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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-32179
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EXACT SCIENCES CORPORATION
(Exact Name of registrant as specified in its charter)
DELAWARE 02-0478229
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
63 GREAT ROAD, MAYNARD, MASSACHUSETTS 01754
(Address of principal executive (zip code)
offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 897-2800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 Par Value
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 report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 29, 2001, was approximately $70,852,913 (based on the
closing price of the Registrant's Common Stock on March 29, 2001, of $7.50 per
share).
The number of shares outstanding of the Registrant's $.01 par value Common
Stock as of March 29, 2001 was 18,686,076.
DOCUMENT INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2000. Portions of such proxy statement are incorporated by reference into
Part III of this Form 10-K.
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EXACT SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
NO.
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PART I
Item 1. Business......................................... 2
Item 2. Properties....................................... 14
Item 3. Legal Proceedings................................ 14
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 16
Item 6. Selected Consolidated Financial Data............. 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 19
Item 7a. Quantitative and Qualitative Disclosure About
Market Risk............................................... 30
Item 8. Financial Statements and Supplementary Data...... 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 51
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................ 51
Item 11. Executive Compensation.......................... 51
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 51
Item 13. Certain Relationships and Related
Transactions.............................................. 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 52
SIGNATURES.................................................. 55
PART I
ITEM 1. BUSINESS
THIS BUSINESS SECTION AND OTHER PARTS OF THIS FORM 10-K CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE
RESULTS" AND ELSEWHERE IN THIS FORM 10-K.
OVERVIEW
EXACT Sciences Corporation (Nasdaq: EXAS) has developed proprietary
technologies in applied genomics that we believe will revolutionize the early
detection of colorectal cancer and several other types of common cancers. We
believe that medical practitioners will order tests based on our technologies as
part of a regular screening program for the early detection of such cancers and
pre-cancerous lesions. We also believe that the widespread and periodic
application of these tests will reduce mortality, morbidity and the costs
associated with these cancers.
We have selected colorectal cancer as the first application of our
technology platform because it is the most deadly cancer among non-smokers,
curable if detected early and well understood from a genomics point of view.
There are an estimated 74 million Americans age 50 and above for whom the
American Cancer Society and National Cancer Institute recommend regular
colorectal cancer screening. Moreover, current detection methods for colorectal
cancer have proven to be inadequate screening tools.
We have developed proprietary technologies that isolate the human DNA shed
from the colon into stool. We then identify mutations in DNA shed from abnormal
cells associated with colorectal cancer and pre-cancerous lesions. We have
conducted blinded clinical studies at the Mayo Clinic that we believe indicate
that our tests are able to detect colorectal cancer more accurately in patients
who have the disease at an earlier stage than existing methods available for
mass screening for colorectal cancer. Early detection results in less expensive
and more effective treatment of patients. While our tests are more technically
complex for a laboratory to perform and may be more expensive than some current
colorectal screening methods, we believe that the benefits of early detection
will convince medical practitioners and patients to use tests using our
technologies. We are currently conducting an additional clinical study for
colorectal cancer screening tests using our technologies and are seeking to
develop commercial products and services based on these technologies.
We were incorporated in the State of Delaware on February 10, 1995 as
Lapidus Medical Systems, Inc. We changed our corporate name to EXACT
Laboratories, Inc. on December 11, 1996, to EXACT Corporation on September 12,
2000 and to EXACT Sciences Corporation on December 1, 2000. Our executive
offices are located at 63 Great Road, Maynard, Massachusetts 01754. Our
telephone number is (978) 897-2800. Our web address is www.exactsciences.com.
GENOMICS AND COLORECTAL CANCER
Genomics, broadly defined, is the study of the genome and its importance in
human physiology and disease. Initial efforts in genomics centered on
identifying the definitive sequence of every gene in the human genome.
Scientists are now focusing on applied genomics--the development of novel
technologies for the application of genomics to the detection and management of
disease.
Cancer develops when the DNA in a single normal cell mutates or changes to
encourage uncontrolled cell growth. In a ground-breaking paper published in the
NEW ENGLAND JOURNAL OF MEDICINE in 1988, Dr. Bert Vogelstein, one of our
scientific collaborators, and his colleagues described a multi-step model of
colorectal cancer development. In 1990, Dr. Eric Fearon, a former member of our
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scientific advisory board, and Dr. Vogelstein published a diagram depicting the
development of colorectal cancer. An updated version of this diagram showing
many of the genomic events involved in the development of colorectal cancer is
shown below:
[The graphic on this page consists of the words "Chromosome" and "Mutation"
on the left side of the chart with the word "Chromosome" listed above
"Mutation". Equally spaced and in line with the word "Chromosome" from left to
right are the phrases "5q loss", "18q loss", "17p loss" and "8p loss". Equally
spaced in line with the word "Mutation" from left to right are "Apc" directly
underneath "5q loss", with the word "Beta-Catenin" directly underneath "Apc",
"K-ras" directly underneath "18q loss", "Bat-26" directly underneath "17p loss",
with "p53" directly underneath "Bat-26". Below these words are 5 equally spaced
boxes connected by arrows from left to right. The following phrases are in the
indicated box: "Normal Epithelium" in the first box, "Early Adenoma" in the
second box, "Late Adenoma" in the third box, "Early Cancer" in the fourth box
and "Late Cancer" in the fifth box. There is also an arrow connecting the
corresponding chromosome and mutations to the space between the boxes.]
The diagram illustrates that cancer develops in steps, and that it arises
from alterations in multiple genes in an individual cell, frequently with
chromosome loss. The diagram shows that these alterations lead to pathologic
changes in the colon from normal epithelium--the tissue that lines the surface
of the colon--through early and late adenomas, which are a form of pre-cancerous
growth, to early cancer and late cancer. These alterations, shown in the above
diagram, usually accumulate over many years, and are typically due to:
- mutations in individual genes, such as the APC, K-RAS and P53 genes;
- larger scale effects in which large parts of a chromosome or even entire
chromosome arms, such as 5q, 18q, 17p and 8p, are deleted; or
- deletions in DNA regions such as BAT-26.
The multi-step process provides genomic targets for the early detection of
cancer. The detection of genetic alterations associated with cancer allows for
the direct, early detection of cancer before the onset of symptoms.
COLORECTAL CANCER
Colorectal cancer is the most deadly cancer in the U.S. among non-smokers
and the second most deadly cancer overall. Only lung cancer kills more people
each year. The American Cancer Society estimates that in the U.S. there will be
approximately 136,000 new cases and approximately 57,000 deaths in the year 2000
from colorectal cancer. Almost 50% of the patients with a new diagnosis of
colorectal cancer will die within five years.
Medical practitioners commonly classify colorectal cancer into four stages
at the time of diagnosis as shown in the following table:
[The chart is a rectangle with six vertical columns and three horizontal
rows. The vertical columns, from left to right, are titled as follows: Column
one is titled "Stage"; Column two is titled "Classification"; Column three is
titled "Extent of Disease"; Column four is titled "% of Patients Diagnosed at
This Stage"; Column five is titled "5-Year Survival Rates (approximate)"; and
Column six is titled "Typical Treatment". The first row has the words: "Early"
in the first column; the second column, which is subdivided into two rows, has
the phrases "Dukes' A" in the top subdivison and "Dukes' B" in the bottom
subdivision; the third column, which is subdivided into two rows, has the
phrases "Confined to the surface lining of the colon" in the top subdivision and
"Below the surface; no lymph node involvement" in the bottom subdivision; the
fourth column has the percentage "37%" in the first row; the fifth column, which
is subdivided into two rows, has the percentages "95%" in the top
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subdivision and "85%" in the bottom subdivision; the sixth column has the word
"Surgery". The second row has the word "Late" in the first column; the second
column, which is subdivided into two rows, has the words "Dukes' C" in the top
subdivision and "Dukes' D" in the bottom subdivision; the third column, which is
also subdivided into two rows, has the phrases "Lymph node involvement" in the
top subdivision and "Metastatic disease" in the bottom subdivision; the fourth
column has the percentage "63%"; the fifth column, which is subdivided into two
rows, has the percentages "50%-60%" in the top subdivision and "10%" in the
bottom subdivision; and the sixth column has the phrase "Surgery and
chemotherapy".]
Detection of pre-cancerous adenomas and cancer in its earliest stages
increases the number of patients who survive and reduces the cost of treatment
and care. As a result, the American Cancer Society and National Cancer Institute
recommend that the 74 million Americans age 50 and above undergo regular
colorectal cancer screening tests.
OUR SOLUTION
Many non-invasive cancer screening methods are not effective early detection
methods. For example, PSA for prostate cancer screening, mammography and fecal
occult blood testing, or FOBT, find only indirect evidence of cancer and suffer
from lack of sensitivity or specificity. As a result, mortality, morbidity and
the cost of treatment of many cancers remain high. We have made significant
scientific advances that we believe will allow for the direct early detection of
several types of common cancers. Our business opportunity is to use our
technologies to lower mortality, morbidity and the costs associated with these
cancers.
The first application of our technologies is colorectal cancer screening. We
believe medical practitioners will order tests using our technologies every one
to three years to screen for the presence of colorectal cancer. Using our
proprietary genomic technologies, a laboratory will isolate the human DNA shed
into the stool from the colon. The laboratory will then use our technologies to
identify mutations in the genome shed from abnormal cells associated with
adenomas and colorectal cancer. When individuals test positive in these tests,
medical practitioners will refer them for colonoscopy for follow-up. Through
regular screening, we believe that tests using our technologies will enable the
detection of colorectal cancer and adenomas earlier so that patients can be
treated effectively.
We believe colorectal cancer screening tests using our technologies will
become a widely-accepted and regularly-used screening tool as a result of the
following features and benefits:
- EARLIER DETECTION. Early detection saves lives. We believe colorectal
cancer screening tests using our technologies will detect Dukes' A and B
cancers, as well as some pre-cancerous lesions. We believe that this will
represent a marked improvement over current colorectal cancer screening
methods.
- HIGHER SENSITIVITY. Since the fall of 1998, we have conducted a series of
blinded clinical studies at the Mayo Clinic using our colorectal cancer
screening tests. In these clinical studies, the sensitivity of our tests
for colorectal cancer substantially exceeded the sensitivity reported for
FOBT and flexible sigmoidoscopy.
- HIGHER COMPLIANCE. We designed our technologies to detect colorectal
cancer from a single whole stool sample obtained non-invasively. Patients
are not required to touch their stool, modify their diet or undergo bowel
preparation. Moreover, we believe that, based on the results of our
clinical studies and trials, opinion leaders will educate primary care
physicians, about the potential for improving detection of colorectal
cancer with our technologies. We also believe that this will lead many
primary care physicians to make regular testing based on our technologies
a part of their physical examinations of patients aged 50 and above who,
upon learning of the benefits, will be likely to submit to such testing.
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- COST-EFFECTIVE PREVENTION AND TREATMENT. We believe that colorectal cancer
screening tests using our technologies will detect early stage lesions
more effectively than current screening methods. As a result of this early
detection, medical practitioners can treat early stage colorectal cancer
and pre-cancerous lesions in a less expensive and more effective manner
than late stage cancer.
- SCALABILITY. Screening 74 million Americans age 50 and above requires a
process that is able to efficiently test a large population. Procedures
such as flexible sigmoidoscopy and colonoscopy suffer problems of
scalability because of the short supply of skilled clinicians. We believe
tests using our technologies will enable mass screening on a regular
basis.
OUR TESTING PROCESS
Diagnostic tests typically require sample collection and preparation
procedures as well as detection methods. We have overcome significant technical
challenges in the development of a three-step sample collection and preparation
process and four detection methods that apply genomics to the early detection of
colorectal cancer. We currently have eleven issued U.S. patents and 25 pending
U.S. patent applications relating to our testing process.
[This chart has three boxes and one oval connected by arrows from left to
right with the following words in each box or oval: "Specimen Collection and
Transportation", "Representative Sampling", "DNA Extraction, Purification and
Amplification" and "Cancer Detection Methods".]
