical manufacturing and product release schedules. Our business could be adversely affected, for example, if suppliers fail to meet product release schedules, if we experience supply constraints, if we fail to negotiate favorable pricing or if we experience any other interruption or delay in the supply chain which interferes with our ability to manufacture our products or manage our inventory levels.
We may lose customers or sales if we are unable to meet customer demand for our products on a timely and cost-effective basis, or if we are unable to ensure the proper performance and quality of our products.
We produce our products in an innovative and complicated manufacturing process which has the potential for significant variability in manufacturing yields. We have encountered, and may in the future encounter, difficulties in manufacturing our products and, due to the complexity of our products and our manufacturing process, we may experience delays in the manufacture of our products or fail to ensure their proper performance or quality. As we develop new and enhanced products, we must be able to resolve in a timely, cost-effective manner manufacturing issues that may arise from time to time.
We base our manufacturing capabilities on our product mix forecast for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which could adversely impact our financial results. Difficulties in meeting customer, collaborator and internal demand could also cause us to lose customers or require us to delay new product introductions, which could in turn result in reduced demand for our products.
We rely on internal quality control procedures to verify our manufacturing processes. Due to the complexity of our products and manufacturing process, however, it is possible that products that do not meet all of our performance specifications may not be identified before they are shipped. If our products do not consistently meet our customers' performance expectations, demand for our products will decline. In addition, we do not maintain any backup manufacturing capabilities for the production of our products. Any interruption in our ability to continue operations at our existing manufacturing facilities could delay our ability to develop or sell our products, which could result in lost revenue and seriously harm our business, financial condition and results of operations.
We may need to adjust our manufacturing capacity based on business requirements or improvements made to our technological capabilities and there are risks associated with such adjustment.
If demand for our products is reduced or if we implement technologies that increase the density or yields of our wafers, our manufacturing capacity could be under-utilized and some of our long-lived assets, including facilities and

20



equipment, may be impaired, which would increase our expenses. In addition, factory planning decisions may shorten the useful lives of long-lived assets including facilities and equipment, and cause us to accelerate depreciation. These changes in demand for our products, and changes in our customers' product needs, could have a variety of negative effects on our competitive position and our financial results, and, in certain cases, may reduce our revenue, increase our costs, lower our gross margin percentage or require us to recognize impairments of our assets. In addition, if demand for our products is reduced or we fail to accurately forecast demand, we could be required to write down inventory since certain of our products have a limited shelf life, which would have a negative impact on our gross margin.
We have in the past, and may in the future, adjust our manufacturing capacity based on business requirements, which may include the rationalization of our facilities, including the abandonment of long-lived manufacturing assets and additional charges related to a reduction in capacity. Manufacturing and product quality issues may arise as we launch new products in our Singapore, Ohio, San Diego and Vienna facilities and rely upon manufacturing by third parties. We may lose customers if we are unable to manufacture products or if we experience delays in the manufacture of our products as a result of this transition.
We may not be able to deliver acceptable products to our customers due to the rapidly evolving nature of genetic sequence information upon which our products are based.
The genetic sequence information upon which we rely to develop and manufacture our products is contained in a variety of databases throughout the world. These databases are rapidly expanding and evolving. In addition, the accuracy of these databases and resulting genetic research is dependent on various scientific interpretations and it is not expected that global genetic research efforts will result in standardized genetic sequence databases for particular genomes in the near future.
Although we have implemented ongoing internal quality control efforts to help ensure the quality and accuracy of our products, the fundamental nature of our products requires us to rely on genetic sequence databases and scientific interpretations which are continuously evolving. As a result, these variables may cause us to develop and manufacture products that incorporate sequence errors or ambiguities. The magnitude and importance of these errors will depend upon multiple and complex factors that would be considered in determining the appropriate actions required to remedy any inaccuracies. Our inability to timely deliver acceptable products as a result of these factors would likely adversely affect our relationship with customers, and could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Operations
We may not achieve sustained profitability.
Prior to 2002, we incurred losses each year since our inception, and we reported losses in 2006 and from 2008 through 2013. As a result, we had an accumulated deficit of approximately $509.6 million as of December 31, 2014. Our ability to achieve sustained profitability will depend, in part, on the rate of growth of our revenue and on the level of our expenses. We reported year-over-year revenue growth in 2014, 2013 and 2012 compared to a trend of declining revenue in 2011. The 2013 and 2012 revenue growth was primarily due to the acquisition of eBioscience mid-2012 that continues to grow revenues. Revenue growth in 2014 was driven by increased product and service sales across the portfolio offset by declines in our Expression Business Unit. We have reported continued decreases in revenue for Affymetrix Core in the past. There can be no assurance that our revenue will not decrease in future periods. We reported cost savings during fiscal 2013 largely driven by corporate restructuring in early 2013. We have also reported income from operations in 2014 and will continue to explore opportunities to grow our revenue and income from operations; however, there can be no assurance that anticipated growth will materialize. We expect to continue incurring significant expenses related to research and development, sales and marketing efforts to commercialize our products, litigation and non-cash stock based compensation, and we expect to continue to experience fluctuations in our operating results. If our revenue grows more slowly than we anticipate, if our gross margins are lower than we project or if our operating expenses are above what we expect or cannot be reduced in the event of lower revenue, we may not become profitable on a sustained basis, or at all.
If we do not attract and retain key employees, our business could be impaired.
To be successful, we must attract and retain qualified scientific, engineering, manufacturing, sales, marketing and management personnel. To expand our research, product development and sales efforts we need additional people skilled in areas such as bioinformatics, organic chemistry, molecular biology, information services, regulatory affairs, manufacturing, sales, marketing and technical support. Competition for these people is intense, and our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating existing employees. For example, our stock price has been volatile in recent years, resulting in a significant number of stock options granted to our employees having a strike price that is higher than the current trading price of our common stock. We cannot be assured that these equity awards will be successful in retaining and incentivizing key employees. If we are unable to hire, train

21



and retain a sufficient number of qualified employees, we will not be able to expand our business or our business could be adversely affected.
We also rely on our scientific advisors and consultants to assist us in formulating our research, development and commercialization strategy. All of these individuals are engaged by other employers and have commitments to other entities that may limit their availability to us.
Our results may be impacted by changes in foreign currency exchange rates.
A significant amount of our revenue is currently generated from sales outside the United States, predominantly in Europe and Japan. Although such transactions are denominated in both U.S. dollars and foreign currencies, our future revenue, gross margin, expenses and financial condition are still affected by changes in foreign currency exchange rates. Increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in a particular country, possibly leading to a reduction in sales and profitability in that country. Also, if our international sales increase, we may enter into a greater number of transactions denominated in foreign currencies, which would expose us to greater foreign currency risks, including changes in currency exchange rates. In particular, given the fluctuations in Euro and Japanese Yen in the second half of 2014, we have been exposed to an increased risk environment. Gains and losses on the conversion to U.S. dollars of such revenues and of other associated monetary assets and liabilities, as well as profits and losses incurred in certain countries, may contribute to fluctuations in the value of our assets and our results of operations. We also have costs and expenses that are denominated in foreign currencies, and decreases in the value of the U.S. dollar could result in increases in such costs that could have a significant negative impact on our results of operations. In addition, fluctuating values between the U.S. dollar and other currencies can result in currency gains which are used in the computation of foreign taxes and can increase foreign taxable income. Additionally, the assets and liabilities of our non-U.S. subsidiaries are denominated in foreign currencies and translated to U.S. dollars at exchange rates in effect at the balance sheet date. Generally, such assets are adversely affected when the U.S. dollar strengthens relative to other currencies.

We enter into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. We will experience foreign currency gains and losses in certain instances if it is not possible or cost effective to hedge our foreign currency exposure or should we suspend our foreign currency forward contracts. Our ultimate realized loss or gain with respect to currency fluctuations will generally depend on the size and type of cross-currency exposures that we enter into, the currency exchange rates associated with these exposures and changes in those rates, whether we have entered into foreign currency forward contracts to offset these exposures and other factors. If we are unable to address these risks and challenges effectively, our results of operations and financial position could suffer.

Due to the international nature of our business, political or economic changes or other factors could harm our business.
Our international operations are subject to unexpected changes in, or impositions of, legislative or regulatory requirements, including export and trade barriers and taxes; longer payment cycles and greater difficulty in accounts receivable collection.
We also are subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, including austerity measures, potential hostilities, epidemics and changes in diplomatic and trade relationships. We cannot assure investors that one or more of the foregoing factors will not have a material adverse effect on our business, financial condition and operating results or require us to modify our current business practices.
As we expand our development and commercialization activities outside of the United States, we will be subject to an increased risk of inadvertently conducting activities in a manner that violates the U.S. Foreign Corrupt Practices Act and similar laws. If that occurs, we may be subject to civil or criminal penalties which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We are subject to the U.S. Foreign Corrupt Practices Act ("FCPA"), which prohibits corporations and individuals from paying, offering to pay, or authorizing the payment of anything of value to any foreign government official, government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. We are also subject to the UK Anti-Bribery Act, which prohibits both domestic and international bribery, as well as bribery across both public and private sectors.
In the course of establishing and expanding our commercial operations and seeking regulatory approvals outside of the United States, we will need to establish and expand business relationships with various third parties and we will interact more frequently with foreign officials, including regulatory authorities. Expanded programs to maintain compliance with such laws will be costly and may not be effective. Any interactions with any such parties or individuals where compensation is provided

