The following discussion of our financial condition and results of operations should be read with our unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report for the six months ended June 30, 2012, as well as the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2011, included in our Annual Report on Form 10-K for the year ended December 31, 2011. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management including, without limitation, our expectations regarding our results of operations, sales and marketing expenses, general and administrative expenses, research and development expenses, and the sufficiency of our cash for future operations. Words such as "we expect," "anticipate," "target," "project," "believe," "goals," "estimate," "potential," "predict," "may," "will," "expect," "might," "could," "intend," variations of these terms or the negative of those terms and similar expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.

Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed under the heading "Risk Factors" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2011 and any risk factors described under the heading "Risk Factors" in Item 1A of Part II of this Quarterly Report. We do not intend to update these forward looking statements to reflect future events or circumstances.

Overview

GenMark was established to serve as the parent company of Osmetech upon a corporate reorganization in Delaware in February 2010 and had no operations prior to its initial public offering which was completed in June 2010. Immediately prior to the closing of the initial public offering, GenMark acquired all of the outstanding ordinary shares of Osmetech in a reorganization under the applicable laws of the United Kingdom. As a result of the reorganization, all of the issued ordinary shares in Osmetech were cancelled in consideration of (i) the issuance of common stock of GenMark to the former shareholders of Osmetech and (ii) the issuance of new shares in Osmetech to GenMark. Following the reorganization, Osmetech became a wholly-owned subsidiary controlled by GenMark, and the former shareholders of Osmetech held shares of GenMark. Any historical discussion of GenMark relates to Osmetech and its consolidated subsidiaries prior to the reorganization.

We are a molecular diagnostics company focused on developing and commercializing our proprietary eSensor detection technology. Our proprietary electrochemical technology enables fast, accurate and highly sensitive detection of up to 72 distinct biomarkers in a single sample. Our XT-8 system received 510(k) clearance from the FDA and is designed to support a broad range of molecular diagnostic tests with a compact and easy-to-use workstation and self-contained, disposable test cartridges. Within 30 minutes of receipt of an amplified DNA sample, our XT-8 system produces clear and accurate results. Our XT-8 system supports between one and three analyzers. Each analyzer holds up to eight independent test cartridges, resulting in the XT-8 system supporting up to 24 test cartridges, each of which can be run independently, resulting in a convenient and flexible workflow for our target customers, which are hospitals and reference laboratories. As of June 30, 2012, we had an installed base of 220 analyzers, or placements, with our customers.

We have developed six tests for use with our XT-8 system and expect to expand this test menu by introducing new tests annually. Three of our diagnostic tests have received FDA clearance, including our Cystic Fibrosis Genotyping Test, which detects genetic changes associated with cystic fibrosis, our Warfarin Sensitivity Test, which determines an individual's ability to metabolize the oral anticoagulant warfarin, and our Thrombophilia Risk Test, which detects an individual's increased risk of blood clots. Our eSensor technology has demonstrated 100% accuracy in clinical studies compared to DNA sequencing in our Cystic Fibrosis Genotyping Test, our Warfarin Sensitivity Test and our Thrombophilia Risk Test. We have also developed a Respiratory Viral Panel Test, which detects the presence of major respiratory viruses and is currently labeled for Research Use Only (RUO). In December 2011, we submitted our Respiratory Viral Panel Test to the FDA for 510(k) clearance. We also have developed a Hepatitis C Virus genotyping assay and a 2C19 genotyping assay, versions of which are available for RUO. We also have a pipeline of several additional potential products in different stages of development or design, including a diagnostic test for mutations in a gene known as KRAS, which is predictive of an individual's response to certain prescribed anti-cancer therapies, and other tests.

We are also developing our next-generation platform, the NexGen system. We are designing the NexGen system to integrate automated nucleic acid extraction and amplification with our eSensor detection technology to enable technicians using the NexGen system to be able to place a raw or a minimally prepared patient sample into our test cartridge and obtain results without any additional steps. This sample-to-answer capability is enabled by the robust nature of our eSensor detection technology, which is not impaired by sample impurities that we believe hinder competing technologies. We are designing our NexGen system to further simplify workflow and provide powerful, cost-effective molecular diagnostics solutions to a significantly expanded group of hospitals and reference laboratories.