SPECIMEN COLLECTION AND TRANSPORTATION. We have based our tests on
collecting a single whole stool in a self-contained device. Patients will bring
the samples to their physicians who will forward them to the laboratory
performing the colorectal cancer screening test.
REPRESENTATIVE SAMPLING. In the past, DNA testing using stool samples
lacked sensitivity. We believe that this was due to the non-uniform distribution
of abnormal DNA in stool. We have invented proprietary methods to assure that
the portion of stool that is processed at the laboratory is representative of
the entire stool. We believe these methods lead to increased sensitivity.
DNA EXTRACTION, PURIFICATION AND AMPLIFICATION. The isolation and
amplification of human DNA found in stool is technically challenging because
over 99% of DNA is not human DNA, but is DNA from bacteria normally found in the
colon. In addition, there are substances in stool that make the isolation and
amplification of human DNA a difficult task. Our proprietary technologies
simplify the isolation and amplification of human DNA found in stool.
CANCER DETECTION METHODS. We have designed four proprietary methods for
detecting and identifying genomic markers associated with colorectal cancer that
can be performed on instruments commonly available in clinical laboratories
conducting molecular testing.
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OUR PROPRIETARY CANCER DETECTION METHODS
Our technology platform consists of the proprietary cancer detection methods
set forth in the table below. Each of these methods enables the early detection
of cancer in a minute amount of altered DNA obtained from a sample that is
composed of DNA largely from normal cells.
NAME ROLE IN DETECTION OUR SCIENTIFIC ADVANCE
- ----------------------------- ----------------------------- -----------------------------
MULTIPLE MUTATION DETECTION - Each element of MuMu - Sensitive and specific
(MUMU) detects a single mutation detection of single DNA
of a cancer-related gene mutations
DELETION TECHNOLOGY - Detects short deletions and - Distinguishes between
insertions in the BAT-26 deletions and insertions
region of a specific gene resulting from the testing
itself, and those
associated with
mismatch-repair cancers
DNA INTEGRITY ASSAY (DIA) - Detects longer human DNA - Proprietary marker
fragments associated with associated with cancer that
abnormality does not require knowledge
of which genes cause cancer
ENUMERATED LOSS OF - Enumerates ratio of - Statistical method that
HETEROZYGOSITY (E-LOH) paternal DNA as compared to applies a commonly used
maternal DNA at a given analytical technique to
genomic site to identify indicate a missing gene and
chromosomal loss that is does not require knowledge
characteristic of many of which genes cause cancer
cancers
MULTIPLE MUTATION. Multiple Mutation, or MuMu, identifies DNA mutations at
specific sites. We have selected 15 sites that are commonly mutated in the
colorectal cancer-related genes APC, P53 and K-RAS. We have designed our
proprietary MuMu method to allow simultaneous probing of different DNA sequences
and to allow analysis even though only a small amount of DNA in the sample is
derived from abnormal cells while the vast majority is derived from normal human
cells or bacteria.
DELETION TECHNOLOGY. Deletion Technology detects short deletions and
insertions in segments of DNA that are indications of defects in cellular
mechanisms for DNA repair. Approximately 15% of colorectal cancers, referred to
as mismatch-repair cancers, result from inactivation of the proteins that
normally repair errors in DNA after DNA replication. We have developed a
proprietary method for identifying this condition by detecting the presence of
short deletions and insertions in a DNA segment known as BAT-26. This altered
gene segment appears in virtually all colorectal cancers resulting from defects
in the mismatch repair mechanism.
DNA INTEGRITY ASSAY. DNA recovered from the stool of many cancer patients
contains a small but detectable population of DNA that is longer than DNA
recovered from individuals who are normal and have never had cancer or an
adenoma. Use of this proprietary detection method does not require knowledge of
which genes cause cancer. In addition to its utility for our colorectal cancer
tests, we believe that this discovery may lead us to the development of a marker
for other cancers, including lung, pancreas, gall bladder and bile duct cancers.
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ENUMERATED LOSS OF HETEROZYGOSITY. In normal cells, the quantity of DNA
inherited from each parent is generally equal. This is not true for cells from
many different types of cancers, including virtually all non-mismatch repair
colorectal cancers. This condition, which is an imbalance of maternal and
paternal chromosomal fragments, is called loss of heterozygosity, or LOH. Prior
to our development efforts, we believe that scientists were unable to detect LOH
in stool samples. We have developed proprietary methods for detecting LOH in a
highly heterogeneous DNA sample such as stool by enumerating the ratio of
fragments of DNA that are inherited from each parent at defined locations in the
genome. We call this detection method e-LOH. Use of this detection method does
not require knowledge of which genes cause cancer. We believe that our novel
e-LOH detection method may be broadly applicable to early cancer detection from
many body sites.
SALES AND MARKETING
We are building our organization and programs to support our
commercialization strategy--applying our proprietary technologies to the early
detection of colorectal cancer initially and then extending our technologies to
several other types of cancers. We believe that opinion leaders in genomics,
gastroenterology and primary care are key to establishing tests using our
technologies as a standard of care for colorectal cancer screening. We have
worked closely with leading researchers at academic institutions, including the
Mayo Clinic and The Johns Hopkins University, since our inception to evaluate
our technologies and our colorectal cancer screening tests, and to gain support
for our clinical studies. We have an agreement with Mayo Clinic, that expires on
December 31, 2001, under which Dr. Ahlquist, a member of our scientific advisory
board and a director of the Colorectal Neoplasia Clinic at Mayo, assists us in
our clinical trials and the use of our technologies in the detection of
colorectal cancer. We participate in conferences and scientific meetings. The
journal GASTROENTEROLOGY published our first full-length peer-reviewed article
in November 2000. We also believe our continuing efforts will make our products
and services attractive to third-party payors, medical practitioners and
patients.
In addition, we intend to build upon public awareness about colorectal
cancer. Several stories of high profile individuals with colorectal cancer have
increased public awareness about colorectal cancer and the need for effective
early detection. We believe that this publicity has a heightened effect on the
public given an increasing perception that people wish to take more control over
decisions relating to their medical care.
We intend to commercialize our products and services through a staged market
entry. Initially, we intend to offer colorectal cancer screening services
ourselves to establish the market. We then intend to license our proprietary
technologies and sell reagents to leading clinical reference laboratories to
enable them to develop their own tests. We may also package our technologies and
seek approval for diagnostic test kits with which any clinical laboratory could
conduct tests using our technologies.
In support of our staged market entry strategy, we plan to execute a
multi-channel sales approach. Initially, we intend to create our own dedicated
business development team whose efforts will focus on securing adequate
reimbursement for our products and services. This team will also educate senior
staff of the Health Care Financing Administration, large managed care
organizations, insurance companies, large employers and large physician groups
about the cost effectiveness of using our products and services. In parallel
with this effort, we intend to enter into business relationships with leading
clinical reference laboratories that will market their own tests utilizing our
technologies through their dedicated sales forces. In addition, we may enter
into business relationships with distributors of other medical products to
distribute our products and services.
We believe that our business relationships with leading clinical reference
laboratories will support the strategies of these laboratories to expand their
molecular diagnostic businesses. In addition, we
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believe that tests utilizing our technologies will be attractive to the clinical
reference laboratories because such tests:
- enable laboratories to perform higher volumes of testing with their
existing infrastructure;
- enable the laboratories to differentiate themselves technologically; and
- offer potentially higher gross margins than most existing tests.
CLINICAL STUDIES
COLORECTAL CANCER
In conjunction with the Mayo Clinic, we have conducted three blinded
clinical studies since the fall of 1998. These clinical studies included stool
samples from 219 patients of the Mayo Clinic, 58 of whom had cancer. Each
patient participating in our clinical studies received a colonoscopy at the Mayo
Clinic to determine whether cancer was present. The first two clinical studies
were conducted using frozen, partial stool samples. The Mayo Clinic sent stool
samples to us for testing and we analyzed the testing results jointly with the
Mayo Clinic. The sensitivity for each of these two clinical studies was 91% and
67%, respectively. When excluding the data from patients who began bowel
preparation before their stool samples were collected, which we believe may have
lowered sensitivity, sensitivity was 91% and 72%, respectively. In the spring of
2000, we conducted a third clinical study at the Mayo Clinic in which we
collected fresh, whole stool. The sensitivity for this clinical study was 78%.
These sensitivity rates are superior to the 25%-30% sensitivity of FOBT and the
approximately 48% sensitivity of flexible sigmoidoscopy for colorectal cancers
located throughout the colon. Specificity ranged from 95% to 100% across all
three clinical studies. These specificity rates are comparable or superior to
rates reported for FOBT and flexible sigmoidoscopy.
The results of these three blinded clinical studies are set forth in the
table below:
NUMBER OF
STUDY COMPLETION DATE PATIENTS SAMPLE TYPE SENSITIVITY SPECIFICITY
- ----- --------------- --------- -------------------- ------------- --------------
Mayo Clinic I Pilot November 1999 61 Frozen partial stool 91% 95-100%
Study...................
Mayo Clinic II Study...... April 2000 129 Frozen partial stool 67-72% 95%
Mayo Clinic III Study..... June 2000 29 Fresh whole stool 78% 100%
Based on these results, in August 2000 we initiated a multi-center clinical
study for the primary purpose of establishing certain technological benchmarks
for our DIA detection method on whole stools in anticipation of our multi-center
clinical trial.
We intend to initiate a blinded multi-center clinical trial in the fourth
quarter of 2001 that will include an estimated 5,300 patients age 50 and older
with average-risk profiles from at least 40 academic and community-based
practices. The goal of this clinical trial will be to compare the sensitivity
and specificity of our tests for colorectal cancer to that of existing
technologies on average-risk individuals. We intend to conduct this clinical
trial in accordance with the applicable guidelines of the Food and Drug
Administration, or FDA, so that the results may be used in any application that
we may make to the FDA.
ADENOMAS
While most adenomas do not progress to cancer in a patient's lifetime, those
that do are more likely to have villous features characterized by an irregular
surface and associated with more rapid growth. In the Mayo Clinic II study,
there were 24 patients with adenomas greater than one centimeter. The
sensitivity of our screening tests in detecting these adenomas with villous
features was 56%. The sensitivity results for villous adenomas are much better
than those obtained with FOBT and are comparable to those obtained by flexible
sigmoidoscopy. We believe that by detecting adenomas more
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likely to progress to cancer during a patient's lifetime through a non-invasive
screening procedure we will provide additional medical value for our
technologies. We intend to test for adenomas in our planned 5,300-patient
clinical trial.
REIMBURSEMENT
We intend to obtain reimbursement for tests using our technologies from
Medicare, major national and regional managed care organizations and insurance
carriers. We currently do not have reimbursement approval from any organization.
Medicare and other third-party payors will independently evaluate our
technologies by reviewing the published literature with respect to the results
obtained from our clinical studies. We intend to assist them in evaluating our
technologies by providing scientific and clinical data to support our claims
regarding the superiority of our technologies. In addition, we intend to present
analysis showing the benefits of early disease detection and the resulting
cost-effectiveness of our technologies. We also intend to apply for current
procedural terminology codes which facilitate Medicare reimbursement.
The Federal Balanced Budget Act of 1997 required Medicare to reimburse for
colorectal cancer screening for average-risk patients beginning on January 1,
1998 and mandated Medicare coverage for FOBT and flexible sigmoidoscopy. Based
on evidence provided by the Black Caucus and the Black Caucus Health Brain
Trust, Congress amended the Budget Act of 1997 to include coverage for double
contrast barium enema, a radiographic imaging test used to detect colorectal
cancer in areas beyond the reach of flexible sigmoidoscopy. We believe these
actions provide evidence of the public interest in new colorectal cancer
screening methods and the federal government's willingness to fund these
methods.
Most importantly, the Budget Act of 1997 allows new technologies to be
included as colorectal cancer screening tests by action of the Secretary of
Health and Human Services without the need for additional Congressional action.
In the spring of 1999, we met with senior staff members of the Health Care
Financing Administration to apprise them of our progress and to determine the
steps we would need to take prior to a reimbursement determination. Following
that meeting, we successfully petitioned the Health Care Financing
Administration staff to cover all medical expenses of a patient participating in
our clinical studies who tests positive for colorectal cancer, which we believe
is a departure from the Health Care Financing Administration's policy of not
reimbursing for these costs.