22



that are found to be in violation of such laws could result in substantial fines and penalties and could materially harm our business. Furthermore, any finding of a violation under one country's laws may increase the likelihood that we will be prosecuted and be found to have violated another country's laws. If our business practices outside the United States are found to be in violation of the FCPA, UK Anti-Bribery Act or other similar law, we may be subject to significant civil and criminal penalties which could have a material adverse effect on our financial condition and results of operations.
Our effective tax rate may vary significantly.
Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions. Estimates and judgments are required in determining our worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.
Changes in overall levels and the geographic mix of pretax earnings may adversely impact our effective tax rate. Certain jurisdictions have lower tax rates, and the amount of earnings in these jurisdictions may fluctuate. If we do not have profitable operations in these jurisdictions, our effective tax rate could be adversely impacted. Changes in tax laws, regulatory requirements, our treasury plans, and applicability of tax holidays and incentive programs in the countries in which we operate could have a material impact on our tax provision. Tax authorities may challenge the allocation of profits between our subsidiaries and conformance with requirements of tax holidays and incentive programs and we may not prevail in any such challenge. If we were not to prevail, we could be subject to higher tax rates or double tax.
Estimates are required in determining any valuation allowance to be recorded against our net deferred tax assets. Changes in the amount of valuation allowance required may significantly impact our financial results of operations.
Changes in other categories of earnings such as discontinued operations and other comprehensive income may affect our tax provision allocated to continuing operations.
In the normal course of business, we are subject to examination by taxing authorities in the U.S. and multiple foreign jurisdictions.
Failure in our information technology systems or unforeseen problems with the implementation and maintenance of our information systems could disrupt our operations and cause the loss of customers or business opportunities.
Information technology ("IT") systems are used extensively in virtually all aspects of our business, including sales forecast, order fulfillment and billing, making payments, shipping products, tracking customers, filling contractual obligations, customer service, logistics and management of data from running samples on our products. Our success depends, in part, on the continued and uninterrupted performance of our IT systems. IT systems may be vulnerable to damage from a variety of sources, including telecommunications or network failures, power loss, human acts and natural disasters. Moreover, despite the security measures we have implemented, our IT systems may be subject to physical or electronic break-ins, computer viruses, computer denial-of-service attacks, unauthorized access to customer or employee data or company trade secrets and similar disruptive problems. We also have taken precautionary measures to prevent unanticipated problems that could affect our IT systems. Nevertheless, we may experience damages to our systems, and system failures and interruptions.
As a part of our ongoing effort to upgrade our current information systems, we are implementing new enterprise resource planning software and other software applications to manage certain of our business operations. As we implement and add functionality, problems could arise that we have not foreseen. Such problems could adversely impact our ability to provide quotes, take customer orders or otherwise run our business in a timely manner. In addition, if our new systems fail to provide accurate and increased visibility into pricing and cost structures, it may be difficult to improve or maximize our profit margins. As a result, our results of operations and cash flows could be adversely affected. When we upgrade or change systems, we may suffer interruptions in service, loss of data, or reduced functionality. Certain of our systems are not redundant, and our disaster recovery planning is not sufficient for every eventuality.
If we experience systems problems, they may interrupt our ability to operate and adversely affect our reputation and result in a loss of customers and revenues.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information, and that of our customers, and personally identifiable information of our customers and employees. The secure maintenance of this information is important to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to

23



employee error, malfeasance, or other disruptions. Any such breach could compromise our systems and the information stored there could be accessed, publicly disclosed, lost, or stolen. Any such access, disclosure, or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and damage to our reputation.
Risks Related to Our Investments
Our strategic equity investments may result in losses.
We periodically make strategic equity investments in various public and private companies with businesses or technologies that may complement our business. The market values of these strategic equity investments may fluctuate due to market conditions and other conditions over which we have no control. Other-than-temporary declines in the market price and valuations of the securities that we hold in other companies have required us to record losses relative to our ownership interest. This could result in future charges to our earnings. It is uncertain whether or not we will realize any long-term benefits associated with these strategic investments.
Risks Related to Government Regulation
We and our customers are subject to various government regulations, and we may incur significant expenses to comply with, and experience delays in our product commercialization as a result of, these regulations.
The FDA has jurisdiction over medical devices, including in vitro diagnostic test kits and the reagents and instrumentation used to perform these tests. In vitro diagnostic tests, reagents, and instruments may be subject to pre-market review and post-market controls by the FDA. Certain in vitro diagnostic products must also be approved by foreign regulatory agencies before the product can be sold outside the United States. Commercialization of our and our collaborative partners' in vitro diagnostic products outside of the research environment may depend upon successful completion of clinical trials. Clinical development is a long, expensive and uncertain process and we do not know whether we, or any of our collaborative partners, will be permitted to undertake the clinical trial(s) required to support a marketing application for any potential in vitro diagnostic products. It may take us or our collaborative partners many years to complete any such testing, and failure can occur at any stage. Delays or regulatory rejections of potential products may be encountered based on changes in regulatory policy during the period of product development and regulatory agency review. Moreover, if and when our projects reach clinical trials, we, or our collaborative partners, may decide to discontinue development of any or all of these projects at any time for commercial, scientific or other reasons. Any of the foregoing matters could have a material adverse effect on our business, financial condition and results of operations.
Many of our products are labeled “for research use only." Products labeled “for research use only” are not subject to premarket clearance or approval by the FDA, but are subject to limited, specific regulation with respect to their labeling. Merely including a labeling statement that a product is intended for research use only will not necessarily render the product exempt from the FDA’s clearance, approval, or other requirements. FDA may look to the totality of the circumstances surrounding the distribution of the product to determine whether the manufacturer intends for its product to be offered for clinical diagnostic use (versus for research use only). Written or verbal statements in any labeling, advertising or promotion, including performance claims, instructions for clinical interpretation, clinical information, and statements that suggest a clinical laboratory can validate a test through its own procedures and subsequently offer it for clinical use, the manufacturer’s provision of technical support for clinical applications, and solicitation of business from clinical laboratories may be considered by FDA as evidence of intended uses that conflict with research use only labeling.
Even when a product is not otherwise subject to FDA’s clearance or approval requirements, the FDA may impose restrictions as to manner in which we can market and sell our products. Such restrictions may materially and adversely affect our business, financial condition and results of operations.
The FDA, CMS, state authorities and foreign government regulators are increasingly focused on genetic analysis tools, including the use of arrays that are labeled for research use only, by clinical laboratories in LDTs. Historically, the FDA has exercised enforcement discretion with respect to most LDTs and has not required laboratories that furnish LDTs to comply with the agency’s requirements for medical devices. In recent years, however, the FDA has stated it intends to end its policy of general enforcement discretion and regulate certain LDTs as medical devices. To this end, on October 3, 2014, the FDA issued two draft guidance documents, entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs)”, respectively, that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. The FDA has indicated that it does not intend to modify its policy of enforcement discretion until the draft guidance documents are finalized, and even then, the new regulatory requirements are proposed to be phased-in consistent with the schedule set forth in the guidance (in as

24



little as 12 months after the draft guidance is finalized for certain high-priority LDTs). Nevertheless, the FDA may decide to regulate certain LDTs on a case-by-case basis at any time.
Legislative proposals addressing the FDA’s oversight of LDTs have been introduced in previous Congresses, and we expect that new legislative proposals will be introduced from time-to-time. The likelihood that Congress will pass such legislation and the extent to which such legislation may affect the FDA’s plans to regulate certain LDTs as medical devices is difficult to predict at this time.
We cannot predict the extent of future regulatory requirements with respect to the sale and use of arrays. If regulations or enforcement policies restrict our customers' use of our products, or if we otherwise are required to obtain FDA premarket clearance or approval prior to commercializing our products, our ability to generate revenue from the sale of our products may be delayed or otherwise adversely affected.
Our failure to comply with governmental rules and regulations related to our products could cause us to incur significant adverse publicity, or subject us to investigations, notices of non-compliance, fines, injunctions, civil monetary penalties, recall or seizure of products, operating restrictions, partial suspension or total shutdown of production, delays in or challenges to premarket clearance or approval, restrictions on labeling and promotion of our products, or criminal prosecution.
Medical device laws and regulations are also in effect in many countries, ranging from comprehensive device approval requirements to requests for product data or certifications. The number and scope of these requirements are increasing. We may not be able to obtain regulatory approvals in such countries or may incur significant costs in obtaining or maintaining our foreign regulatory approvals. In addition, the export by us of certain of our products which have not yet been cleared for domestic commercial distribution may be subject to FDA or other export restrictions.
We have agreements to sell certain products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. Our failure to comply with these requirements might result in suspension of these contracts or administrative or other penalties, and could have a material adverse effect on our ability to compete for future government grants, contracts and programs.
Healthcare reform and restrictions on coverage and reimbursement may limit our returns on molecular diagnostic products that we may develop independently or with our collaborators.
We are currently collaborating with our partners to develop diagnostic and therapeutic products. Our (or our collaborators’) ability to commercialize such products may depend, in part, on the extent to which coverage and reimbursement for these products will be available under U.S. and foreign rules and regulations that govern coverage and reimbursement for clinical testing services by government authorities, private health insurers and other organizations.
Under the Affordable Care Act, expansion in healthcare coverage may expand the market for clinical diagnostic testing while at the same time, various policies aimed at reducing costs or bundling care may reduce the rates paid for such services; the net impact of these factors on the market for our products is not clear. In April 2014, Congress passed the Protecting Access to Medicare Act of 2014, which included substantial changes to the way in which clinical laboratory services will be paid under Medicare. Beginning in 2017, Medicare payments for clinical laboratory services will be paid based upon private payor rates as reported by clinical laboratories across the United States in contrast to the current system, which is based upon fee schedules derived from historical charges for tests from approximately 30 years ago. We cannot predict the impact of the new payment system on rates for tests that may use our products. It is possible that the new system could reduce payment rates for health care products and services, adversely affect the profits of our customers and collaborative partners and thus reduce our royalties and product sales.
Under Medicare rules, diagnostic tests must be ordered by a physician who is treating the beneficiary and who uses the test results in patient management. As such, Medicare may deny coverage for a test, even if the test has been cleared or approved by the FDA, unless the Medicare Administrative Contractor determines that the test is useful in patient management. As such, our (and our collaborators’) ability to successfully commercialize a test may depend on the extent to which clinical data are developed that support the utility of the test in patient management. If we (or our collaborators) are unable to develop clinical data supporting the use of a test in patient management, payors may be unlikely to provide coverage or payment for such test.

We face risks related to handling of hazardous materials and other regulations governing environmental safety.
Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these

25



regulations include, among other things, our use of hazardous and radioactive materials and the generation, transportation and storage of waste. We could discover that we or an acquired business is not in material compliance. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business.
We may be exposed to liability due to product defects.
The risk of product liability claims is inherent in the testing, manufacturing, marketing and sale of human diagnostic and therapeutic products and we may be subjected to such claims. We have voluntarily recalled products in the past. We may seek to acquire additional insurance for clinical or product liability risks. We may not be able to obtain such insurance or general product liability insurance on acceptable terms or in sufficient amounts. A product liability claim or recall could have a serious adverse effect on our business, financial condition and results of operations.
Ethical, legal and social concerns surrounding the use of genetic information could reduce demand for our products.
Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons, governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. Any of these scenarios could reduce the potential markets for our molecular diagnostic products, which could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Intellectual Property and Litigation Matters
We may be unable to effectively protect or enforce our intellectual property, which could harm our competitive position.
Maintaining a strong patent position is critical to our business. Patent law relating to the scope of claims in the technology fields in which we operate is uncertain, so we cannot be assured the patent rights we have or may obtain will be valuable. Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial costs in legal fees and could substantially affect the scope of our patent protection. We cannot be assured our patent applications will have priority over those filed by others. Also, our intellectual property may be subject to significant administrative and litigation proceedings. In addition, we may acquire businesses, which may not have developed or maintained a similarly robust patent position. For example, eBioscience currently does not have a patent portfolio, so we must rely on non-patent rights, including third-party licenses that relate to such business operations.
Legal actions to enforce our patent rights can be expensive and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could also result in the invalidation of our patents or a finding that they are unenforceable. We may or may not choose to pursue litigation or interferences against those that have infringed on our patents, or used them without authorization, due to the associated expense and time commitment of monitoring these activities. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our results of operations.
In addition to patent protection, we also rely upon copyright and trade secret protection, as well as non-disclosure agreements with our employees, consultants and third-parties, to protect our confidential and proprietary information. Such measures may not provide adequate protection for our proprietary information.
Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or services or impact our stock price.
We are currently subject to claims from third parties asserting intellectual property infringement and breach of contract. See Note 14. "Legal Proceedings" of the financial statements included elsewhere in this Annual Report on 10-K for further information. Third parties may in the future assert additional claims against us, including claims we are employing their proprietary technology without authorization. As we launch new products and enter new markets, we expect that competitors will claim that our products infringe their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. In addition, we are aware of third-party patents that may relate to our technology. We routinely receive notices claiming infringement from third parties as well as invitations to take licenses under

26



third-party patents. Third parties may have obtained, and may in the future obtain, patents allowing them to claim that the use of our technologies infringes these patents.