Since inception, we have incurred net losses from continuing operations each year, and we expect to continue to incur losses for the foreseeable future. Our losses attributable to continuing operations for the six months ended June 30, 2012 and 2011 were approximately $11.2 million and $12.2 million, respectively. As of June 30, 2012, we had an accumulated deficit of $179.6 million. Our operations to date have been funded principally through sales of capital stock, borrowings and revenues. We expect to incur increasing expenses over the next several years, principally to develop our NexGen system and additional diagnostic tests, as well as to further increase our spending to manufacture, sell and market our products.

We believe the global market for molecular diagnostics to be approximately $4.5 billion and growing at a rate of approximately 15% per year over the course of the next several years based on research published by leading market research firms. Although we believe the global market for molecular diagnostics to approximate $4.5 billion, our existing technology is suited to address a subset of this market that approximates $900.0 million in 2012.

We anticipate that our NexGen system currently under development would, when completed, expand the market opportunity for our technology so that we could address up to half of the total market for molecular diagnostics. We believe that the NexGen system will be well positioned to address the greater than $2.0 billion global markets that currently exist for each of multiplex tests and low-plex tests. We anticipate that the market for the molecular diagnostic tests on which our NexGen system will focus to increase by more than 20% per year over the next several years. Many factors are driving growth of this market, including the expansion of genetic testing for disease predisposition, advances in personalized medicine, such as the tailoring of cancer therapies to those individuals most likely to respond, and increased demand for infectious disease diagnostics panels. The markets for personalized medicine, cancer diagnostics and infectious disease diagnostic panels are anticipated to grow at 30%, 17% and 14% per annum over the next several years.

Growth in installed based and available market

The aggregate installed base of the Company's eSensor systems has grown from 37 at the end of 2009 to 82 at the end of 2010 to 167 at the end of 2011. The Company currently expects its aggregate installed base of eSensor systems to grow to in excess of 270 systems by the end of 2012.

We believe that our NexGen system, when completed, will expand the number of labs that we can target as customers from the approximately 1,000 labs that have the capability to run our existing eSensor technology to the more than 5,000 labs that currently perform diagnostic testing. We also anticipate that our NexGen system will allow us to develop tests for blood culture identification, healthcare associated infections and sexually transmitted infections, none of which we currently have tests to target. Although our NexGen system will expand our addressable markets, we anticipate that our existing eSensor technology will continue to be used to perform existing tests for inherited diseases and oncology, amongst others, until such time as we develop those tests for our NexGen system. As a result, we expect that customers will continue to use our existing technology after the introduction of our NexGen system for the foreseeable future.

Results of Operations - Three months ended June 30, 2012 compared to the three months ended June 30, 2011 (in thousands)

Revenue

The increase in revenue for the quarter ended June 30, 2012 increased by $2,711,000, or 301%, as compared to the same quarter of 2011 due to higher reagent revenues of $3,471,000 versus $824,000 in the comparable period ended June 30, 2011. This increase in reagent revenue was primarily driven by an 85% increase in the number of our installed base of analyzers to 220 at June 30, 2012 from 119 as of June 30, 2011, as well as an increase due to one new RUO assay. These two factors resulted in an increase of our annuity per analyzer to $73,000 from $32,000. We define "annuity per analyzer" to mean the annual amount of revenue we generate, on average, from each installed analyzer. Pricing changes between our current and legacy tests were not a material cause of our significant increase in revenue.

Cost of Sales and Gross Profit (Loss)



                                               June 30,
                                           2012        2011         $ Change       % Change
 Cost of Sales-three months ended         $ 2,165     $ 1,294      $      871              67 %
 Gross Profit (Loss)-three months ended   $ 1,447     $  (393 )    $    1,840             468 %

The increase in cost of sales for the quarter ended June 30, 2012 compared to the quarter ended June 30, 2011, was directly related to the increase in reagent sales, increased salaries of $106,000, and increased warranty expense of $70,000 related to the increased number of placements in 2012. The improvement to gross profit of $1,840,000 was primarily due to two factors. First, the increase in volume allowed for increased absorption of our fixed manufacturing costs since we have unused manufacturing capacity which was put in place in anticipation of future growth. Second, we have realized improved manufacturing efficiencies since relocating manufacturing operations from Pasadena, CA to Carlsbad, CA which has resulted in substantially improved manufacturing yields.

Operating Expenses

Research and Development

The increase in research and development expense for the quarter ended June 30, 2012, compared to the quarter ended June 30, 2011, was primarily due to higher salaries of $232,000 associated with the increased headcount of 14 individuals along with increased consulting services expense of $739,000 to support development of our NexGen platform and new assays currently in the pipeline. The increase in salaries and outside services were offset by lower clinical trial costs in 2012 of $467,000 as we concluded our clinical trials in 2011.