In addition, we have met with several members of Congressional staffs and
national organizations with an interest in colorectal cancer. In October 1999,
we testified before the Subcommittee on Health of the House Ways and Means
Committee in support of the Eliminate Colorectal Cancer Act of 1999, sponsored
by Senators Edward Kennedy and Jesse Helms. The Eliminate Cancer Act of 1999
requires private insurers to cover colorectal cancer screening tests deemed
appropriate by the third-party payors and patients. In addition, we have worked
with the Black Caucus and the Black Caucus Health Brain Trust.
We are also meeting with senior executives, medical directors and chiefs of
service in gastroenterology and primary care at managed care organizations,
insurance companies, large employers and large physician groups. The person in
each of these positions will play a key role in the reimbursement determination
for tests using our technologies.
We believe that colorectal cancer screening tests based on our technologies
will save more lives more cost-effectively than any other colorectal cancer
screening method available today. Reimbursement for FOBT tests ranges from $5 to
$30, but FOBT is most effective in detecting later stage cancers where survival
rates are low and treatment costs are high. Reimbursement for flexible
sigmoidoscopy ranges from $180 to $500, but flexible sigmoidoscopy at best can
directly detect no more than half of all colorectal cancers and adenomas.
Medicare will reimburse for colonoscopy for cancer screening once every
10 years in average risk individuals beginning July 1, 2001. We believe that the
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cost of this procedure ranges from $700 to $2,000, and while colonoscopy is
sensitive, the use of colonoscopy as a screening test has been limited.
RESEARCH AND DEVELOPMENT
Our research and development efforts aim to develop multiple genomics
methods for the early detection of cancer and pre-cancerous lesions. We believe
that the evaluation of these methods in a clinical setting will determine the
best approaches for commercialization. Finally, we believe it is necessary to
develop methods to automate and simplify the collection, preparation and
analysis of samples to produce cost-effective commercial tests.
PROCESS DEVELOPMENT. We have undertaken a multi-year effort to automate our
testing process and reduce the cost of processing stool samples. Our objectives
include eliminating many of the manual steps, reducing the use of expensive
reagents and increasing screening throughput. This effort is important so that
we will be able to offer our products and services at commercially reasonable
prices in our own laboratory and then enter into business relationships with
leading clinical reference laboratories.
EXTENSIONS TO OTHER CANCERS. Our proprietary DIA detection method uses a
marker that may be broadly applicable to the detection of cancers other than
colorectal cancer. In the course of our blinded clinical studies at the Mayo
Clinic, we tested 50 stool samples from patients diagnosed with aero-digestive
cancers at sites other than the colon, such as cancer in the lung, pancreas,
esophagus, stomach and duodenum, gall bladder and bile ducts. The results are
shown in the table below.
NUMBER DETECTED/
LOCATION OF CANCER NUMBER WITH CANCER PERCENT DETECTED
- ------------------ ------------------ ----------------
Lung, non-adenocarcinoma.................................... 7/8 88%
Lung, adenocarcinoma........................................ 3/13 23%
Pancreas.................................................... 10/11 91%
Esophagus................................................... 3/7 43%
Stomach/Duodenum............................................ 1/5 20%
Gall Bladder/Bile Ducts..................................... 6/6 100%
Combined, these cancers kill more people than colorectal cancer. We intend
to collect additional data on these aero-digestive cancers in our planned
5,300-patient clinical trial. If the results are promising, we will develop
methods and technologies to detect these cancers.
ADENOMAS. While our research focus has been the detection of cancer, we
intend to conduct research on improved methods for adenoma detection as well,
particularly those adenomas with villous features. We have invented a new method
for scanning regions of DNA at which mutations associated with adenoma
development are often found.
NEW TECHNOLOGY PLATFORM. As part of this effort, we are also conducting
research on a new technology that may enable us to develop new instrumentation
and methods for life sciences research. If successful, we believe this
technology may be used in both clinical and research laboratories for detecting
abnormalities in DNA, identifying single nucleotide polymorphisms in populations
of individuals and for high throughput screening in the pharmaceutical industry.
GOVERNMENT REGULATION
We are subject to extensive regulation by the FDA under the Federal Food,
Drug and Cosmetic Act and regulations thereunder, including regulations
governing the development, marketing, labeling, promotion, manufacturing and
export of our products. Failure to comply with these requirements can lead to
stringent sanctions, including withdrawal of products from the market, recalls,
refusal to
10
authorize government contracts, product seizures, civil money penalties,
injunctions and criminal prosecution.
We intend to offer colorectal cancer screening services performed in our own
laboratories. We then intend to license our intellectual property and sell our
reagents that target specific areas in the genome to leading clinical reference
laboratories to enable them to perform their own colorectal cancer screening
services, using their own test methods, equipment and additional reagents. We
may also package our technologies in the form of diagnostic test kits with which
clinical laboratories could conduct colorectal cancer screening tests.
Generally, medical devices, a category that includes our products, require
FDA approval or clearance before they may be marketed. The FDA has not, however,
actively regulated laboratory tests that have been developed and used by the
laboratory conducting the tests. The FDA does regulate the sale of reagents,
including our reagents, used in laboratory tests. The FDA refers to the reagents
used in these tests as analyte specific reagents. Analyte specific reagents
react with a biological substance to identify a specific DNA sequence or
protein. They generally do not require FDA approval or clearance if they are
used in in-house laboratories or are sold to clinical laboratories certified by
the government to perform high complexity testing and are labeled in accordance
with FDA requirements, including a statement that their analytical and
performance characteristics have not been established. A similar statement would
also be required on all advertising and promotional materials relating to
analyte specific reagents such as ours. Laboratories also are subject to
restrictions on the labeling and marketing of tests that have been developed
using analyte specific reagents. The analyte specific reagent regulatory
category is relatively new and its boundaries are not well defined, and there
has been some discussion within the government of changing the analyte specific
reagent regulation, although it is not certain whether any such changes would
affect our tests. We believe that our in-house testing and the analyte specific
reagents that we intend to sell to leading clinical reference laboratories do
not require FDA approval or clearance. We cannot be sure, however, that the FDA
will not assert that our tests or one or more of our reagents require premarket
approval or clearance. In addition, we cannot be sure that the FDA would not
treat the licensing of our intellectual property as labeling that would subject
the reagent to premarket approval or clearance and other FDA regulation. In
addition, we cannot be sure that the FDA will not change its position in ways
that could negatively affect our operations.
Any diagnostic test kits that we may sell would require FDA approval or
clearance before they could be marketed. There are two review procedures by
which a product may receive such approval or clearance. Some products may
qualify for clearance under a premarket notification, or 510(k) procedure, in
which the manufacturer provides to the FDA a premarket notification that it
intends to begin marketing the product, and demonstrates to the FDA's
satisfaction that the product is substantially equivalent to a legally marketed
product, which means that the product has the same intended use as, is as safe
and effective as, and does not raise different questions of safety and
effectiveness than a legally marketed device. A 510(k) submission for an in
vitro diagnostic device generally must include manufacturing and performance
data, and in some cases, it must include data from human clinical studies.
Marketing may commence when FDA issues a clearance letter.
If a medical device does not qualify for the 510(k) procedure, the FDA must
approve a premarket approval application, or PMA, before marketing can begin.
PMA applications must demonstrate, among other matters, that the medical device
is safe and effective. A PMA application is typically a complex submission,
usually including the results of preclinical and extensive clinical studies.
Before FDA will approve a PMA, the manufacturer must pass an inspection of its
compliance with the requirements of the FDA's quality system regulations.
We believe that most, if not all, of our products sold in diagnostic test
kit form will require PMA approval. The PMA process is lengthy and costly, and
we cannot be sure that the FDA will approve
11
PMAs for our products in a timely fashion, or at all. FDA requests for
additional studies during the review period are not uncommon, and can
significantly delay approvals. Even if we were able to gain approval of a
product for one indication, changes to the product, its indication, or its
labeling would be likely to require additional approvals.
Physicians who order colorectal cancer screening tests using our
technologies will need to provide patients a specimen container to collect
stool. Specimen transport and storage containers are also medical devices
regulated by the FDA although they generally have been exempted by regulation
from the FDA's premarket clearance or approval requirement. We believe that our
specimen container falls within the exemption, but we cannot be sure that the
FDA will not assert that our container is not exempt and seek to impose a
premarket clearance or approval requirement.
Regardless of whether a medical device requires FDA approval or clearance, a
number of other FDA requirements apply to its manufacturer and to those who
distribute it. Device manufacturers must be registered and their products listed
with the FDA, and certain adverse events and product malfunctions must be
reported to the FDA. The FDA also regulates the product labeling, promotion, and
in some cases, advertising, of medical devices. Manufacturers must comply with
the FDA's quality system regulation which establishes extensive requirements for
quality control and manufacturing procedures. Thus, manufacturers and
distributors must continue to spend time, money and effort to maintain
compliance, and failure to comply can lead to enforcement action. The FDA
periodically inspects facilities to ascertain compliance with these and other
requirements.
We are also subject to U.S. and state laws and regulations regarding the
operation of clinical laboratories. The federal Clinical Laboratory Improvement
Amendments and laws of certain other states, impose certification requirements
for clinical laboratories, and establish standards for quality assurance and
quality control, among other things. Clinical laboratories are subject to
inspection by regulators, and the possible sanctions for failing to comply with
applicable requirements. Sanctions available under the Clinical Laboratory
Improvement Amendments include prohibiting a laboratory from running tests,
requiring a laboratory to implement a corrective plan, and imposing civil money
penalties. If we fail to meet the requirements of the Clinical Laboratory
Improvement Amendments or state law, it could cause us to incur significant
expense.
INTELLECTUAL PROPERTY
In order to protect our proprietary technologies, we rely on combinations of
patent, trademark, copyright, and trade secret protection, as well as
confidentiality agreements with employees, consultants, and third parties.
We have pursued an aggressive patent strategy designed to maximize our
patent position with respect to third parties. Generally, we have filed patents
and patent applications that cover the methods we have designed to detect
colorectal cancer as well as other cancers, including lung, pancreas, gall
bladder and bile duct cancers. We have also filed patent applications covering
the preparation of stool samples and the extraction of DNA from heterogeneous
stool samples. As part of our strategy, we seek patent coverage in the United
States and in foreign countries on aspects of our technologies that we believe
will be significant and that provide barriers to entry for our competition. As
of March 29, 2001, we had eleven issued patents in the United States, four
issued foreign patents, twenty-five pending patent applications in the United
States, three of which have been allowed, and forty-four pending foreign
applications. Our success depends to a significant degree upon our ability to
develop proprietary products and technologies and to obtain patent coverage for
such products and technologies. We intend to continue to file patent
applications covering any newly-developed products or technologies.
Each of our patents has a term of 20 years from their respective priority
filing dates. Consequently, our first patents are set to expire in 2016. We have
filed terminal disclaimers in certain later-filed
12
patents, which means that such later-filed patents will expire earlier than the
twentieth anniversary of their priority filing dates, from 2016 through 2017.
A third-party institution has asserted co-inventorship rights with respect
to one of our issued patents relating to use of our e-LOH detection method on
pooled samples from groups of patients. Our current cancer screening detection
methods do not include pooled samples. To date, no legal proceedings have been
initiated by this third party. If any third party, including the third party
discussed above, asserting co-inventorship rights with respect to any patent is
successful in challenging our inventorship determination, such patent may become
unenforceable or we may be required to add that third party inventor to the
applicable patent, resulting in co-ownership of such patent with the third
party. Co-ownership of a patent allows the co-owner to exercise all rights of
ownership, including the right to use, transfer and license the rights protected
by the applicable patent.
We and a third-party institution have filed a joint patent application that
will be co-owned by us and that third-party institution relating to the use of
various DNA markers, including the DNA Integrity Assay, to detect cancers of the
lung, pancreas, esophagus, stomach, small intestine, bile duct, naso-pharyngeal,
liver and gall bladder in stool under the Patent Cooperation Treaty. This patent
application designates the United States, Japan, Europe and Canada.