We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have a material adverse impact on our cash position and stock price. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from selling certain products, all of which could have a material adverse impact on our cash position, business and financial condition.
In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Moreover, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our ability to grow and maintain profitability.
Risks Related to Our Common Stock
The price of our common stock historically has been volatile. This volatility may affect the price at which you could sell your common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock.
The market price for our common stock has varied between a high of $10.15 on December 29, 2014, and a low of $6.37 on April 11, 2014 in the twelve-month period ending on December 31, 2014. Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including those listed in this "Risk Factors" section and other, unknown factors. Our stock price also may be affected by comments by securities analysts regarding our business or prospects, our issuance of common stock or other equity securities, our inability to meet analysts' expectations, general fluctuations in the stock market or in the stock prices of our industry peers or our customers and general conditions and publicity regarding the genomics, biotechnology, pharmaceutical or life science industries. This volatility may affect the price of our common stock.
In addition, the sale of substantial amounts of our common stock could adversely impact its price. As of December 31, 2014, we had outstanding approximately 74.3 million shares of our common stock and options to purchase approximately 4.2 million shares of our common stock (of which approximately 2.6 million were exercisable as of that date). We also had outstanding approximately 3.1 million underlying restricted stock units as of December 31, 2014. As of December 31, 2014, we also had outstanding $105.0 million aggregate principal amount of our 4.00% Notes, which are convertible into shares of our common stock. We have reserved a total of approximately 17.9 million shares of our common stock to satisfy the settlement obligations of such notes. The sale or the availability for sale of a large number of shares of our common stock in the public market could cause the price of our common stock to decline.
Volatility in the stock price of other companies often has led to securities class action litigation against those companies. Any future securities litigation against us could result in substantial costs and divert management's attention and resources, which could seriously harm our business, financial condition and results of operations.
Our quarterly results have historically fluctuated significantly and may continue to do so. Failure to meet financial expectations may disappoint securities analysts or investors and result in a decline in our stock price.
Our revenue and operating results may fluctuate significantly due, in part, to factors that are beyond our control and which we cannot predict. The timing of our customers' orders may fluctuate from quarter to quarter. Historically, we have experienced customer ordering patterns for instrumentation and consumables in which the majority of the shipments occur in the last month of the quarter. These ordering patterns limit management's ability to accurately forecast our future revenue or product mix. Additionally, license revenue may also be unpredictable and fluctuates due to the timing of payments of non-recurring licensing fees. Because our expenses are largely fixed in the short to medium term, any material shortfall in revenue may cause us to experience material losses.
Because of this difficulty in predicting future performance, our operating results may fall below our own expectations and the expectations of securities analysts or investors in some future quarter or quarters. Our failure in the past to meet these expectations has adversely affected the market price of our common stock and may continue to do so.

27



In addition to factors that affect the spending levels of our customers described above, additional factors could cause our operating results to fluctuate, including:
competition;
our inability to produce products in sufficient quantities and with appropriate quality;
the frequency of experiments conducted by our customers;
our customers' inventory of products;
the receipt of relatively large orders with short lead times; and
our customers' expectations as to how long it takes us to fill future orders.
In addition, integrating operations, financial and other systems of acquired businesses, including those in connection with our acquisition of eBioscience, may compound the difficulty of predicting our future performance, for example by decreasing our ability to forecast customer demand and manage our inventory levels, and may therefore increase the fluctuation of our operating results.
Delaware law and our charter documents may impede or discourage a takeover, which could cause the market price of our common stock to decline.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Our charter and bylaws contain provisions relating to issuance of preferred stock, limitations on written consents, special meetings of stockholders and advance notification procedures for stockholder proposals. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, unless certain conditions are met.
These and other provisions of our charter documents and Delaware law could prevent or deter mergers, takeovers or other business combinations involving us, discourage potential acquirers from making tender offers for our common stock, or discourage proxy contests for changes in our management, any of which, under certain circumstances, could depress the market price of our common stock.
Future sales of our common stock could cause our share price to fall.

In November 2014, we entered into a sales agreement with Cantor Fitzgerald & Co. to offer shares of our common stock from time to time through “at-the-market” offerings, pursuant to which we offer and sell shares of our common stock for an aggregate offering price of up to $50 million. We are not obligated to make or continue to make any sale of shares of our common stock under the “at-the-market” offerings. We did not make any sales pursuant to the “at-the market” offering in 2014. However, the sale of securities pursuant to the “at-the-market” offerings will result in dilution of our stockholders and could cause our share price to fall.

ITEM 1B.  UNRESOLVED STAFF COMMENTS
None.
ITEM 2.  PROPERTIES
Our corporate headquarters is located in Santa Clara, California, where we lease approximately 200,000 square feet and we have manufacturing facilities located in Singapore, Vienna, Austria and Cleveland, Ohio, where we lease approximately 147,000 square feet, 19,000 square feet and 18,000 square feet, respectively. In addition to our corporate headquarters, we lease approximately 165,000 square feet of administrative and research and development space in California (San Diego, Emeryville and Sunnyvale), Ohio (Cleveland), China (Beijing and Shanghai), Germany (Freiburg), Japan (Tokyo), United Kingdom (Wooburn Green), Brazil (Sao Paulo) and Dubai.

28



In 2012, we sold our 170,000 square foot facility in West Sacramento, California for $5.8 million, which included $0.3 million in commissions and closing costs paid by us, and recognized a net impairment of $3.5 million during the twelve months ended December 31, 2012.
We believe that our existing properties are in good condition and are suitable for the conduct of our business.
ITEM 3.  LEGAL PROCEEDINGS
Information pertaining to legal proceedings can be found in "Item 8. Financial Statements and Supplementary Data—Note 14. Legal Proceedings" of this Annual Report on Form 10-K, and is incorporated by reference herein.
ITEM 4.  MINE SAFETY DISCLOSURES
Not applicable.

29




PART II
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
Our common stock is traded on The Nasdaq Global Select Market under the symbol of AFFX. The following table sets forth on a per share basis, for the periods indicated, the low and high closing prices of our common stock as reported by The Nasdaq Global Select Market.
 
Low
 
High
2014
 
 
 
First Quarter
$
6.65

 
$
9.50

Second Quarter
$
6.37

 
$
9.42

Third Quarter
$
7.98

 
$
9.36

Fourth Quarter
$
7.10

 
$
10.15

2013
 

 
 

First Quarter
$
3.28

 
$
4.74

Second Quarter
$
3.30

 
$
4.73

Third Quarter
$
3.54

 
$
6.30

Fourth Quarter
$
6.35

 
$
8.85


As of February 16, 2015, there were approximately 244 holders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company ("DTC"). All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC and therefore are considered to be held of record by Cede & Co. as one shareholder.
No cash dividends have been paid on our common stock. We currently intend to retain all future earnings, if any, for use in our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.
No equity securities were sold during 2014 that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). We did not repurchase any shares of our common stock during the fourth quarter of 2014.
For information regarding compensation plans under which equity securities were authorized for issuance, see the section of the Proxy Statement to be filed in connection with our 2015 Annual Meeting of Shareholders entitled "Equity Compensation Plan Information," incorporated by reference into Item 12 of this Annual Report on Form 10-K.

30



Performance Graph
The graph below compares the cumulative total return* on our common stock for the period commencing on December 31, 2009 and ending December 31, 2014 compared to the CRSP Total Return Index for the Nasdaq National Market (U.S. companies) and the CRSP Total Return Index for the Nasdaq Pharmaceutical Stocks (SIC 283). The stock price performance shown on the graph below is not necessarily indicative of future price performance.
*Assumes $100 invested on December 31, 2009 in our common stock and in each index listed above. The total return for our common stock and the indices used assumes the reinvestment of dividends, even though dividends have never been declared on our common stock.
The information under the caption "Performance Graph" is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any filing of Affymetrix under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether made before or after the date of this Annual Report on Form 10-K and irrespective of any general incorporation language in such filings.
ITEM 6.  SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited consolidated financial statements. The information below is not necessarily indicative of our future results of operations and should be read in conjunction with Item 1A. "Risk Factors," Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8. "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K in order to fully understand the factors that may affect the comparability of the information presented below:

31



 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Consolidated Statement of Operations Data:
(in thousands, except per share amounts)
Total revenue (1)
$
349,019

 
$
330,399

 
$
295,623

 
$
267,474

 
$
310,746

Income (loss) from operations (2)
2,123

 
(12,552
)
 
(39,091
)
 
(16,641
)
 
(5,167
)
Net loss (3)
$
(3,834
)
 
$
(16,327
)
 
$
(10,696
)
 
$
(28,161
)
 
$
(10,233
)
Basic and diluted net loss per common share
$
(0.05
)
 
$
(0.23
)
 
$
(0.15
)
 
$
(0.40
)
 
$
(0.15
)
Shares used in computing basic and diluted net loss per common share
73,202

 
71,441

 
70,300

 
70,877

 
68,856

 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data:
 

 
 

 
 

 
 

 
 

Cash, cash equivalents, and available-for-sale securities (4)
$
79,923

 
$
57,128

 
$
35,736

 
$
265,067

 
$
237,184

Working capital
124,197

 
98,792

 
97,384

 
259,961

 
159,932

Total assets (4)
486,548

 
504,511

 
544,294

 
438,015

 
460,785

Long-term obligations (5)
145,576

 
153,196

 
188,252

 
104,596

 
107,220

 
(1)Included in the total revenue for the year ended December 31,
 
2013 is $88.9 million from eBioscience, a one-time licensing payment of $5.3 million from a diagnostic partner, and $4.5 million from Anatrace which was divested,
2012 is $50.5 million from eBioscience which we acquired on June 25, 2012.