The increase in sales and marketing expense for the quarter ended June 30, 2012, compared to the quarter ended June 30, 2011, was driven by increased salaries expense of $177,000 associated with increased headcount of five individuals in our commercial and marketing/product management teams, increased marketing communications expenses of $16,000, and increased trade show expenses of $21,000. These increases were offset by decreases of $22,000 in sales commissions and lower sample expense of $72,000.

General and Administrative

General and administrative expense was $2,648,000 for the quarter ended June 30, 2012, increased by $0.8 million, or 46%, compared to the quarter ended June 30, 2011. The increase was primarily due to increased audit services of $360,000 associated with the year-end audit and Sarbanes-Oxley compliance, increased use of outside consulting services of $213,000 associated with Sarbanes-Oxley compliance, increased facility expenses of $221,000 partially related to our facility expansion, public company expense of $58,000 due to our increased number of shareholders and an increase in salaries and wages expense of $31,000. These increases were offset by lower legal expenses of $79,000 due to the use of in-house counsel in 2012.

Other income (expense) represents non-operating revenue and expenses, earnings on cash and cash equivalents and interest expense related to long-term debt. The change in other income (expense) for the quarter ended June 30, 2012, compared to the quarter ended June 30, 2011, was due primarily to a recovered collection on a note receivable of $165,000 that had been reserved in prior periods.

Provision for Income Taxes

Due to net losses incurred, we have only recorded tax provisions related to interest on uncertain tax positions and minimum tax payments.

Results of Operations - Six months ended June 30, 2012 compared to the six months ended June 30, 2011 (in thousands)

Revenue

The increase in revenue for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 was due to higher reagent revenues of $5,390,000 in 2012 versus $1,433,000 in the comparable period in 2011. This increase in reagent revenue was driven by an 85% increase in the number of our installed base of analyzers to 220 as of June 30, 2012 from 119 as of June 30, 2011, as well as an increase due to one new RUO assay. In addition to the increase in reagent revenue, higher instrument sales during the six months ended June 30, 2012 resulted in an additional $292,000 of revenue for the period over the same period in 2011. These factors resulted in an increase of our annuity per analyzer to $73,000 from $32,000. Pricing changes between our current and legacy tests were not a material cause of our significant increase in revenue.

Cost of Sales and Gross Profit (Loss)



                                               June 30,
                                          2012         2011         $ Change      % Change
  Cost of Sales-six months ended         $ 3,853     $  2,795      $    1,058            38 %
  Gross Profit (Loss)-six months ended   $ 1,918     $ (1,136 )    $    3,054           269 %

The increase in cost of sales for the six months ended June 30, 2012 compared to the six months ended June 30, 2011, was directly related to the increase in reagent sales, and increased warranty expense of $123,000 related to the increased number of placements in 2012. The improvement to gross profit of $3,054,000 was primarily due to two factors. First, the increase in volume allowed for increased absorption of our fixed manufacturing costs since we have unused manufacturing capacity which was put in place in anticipation of future growth. Second, we have realized improved manufacturing efficiencies since relocating manufacturing operations from Pasadena, CA to Carlsbad, CA which has resulted in substantially improved manufacturing yields.

Operating Expenses

Research and Development

The increase in research and development expense of $113,000 for the six months ended June 30, 2012, compared to the six months ended June 30, 2011, was primarily due to increased salaries of $372,000 associated with the increased headcount of 14 individuals and increased outside services and consulting expenses of $328,000 to support development of our NexGen platform and new assays currently in the pipeline, offset by lower clinical trial costs of $618,000 in 2012 since there are no clinical trials ongoing this year. In 2011, we incurred one-time expenses relocating the R&D operations to Carlsbad from Pasadena along with the costs of obtaining the FDA certification of the Carlsbad facility.

Sales and Marketing

The increase in sales and marketing expense for the six months ended June 30, 2012, compared to the six months ended June 30, 2011, was driven by increased salaries and wages of $454,000 associated with increased headcount of three individuals, offset by a decrease in product samples expense of $91,000. The other sales and marketing expenses decreased by $63,000 year over year.