We license on a non-exclusive basis technology for performing a step in our
testing methods from Roche Molecular Systems, Inc. This license relates to a
gene amplification process used in almost all genetic testing, and the patent
that we utilize expires in mid-2004. In exchange for the license, we have agreed
to pay Roche a royalty based on net revenues we receive from tests using our
technologies. Roche may terminate this license upon notice if we fail to pay
royalties, fail to submit reports or breach a material term of the license
agreement.
We license on a non-exclusive basis technology for performing a step in our
testing methods from Genzyme Corporation, the exclusive licensee of patents
owned by The Johns Hopkins University and of which Dr. Vogelstein is an
inventor. This license relates to the use of the APC and P53 genes and
methodologies related thereto in connection with our products and services and
lasts through 2013, the life of the patent term of the last-licensed Genzyme
patent. In exchange for the license, we have agreed to pay Genzyme a royalty
based on net revenues we receive from performing our tests and the sale of our
reagents and diagnostic test kits, as well as certain milestone payments and
maintenance fees. In addition, we must use reasonable efforts to make products
and services based on these patents available to the public. Genzyme may
terminate this license upon notice if we fail to pay milestone payments and
royalties, achieve a stated level of sales and submit reports. In addition, if
we fail to request FDA clearance for a diagnostic test as required by the
agreement, Genzyme may terminate the license.
COMPETITION
To our knowledge, none of the large genomics or diagnostics companies is
developing tests to conduct stool-based DNA testing; however, companies may be
working on such tests that have not yet been announced. In addition, other
companies may succeed in developing or improving technologies and marketing
products and services that are more effective or commercially attractive than
ours. Some of these companies may be larger than we are and can commit
significantly greater financial and other resources to all aspects of their
business, including research and development, marketing, sales and distribution.
We face potential competition from alternative procedures-based detection
technologies such as sigmoidoscopy, colonoscopy and virtual colonoscopy as well
as traditional screening tests such as the FOBT marketed by Beckman
Coulter, Inc. Virtual colonoscopy involves a new and experimental approach being
developed at research institutions that requires patients to undergo bowel
preparation
13
similar to a colonoscopy after which they are scanned by a spiral CT scanner.
Three-dimensional images are constructed to allow a radiologist to virtually
travel through the colon.
In addition, our competitors, including Bayer Corporation, diaDexus, Inc.,
Matritech, Inc., Millennium Predictive Medicine, Inc., are developing
serum-based tests, an alternative cancer-screening approach that is based on
detection of proteins or nucleic acids that are produced by colon cancers and
may be found circulating in blood. We believe serum-based testing is not able to
detect disease at the earliest stages of cancer at levels of sensitivity and
specificity comparable to that of stool-based testing.
We believe the principal competitive factors in the cancer screening market
include:
- improved sensitivity;
- non-invasiveness;
- acceptance by the medical community and primary care medical
practitioners;
- adequate reimbursement from Medicare and other third-party payors;
- cost-effectiveness; and
- patent protection.
EMPLOYEES
As of December 31, 2000, we had 44 employees, seven of whom have Ph.Ds.
Twenty-eight persons are engaged in research and development, four persons in
sales and marketing and twelve persons in general and administration. None of
our employees is represented by a labor union. We consider our relationships
with our employees to be good.
ITEM 2. PROPERTIES
We lease 17,877 square feet of space in our headquarters located in Maynard,
Massachusetts. The lease expires on June 30, 2003. We have an option to extend
the lease for an additional three-year term and have a right of first refusal on
approximately 11,000 square feet of space as it becomes available in the
building. We believe that this facility is adequate to meet our current and
foreseeable requirements and that suitable additional or substitute space will
be available on commercially reasonable terms if needed.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are a party to various legal proceedings arising in the
ordinary course of our business. We are not currently a party to any legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In October 2000, we obtained the approval by written consent of holders of
at least a majority of the then outstanding shares of our capital stock to:
(i) approve an amendment to our Fifth Amended and Restated Certificate of
Incorporation to increase the authorized number of shares of our common stock to
100,000,000 shares; (ii) approve the filing of our Sixth Amended and Restated
Certificate of Incorporation with the Delaware Secretary of State upon the
closing of our initial public offering; (iii) approve the amendment and
restatement of our By-Laws effective upon the closing of our initial public
offering; (iv) approve an increase by 250,000 shares in the number of shares of
our common stock reserved for issuance under our 1995 Stock Option Plan for an
aggregate of 1,450,000 shares available for issuance thereunder; (v) adopt our
2000 Stock Option and Incentive Plan and approve the reservation of 1,000,000
shares of our common stock for issuance thereunder; (vi) adopt our 2000 Employee
Stock Purchase Plan and approve the reservation of 300,000 shares of our common
stock for
14
issuance thereunder; (vii) elect each of Noubar B. Afeyan, Don M. Hardison and
William W. Helman, effective upon the closing of our initial public offering, to
serve as Class I directors until the date of annual meeting of stockholders next
following the year ending December 31, 2000 or until his earlier death,
resignation or removal; (viii) elect each of Richard W. Barker, Wycliffe K.
Grousbeck and Lance Willsey, effective upon the closing of our initial public
offering, to serve as Class II directors until the date of annual meeting of
stockholders next following the year ending December 31, 2001 or until his
earlier death, resignation or removal; and (ix) elect each of Sally W. Crawford,
Edwin M. Kania, Jr. and Stanley N. Lapidus, effective upon the closing of our
initial public offering, to serve as Class III directors until the date of
annual meeting of stockholders next following the year ending December 31, 2002
or until his or her earlier death, resignation or removal. Stockholders holding
an aggregate of 8,922,511 shares of capital stock signed the action by written
consent.
In December 2000, we obtained the approval by written consent of holders of
at least a majority of the then outstanding shares of our capital stock to
approve an amendment to our Fifth Amended and Restated Certificate of
Incorporation to change the name of the corporation to EXACT Sciences
Corporation. Stockholders holding an aggregate of 8,922,511 shares of capital
stock signed the action by written consent.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been listed for trading on the Nasdaq National Market
under the symbol "EXAS" since the effective date of our initial public offering
on January 30, 2001. Prior to that time, including during the period covered by
this report, there was no public market for our common stock. On March 29, 2001,
the last reported price of our common stock on the Nasdaq National Market was
$7.50 per share. Based upon information supplied to us by the registrar and
transfer agent for our common stock, the number of common stockholders of record
on March 29, 2001 was 173, not including beneficial owners in nominee or street
name. We believe that a significant number of shares of our common stock are
held in nominee name for beneficial owners.
We have not paid any cash dividends on our common stock and we currently
intend to retain any future earnings for use in our business. Accordingly, we do
not anticipate that any cash dividends will be declared or paid on the common
stock in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 2000, we issued the following
securities that were not registered under the Securities Act of 1933, as
amended:
(a) ISSUANCES OF CAPITAL STOCK
In December 2000, we issued a warrant to purchase 48,125 shares of common
stock at an exercise price of $10.9091 per share to one investor.
In April 2000, we issued and sold an aggregate of 1,417,534 shares of
Series D convertible preferred stock to 75 investors at a price of $22.50 per
share for aggregate consideration of $31,894,515. Each share of Series D
convertible preferred stock automatically converted into 2.75 shares of common
stock upon the closing of our initial public offering on February 5, 2001.
In March 2000, we issued and sold an aggregate of 48,125 shares of common
stock to one investor at a price of approximately $0.38 per share for aggregate
consideration of $18,375.
(b) EXERCISES OF STOCK OPTIONS
From January 1, 2000 to December 31, 2000, we issued 1,186,449 shares of
common stock at exercise prices ranging from $0.04 to $7.27 for an aggregate
purchase price of $1,188,572 pursuant to the exercise of options granted under
our 1995 stock option plan. During the same period, we granted options to
purchase an aggregate of 1,901,492 shares of common stock at exercise prices
ranging from $0.15 to $10.91 under our 1995 stock option plan.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Act set forth in Section 4(2) thereof relative to sales by an issuer not
involving any public offering or the rules and regulations thereunder, or, in
the case of options to purchase common stock, Rule 701 of the Act. All of the
foregoing securities are deemed restricted securities for the purposes of the
Securities Act.
USE OF PROCEEDS FROM REGISTERED SECURITIES
On January 30, 2001, we commenced our initial public offering of 4,000,000
shares of common stock, $.01 par value per share, pursuant to our final U.S.
prospectus and our final international prospectus, each dated January 30, 2001.
These prospectuses were contained in our Registration Statement on Form S-1,
which was declared effective by the Securities and Exchange Commission (SEC File
No. 333-48812) on January 30, 2001. We offered the shares in the U.S. and Canada
through
16
Merrill Lynch, Pierce, Fenner & Smith Incorporated, CIBC World Markets Corp. and
Thomas Weisel Partners LLC, as U.S. representatives for the several U.S.
underwriters, and outside the U.S. and Canada through Merrill Lynch
International, CIBC World Markets plc and Thomas Weisel Partners LLC as lead
managers for the several international managers. The initial public offering
closed on February 5, 2001. We sold 4,000,000 shares of common stock covered by
the Registration Statement. The several underwriters did not exercise their
over-allotment option to purchase up to an additional 600,000 shares of common
stock covered by the Registration Statement.
The aggregate offering price of the initial public offering to the public
was $56,000,000, with proceeds to us, after deduction of underwriting discounts
and commissions, of $52,080,000 (before deducting offering expenses payable by
us). We estimate that the aggregate amount of expenses incurred by us in
connection with the issuance and distribution of the shares of common stock
offered and sold in the initial public offering was approximately $4,920,000,
including $3,920,000 in underwriting discounts and $1,000,000 in other expenses.
These expenses were direct payments to persons other than directors, officers,
persons owning ten percent or more of our equity securities, or our affiliates.
None of the expenses paid by us in connection with the initial public offering
was paid, directly or indirectly, to directors, officers, persons owning ten
percent or more of our equity securities, or our affiliates.
The estimated net proceeds to us from the initial public offering, after
deducting underwriting discounts and commissions and other expenses, were
approximately $51 million. We currently expect to use the net proceeds of the
offering to fund clinical studies and trials, to fund other research and
development and for working capital and other general corporate purposes. To
date, none of the net proceeds from the initial public offering has been
applied. As of March 29, 2001, we have invested all of the net proceeds of the
offering in money-market mutual funds and direct and guaranteed obligations of
the United States. None of the net proceeds were paid, directly or indirectly,
to directors, officers, persons owning ten percent or more of our equity
securities, or our affiliates.
17
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data set forth below as of December 31,
1999 and 2000 and for the years ended December 31, 1998, 1999 and 2000, are
derived from our financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants, and which are included elsewhere
in this Form 10-K. The selected historical financial data as of December 31,
1996, 1997 and 1998 and for the years ended December 31, 1996 and 1997 are
derived from our financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants and which are not included
elsewhere in this Form 10-K.
The selected historical financial data should be read in conjunction with,
and are qualified by reference to "Management's Discussion and Analysis of
Financial Condition and Results of Operations," our financial statements and
notes thereto and the report of independent public accountants included
elsewhere in this Form 10-K.
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Research and development.................... $ 366 $ 1,222 $ 2,849 $ 3,689 $ 5,332
General and administrative.................. 312 814 1,170 1,560 4,814
Stock-based compensation(1)................. -- 1 2 14 3,184
------- -------- -------- -------- ----------
Loss from operations........................ (678) (2,037) (4,021) (5,263) (13,330)
Interest income............................. 26 154 443 299 1,447
------- -------- -------- -------- ----------
Net loss...................................... $ (652) $ (1,883) $ (3,578) $ (4,964) $ (11,883)
Net loss per common share:
Basic and diluted(2)...................... $ (6.77) $ (10.70) $ (6.08) $ (5.32) $ (8.13)
Pro forma basic and diluted
(unaudited)(3).......................... $ (0.97)
Weighted average common shares outstanding:
Basic and diluted......................... 96,250 175,953 588,143 932,593 1,461,726
Pro forma basic and diluted
(unaudited)(3).......................... 12,311,358
AS OF DECEMBER 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- -------------------------
ACTUAL PRO FORMA(4)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 3,896 $ 1,792 $ 8,826 $ 3,553 $ 26,470 $ 77,550
Total assets.................... 4,119 2,417 9,708 4,754 29,059 80,139
Stockholders' equity............ 4,010 2,305 9,298 4,410 27,700 78,700
- --------------------------
(1) The following summarizes the departmental allocation of stock-based
compensation:
Research and development.......... $ -- $ 1 $ 2 $ 9 $ 810
General and administrative........ -- -- -- 5 2,374
------- -------- -------- -------- ----------
Total........................... $ 0 $ 1 $ 2 $ 14 $ 3,184
------- -------- -------- -------- ----------
(2) Computed as described in Note 2 to the financial statements included
elsewhere in this Form 10-K.