(2)Included in loss from operations for the year ended December 31, 2012 was $8.8 million from eBioscience and the following items related to the acquisition of eBioscience:

$8.2 million in acquisition and integration related costs, and
$8.3 million in share-based compensation charges.

Additionally, we recognized $4.5 million and $1.8 million in 2013 and 2012, respectively, of expense related to our restructuring plans that was presented in a single line item labeled "Restructuring charges" in our accompanying Consolidated Statements of Operations.

In 2013, we recognized $9.3 million gain on the sale of the Anatrace-branded reagent product line that was presented in a single line item labeled "Gain on sale of product line" in our accompanying Consolidated Statements of Operations.

In 2014, we paid $5.1 million to Enzo Biochem, Inc. (Enzo) and recorded litigation settlement charge.

(3)As part of our repurchases and redemption of our 3.50% Notes, we recognized the following gains (see (5) for further details):

In 2013, we redeemed our remaining 3.50% Senior Convertible Notes and recognized a gain of $0.1 million; and
In 2010, we recognized a net gain of $6.3 million on repurchases totaling $151.7 million in aggregate principal amount.

(4)In 2013, we sold our Anatrace-branded reagent product line for net proceeds of approximately $11.8 million. The carrying value of the group of assets sold was approximately $2.5 million. In 2012, we completed the acquisition of eBioscience for aggregate cash consideration of $307.8 million.

(5)In 2014, we prepaid $16.5 million of our senior secured debt with cash provided by operations. In July 2014, we entered into the Fifth Amendment of our Credit Agreement, which provides, among other things, for (1) an uncommitted incremental term loan facility in an aggregate amount not to exceed $50.0 million and (2) the reduction of interest rate margins. As of December 31, 2014, the carrying amount of the senior secured debt was $23.0 million.

In 2013, we amended the Credit Agreement and refinanced our Senior Secured Credit Facility. The Fourth Amendment provides, among other things, for new term loans in the aggregate principal amount of $38.0 million and new

32



revolving loan commitments in the aggregate principal amount of $10.0 million. Long-term obligations include $26.7 million and current liabilities include $12.7 million outstanding debt under our Senior Secured Credit Facility as of December 31, 2013.

In 2012, as part of our acquisition of eBioscience, we obtained a Term Loan of $85.0 million under our Senior Secured Credit Facility and issued $105.0 million aggregate principal amount of 4.00% Notes. Long-term obligations include $60.6 million and current liabilities include $12.7 million outstanding debt under our Senior Secured Credit Facility as of December 31, 2012.

We repurchased and redeemed our 3.50% Notes:

In 2013, we redeemed the remaining outstanding 3.50% Notes for cash considerations of $3.9 million, including accrued and unpaid interest and transaction costs.
In 2012, a total of $91.6 million aggregate principal amount was purchased for cash consideration of $92.1 million, including accrued and unpaid interest and transaction costs of $0.5 million; and
In 2010, a total of $151.7 million aggregate principal amount was purchased for cash consideration of $143.6 million, including accrued and unpaid interest and transaction costs.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document.
All statements in this annual report that are not historical are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act as amended, including statements regarding our strategic initiatives, anticipated cost savings, return to profitability and integration of and synergies related to eBioscience, as well as all other statements regarding our "goals," "expectations," "beliefs," "intentions," "strategies" or the like. Such statements are based on our current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Actual results or business conditions may differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, our capacity to identify and capitalize upon emerging market opportunities; risks relating to our ability to acquire new businesses and technologies and successfully integrate and realize the anticipated strategic benefits and cost savings or other synergies thereof, including our acquisition of eBioscience, in a cost-effective manner while minimizing the disruption to our business; risks that eBioscience's future performance may not be consistent with its historical performance; risks relating to our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness; risks relating to our ability to develop and successfully commercialize new products and services; uncertainties related to cost and pricing of our products; fluctuations in overall capital spending in the academic and biotechnology sectors; changes in government funding policies; our dependence on collaborative partners; the size and structure of our current sales, technology and technical support organizations; uncertainties relating to our suppliers and manufacturing processes; risks relating to our ability to achieve and sustain higher levels of revenue, higher gross margins and reduced operating expenses; uncertainties relating to technological approaches; global credit and financial market conditions; personnel retention; uncertainties relating to the FDA and other regulatory approvals; competition; risks relating to intellectual property of others and the uncertainties of patent protection and litigation; volatility of the market price of our common stock; unpredictable fluctuations in quarterly revenues; and the risk factors disclosed under Part I, Item 1A of this Annual Report on Form 10-K for the year ended December 31, 2014. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based, except as required by law.
Overview
Affymetrix is a provider of life science products and molecular diagnostic products that enable parallel analysis of biological systems at the gene, protein and cell level. We sell our products to genomic research centers, academic institutions, government and private laboratories, as well as pharmaceutical, diagnostic and biotechnology companies. Over 94,500 peer-reviewed papers have been published based on work using our products. We have approximately 1,100 employees worldwide and maintain sales and distribution operations across the United States, Europe, Latin America and Asia.
We were incorporated in California in 1992 and reincorporated in Delaware in 1998. Our principal executive offices are located at 3420 Central Expressway, Santa Clara, CA 95051. Our telephone number is (408) 731-5000.

33



Our Strategy
Our strategy has been to transform the company from one that is highly dependent on its GeneChip® Expression product line that faces intense competition in certain applications, to one with diversified revenue streams and a broad reach into the growing markets for translational medicine, molecular diagnostics and applied sciences, such as AgBio.

Since 2011, under the leadership of Dr. Frank Witney, our President and Chief Executive Officer, we have executed on a strategy to realign our product portfolio, stabilize our business and return our company to growth and profitability. We expect this transformation to take place over three phases, two of which are now completed:
Phase 1 (2011-2012) –Portfolio Realignment. During this phase, we reorganized ourselves into business units to sharpen our focus based on target markets. We also launched CytoScan®, our cytogenetic microarray product line, and acquired eBioscience. Through eBioscience, we offer flow cytometry reagents and immunoassay products which, aligned with our new product introductions, have enabled us to broaden our reach into the translational medicine, applied, and molecular diagnostics markets. We believe these actions contributed to the stabilization of our business and the realignment of our product portfolio positioned us for growth.

Phase II (2013-2014) – Profitability, Strengthen Balance Sheet, Development of Newer Product Lines. In the beginning of 2013, we implemented a corporate restructuring which resulted in significant cost savings and accelerated our path to profitability. In addition, we reduced our senior secured debt to $23.0 million as of December 31, 2014. We grew total revenue by 9% in 2014 compared to 2013, after adjustment for the divestiture of our Anatrace product line (which was sold in 2013) and a one-time license payment in 2013. This growth was driven by strong sales of CytoScan and Axiom Genotyping products and services, along with eBioscience products. We trained and refocused our internal research and development, marketing, operations and regulatory teams along with our global commercial organization to expand our reach to customers in the translational medicine, molecular diagnostics and applied markets.

Phase III (2015 -2016) – Strategic Flexibility, Expansion of Product Lines, Growth. We enter Phase III of our transformation in 2015. In this phase, our goal is to leverage the work we have done in Phase I and II in order to have well established and growing franchises in: (1) translational medicine and molecular diagnostics (with a focus on reproductive health and oncology); (2) genotyping (both human and AgBio); and (3) single cell biology (the analysis of individual cells that comprise the population of cells typically studied by researchers). We intend to continue the growth that we demonstrated in Phase II, as well as improve our profitability. We strengthened our balance sheet in Phase II and are now in position to evaluate complimentary technology acquisitions that may enhance our positions in our target markets.

Reportable Operating Segments
We report operating information on a business unit level to our chief operating decision-maker. Resource allocations and decision-making processes are also made at the business unit level by our chief operating decision-maker. Affymetrix Core accounted for approximately 73% of total revenue and eBioscience accounted for approximately 27% of total revenue during the year ended December 31, 2014.
Affymetrix Core is divided into four business units, with each business unit having its own strategic marketing and research and development groups to better serve customers and respond quickly to market needs. Affymetrix Core manufacturing operations are based on platforms that are used to produce various Affymetrix products that serve multiple applications and markets and similar customer and economic characteristics. Additionally, the business units share certain research and development and common corporate services that provide capital, infrastructure and functional support, including finance, legal and human resources. As such, we have concluded that the four business units represent one reportable operating segment. The following describes the four business units that form Affymetrix Core:

Expression: This business unit markets the Company's GeneChip® gene expression products and services;
Genetic Analysis and Clinical Applications: This business unit markets the Company's Axiom® genotyping product line, as well as products with clinical diagnostic and research applications including CytoScan® HD, OncoScan products, and the ViewRNA in-situ hybridization platform for clinical translational research. In addition, the business unit is responsible for managing the PbA clinical partnering and licensing program which enables third-party diagnostic companies to access and develop DNA and RNA-based diagnostic tests on Affymetrix technology

34



platforms. This business unit also markets the CytoScan Dx product, the recently FDA approved microarray system for post natal diagnostics of children with developmental delays and intellectual disabilities;
Life Science Reagents: This business unit sells reagents, enzymes, purification kits and biochemicals used by life science researchers and other biological and health care manufacturers, including those developing and marketing Next Generation Sequencing (“NGS”) products and molecular diagnostics; and
Corporate: This business unit is comprised primarily of incidental revenue from royalty arrangements and field revenue from field-services provided to customers of the Company.
The eBioscience reporting segment operates with its own manufacturing, research and marketing groups. eBioscience does utilize certain Corporate functions such as finance, legal and human resources. This reportable segment specializes in the areas of flow cytometry reagents, immunoassays, microscopic imaging, other protein-based analyses, QuantiGene single and multiplex RNA solution assays (not including the View RNA in-situ hybridization platform) and the Procarta multiplex immunoassay product lines.

During 2014, the Genetic Analysis and Clinical Applications Business Unit began marketing the ViewRNA in-situ hybridization platform for clinical translational research of RNA in tissue sections, whereas these activities were previously part of the Expression Business Unit. In addition, eBioscience began integrating the development and marketing of the remaining QuantiGene (excluding the ViewRNA platform) and Procarta product lines during 2013 with full integration in 2014. These products were previously reported by the Expression Business Unit. Accordingly, segment information for prior periods has been restated to reflect these changes for purposes of comparability.

All of our business units sell their products through our Global Commercial Organization comprised of sales, field application and engineering support personnel. We market and distribute our products directly to customers in North America, Japan and major European markets. In these markets, we have our own sales, service and application support personnel responsible for expanding and managing their respective customer bases. In other markets, such as Mexico, India, Brazil, the Middle East and Asia Pacific, including China, we sell our products principally through third-party distributors that specialize in life science supply. We are selectively expanding our presence in the larger and more attractive markets, such as China. For certain molecular diagnostic and industrial opportunities, we supply our partners with arrays and instruments, which they incorporate into diagnostic products or other routine applications and assume the primary commercialization responsibilities.