General and administrative expense was $5,233,000 for the six months ended June 30, 2012 compared to $3,933,000 for the same period last year. The increase was attributable to higher audit services of $323,000 associated with the year-end audit and Sarbanes-Oxley compliance, increased use of outside consulting services of $57,000 associated with Sarbanes-Oxley compliance, an increase in salaries and wages expense of $292,000, increased facility expenses of $163,000 partially related to our facility expansion, public company expense of $101,000 related to our increased number of shareholders, an increase in software maintenance of $49,000 and travel of $30,000.

Other Income (Expense), Net

Other income (expense) represents non-operating revenue and expenses, earnings on cash and cash equivalents and interest expense related to long-term debt. The change in other income (expense) for the six months ended June 30, 2012, compared to the six months ended June 30, 2011, was due primarily to a recovered collection on a note receivable of $165,000 that had been reserved in prior periods.

Provision for Income Taxes

Due to net losses incurred, we have only recorded tax provisions related to interest on uncertain tax positions and minimum tax payments.

To date we have funded our operations primarily from the sale of our common stock, borrowings and revenues. We have incurred net losses from continuing operations each year and have not yet achieved profitability. At June 30, 2012, we had $60.8 million of working capital, including $64.2 million in cash and cash equivalents.

Cash Flows

The following table summarizes, for the periods indicated, selected items in our
consolidated statements of cash flows (in thousands):



                                                               June 30,
                                                          2012          2011
      Six months ended:
      Cash used in operating activities                 $ (8,745 )    $ (7,993 )
      Cash provided by (used in) investing activities      2,732          (974 )
      Cash provided by financing activities               44,912        34,155

      Net increase in cash and cash equivalents         $ 38,899      $ 25,188

Cash flows used in operating activities

Net cash used in operating activities increased $0.7 million to $8.7 million for the six months ended June 30, 2012 compared to $8.0 million for the six months ended June 30, 2012. The increased use of cash during the second quarter of 2012 was due primarily the net loss along with an increase in accounts receivable of $0.2 million.

Cash flows provided by (used in) investing activities

Net cash provided by investing activities was $2.7 million for the six months ended June 30, 2012, compared to net cash used in investing activities of $1.0 million for the six months ended June 30, 2011. During the first quarter of 2012, a short-term investment of $5.0 million matured and was converted to cash, which was offset by increased uses of cash for payments for intellectual property of $0.4 million and plant, property and equipment of $0.9 million which was primarily for purchases of instruments to be placed at customer sites.

Cash flows provided by financing activities

Net cash provided by financing activities was $44.9 million for the six months ended June 30, 2012, compared to cash provided by financing activities of $34.2 million for the six months ended June 30, 2011. During the second quarter of 2012, we issued common stock netting $45.1 million after offering costs. During the second quarter of 2011, we issued common stock netting $31.7 million after offering costs. During the first quarter of 2011, we also drew down a $2.0 million term loan on our credit facility. In 2012, we have not drawn down any loans and have repaid a portion of the long-term debt outstanding.

In March 2011, an additional loan was made available under the amended loan and security agreement for up to $1.0 million to finance equipment purchases. Based upon certain financial covenants, interest on this equipment term loan will be either (i) the greater of (a) the bank's prime rate plus 3.25%, or (b) 6.50%; or
(ii) the greater of (a) the bank's prime rate plus 4.25%, or (b) 7.50%. This term loan matures in March 2014.

As of June 30, 2012, we had no outstanding loans on the line of credit or the 2011 equipment loan and had a balance of $1.1 million used to finance 2010 equipment purchases and tenant improvements to our Carlsbad facility on the original 2010 equipment term loan. The loan bears an interest rate of 6.5%. Interest-only payments at the rate of 6.5% were due monthly from the date of each initial equipment advance until July 12, 2011. Initial equipment advances that were then outstanding are payable in 24 equal monthly installments of principal, plus all accrued and unpaid interest, beginning on August 12, 2011 and continuing on the same day of each month thereafter through July 12, 2013.

Pursuant to the terms of the loan and security agreement, we are required to maintain a ratio of liquidity to bank indebtedness equal to at least 1.50 to
1.00. In addition, the loan and security agreement includes several restrictive covenants, including requirements that we obtain the consent of Square 1 Bank prior to entering into any change of control event unless all debt is repaid to Square 1 Bank prior to the change of control event, incurring other indebtedness or liens with respect to our property, making distributions to our stockholders, making certain investments or entering into certain transactions with affiliates and other restrictions on storing inventory and equipment with third parties. The agreement also limits the amount we can borrow under the term loan to license genetic biomarkers to $500,000. To secure the credit facility, . . .