(3) Assumes conversion of all outstanding shares of preferred stock into common
stock upon closing of our initial public offering.
(4) Reflects the sale of 4,000,000 shares of common stock at the initial public
offering price of $14.00 per share net of underwriting discounts and
commissions and offering expenses.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
HEREIN, THIS FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND OUR CONTROL. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF A NUMBER OF FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE FACTORS
DESCRIBED IN "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS
FORM 10-K.
OVERVIEW
We apply proprietary genomics technologies to the early detection of common
cancers. We have selected colorectal cancer screening as the first application
of our technology platform. Since our inception on February 10, 1995, our
principal activities have included:
- researching and developing our technologies for colorectal cancer
screening;
- conducting clinical studies to validate our colorectal cancer screening
tests;
- negotiating licenses for intellectual property of others incorporated into
our technologies;
- developing relationships with opinion leaders in the scientific and
medical communities;
- conducting market studies and analyzing potential approaches for
commercializing our technologies;
- hiring research and clinical personnel;
- hiring management and other support personnel; and
- raising capital.
Initially, we intend to offer colorectal cancer screening services ourselves
to establish the market. We then intend to license our proprietary technologies
and sell reagents to leading clinical reference laboratories to enable them to
develop tests. We may also package our technologies and seek approval for
diagnostic test kits with which any clinical laboratory could conduct our tests.
We have generated no operating revenues since our inception and do not
expect operating revenues for the foreseeable future. As of December 31, 2000,
we had an accumulated deficit of approximately $23.1 million. Our losses have
resulted principally from costs incurred in conjunction with our research and
development initiatives.
Research and development expenses include costs related to scientific and
laboratory personnel, clinical studies and reagents and supplies used in the
development of our technologies. We expect that the cost of our research and
development activities will increase substantially as we continue activities
relating to the development of our colorectal cancer screening tests and the
extension of our technologies to several other forms of common cancers and
pre-cancerous lesions. We are currently conducting a clinical study which
includes a population of both high-risk and average-risk patients and thereafter
intend to conduct a clinical trial that will include an estimated 5,300
average-risk patients from at least 40 academic and community-based practices,
the costs of which will be borne by us.
General and administrative expenses consist primarily of non-research
personnel salaries, office expenses and professional fees. We expect general and
administrative expenses to increase significantly as we hire additional
personnel and build our infrastructure to support future growth.
Stock-based compensation expense represents the difference between the
exercise price and fair value of common stock on the date of grant. The stock
compensation is being amortized over the vesting period of the applicable
options, which is generally 60 months. As of March 29, 2001, we expect to
recognize amortization expense of deferred compensation recorded related to
employee and director
19
options of approximately $4.0 million, $2.3 million, $1.4 million, $674,000 and
$230,000 during the years ended December 31, 2001, 2002, 2003, 2004 and 2005,
respectively.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses,
excluding departmental allocations of stock-based compensation, increased to
$5.3 million for the year ended December 31, 2000 from $3.7 million for the year
ended December 31, 1999. This increase was attributable primarily to an increase
of $285,000 in personnel-related expenses, an increase of $168,000 in
professional fees and expenses, an increase of $505,000 in lab expenses, an
increase of $579,000 in trials and studies expenses and an additional $63,000
related to the leasing of additional laboratory space.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses,
excluding departmental allocations of stock-based compensation, increased to
$4.8 million for the year ended December 31, 2000 from $1.6 million for the year
ended December 31, 1999. This increase was attributable primarily to an increase
of $1.2 million in personnel-related expenses, an increase of $1.8 million in
professional fees and expenses, an increase of $114,000 in travel-related
expenses and an additional $47,000 related to the leasing of additional office
space.
STOCK-BASED COMPENSATION. Stock-based compensation increased to
$3.2 million for the year ended December 31, 2000, of which $810,000 related to
research and development personnel and $2.4 million related to general and
administrative personnel. Stock-based compensation was $14,000 for the year
ended December 31, 1999, of which $9,000 related to research and development
personnel and $5,000 related to general and administrative personnel.
INTEREST INCOME. Interest income increased to $1,447,000 for the year ended
December 31, 2000 from $299,000 for the year ended December 31, 1999. This
increase was primarily due to an increase in our cash and cash equivalents
balances resulting from the issuance of preferred stock in April 2000.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses,
excluding departmental allocations of stock-based compensation, increased to
$3.7 million for the year ended December 31, 1999 from $2.8 million for the year
ended December 31, 1998. This increase was attributable primarily to an increase
of $303,000 in research and development personnel and an additional $53,000
related to the leasing of additional laboratory space. In addition, we incurred
$429,000 in connection with our ongoing clinical studies during 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses,
excluding departmental allocations of stock-based compensation, increased to
$1.6 million for the year ended December 31, 1999 from $1.2 million for the year
ended December 31, 1998. This increase was attributable primarily to an increase
of $200,000 in general and administrative personnel, an increase of $76,000 in
legal and consulting fees and an increase of $55,000 in amortization and
depreciation expense.
STOCK-BASED COMPENSATION. Stock-based compensation expense increased to
$14,000 for the year ended December 31, 1999, of which $9,000 related to
research and development personnel and $5,000 related to general and
administrative personnel. Stock-based compensation expense was $2,000 for the
year ended December 31, 1998, of which $1,500 was related to research and
development personnel and $500 related to general and administrative personnel.
20
INTEREST INCOME. Interest income decreased to $299,000 for the year ended
December 31, 1999 from $443,000 for the year ended December 31, 1998. The
decrease in 1999 was primarily due to a decrease in our cash and cash
equivalents balances as a result of losses from operations.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each the eight quarters ended December 31, 2000. In the opinion of
management, this information has been prepared on the same basis as the audited
financial statements appearing elsewhere in this Form 10-K, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited quarterly results of
operations. The quarterly data should be read in conjunction with our audited
financial statements and the notes to the financial statements appearing
elsewhere in this Form 10-K.
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- ---------- ---------- ---------- ---------- ----------
Statement of Operations
Data
Research and
development......... $ 865 $ 950 $ 924 $ 951 $ 1,154 $ 1,145 $ 1,516 $ 1,517
General and
administrative...... 360 392 372 435 483 824 1,135 2,372
Stock-based
compensation........ 0 0 14 0 242 505 772 1,665
-------- -------- -------- ---------- ---------- ---------- ---------- ----------
Loss from
operations.......... (1,225) (1,342) (1,310) (1,386) (1,879) (2,474) (3,423) (5,554)
Interest income....... 98 80 70 51 41 451 500 455
-------- -------- -------- ---------- ---------- ---------- ---------- ----------
Net loss................ $ (1,127) $ (1,262) $ (1,240) $ (1,335) $ (1,838) $ (2,023) $ (2,923) $ (5,099)
Net loss per common
share:
Basic and
diluted(1)...... $ 1.40 $ 1.37 $ 1.27 $ 1.28 $ 1.54 $ 1.41 $ 1.91 $ 3.03
Weighted average
common shares
outstanding:
Basic and
diluted......... 805,111 920,832 980,072 1,039,313 1,194,025 1,434,267 1,534,010 1,684,602
- --------------------------
(1) Computed as described in Note 2 to the financial statements included
elsewhere in this Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through private
sales of preferred stock. As of December 31, 2000, we had received net proceeds
of $47.2 million from the issuance of preferred stock. As of December 31, 2000,
we had approximately $26.5 million in cash and cash equivalents.
Net cash used in operating activities was $8.0 million for the year ended
December 31, 2000, $4.6 million in 1999 and $3.0 million in 1998. These
increases are primarily due to the increase in our research and development
activities and associated general and administrative expenses.
Net cash used in investing activities was $1.1 million for the year ended
December 31, 2000, $722,000 in 1999 and $496,000 in 1998. For each of these
periods, cash used in investing activities reflected increased investment in our
intellectual property portfolio and the expansion of our laboratory and office
space.
21
Net cash provided by financing activities was $32.0 million for the year
ended December 31, 2000, $57,000 in 1999 and $10.6 million in 1998. Cash
provided during these periods resulted from the sale of our preferred stock
during the year ended December 31, 2000 and the year ended 1998.
We expect that the net proceeds of approximately $51 million from our
initial public offering in February 2001, together with our current working
capital, will fund our operations through 2003. Our future capital requirements
include, but are not limited to, continuing our research and development
programs, supporting our clinical trial efforts, and launching our marketing
efforts. Our future capital requirements will depend on many factors, including
the following:
- the success of our clinical studies;
- the scope of and progress made in our research and development activities;
and
- the successful commercialization of colorectal cancer screening tests
based on our technologies.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 2000, we had net operating loss carryforwards of
approximately $22 million and research and development tax credit carryforwards
of approximately $609,000. The net operating loss and tax credit carryforwards
will expire at various dates through 2020, if not utilized. The Internal Revenue
Code and applicable state law impose substantial restrictions on a corporation's
utilization of net operating loss and tax credit carryforwards if an ownership
change is deemed to have occurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or the FASB, issued
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement established
accounting and reporting standards for derivative instruments and hedging
activities. SFAS 133, as amended by SFAS 137, will be effective for our
financial reporting beginning in the first quarter of 2001. SFAS 133 will
require that we recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. The accounting for
gains and losses from changes in the fair value of a particular derivative will
depend on the intended use of that derivative. We believe the adoption of this
statement will not have a significant impact on our financial position, results
of operations or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, REVENUE
RECOGNITION. This bulletin establishes guidelines for revenue recognition and is
in effect beginning October 1, 2000. The adoption of this guidance did not have
a material impact on our financial condition or results of operations.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AND INTERPRETATION OF APB OPINION
NO. 25. The interpretation clarifies the application of APB Opinion No. 25 to
accounting for stock issued to employees. The interpretation is effective
July 1, 2000, but covers events occurring during the period between
December 15, 1998 and July 1, 2000. If events covered by the interpretation
occur during this period, the effects of applying the interpretation to the
events would be recognized on a prospective basis from July 1, 2000. As a
result, the interpretation will not require that any adjustments be made to our
consolidated financial statements for periods before July 1, 2000, and no
expense would be recognized for any additional compensation cost measured that
is attributable to periods before July 1, 2000. The adoption of this
interpretation did not have an impact on our financial position, results of
operations or cash flows.
22
FACTORS THAT MAY AFFECT FUTURE RESULTS
We operate in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. This discussion highlights some of
the risks which may affect future operating results.
WE ARE A DEVELOPMENT STAGE COMPANY AND MAY NEVER COMMERCIALIZE ANY OF OUR
PRODUCTS OR SERVICES OR EARN A PROFIT.
We are a development stage company and have incurred losses since we were
formed. From our date of inception on February 10, 1995 through December 31,
2000, we have accumulated a total deficit of approximately $23.1 million. Since
our colorectal cancer screening tests are still in development, we do not expect
to have any material revenue from the sale of our products and services until
2003. Even after we begin selling our products and services, we expect that our
losses will continue and increase as a result of continuing high research and
development expenses, as well as increased sales and marketing expenses. We
cannot assure you that we will ever commercialize any of our products or
services, or that the revenue from any of our products or services will be
sufficient to make us profitable.