Acquisition of eBioscience Holding Company, Inc.
On June 25, 2012, we acquired eBioscience, a privately-held company based in San Diego, California engaged in the development, manufacture and sale of flow cytometry and immunoassay reagents for immunology and oncology research and diagnostics (the "Acquisition") pursuant to an Amended and Restated Agreement and Plan of Merger dated May 3, 2012 (the "Acquisition Agreement"). The Acquisition allowed us to expand our addressable markets and continue to diversify our business beyond genomics discovery into cell and protein analysis.
We operate eBioscience as a separate segment to minimize or avoid any disruption of services, while taking advantage of opportunities to create efficiencies. We continue to seek additional research and development and commercial synergies between the two companies, including cross-selling opportunities, supply chain efficiencies and complementary distribution channels.
The Acquisition purchase price totaled $314.9 million, plus $17.5 million in other fees and expenses, including $8.5 million of underwriting and financing fees. The Acquisition was financed through a combination of cash on hand, the liquidation of available-for-sale securities, proceeds from the Term Loan of an aggregate principal amount of $85.0 million provided under our Senior Secured Credit Facility and the issuance of $105.0 million principal amount of our 4.00% Notes.

CRITICAL ACCOUNTING POLICIES & ESTIMATES
General
The following section of Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles ("US GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of

35



contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are fully described in "Item 8. Financial Statements and Supplementary Data—Note 2. Summary of Significant Accounting Policies." However, certain accounting policies are particularly important to the reporting of our financial position and results of operations and require the application of significant judgment by our management. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates could have reasonably been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the consolidated financial statements.
REVENUE RECOGNITION
We enter into contracts to sell our products and, while the majority of our sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the value of the arrangement should be allocated among the deliverable elements, when and how to recognize revenue for each element, and the period over which revenue should be recognized.
INVENTORIES
We enter into inventory purchases and commitments so that we can meet future shipment schedules based on forecasted demand for our products. The business environment in which we operate is subject to rapid changes in technology and customer demand. We perform a detailed assessment of inventory each period, which includes a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration and quality issues. Based on this analysis, we record adjustments to inventory for potentially excess, obsolete or impaired goods, when appropriate, in order to report inventory at net realizable value. These inventory adjustments may be required if actual demand, component costs, supplier arrangements, or product life cycles differ from our estimates. Any such adjustments would result in a charge to our results of operations.
GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS – IMPAIRMENT ASSESSMENTS
We review goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that its carrying value may not be recoverable. We first conduct an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we then conduct a two-step test for impairment of goodwill. In the first step, the fair value of our reporting units is compared to their carrying values. If the fair values of the reporting units exceed the carrying value of the net assets, goodwill is not considered impaired and no further analysis is required. If the carrying values of the net assets exceed the fair values of the reporting units, then the second step of the impairment test must be performed in order to determine the implied fair value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value, then an impairment loss equal to the difference would be recorded. During the third quarter of 2014, the Company performed an analysis of the qualitative factors and concluded that it was not more likely than not that the fair value of its reporting units are less than their carrying amounts.
We regularly review our finite-lived intangible assets and other long-lived assets to determine if the carrying values are impaired. A review is performed when an event occurs that may indicate the potential for impairment. If indicators of impairment exist, we assess the recoverability of the affected finite-lived intangible assets and other long-lived assets by determining whether the carrying amount of such assets exceeds the undiscounted expected future cash flows associated with such assets. If so, an impairment charge is recorded for the excess.
NON-MARKETABLE EQUITY SECURITIES
As part of our strategic efforts to gain access to potential new products and technologies, we invest in a limited partnership investment fund that is accounted for under the equity method. We periodically review our investment for impairment; however, the impairment analysis requires significant judgment in identifying events or circumstances that would

36



likely have significant adverse effect on the fair value of the investment. The analysis may include assessment of the investee's (i) revenue and earnings trend, (ii) business outlook for its products and technologies, (iii) liquidity position and the rate at which it is using its cash, and (iv) likelihood of obtaining subsequent rounds of financing. If an investee obtains additional funding at a valuation lower than our carrying value, we presume that the investment is other than temporarily impaired. We have experienced impairments due to the decline in the value of certain of our non-marketable investments over the past few years.
INCOME TAXES
Income tax expense is based on pretax financial accounting income. Under the asset and liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We must assess the likelihood that the resulting deferred tax assets will be realized. To the extent we believe that realization is not more likely than not, we establish a valuation allowance. Significant estimates are required in determining our provision for income taxes, our deferred tax assets and liabilities, any valuation allowance to be recorded against our deferred tax assets, and reserves for income tax related uncertainties. Some of these estimates are based on interpretations of existing tax laws or regulations.  Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in overall levels, character, or geographical mix of pretax earnings, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in the valuation of our deferred tax assets or liabilities, levels of research and development spending, nondeductible expenses, applicability of tax holidays, ultimate outcomes of income tax audits, income tax impacts of any business combination transactions, intraperiod tax allocation provisions, or changes in our equity structure.
CONTINGENCIES
We are subject to legal proceedings principally related to intellectual property matters. Based on the information available at the balance sheet dates, we assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. If losses are probable and reasonably estimable, we will record a reserve which may change in the future due to new developments in each matter.
SHARE-BASED COMPENSATION
We estimate the fair value of our option grants under our equity incentive plan and shares sold under our Employee Stock Purchase Plan using the Black‑Scholes-Merton ("BSM") option pricing model. This model requires the use of certain estimates and assumptions such as the expected term of options, estimated forfeitures, expected volatility of our stock price, expected dividends and the risk-free interest rate at the grant date to determine the fair value of the stock options. The fair value of our restricted stock awards, restricted stock units and performance based restricted stock units issued under our equity incentive plan, collectively referred to as restricted stock, is based on the market price of our common stock on the grant date. We recognize the fair value of its share-based compensation as expense on a straight-line basis over the requisite service period of each award, generally four years.
RESULTS OF OPERATIONS
The following discussion compares the historical results of operations for the years ended December 31, 2014, 2013 and 2012.

37



REVENUE
 
Year ended December 31,
 
 $ Change from
 
% Change from
 
2014
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Total revenue ($ in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumables
$
294,244

 
$
288,208

 
$
247,687

 
$
6,036

 
$
40,521

 
2
 %
 
16
 %
Instruments
16,214

 
14,410

 
18,376

 
1,804

 
(3,966
)
 
13
 %
 
(22
)%
Product sales
310,458

 
302,618

 
266,063

 
7,840

 
$
36,555

 
3
 %
 
14
 %
Services and other revenue
38,561

 
27,781

 
29,560

 
10,780

 
(1,779
)
 
39
 %
 
(6
)%
Total revenue
$
349,019

 
$
330,399

 
$
295,623

 
$
18,620

 
$
34,776

 
6
 %
 
12
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment revenue ($ in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
Affymetrix Core:
 
 
 
 
 
 
 
 
 
 
 
 
 
Expression
$
73,368

 
$
86,796

 
$
104,486

 
$
(13,428
)
 
$
(17,690
)
 
(15
)%
 
(17
)%
Genetic analysis and clinical applicaitons
138,446

 
98,978

 
85,063

 
39,468

 
13,915

 
40
 %
 
16
 %
Life science reagents
26,166

 
30,228

 
32,050

 
(4,062
)
 
(1,822
)
 
(13
)%
 
(6
)%
Corporate
18,545

 
25,448

 
23,506

 
(6,903
)
 
1,942

 
(27
)%
 
8
 %
Total Affymetrix Core
256,525

 
241,450

 
245,105

 
15,075

 
(3,655
)
 
6
 %
 
(1
)%
eBioscience
92,494

 
88,949

 
50,518

 
3,545

 
38,431

 
4
 %
 
76
 %
Total revenue
$
349,019

 
$
330,399

 
$
295,623

 
$
18,620

 
$
34,776

 
6
 %
 
12
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment revenue (% of revenue):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
Affymetrix Core:
 
 
 
 
 
 
 
 
 
 
 
 
 
Expression
21
%
 
26
%
 
35
%
 
 
 
 
 
 
 
 
Genetic analysis and clinical applicaitons
40
%
 
30
%
 
29
%
 
 
 
 
 
 
 
 
Life science reagents
7
%
 
9
%
 
11
%
 
 
 
 
 
 
 
 
Corporate
5
%
 
8
%
 
8
%
 
 
 
 
 
 
 
 
Total Affymetrix Core
73
%
 
73
%
 
83
%
 
 
 
 
 
 
 
 
eBioscience
27
%
 
27
%
 
17
%
 
 
 
 
 
 
 
 
Total revenue
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 

Product sales
For the year ended December 31, 2014, product sales increased $7.8 million or 3% as compared to 2013. The increase was primarily due to higher volume of Cytogenetics, Axiom, OncoScan, and Procarta Plex products. These increases were partially offset by a decline in our legacy in vitro transcription (IVT) expression product sales and a decrease in revenue of $4.5 million due to the divestiture of our Anatrace-branded reagents in October of 2013. Instrument revenue increased due to a higher volume of genotyping instrument sales.
For the year ended December 31, 2013, product sales increased $36.6 million or 14% as compared to 2012. The increase was primarily due to a full year revenue from eBioscience in 2013 as compared to half a year revenue from eBioscience in 2012 and a $13.9 million increase in our Genetic Analysis and Clinical Applications business unit as a result of