IF OUR CLINICAL STUDIES DO NOT PROVE THE SUPERIORITY OF OUR TECHNOLOGIES, WE MAY
NEVER SELL OUR PRODUCTS AND SERVICES.
In the fourth quarter of 2001, we intend to initiate a blinded multi-center
clinical trial that will include approximately 5,300 patients with average risk
profiles. The results of this clinical trial may not show that tests using our
technologies are superior to existing screening methods. In that event, we will
have to devote significant financial and other resources to further research and
development. In addition, we may experience delays in the commercialization of
tests using our technologies or commercialization may never occur. Our earlier
clinical studies were small and included samples from high-risk patients. The
results from these earlier studies may not represent the results we obtain from
any future studies, including our planned clinical trial, which will include
substantially more samples and average-risk patients. See "Business--Clinical
Studies."
WE MAY BE UNABLE TO RECRUIT A SUFFICIENT NUMBER OF PATIENTS FOR OUR PLANNED
AVERAGE-RISK CLINICAL TRIAL.
We intend to conduct a blinded multi-center clinical trial of approximately
5,300 average-risk patients. If we are unable to enroll the required number of
average risk patients, we will be unable to validate the superiority of our
technologies, which would make it difficult to sell our products and services.
Despite the availability of colorectal cancer screening methods today, most
Americans who are recommended for colorectal cancer screening do not get
screened. Participants in our clinical trial will only have an average risk of
developing colorectal cancer, yet will have to undergo a colonoscopy. This
procedure requires sedation and causes patient discomfort. We cannot guarantee
that we will be able to recruit patients on a timely basis, if at all.
IF MEDICARE AND OTHER THIRD-PARTY PAYORS, INCLUDING MANAGED CARE ORGANIZATIONS,
DO NOT PROVIDE ADEQUATE REIMBURSEMENT FOR OUR PRODUCTS AND SERVICES, MOST
CLINICAL REFERENCE LABORATORIES WILL NOT USE OUR PRODUCTS OR LICENSE OUR
TECHNOLOGIES TO PERFORM CANCER SCREENING TESTS.
Most clinical reference laboratories will not perform colorectal cancer
screening tests using our products and licensing our technologies unless they
are adequately reimbursed by third-party payors such as Medicare and managed
care organizations. There is significant uncertainty concerning third-party
reimbursement for the use of any test incorporating new technology.
Reimbursement by a third-party payor may depend on a number of factors,
including a payor's determination that tests using our products and technologies
are sensitive for colorectal cancer, not experimental or investigational,
23
medically necessary, appropriate for the specific patient and cost-effective. To
date, we have not secured any reimbursement approval for tests using our
products and technologies from any third-party payor, nor do we expect any such
approvals in the near future.
Reimbursement by Medicare will require approval by the Secretary of Health
and Human Services, or HHS. The Federal Budget Act of 1997 provides for
reimbursement of new technologies such as ours, but only with action of the
Secretary of HHS. We cannot guarantee that the Secretary of HHS will act to
approve tests based on our technologies on a timely basis or at all. In
addition, the assignment of a current procedural terminology code facilitates
Medicare reimbursement. The process to obtain this code is lengthy and we cannot
guarantee that we will receive a current procedural terminology code on a timely
basis, or at all.
Since reimbursement approval is required from each payor individually,
seeking such approvals is a time-consuming and costly process. If we are unable
to obtain adequate reimbursement by Medicare and managed care organizations, our
ability to generate revenue and earnings from the sale of our products or
licenses to our technologies will be limited.
WE WILL NOT BE ABLE TO COMMERCIALIZE OUR TECHNOLOGIES IF WE ARE NOT ABLE TO
LOWER COSTS THROUGH AUTOMATING AND SIMPLIFYING KEY OPERATIONAL PROCESSES.
Currently, colorectal cancer screening tests using our technologies are very
expensive because they are labor-intensive and use highly complex and expensive
reagents. In order to price our products and services competitively, we will
need to reduce substantially the costs of tests using our technologies through
significant automation of key operational processes and other cost savings
procedures. If we fail to sufficiently reduce costs, tests using our
technologies either may not be commercially viable or may generate little, if
any, profitability.
OUR INABILITY TO ESTABLISH STRONG BUSINESS RELATIONSHIPS WITH LEADING CLINICAL
REFERENCE LABORATORIES TO PERFORM COLORECTAL CANCER SCREENING TESTS USING OUR
TECHNOLOGIES WILL LIMIT OUR REVENUE GROWTH.
A key step in our strategy is to sell reagents and license our proprietary
technologies to leading clinical reference laboratories that will perform
colorectal cancer screening tests. We currently have no business relationships
with these laboratories and have limited experience in establishing these
business relationships. If we are unable to establish these business
relationships, we will have limited ability to obtain revenues beyond revenue we
can generate from our limited in-house capacity to process tests.
OUR FAILURE TO CONVINCE MEDICAL PRACTITIONERS TO ORDER TESTS USING OUR
TECHNOLOGIES WILL LIMIT OUR REVENUE AND PROFITABILITY.
If we fail to convince medical practitioners to order tests using our
technologies, we will not be able to sell our products or license our
technologies in sufficient volume for us to become profitable. We will need to
make leading gastroenterologists aware of the benefits of tests using our
technologies through published papers, presentations at scientific conferences
and favorable results from our clinical studies. Our failure to be successful in
these efforts would make it difficult for us to convince medical practitioners
to order colorectal cancer screening tests using our technologies for their
patients.
IF WE LOSE THE SUPPORT OF OUR KEY SCIENTIFIC COLLABORATORS, IT MAY BE DIFFICULT
TO ESTABLISH TESTS USING OUR TECHNOLOGIES AS A STANDARD OF CARE FOR COLORECTAL
CANCER SCREENING, WHICH MAY LIMIT OUR REVENUE GROWTH AND PROFITABILITY.
We have established relationships with leading scientists, including members
of our scientific advisory board, and research institutions, such as the Mayo
Clinic, that we believe are key to establishing tests using our technologies as
a standard of care for colorectal cancer screening. We have consulting
agreements with all but one member of our scientific advisory board, each of
which may be
24
terminated by us or the scientific advisory board member with 30 or 60 days
notice. Our existing collaboration agreement with the Mayo Clinic expires on
December 31, 2001. If any of our collaborators determine that colorectal cancer
screening tests using our technologies are not superior to available colorectal
cancer screening tests or that alternative technologies would be more effective
in the early detection of colorectal cancer, we would encounter difficulty
establishing tests using our technologies as a standard of care for colorectal
cancer screening, which would limit our revenue growth and profitability.
WE MAY EXPERIENCE LIMITS ON OUR REVENUE AND PROFITABILITY IF ONLY AN
INSIGNIFICANT NUMBER OF PEOPLE DECIDE TO BE SCREENED FOR COLORECTAL CANCER.
Even if our technologies are superior to alternative colorectal cancer
screening technologies, adequate third-party reimbursement is obtained and
medical practitioners order tests using our technologies, an insignificant
number of people may decide to be screened for colorectal cancer. Despite the
availability of current colorectal cancer screening methods as well as the
recommendation of the American Cancer Society and the National Cancer Institute
that all Americans age 50 and above be screened for colorectal cancer, most of
these individuals decide not to complete a colorectal cancer screening test. If
only an insignificant portion of the population decides to complete colorectal
cancer screening tests, we may experience limits on our revenue and
profitability.
OUR INABILITY TO APPLY OUR PROPRIETARY TECHNOLOGIES SUCCESSFULLY TO DETECT OTHER
COMMON CANCERS MAY LIMIT OUR REVENUE GROWTH AND PROFITABILITY.
While to date, we have focused substantially all of our research and
development efforts on colorectal cancer, we have used our technologies to
detect cancers of the lung, pancreas, esophagus, stomach and gall bladder. As a
result, we intend to devote significant personnel and financial resources in the
future to extending our technology platform to the development of screening
tests for these common cancers and pre-cancerous lesions. To do so, we may need
to overcome technological challenges to develop reliable screening tests for
these cancers. We may never realize any benefits from these research and
development activities. See "Business--Research and Development."
IF WE FAIL TO OBTAIN THE APPROVAL OF THE U.S. FOOD AND DRUG ADMINISTRATION, OR
FDA, OR COMPLY WITH OTHER FDA REQUIREMENTS, WE MAY NOT BE ABLE TO MARKET OUR
PRODUCTS AND SERVICES AND MAY BE SUBJECT TO STRINGENT PENALTIES.
The FDA does not actively regulate laboratory tests that have been developed
and used by the laboratory conducting the test. Although the FDA does regulate
reagents, such as ours, that react with a biological substance to identify a
specific DNA sequence or protein, its regulations provide that most such
reagents, which the FDA refers to as analyte specific reagents, are exempt from
the FDA's premarket review requirements. If the FDA were to decide to regulate
in-house developed laboratory tests, decide to require premarket approval or
clearance of our analyte specific reagents, conclude that our reagents do not
meet the requirements for analyte specific reagents, or conclude that licensing
our intellectual property constitutes non-compliant labeling, the
commercialization of our products and services could be delayed, halted or
prevented. In addition, the FDA may impose penalties on us or seek other
enforcement actions. Similarly, if the FDA were to determine that our stool
collector requires premarket approval or clearance, the sale of our products and
services could be delayed, halted or prevented and the FDA could impose
penalties on us or seek other enforcement action. Finally, our analyte specific
reagents will be subject to a number of FDA requirements, including a
requirement to comply with the FDA's quality system regulation which establishes
extensive regulations for quality control and manufacturing procedures. Failure
to comply with these regulations could subject us to enforcement action. Adverse
FDA action in any of these areas could significantly increase our expenses and
limit our revenue and profitability.
25
IF WE FAIL TO COMPLY WITH REGULATIONS RELATING TO CLINICAL LABORATORIES, WE MAY
BE PROHIBITED FROM PROCESSING OUR OWN TESTS IN-HOUSE, BE REQUIRED TO INCUR
SIGNIFICANT EXPENSE TO CORRECT NON-COMPLIANCE, OR BE SUBJECT TO OTHER
REQUIREMENTS OR PENALTIES.
We are subject to U.S. and state laws and regulations regarding the
operation of clinical laboratories. For example, the federal Clinical Laboratory
Improvement Amendments impose certification requirements for clinical
laboratories, and establish standards for quality assurance and quality control,
among other things. Clinical laboratories are subject to inspection by
regulators, and the possible sanctions for failing to comply with applicable
requirements include prohibiting a laboratory from running tests, requiring a
laboratory to implement a corrective plan, and imposing civil money or criminal
penalties. In May 2000, we received a clinical laboratory certificate of
compliance. However, if we fail to meet the requirements of the Clinical
Laboratory Improvement Amendments in the future, we could be required to halt
providing services and incur significant expense, thereby limiting our revenue
and profitability.
OTHER COMPANIES MAY DEVELOP AND MARKET METHODS FOR DETECTING COLORECTAL CANCER,
WHICH MAY MAKE OUR TECHNOLOGIES LESS COMPETITIVE, OR EVEN OBSOLETE.
The market for colorectal cancer screening is large, approximating
74 million Americans age 50 and above, and has attracted competitors, some of
which have significantly greater resources than we have.
Currently, we face competition from alternative procedures-based detection
technologies such as flexible sigmoidoscopy and colonoscopy, as well as
traditional screening tests such as the fecal occult blood test marketed by
Beckman Coulter, Inc. Other entities are developing new colorectal screening
methods such as virtual colonoscopy, an experimental procedure being developed
at research institutions in which a radiologist views the inside of the colon
through a scanner. In addition, competitors, including Bayer Corporation,
diaDexus, Inc., Matritech, Inc. and Millennium Predictive Medicine, Inc., are
developing serum-based tests, a screening test based on the detection of
proteins or nucleic acids produced by colon cancer. These and other companies
may also be working on additional methods of detecting colon cancer that have
not yet been announced. We may be unable to compete effectively against these
competitors either because their test is superior or because they may have more
expertise, experience, financial resources and business relationships.
THE LOSS OF KEY MEMBERS OF OUR SENIOR MANAGEMENT TEAM COULD ADVERSELY AFFECT OUR
BUSINESS.
Our success depends largely on the skills, experience and performance of key
members of our senior management team, including Stanley N. Lapidus, our
Chairman, Don M. Hardison, our President, John A. McCarthy, Jr., our Vice
President and Chief Financial Officer, and Anthony P. Shuber, our Vice President
of Molecular Biology. Messrs. Lapidus and Shuber have been critical to the
development of our technologies and business. Mr. Hardison, who joined us in
May 2000, and Mr. McCarthy, who joined us in October 2000, are key additions to
our management team and will be critical to directing and managing our growth
and development in the future. We have no employment agreements with any of
Messrs. Lapidus, Hardison, McCarthy or Shuber, however each has signed a
non-disclosure and assignment of intellectual property agreement and non-compete
agreement. We also have a severance agreement with each of Messrs. Lapidus,
Hardison, McCarthy and Shuber that provides for twelve months severance under
certain circumstances. The efforts of each of these persons will be critical to
us as we continue to develop our technologies and our testing process and as we
attempt to transition from a development company to a company with
commercialized products and services. If we were to lose one or more of these
key employees, we may experience difficulties in competing effectively,
developing our technologies and implementing our business strategies.
26
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY EFFECTIVELY, WE MAY BE
UNABLE TO PREVENT THIRD PARTIES FROM USING OUR TECHNOLOGIES, WHICH WOULD IMPAIR
OUR COMPETITIVE ADVANTAGE.
We rely on patent protection as well as a combination of trademark,
copyright and trade secret protection, and other contractual restrictions to
protect our proprietary technologies, all of which provide limited protection
and may not adequately protect our rights or permit us to gain or keep any
competitive advantage. If we fail to protect our intellectual property, we will
be unable to prevent third parties from using our technologies and they will be
able to compete more effectively against us.
As of March 29, 2001, we had eleven issued patents in the United States,
four issued foreign patents, twenty-five pending patent applications in the
United States, three of which have been allowed, and forty-four pending foreign
applications. We cannot assure you that any of our currently pending or future
patent applications will result in issued patents, and we cannot predict how
long it will take for such patents to be issued. Further, we cannot assure you
that other parties will not challenge any patents issued to us, or that courts
or regulatory agencies will not hold our patents to be invalid or unenforceable.
A third-party institution has asserted co-inventorship rights with respect
to one of our issued patents relating to pooling patient samples in connection
with our loss of heterozygosity detection method. We cannot guarantee you that
we will be successful in defending this or other challenges made in connection
with our patents and patent applications. Any successful third-party challenge
to our patents could result in co-ownership of such patents with a third party
or the unenforceability or invalidity of such patents. In addition, we and a
third-party institution have filed a joint patent application that will be
co-owned by us and that third-party institution relating to the use of various
DNA markers, including one of our detection methods, to detect cancers of the
lung, pancreas, esophagus, stomach, small intestine, bile duct, naso-pharyngeal,
liver and gall bladder in stool under the Patent Cooperation Treaty. This patent
application designates the United States, Japan, Europe and Canada. Co-ownership
of a patent allows the co-owner to exercise all rights of ownership, including
the right to use, transfer and license the rights protected by the applicable
patent.
In addition to our patents, we rely on contractual restrictions to protect
our proprietary technology. We require our employees and third parties to sign
confidentiality agreements and employees to also sign agreements assigning to us
all intellectual property arising from their work for us. Nevertheless, we
cannot guarantee that these measures will be effective in protecting our
intellectual property rights.
We cannot guarantee you that the patents issued to us will be broad enough
to provide any meaningful protection nor can we assure you that one of our
competitors may not develop more effective technologies, designs or methods to
test for colorectal cancer or any other common cancer without infringing our
intellectual property rights or that one of our competitors might not design
around our proprietary technologies.
WE MAY INCUR SUBSTANTIAL COSTS TO PROTECT AND ENFORCE OUR PATENTS.
We have pursued an aggressive patent strategy designed to maximize our
patent protection against third parties in the U.S. and in foreign countries. We
have filed patent applications that cover the methods we have designed to detect
colorectal cancer and other cancers, as well as patent applications that cover
our testing process. In order to protect or enforce our patent rights, we may
initiate actions against third parties. Any actions regarding patents could be
costly and time-consuming, and divert our management and key personnel from our
business. Additionally, such actions could result in challenges to the validity
or applicability of our patents.
27
WE MAY BE SUBJECT TO SUBSTANTIAL COSTS AND LIABILITY OR BE PREVENTED FROM
SELLING OUR SCREENING TESTS FOR CANCER AS A RESULT OF LITIGATION OR OTHER
PROCEEDINGS RELATING TO PATENT RIGHTS.
Third parties may assert infringement or other intellectual property claims
against our licensors or us. We pursue an aggressive patent strategy that we
believe provides us with a competitive advantage in the early detection of
colorectal cancer and other common cancers. We currently have eleven issued U.S.
patents and twenty-five pending patent applications in the United States.
Because the U.S. Patent & Trademark Office maintains patent applications in
secrecy until a patent issues, others may have filed patent applications for
technology covered by our pending applications. There may be third-party
patents, patent applications and other intellectual property relevant to our
potential products that may block or compete with our products or processes.
Even if third-party claims are without merit, defending a lawsuit may result in
substantial expense to us and may divert the attention of management and key
personnel. In addition, we cannot assure you that we would prevail in any of
these suits or that the damages or other remedies if any, awarded against us
would not be substantial. Claims of intellectual property infringement may
require us to enter into royalty or license agreements with third parties that
may not be available on acceptable terms, if at all. These claims may also
result in injunctions against the further development and use of our technology,
which would have a material adverse effect on our business, financial condition
and results of operations.
Also, patents and applications owned by us may become the subject of
interference proceedings in the United States Patent and Trademark Office to
determine priority of invention, which could result in substantial cost to us,
as well as a possible adverse decision as to the priority of invention of the
patent or patent application involved. An adverse decision in an interference
proceeding may result in the loss or rights under a patent or patent application
subject to such a proceeding.
OUR BUSINESS WOULD SUFFER IF CERTAIN LICENSES WERE TERMINATED.
We license certain technologies from Roche Molecular Systems, Inc. and
Genzyme Corporation that are key to our technologies. The Roche license, which
relates to a gene amplification process used in almost all genetic testing, is a
non-exclusive license through 2004, the date on which the patent that we utilize
expires. Roche may terminate the license upon notice if we fail to pay
royalties, submit certain reports or breach any other material term of the
license agreement. The Genzyme license is a non-exclusive license to use the APC
and P53 genes and methodologies relating to the genes in connection with our
products and services through 2013, the date on which the term of the patent
that we utilize expires. Genzyme may terminate the license upon notice if we
fail to pay milestone payments and royalties, achieve a certain level of sales,
submit certain reports. In addition, if we fail to use reasonable efforts to
make products and services based on these patents available to the public or
fail to request FDA clearance for a diagnostic test kit as required by the
agreement, Genzyme may terminate the license. If either Roche or Genzyme were to
terminate the licenses, we would incur significant delays and expense to change
a portion of our testing methods and we cannot guarantee that we would be able
to change our testing methods without affecting the sensitivity of our tests.
CHANGES IN HEALTHCARE POLICY COULD SUBJECT US TO ADDITIONAL REGULATORY
REQUIREMENTS THAT MAY DELAY THE COMMERCIALIZATION OF OUR TESTS AND INCREASE OUR
COSTS.
Healthcare policy has been a subject of discussion in the executive and
legislative branches of the federal and many state governments. We developed a
staged commercialization strategy for our colorectal cancer screening tests
based on existing healthcare policies. Changes in healthcare policy, if
implemented, could substantially delay the use of our tests, increase costs, and
divert management's attention. We cannot predict what changes, if any, will be
proposed or adopted or the effect that such proposals or adoption may have on
our business, financial condition and results of operations.
28
OUR INABILITY TO RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS IN THE FUTURE MAY
LIMIT OUR GROWTH.
We may need to raise additional funds to execute our business strategy. Our
inability to raise capital would seriously harm our business and development
efforts. In addition, we may choose to raise additional capital due to market
conditions or strategic considerations even if we believe we have sufficient
funds for our current or future operations. To the extent that additional
capital is raised through the sale of equity or convertible debt securities, the
issuance of these securities could result in dilution to our stockholders.
We currently have no credit facility or committed sources of capital. If our
capital resources are insufficient to meet future requirements, we will have to
raise additional funds to continue the development and commercialization of our
technologies. These funds may not be available on favorable terms, or at all. If
adequate funds are not available on attractive terms, we may have to restrict
our operations significantly or obtain funds by entering into agreements on
unattractive terms.
OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS OWN A SIGNIFICANT
PERCENTAGE OF OUR COMPANY AND COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS
REQUIRING STOCKHOLDER APPROVAL.
As of March 29, 2001, our executive officers, directors and principal
stockholders and their affiliates together control approximately 49.4% of our
outstanding common stock, without giving effect to the exercise of outstanding
options under our stock plans. As a result these stockholders, if they act
together, will have significant influence over matters requiring stockholder
approval, such as the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying, preventing or deterring a change in control, could deprive you of the
opportunity to receive a premium for your common stock as part of a sale and
could adversely affect the market price of our common stock.
CERTAIN PROVISIONS OF OUR CHARTER, BY-LAWS AND DELAWARE LAW MAY MAKE IT
DIFFICULT FOR YOU TO CHANGE OUR MANAGEMENT AND MAY ALSO MAKE A TAKEOVER
DIFFICULT.
Our corporate documents and Delaware law contain provisions that limit the
ability of stockholders to change our management and may also enable our
management to resist a takeover. These provisions include a staggered board of
directors, limitations on persons authorized to call a special meeting of
stockholders and advance notice procedures required for stockholders to make
nominations of candidates for election as directors or to bring matters before
an annual meeting of stockholders. These provisions might discourage, delay or
prevent a change of control or in our management. These provisions could also
discourage proxy contests and make it more difficult for you and other
stockholders to elect directors and cause us to take other corporate actions. In
addition, the existence of these provisions, together with Delaware law, might
hinder or delay an attempted takeover other than through negotiations with our
board of directors.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including:
- technological innovations or new products and services by us or our
competitors;
- clinical trial results relating to our tests or those of our competitors;
- reimbursement decisions by Medicare and other managed care organizations;
- FDA regulation of our products and services;
- the establishment of partnerships with clinical reference laboratories;
29
- health care legislation;
- intellectual property disputes;
- additions or departures of key personnel; and
- sales of our common stock.
Because we are a development stage company with no material revenue expected
until 2003, you may consider one of these factors to be material. Our stock
price may fluctuate widely as a result of any of the above.
In addition, the Nasdaq National Market and the market for applied genomics
companies in particular, have experienced significant price and volume
fluctuations that have often been unrelated or disproportionate to the
performance of those companies.
FUTURE SALES BY OUR EXISTING STOCKHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK.
If our existing stockholders sell a large number of shares of our common
stock, the market price of our common stock could decline significantly.