38



increased volume of sales in our Cytogenetics and Axiom® products. The increase is partially offset by a $17.7 million decline in our Expression business unit revenue.
Services and other revenue
For the year ended December 31, 2014, services and other revenue increased $10.8 million or 39% as compared to 2013. The increase was primarily due to increased Axiom genotyping services of $15.4 million and OncoScan services of $1.0 million. These increases were partially offset by lower royalties and license revenue of $5.7 million.
For the year ended December 31, 2013, services and other revenue decreased $1.8 million or 6% as compared to 2012. The decrease was primarily due to decreased Axiom services and field services, partially offset by a $5.3 million one-time licensing payment from a diagnostic partner in 2013.
Expression  
For the year ended December 31, 2014, Expression revenue decreased $13.4 million or 15% as compared to 2013. The decrease was primarily due to lower IVT product sales of $10.4 million, lower Exon array sales of $7.1 million, and lower Gene array sales of $1.7 million. These decreases were partially offset by higher human transcriptome array (HTA) sales of $5.9 million.
For the year ended December 31, 2013, Expression revenue decreased $17.7 million or 17% as compared to 2012. The decrease was primarily driven by a decline in GeneChip revenue of $15.4 million, which was related to lower sales of IVT products. Instrument-related revenue also decreased $2.3 million as compared to the prior year.
Genetic Analysis and Clinical Applications  
For the year ended December 31, 2014, Genetic Analysis and Clinical Applications revenue increased $39.5 million or 40% as compared to 2013. The increase was primarily due to increased Axiom® product sales and services of $23.8 million, increased Cytogenetics product sales of $7.9 million, increased instrument sales of $2.4 million, increased sales to PbA partners of $3.7 million, and increased OncoScanTM product sales and services of $3.7 million, partially offset by a decline in sales of SNP 6.0, our legacy genotyping product, of $2.5 million.
For the year ended December 31, 2013, Genetic Analysis and Clinical Applications revenue increased $13.9 million or 16% as compared to 2012. The increase was primarily due to increases in our CytoGenetics products of $7.4 million and Axiom product and service of $14.6 million. These increases were partially offset by a decline in sales of our legacy genotyping product, SNP 6.0, of $5.2 million and instruments of $1.7 million.
Life Science Reagents  
For the years ended December 31, 2014 and 2013, Life Science Reagents revenue decreased $4.1 million or 13% and $1.8 million or 6%, respectively, when compared to prior year periods primarily due to the divestiture of our Anatrace-branded reagents in October 2013 and lower volume of sales.
Corporate
For the year ended December 31, 2014, Corporate revenue decreased $6.9 million or 27% as compared to 2013 due to a decrease in royalties and license revenue of $5.7 million and a decrease in freight revenue of $1.6 million related to change in classification.
For the year ended December 31, 2013, Corporate revenue increased by $1.9 million or 8% as compared to 2012 due to an increase in royalties and licensing fees of $4.4 million, partially offset by decrease in field service revenue of $1.4 million.
eBioscience
For the year ended December 31, 2014, eBioscience revenue increased $3.5 million or 4% as compared to 2013. The increase was primarily due to increase in our Procarta Plex sales of $6.2 million and Flow Cytometry sales of $1.2 million. These increases were offset by a decrease in our legacy Procarta product sales of $2.5 million and a decrease in Flowcytomics sales of $1.8 million.

39



For the year ended December 31, 2013, eBioscience revenue increased $38.4 million or 76% as compared to 2012. The increase was due to a full year of revenue in 2013 compared to six months in 2012.
GROSS MARGIN
Dollars in thousands
Year ended December 31,
 
$ % Change from
 
2014
 
2013
 
2012
 
2013
 
2012
Total gross profit on product sales
$
192,959

 
$
168,636

 
$
149,802

 
$
24,323

 
$
18,834

Total gross profit on services and other
$
12,902

 
$
12,402

 
$
13,686

 
500

 
(1,284
)
 
 
 
 
 
 
 
 
 
 
Product gross margin as a percentage of product sales
62
%
 
56
%
 
56
%
 
6
 %
 
 %
Service gross margin as a percentage of services and other
33
%
 
45
%
 
46
%
 
(12
)%
 
(1
)%

Product gross profit
For the year ended December 31, 2014, product gross profit increased $24.3 million as compared to 2013, primarily due to increased sales, favorable factory absorption on higher manufacturing volume to support increased sales, and the cost savings arising from using materials available internally in the manufacture of our products. The increase is also due to the decline in amortization of step-up in inventory fair value that was recognized when we acquired eBioscience in 2012 and was fully amortized as of June 30, 2014. Product gross profit for 2014 included $4.7 million of amortization of step-up in inventory fair value compared to $14.9 million in 2013. In addition, the increase is due to lower instrument and array warranty expense of $2.3 million and reduction in inventory reserve of $1.4 million related to an inventory write-off for a quality issue in the same period of 2013 and improved product shelf lives.
For the year ended December 31, 2013, product gross profit increased $18.8 million as compared to 2012, primarily due to the inclusion of eBioscience product margins. The increase is also due to headcount reduction savings following our first quarter restructuring effort, favorable cost absorption and material cost savings. These increases were partially off-set by lower product pricing and a shift to lower margin products.
Services and other gross profit
For the year ended December 31, 2014, services and other gross profit increased $0.5 million as compared to 2013, primarily due to favorable impact of revenue recognized from a large biobank project in 2014, offset by a decrease in royalty and license revenue.
For the year ended December 31, 2013, services and other gross profit decreased $1.3 million as compared to 2012, primarily due to decreased Axiom services and field services, partially offset by $5.3 million one-time licensing payment from a diagnostic partner.
OPERATING EXPENSES
Dollars in thousands
Year ended December 31,
 
$ Change from
 
% Change from
 
2014
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Research and development
$
50,227

 
$
47,670

 
$
57,881

 
$
2,557

 
$
(10,211
)
 
5
 %
 
(18
)%
Selling, general and administrative
148,411

 
141,430

 
142,853

 
6,981

 
(1,423
)
 
5
 %
 
(1
)%
Litigation settlement
5,100

 

 

 
5,100

 

 
nm

 
nm

Restructuring charges

 
4,490

 
1,845

 
(4,490
)
 
2,645

 
(100
)%
 
143
 %
nm - not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 


40



Research and development
For the year ended December 31, 2014, research and development expenses increased $2.6 million or 5% as compared to 2013. The increase was primarily due to consulting services of $2.8 million related to the development of our new instrument and increased compensation and benefits of $0.4 million, partially offset by lower spending on supplies of $0.7 million.
For the year ended December 31, 2013, research and development expenses decreased $10.2 million or 18% as compared to 2012. The decrease was primarily due to lower spending on supplies of $4.4 million, savings in headcount-related costs due to restructuring totaling $4.1 million and savings in allocated costs associated with IT and facilities of $3.4 million and consulting of $2.9 million. These decreases were partially offset by an increase in eBioscience research and development expenses and an increase in variable compensation costs of $1.1 million. eBioscience research and development expense increased approximately $5.0 million because 2013 represents a full year of expenses compared to half a year in 2012.
Selling, general and administrative

For the year ended December 31, 2014, selling, general and administrative expenses increased $7.0 million or 5% as compared to 2013. The increase was primarily due to increases in compensation and benefits of $5.0 million due to increased headcount, increased bonus attainment and commission accelerators, increased stock-based compensation of $2.2 million, and additional legal fees of $3.0 million incurred during 2014 primarily related to on-going litigation activities, partially offset by lower depreciation and amortization expense of $2.2 million due to assets becoming fully depreciated and amortized.
For the year ended December 31, 2013, selling, general and administrative expenses decreased $1.4 million or 1% as compared to 2012. The decrease was primarily due to savings in headcount related costs totaling $7.2 million, lower facilities and rent expense of $1.6 million, lower consulting fees of $1.0 million, lower depreciation and amortization expense of $1.5 million due to assets becoming fully amortized, and lower allocated costs associated with IT and facilities of $3.2 million. The decrease was mostly offset by an increase in eBioscience selling, general and administrative expenses of $18.2 million, and an increase in variable compensation costs of $3.5 million. Selling, general and administrative expenses for eBioscience increased approximately $18.2 million because 2013 represents a full year of expenses compared to half a year in 2012. In addition, in 2012, we incurred non-recurring acquisition-and integration-related costs of $16.5 million as compared to $0.8 million incurred in 2013.
Litigation settlement
On April 22, 2014, the Company entered into a settlement agreement with Enzo with respect to our dispute with Enzo brought in the Southern District Court of New York. Pursuant to the agreement the Company agreed to pay Enzo $5.1 million as consideration for both parties agreeing to release each other from all liabilities and claims arising under both lawsuits. As the settlement related to past claims with no ongoing benefit, these costs were recognized during the first three months of 2014 when the amount was determined to be probable and estimable.
Restructuring charges
During 2012, the Company initiated a cost reduction action that included workforce reductions to realign the Company's organization to support its strategy to stabilize its core business and position the Company for growth. Restructuring charges of $4.5 million and $1.8 million were recognized during the first half of 2013 and fourth quarter of 2012, respectively. The restructuring activities were completed in the second quarter of 2013.


41



OPERATING INCOME (LOSS)
Dollars in thousands
Year ended December 31,
 
$ Change from
 
% Change from
 
2014
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Operating income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Affymetrix Core
2,917

 
(1,085
)
 
(35,374
)
 
$
4,002

 
$
34,289

 
369
 %
 
97
 %
eBioscience
(794
)
 
(11,467
)
 
(3,717
)
 
10,673

 
(7,750
)
 
93
 %
 
(209
)%
Total operating income (loss)
$
2,123

 
$
(12,552
)
 
$
(39,091
)
 
$
14,675

 
$
26,539

 
117
 %
 
68
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation to loss before income taxes:
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense), net
$
652

 
$
802

 
$
(265
)
 
$
(150
)
 
$
1,067

 
(19
)%
 
403
 %
Interest expense
6,373

 
12,711

 
7,193

 
(6,338
)
 
5,518

 
50
 %
 
(77
)%
Gain on sale of product line

 
9,295

 

 
(9,295
)
 
9,295

 
(100
)%
 
nm

Loss before income taxes
$
(3,598
)

$
(15,166
)
 
$
(46,549
)
 
11,568

 
31,383

 
76
 %
 
67
 %
nm - not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 

Other income (expense), net, decreased $0.2 million for the year ended December 31, 2014 as compared to 2013. The decrease was primarily due to currency losses related to the fluctuations in Euros and Japanese Yen, offset by the gains recorded in 2014 related to the liquidation of non-marketable securities.
Other income (expense), net, increased $1.1 million for the year ended December 31, 2013 as compared to 2012. The increase was primarily due to a property tax refund of approximately $0.6 million, receipt of $0.2 million for a private biotechnology company investment that was fully impaired, and lower impairment loss recorded in 2013.
Interest expense decreased in 2014 as compared to 2013, primarily due to a combination of lower outstanding borrowings in 2014 as well as lower interest rates following the refinancing of our Senior Secured Credit Facility in October 2013 and the further modification in July 2014.
Interest expense increased in 2013 as compared to 2012 due to a full year of interest expense in 2013 compared to six months in 2012 on our Term Loan. The Company also refinanced the Senior Secured Credit Facility and wrote off unamortized debt issuance costs of $2.5 million associated with the original Term Loan during 2013.
SALE OF PRODUCT LINE
Effective October 11, 2013, the Company sold its Anatrace-branded reagents and the related group of assets used to manufacture the product line for net proceeds of approximately $11.8 million. The carrying value of the group of assets sold was approximately $2.5 million at the date of disposition and was primarily comprised of inventory. The Company recorded a gain on the sale of Anatrace product line of $9.3 million during the fourth quarter of 2013.
INCOME TAX PROVISION (BENEFIT)
Dollars in thousands
 
 
 
 
 
 
Dollar
 
Percentage
 
Year ended December 31,
 
change from
 
change from
 
2014
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Income tax provision(benefit)
$
236

 
$
1,161

 
$
(35,853
)
 
$
(925
)
 
$
37,014

 
(80
)%
 
(103
)%

The income tax expense in 2014 of approximately $0.2 million consisted primarily of foreign taxes, offset by a benefit resulting from a reduction in valuation allowance for net deferred tax assets arising from other comprehensive income recorded in accordance with intraperiod tax allocation provisions, as well as a benefit related to uncertain tax benefits resulting from

42



lapses of statute of limitations and effective settlements. The income tax expense in 2013 of approximately $1.2 million consisted primarily of foreign taxes, offset by an income tax benefit of approximately $0.3 million resulting from a reduction in valuation allowance for net deferred tax assets arising from other comprehensive income recorded in accordance with intraperiod tax allocation provisions. The income tax benefit in 2012 of approximately $35.9 million consisted primarily of a $37.1 million one-time benefit resulting from a change in valuation allowance for our previously existing deferred tax assets as a result of the Acquisition, offset by an income tax provision for foreign taxes.
Deferred tax assets are recognized if the realization of such assets is more likely than not. As of December 31, 2014, we provided for a valuation allowance of $138.0 million against our net deferred tax assets. As a result of negative evidence based on our cumulative net loss position, we have placed a full valuation allowance on U.S. and certain foreign deferred tax assets. We intend to maintain the valuation allowance until sufficient positive evidence exists to assure realization of these tax benefits through future taxable income.
As of December 31, 2014, we had U.S. federal net operating loss carryforwards of $178.2 million which begin to expire in 2022 if not utilized, and California net operating loss carryforwards of $115.4 million which begin to expire in 2015 if not utilized. As certain of our net operating loss and tax credit carryforwards as of December 31, 2014 were generated by entities we previously acquired, they are subject to annual limitations due to the ownership change provisions under Internal Revenue Code Section 382 and similar state provisions. We expect our cash payments of U.S. taxes will be minimal as long as we are able to offset our taxable income by U.S. net operating losses and credits. If we have an ownership change subsequent to December 31, 2014, utilization of our net operating loss and tax credit carryforwards may be subject to an annual limitation against taxable income in future periods.

LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Historically, we have financed our operations primarily through product sales; borrowings under credit arrangements; sales of equity and debt securities, collaborative agreements; interest income; and licensing of our technology.
Our cash outflows have generally been as follows: cash used in operating activities such as research and development programs, sales and marketing activity, compensation and benefits of our employees and other working capital needs; cash paid for acquisitions; cash paid for litigation activity and settlements; and cash used for the payment of principal on debt obligations and repurchases of our convertible notes as well as interest payments on our long-term debt obligations.
As of December 31, 2014, we had cash and cash equivalents of approximately $79.9 million. We anticipate that our existing capital resources along with the cash to be generated from operations will enable us to maintain currently planned operations, debt service, convertible notes repurchases, and capital expenditures for at least the next twelve months. These expectations are based on our current operating and financing plans, which are subject to change, and therefore we could require further funding. Factors that may cause us to require additional funding may include, but are not limited to: costs associated with defending third party claims; adverse ruling in any of our current litigation proceedings; investments required to commercialize our products; investments required to upgrade our older product lines; a decline in cash generated by sales of our products and services; our ability to maintain existing collaborative and customer arrangements and establish and maintain new collaboration and customer arrangements; arrangements that we may enter into in connection with future acquisitions; the progress of our research and development programs; initiation or expansion of research programs and collaborations; the costs involved in preparing, filing, prosecuting and enforcing intellectual property rights; the purchase of patent licenses; and other factors.
On June 25, 2012, we completed our acquisition of eBioscience for approximately $307.8 million, representing the purchase price of $314.9 million less $7.1 million cash transferred from eBioscience. The Acquisition was financed through a combination of cash on hand, the liquidation of available-for-sale securities, the proceeds, net of debt issuance costs, from our Term Loan of $80.5 million provided under our Senior Secured Credit Facility and the proceeds from the issuance, net of underwriting fees, of our 4.00% Notes of $101.1 million. During the year ended December 31, 2012, we made $8.2 million of cash payments for legal, advisory and other costs related to the Acquisition. As part of the terms of the Senior Secured Credit Facility, we are required to meet certain financial and other negative covenants.
On October 17, 2013, we amended the Credit Agreement and refinanced our Senior Secured Credit Facility to provide, among other things, for new term loans in the aggregate principal amount of $38.0 million and new revolving loan commitments in the aggregate principal amount of $10.0 million.

43



During the year ended December 31, 2014, we prepaid $16.5 million of our Senior Secured Credit Facility with cash provided by operations. In July 2014, we entered into the Fifth Amendment, which provides, among other things, for (1) an uncommitted incremental term loan facility in an aggregate amount not to exceed $50.0 million and (2) the reduction of interest rate margins. As of December 31, 2014, the carrying amount of the senior secured debt was $23.0 million.
As part of the terms of the Senior Secured Credit Facility, we are required to meet certain financial and other negative covenants. As of December 31, 2014, we were in compliance with the amended covenants. Refer to Note 12. "Long-Term Debt Obligations" for further details regarding our Senior Secured Credit Facility and 4.00% Notes.
From time to time, we may seek to retire, repurchase or exchange common stock or convertible notes in open market purchases, privately negotiated transactions dependent on market conditions, liquidity, and contractual obligations and other factors. We did not retire, repurchase or exchange any of our common stock or 4.00% Notes during the years ended December 31, 2014 or 2013. During the first quarter of 2012, we repurchased approximately $91.6 million of aggregate principal amount of our 3.50% Notes at par plus accrued and unpaid interest for total cash consideration of $92.1 million, including accrued interest of $0.5 million. In January 2013, we redeemed the remaining $3.9 million of outstanding aggregate principal amount of our 3.50% Notes at par plus accrued and unpaid interest of $0.1 million.
On November 18, 2014, we entered into a Sales Agreement with Cantor Fitzgerald & Co. (“Cantor Fitzgerald”) to offer shares of our common stock from time to time through Cantor Fitzgerald, as the Company’s sales agent for the offer and sale of the shares. The Company may offer and sell shares for an aggregate offering price of up to $50 million. We did not make any sales under the Sales Agreement in 2014.

Cashflow (in thousands)
 
Year Ended December 31,
 
2014
 
2013
 
2012
Net cash provided by operating activities
$
43,483

 
$
53,584

 
$
3,731

Net cash provided by (used in) investing activities
(4,671
)
 
15,652

 
(258,933
)
Net cash (used in) provided by financing activities
(15,293
)
 
(37,936
)
 
78,500

Effect of foreign currency translation on cash and cash equivalents
(724
)
 
157

 
436

Net increase (decrease) in cash and cash equivalents
$
22,795

 
$
31,457

 
$
(176,266
)

Operating Activities
Net cash provided by operating activities for the year ended December 31, 2014 was comprised of net loss of $3.8 million, non-cash charges of $44.3 million, and an increase related to changes in operating assets and liabilities of $3.0 million. Adjustments for non-cash expenses include depreciation and amortization expense of $30.7 million, $4.7 million of amortization on the fair value step-up of inventory, share-based compensation expense of $12.4 million and gain on sales of securities of $2.5 million.
Net cash provided by operating activities for the year ended December 31, 2013 was comprised of net loss of $16.3 million, non-cash charges of $57.6 million including a gain on the sale of the Anatrace product line of $9.3 million, and an increase related to changes in operating assets and liabilities of $12.3 million. Adjustments for non-cash expenses include depreciation and amortization expense of $39.0 million, $14.9 million of amortization on the fair value step-up of inventory, and share-based compensation expense of $7.7 million.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2014 included proceeds from sale of non-marketable securities of $3.1 million and capital expenditures of $7.9 million.
During the first quarter of 2013, we sold our remaining available-for-sale securities for $9.4 million in cash proceeds. Investing activities for the year ended December 31, 2013 included $11.8 million proceeds from the sale of the Anatrace product line, capital expenditures of $4.8 million and purchases of technology rights of $0.7 million.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2014 included $16.5 million of early payments on the outstanding principal amount of borrowings under our Term Loan agreement. Other financing activities generally

44



consisted of stock option exercise activity under our employee stock plan. Cash used in the paying withholding taxes in connection with issuance of stock under our employee stock plan, net of treasury shares withheld for taxes, was $1.2 million for the year ended December 31, 2014.
In 2012, to fund the acquisition of eBioscience, we obtained a Term Loan of an aggregate principal amount of $85.0 million. On October 17, 2013, we amended the Credit Agreement and refinanced our Senior Secured Credit Facility, which is subject to certain financial and operating covenants and amortizes over a 5 year period. The Fourth Amendment provides, among other things, for new term loans in the aggregate principal amount of $38.0 million and new revolving loan commitments in the aggregate principal amount of $10.0 million. The proceeds from the debt refinancing were used to pay off existing senior debt. The existing unamortized deferred debt issuance costs with a carrying value of approximately $2.5 million were written off during the fourth quarter of 2013 as the modified terms of the arrangement are substantially different. Refer to Note 12. "Long-Term Debt Obligations" in this Annual Report on Form 10-K for further details regarding the Term Loan, our Senior Secured Credit Facility and our 4.00% Notes.
In addition to certain mandatory payments, from time to time, we also may make early payments on the outstanding principal amount of our Term Loan.
Other financing activities generally consist of stock option exercise activity under our employee stock plan. Cash used in the issuance of stock under our employee stock plan, net of treasury shares withheld for taxes, was $0.8 million for the year ended December 31, 2013. In addition, during the first quarter of 2013, we redeemed the remaining outstanding 3.50% Notes for $3.9 million in total cash consideration, including accrued interest of $0.1 million.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
As of December 31, 2014, we had no off-balance sheet arrangements. The impact that our contractual obligations as of December 31, 2014 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):
 
Total
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
Convertible notes (1)
$
105,000

 

 

 

 

 
105,000

 

Senior secured credit facility (2)
22,950

 

 

 
150

 
22,800

 

 

Interest payments
20,815

 
4,888

 
4,766

 
4,644

 
4,417

 
2,100

 

Operating leases
65,222

 
9,003

 
7,229

 
7,745

 
7,055

 
7,193

 
26,997

Purchase commitments (3)
5,115

 
4,585

 
530

 

 

 

 

Total contractual obligations
$
219,102

 
$
18,476

 
$
12,525

 
$
12,539

 
$
34,272

 
$
114,293

 
$
26,997


(1)
Our 4.00% Notes may be converted into shares at the option of holder prior to maturity date. On or after July 1, 2017, the Company may redeem all or part of the 4.00% Notes for cash following certain events. Refer to "Item 8. Financial Statements and Supplementary Data-Note 12. Long Term Debt Obligation" for additional discussion.

(2)
Reflects anticipated principal payment obligations that will be made each year.

(3)
Purchase commitments include agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

The above table does not reflect unrecognized tax benefits of approximately $21.9 million, the timing of which is uncertain. Refer to "Item 8. Financial Statements and Supplementary Data—Note 15. Income Taxes" for additional discussion on unrecognized tax benefits.

45



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to foreign currency exchange rate, interest rate and equity price risks that could impact our financial position and results of operations. Our risk management strategy with respect to these three market risks may include the use of derivative financial instruments. We use derivative contracts only to manage existing underlying exposures of Affymetrix. Accordingly, we do not use derivative contracts for speculative purposes. Our risks, risk management strategy and a sensitivity analysis estimating the effects of changes in fair values for each of these exposures are outlined below.
Actual gains and losses in the future may differ materially from the sensitivity analyses based on changes in the timing and amount of interest rate, foreign currency exchange rate and equity price movements and our actual exposures and hedges.
Interest Rate Risk
We are exposed to market risk from changes in interest rates on long-term debt obligations. We have a combination of fixed and variable rate debt. Refer to "Item 8. Financial Statements and Supplementary Data-Note 12. Long-Term Debt Obligations." In October 2013, we refinanced $48.0 million under our Senior Secured Credit Facility. In July 2014, we entered into the Fifth Amendment, which provides, among other things, for (1) an uncommitted incremental term loan facility in an aggregate amount not to exceed $50.0 million and (2) the reduction of interest rate margins. As of December 31, 2014, we had $23.0 million of borrowings outstanding under the term loans. Our interest rate risk relates primarily to U.S. dollar LIBOR-indexed borrowings.
A 100 basis point increase in interest rates on the current borrowings is not expected to have a material impact on our financial position, results of operations or cash flows since interest on our borrowings is not material to our overall financial position.
 
Periods of Maturity
 
 
 
Fair Value at December 31, 2014
 
2015
 
2016
 
2017
 
Thereafter
 
Total
 
LIABILITIES:
 

 
 

 
 

 
 

 
 

 
 

4.00% convertible senior notes due 2019
$

 
$

 
$

 
$
105,000

 
$
105,000

 
$
188,337

Average interest rate
 

 
 

 
 

 
4.00
%
 
 

 
 

Average interest rate
 
 
 
 
 
 
Variable

 
 
 
 
Senior secured credit facility
$

 
$

 
$
150

 
$
22,800

 
$
22,950

 
$
22,950

Average interest rate
Variable
 
Variable
 
Variable
 
Variable
 
 

 
 


Foreign Currency Exchange Rate Risk
We derive a portion of our revenues in foreign currencies, which are predominantly denominated in Euros and Japanese Yen. In addition, a portion of our assets are held in nonfunctional currencies of our subsidiaries. We use currency forward contracts to manage a portion of the currency exposures created from our activities denominated in foreign currencies. Our hedging program is designed to reduce, but does not entirely eliminate, the impact of currency exchange rate movements. Refer to "Item 8. Financial Statements and Supplementary Data-Note 2. Summary of Significant Accounting Policies – Derivative Instruments" for further information.

46



The following table summarizes the notional amounts, weighted-average currency exchange rates and fair values of our unsettled foreign currency exchange forward contracts at December 31, 2014 and 2013. All contracts have maturities of 12 months or less. Weighted-average rates are stated in terms of the amount of U.S. dollars per foreign currency. Fair values represent estimated settlement amounts at December 31, 2014 and 2013 (notional amounts and fair values in U.S. dollars and in thousands):
 
Notional
Amount
 
Weighted-
Average
Settlement
Price
 
Fair
Value
December 31, 2014
 
 
 
 
 
Currency
 
 
 
 
 
Euro
$
15,982

 
1.28

 
$
822

Japanese Yen
3,391

 
106.75

 
365

British Pound
1,784

 
1.62

 
71

Interest rate swap

 
 

 

Total
$
21,157

 
 

 
$
1,258

December 31, 2013
 

 
 

 
 

Currency
 

 
 

 
 

Euro
$
21,990

 
1.37

 
$
(623
)
Japanese Yen
4,588

 
103.00

 
185

British Pound
5,653

 
1.63

 
304

Interest rate swap
10,308

 
 
 
(11
)
Total
$
42,539

 
 

 
$
(145
)


47



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AFFYMETRIX, INC.

48



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Affymetrix, Inc.
We have audited the accompanying consolidated balance sheets of Affymetrix, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Affymetrix, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Affymetrix, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control‑Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 18, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
 
 
 
Redwood City, California
 
February 18, 2015
 

49



AFFYMETRIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
 
December 31, 2014
 
December 31, 2013
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
79,923

 
$
57,128

Accounts receivable, net
46,896

 
50,862

Inventories—short-term portion
50,676

 
58,059

Deferred tax assets—short-term portion
3,778

 
767

Prepaid expenses and other current assets
9,197

 
8,920

Total current assets
190,470

 
175,736

Property and equipment, net
18,087

 
18,671

Inventories—long-term portion
5,956

 
5,972

Goodwill
156,178

 
161,595

Intangible assets, net
106,183

 
131,108

Deferred tax assets—long-term portion
303

 
355

Other long-term assets
9,371

 
11,074

Total assets
$
486,548

 
$
504,511

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY:
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
53,063

 
$
45,534

Term loan—short-term portion
4,000

 
12,750

Deferred revenue—short-term portion
9,210

 
18,660

Total current liabilities
66,273

 
76,944

Deferred revenue—long-term portion
2,372

 
2,824

Convertible notes
105,000

 
105,000

Term loan—long-term portion
18,950

 
26,700

Other long-term liabilities
21,626

 
21,496

Stockholders' equity:
 

 
 

Convertible preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued and outstanding at December 31, 2014 or 2013

 

Common stock, $0.01 par value; 200,000 shares authorized; 74,287 and 72,305 shares issued and outstanding at December 31, 2014 and 2013, respectively
743

 
723

Additional paid-in capital
781,747

 
768,149

Accumulated other comprehensive income (loss)
(612
)
 
8,392

Accumulated deficit
(509,551
)
 
(505,717
)
Total stockholders' equity
272,327

 
271,547

Total liabilities and stockholders' equity
$
486,548

 
$
504,511


See Accompanying Notes

50



AFFYMETRIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 
Year Ended December 31,
 
2014
 
2013
 
2012
REVENUE:
 
 
 
 
 
Product sales
$
310,458

 
$
302,618

 
$
266,063

Services and other
38,561

 
27,781

 
29,560

Total revenue
349,019

 
330,399

 
295,623

COSTS AND EXPENSES:
 

 
 

 
 

Cost of product sales
117,499

 
133,982

 
116,261

Cost of services and other
25,659

 
15,379

 
15,874

Research and development
50,227

 
47,670

 
57,881

Selling, general and administrative
148,411

 
141,430

 
142,853

Litigation settlement
5,100

 

 

Restructuring charges

 
4,490

 
1,845

Total costs and expenses
346,896

 
342,951

 
334,714

Income (loss) from operations
2,123

 
(12,552
)
 
(39,091
)
Other income (expense), net
652

 
802

 
(265
)
Interest expense
6,373

 
12,711

 
7,193

Gain on sale of product line

 
9,295

 

Loss before income taxes
(3,598
)
 
(15,166
)
 
(46,549
)
Income tax provision (benefit)
236

 
1,161

 
(35,853
)
Net loss
$
(3,834
)
 
$
(16,327
)
 
$
(10,696
)
 
 
 
 
 
 
Basic and diluted net loss per common share
$
(0.05
)
 
$
(0.23
)
 
$
(0.15
)
 
 
 
 
 
 
Shares used in computing basic and diluted net loss per common share
73,202

 
71,441

 
70,300


See Accompanying Notes

51



AFFYMETRIX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
 
Year Ended December 31,
 
2014
 
2013
 
2012
Net loss
$
(3,834
)
 
$
(16,327
)
 
$
(10,696
)
Other comprehensive income (loss), net of tax:
 

 
 

 
 

Foreign currency translation adjustment
(10,717
)
 
2,410

 
4,553

Unrealized change in fair value of available-for-sale and non-marketable securities (net of tax of $290 and $290 for the years ended December 31, 2014 and 2013, respectively)
(154
)
 
476

 
51

Unrealized change in fair value of cash flow hedges (net of tax of $154 and $0 for the years ended December 31, 2014 and 2013, respectively)
1,867

 
(796
)
 
(794
)
Net change in other comprehensive income (loss), net of tax
(9,004
)
 
2,090

 
3,810

Comprehensive loss
$
(12,838
)
 
$
(14,237
)
 
$
(6,886
)

See Accompanying Notes

52



AFFYMETRIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
 
 
 
 
 
Additional
 
Accumulated
Other
 
 
 
 
 
Common Stock
 
Paid-In
 
Comprehensive
 
Accumulated
 
 
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Deficit
 
Total
Balance as of December 31, 2011
70,454

 
$
704

 
$
750,332

 
$
2,492

 
$
(478,694
)
 
$
274,834

Issuance of common stock in connection with employee stock plans and other
271

 
5

 
(756
)
 

 

 
(751
)
Employee stock purchase plan
305

 
1

 
1,026

 

 

 
1,027

Share-based compensation expense

 

 
8,947

 

 

 
8,947

Net change in other comprehensive income (loss), net of tax

 

 

 
3,810

 

 
3,810

Net loss

 

 

 

 
(10,696
)
 
(10,696
)
Balance as of December 31, 2012
71,030

 
710

 
759,549

 
6,302

 
(489,390
)
 
277,171

Issuance of common stock in connection with employee stock plans and other
924

 
9

 
(94
)
 

 

 
(85
)
Employee stock purchase plan
351

 
4

 
907

 

 

 
911

Share-based compensation expense

 

 
7,727

 

 

 
7,727

Income tax benefit from share-based compensation
 
 
 
 
60

 
 
 
 
 
60

Net change in other comprehensive income (loss), net of tax

 

 

 
2,090

 

 
2,090

Net loss

 

 

 

 
(16,327
)
 
(16,327
)
Balance as of December 31, 2013
72,305

 
723

 
768,149

 
8,392

 
(505,717
)
 
271,547

Issuance of common stock in connection with employee stock plans and other
1,647

 
16

 
(987
)
 

 

 
(971
)
Employee stock purchase plan
335

 
4

 
2,174

 

 

 
2,178

Share-based compensation expense

 

 
12,411

 

 

 
12,411

Net change in other comprehensive income (loss), net of tax

 

 

 
(9,004
)
 

 
(9,004
)
Net loss

 

 

 

 
(3,834
)
 
(3,834
)
Balance as of December 31, 2014
74,287

 
$
743