Moreover, the perception in the public market that our existing stockholders
might sell shares of common stock could adversely affect the market price of our
common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no derivative financial instruments in our cash and cash
equivalents. We invest our cash and cash equivalents in securities of the U.S.
governments and its agencies and in investment-grade, highly liquid investments
consisting of commercial paper, bank certificates of deposit and corporate
bonds.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EXACT SCIENCES CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Public Accountants.................... 32
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... 33
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1999
and 2000.................................................. 34
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999 and 2000.................... 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999
and 2000.................................................. 37
Notes to Consolidated Financial Statements.................. 38
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EXACT Sciences Corporation:
We have audited the accompanying consolidated balance sheets of EXACT
Sciences Corporation (a Delaware corporation in the development stage) and
subsidiary as of December 31, 1999 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for the period
from inception (February 10, 1995) to December 31, 2000. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 financial position of EXACT Sciences Corporation
and subsidiary as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for the period from inception (February 10,
1995) to December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
Boston, Massachusetts
January 30, 2001
32
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------------
1999 2000
----------- ---------------------------
ACTUAL PRO FORMA
------------ ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 3,553,257 $ 26,469,866 $ 77,549,866
Prepaid expenses.......................................... 26,843 738,475 738,475
----------- ------------ ------------
Total current assets.................................... 3,580,100 27,208,341 78,288,341
Property and Equipment, at cost:
Laboratory equipment...................................... 594,385 1,011,052 1,011,052
Office and computer equipment............................. 255,161 429,014 429,014
Leasehold improvements.................................... 125,688 236,437 236,437
Furniture and fixtures.................................... 114,618 175,996 175,996
----------- ------------ ------------
1,089,852 1,852,499 1,852,499
Less--Accumulated depreciation and amortization........... (663,397) (988,967) (988,967)
----------- ------------ ------------
426,455 863,532 863,532
Patent Costs and Other Assets, net of accumulated
amortization of approximately $149,000 and $223,000 at
December 31, 1999 and 2000, respectively (Note 2)......... 747,348 986,629 986,629
$ 4,753,903 $ 29,058,502 $ 80,138,502
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 196,895 $ 582,298 $ 582,298
Accrued expenses.......................................... 146,993 776,396 776,396
----------- ------------ ------------
Total current liabilities............................... 343,888 1,358,694 1,358,694
Commitments (Note 7)
Stockholders' Equity:
Series A convertible preferred stock, $0.01 par value--
Authorized--1,000,000 shares
Issued and outstanding--902,414 shares actual; none pro
forma (liquidation preference of $1,046,800).......... 9,024 9,024 --
Series B convertible preferred stock, $0.01 par value--
Authorized--1,250,000 shares
Issued and outstanding--996,196 shares actual; none pro
forma (liquidation preference of $3,934,974).......... 9,962 9,962 --
Series C convertible preferred stock, $0.01 par value--
Authorized--1,015,000 shares
Issued and outstanding--1,007,186 shares actual; none
pro forma (liquidation preference of $10,575,453)..... 10,072 10,072 --
Series D convertible preferred stock, $0.01 par value--
Authorized--1,435,373 shares
Issued and outstanding--1,417,534 shares at December 31,
2000; none pro forma (liquidation preference of
$31,894,515).......................................... -- 14,175 --
Common stock, $0.01 par value--
Authorized--100,000,000 shares
Issued--1,582,848, 2,789,581 and 18,678,715 shares at
December 31, 1999, 2000 and 2000 pro forma,
respectively.......................................... 15,828 27,896 186,788
Subscriptions receivable.................................. (39,706) (975,443) (975,443)
Deferred compensation..................................... (54,482) (8,578,341) (8,578,341)
Additional paid-in capital................................ 15,674,878 60,281,143 111,245,484
Deficit accumulated during the development stage.......... (11,215,561) (23,098,680) (23,098,680)
----------- ------------ ------------
Total stockholders' equity............................ 4,410,015 27,699,808 78,779,808
----------- ------------ ------------
$ 4,753,903 $ 29,058,502 $ 80,138,502
=========== ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
33
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
INCEPTION
(FEBRUARY 10,
YEAR ENDED DECEMBER 31, 1995) TO
---------------------------------------- DECEMBER 31,
1998 1999 2000 2000
----------- ----------- ------------ -------------
Operating Expenses:
Research and development............... $ 2,848,763 $ 3,688,796 $ 5,332,055 $ 13,456,922
General and administrative............. 1,170,366 1,560,368 4,813,715 8,814,692
Stock-based compensation(1)............ 1,902 13,780 3,184,053 3,200,580
----------- ----------- ------------ ------------
Loss from operations................. (4,021,031) (5,262,944) (13,329,823) (25,472,194)
Interest Income.......................... 442,651 299,019 1,446,704 2,373,514
----------- ----------- ------------ ------------
Net loss............................. $(3,578,380) $(4,963,925) $(11,883,119) $(23,098,680)
=========== =========== ============ ============
Net Loss per Share:
Basic and diluted...................... $ (6.08) $ (5.32) $ (8.13)
=========== =========== ============
Pro forma basic and diluted
(unaudited).......................... $ (0.97)
============
Weighted Average Common Shares
Outstanding:
Basic and diluted...................... 588,143 932,593 1,461,726
=========== =========== ============
Pro forma basic and diluted
(unaudited).......................... 12,311,358
============
- ------------------------
(1) The following summarizes the departmental allocation of stock-based
compensation:
Research and development............. $ 1,427 $ 8,819 $ 809,880 $ 820,709
General and administrative........... 475 4,961 2,374,173 2,379,871
----------- ----------- ------------ ------------
Total.............................. $ 1,902 $ 13,780 $ 3,184,053 $ 3,200,580
=========== =========== ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
34
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES A SERIES B SERIES C SERIES D
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- ------------------- ------------------- ------------------- -------------------
NUMBER OF $0.01 NUMBER OF $0.01 NUMBER OF $0.01 NUMBER OF $0.01 NUMBER OF $0.01
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Inception, February
10, 1995.......... -- $ -- -- $ -- -- $ -- -- $ -- -- $ --
Sales of Series A
convertible
preferred stock,
net of issuance
costs of
$6,665.......... 159,308 1,593 -- -- -- -- -- -- -- --
Sale of common
stock........... -- -- -- -- -- -- -- -- 96,250 963
Net loss.......... -- -- -- -- -- -- -- -- -- --
------- ------ ------- ------ --------- ------- ---- ---- --------- -------
Balance, December
31, 1995.......... 159,308 1,593 -- -- -- -- -- -- 96,250 963
Sale of Series A
convertible
preferred stock,
net of issuance
costs of
$12,321......... 743,106 7,431 -- -- -- -- -- -- -- --
Sale of Series B
convertible
preferred stock,
net of issuance
costs of
$36,892......... -- -- 964,551 9,646 -- -- -- -- -- --
Sale of common
stock........... -- -- -- -- -- -- -- -- 550,000 5,500
Net loss.......... -- -- -- -- -- -- -- -- -- --
------- ------ ------- ------ --------- ------- ---- ---- --------- -------
Balance, December
31, 1996.......... 902,414 9,024 964,551 9,646 -- -- -- -- 646,250 6,463
Sale of Series B
convertible
preferred stock,
net of issuance
costs of
$4,138.......... -- -- 31,645 316 -- -- -- -- -- --
Sale of common
stock........... -- -- -- -- -- -- -- -- 203,607 2,036
Exercise of common
stock options... -- -- -- -- -- -- -- -- 23,375 233
Compensation
expense related
to issuance of
stock options... -- -- -- -- -- -- -- -- -- --
Repayment of
subscription
receivable...... -- -- -- -- -- -- -- -- -- --
Net loss.......... -- -- -- -- -- -- -- -- -- --
------- ------ ------- ------ --------- ------- ---- ---- --------- -------
Balance, December
31, 1997.......... 902,414 9,024 996,196 9,962 -- -- -- -- 873,232 8,732
Sale of Series C
convertible
preferred stock,
net of issuance
costs of
$37,414......... -- -- -- -- 1,007,186 10,072 -- -- -- --
Sale of common
stock........... -- -- -- -- -- -- -- -- 55,000 550
Exercise of common
stock options... -- -- -- -- -- -- -- -- 517,000 5,170
Repayment of
subscription
receivable...... -- -- -- -- -- -- -- -- -- --
Compensation
expense related
to issuance of
stock options... -- -- -- -- -- -- -- -- -- --
Repurchase of
common stock.... -- -- -- -- -- -- -- -- -- --
Net loss.......... -- -- -- -- -- -- -- -- -- --
------- ------ ------- ------ --------- ------- ---- ---- --------- -------
Balance, December
31, 1998.......... 902,214 $9,024 996,196 $9,962 1,007,186 $10,072 -- $ -- 1,445,232 $14,452
DEFICIT
TREASURY STOCK ACCUMULATED
------------------- ADDITIONAL DURING THE TOTAL
NUMBER OF $0.01 SUBSCRIPTIONS DEFERRED PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES PAR VALUE RECEIVABLE COMPENSATION CAPITAL STAGE EQUITY
--------- --------- ------------- ------------ ----------- ----------- -------------
Inception, February
10, 1995.......... -- $ -- $ -- $ -- $ -- $ -- $ --
Sales of Series A
convertible
preferred stock,
net of issuance
costs of
$6,665.......... -- -- -- -- 176,574 -- 178,167
Sale of common
stock........... -- -- -- -- (613) -- 350
Net loss.......... -- -- -- -- -- (138,163) (138,163)
----- ------- -------- -------- ----------- ----------- -----------
Balance, December
31, 1995.......... -- -- -- -- 175,961 (138,163) 40,354
Sale of Series A
convertible
preferred stock,
net of issuance
costs of
$12,321......... -- -- (25,000) -- 842,617 -- 825,048
Sale of Series B
convertible
preferred stock,
net of issuance
costs of
$36,892......... -- -- -- -- 3,763,444 -- 3,773,090
Sale of common
stock........... -- -- -- -- 18,500 -- 24,000
Net loss.......... -- -- -- -- -- (652,020) (652,020)
----- ------- -------- -------- ----------- ----------- -----------
Balance, December
31, 1996.......... -- -- (25,000) -- 4,800,522 (790,183) 4,010,472
Sale of Series B
convertible
preferred stock,
net of issuance
costs of
$4,138.......... -- -- -- -- 120,500 -- 120,816
Sale of common
stock........... -- -- -- -- 27,580 -- 29,616
Exercise of common
stock options... -- -- -- -- 787 -- 1,020
Compensation
expense related
to issuance of
stock options... -- -- -- (9,310) 10,155 -- 845
Repayment of
subscription
receivable...... -- -- 25,000 -- -- -- 25,000
Net loss.......... -- -- -- -- -- (1,883,073) (1,883,073)
----- ------- -------- -------- ----------- ----------- -----------
Balance, December
31, 1997.......... -- -- -- (9,310) 4,959,544 (2,673,256) 2,304,696
Sale of Series C
convertible
preferred stock,
net of issuance
costs of
$37,414......... -- -- -- -- 10,527,979 -- 10,538,051
Sale of common
stock........... -- -- -- -- 7,450 -- 8,000
Exercise of common
stock options... -- -- (47,580) -- 64,010 -- 21,600
Repayment of
subscription
receivable...... -- -- 3,802 -- -- -- 3,802
Compensation
expense related
to issuance of
stock options... -- -- -- (6,681) 8,583 -- 1,902
Repurchase of
common stock.... 8,250 (1,200) -- -- -- -- (1,200)
Net loss.......... -- -- -- -- -- (3,578,380) (3,578,380)
----- ------- -------- -------- ----------- ----------- -----------
Balance, December
31, 1998.......... 8,250 $(1,200) $(43,778) $(15,991) $15,567,566 $(6,251,636) $ 9,298,471
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
35
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES A SERIES B SERIES C SERIES D
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
--------------------- --------------------- ---------------------- ----------------------
NUMBER OF $0.01 NUMBER OF $0.01 NUMBER OF $0.01 NUMBER OF $0.01
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE
--------- --------- --------- --------- ---------- --------- ---------- ---------
Balance, December 31, 1998...... 902,414 $ 9,024 996,196 $ 9,962 1,007,186 $ 10,072 -- $ --
Exercise of common stock
options..................... -- -- -- -- -- -- -- --
Repayment of subscription
receivable.................. -- -- -- -- -- -- -- --
Compensation expense related
to issuance of stock
options..................... -- -- -- -- -- -- -- --
Repurchase of common stock.... -- -- -- -- -- -- -- --
Retirement of treasury
stock....................... -- -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- -- --
-------- ------- -------- ------- ---------- -------- ---------- --------
Balance, December 31, 1999...... 902,414 9,024 996,196 9,962 1,007,186 10,072 -- --
Sale of Series D convertible
preferred stock, net of
issuance costs of
$171,985.................... -- -- -- -- -- -- 1,417,534 14,175
Sale of common stock.......... -- -- -- -- -- -- -- --
Repurchase of common stock.... -- -- -- -- -- -- -- --
Retirement of treasury
stock....................... -- -- -- -- -- -- -- --
Exercise of common stock
options..................... -- -- -- -- -- -- -- --
Repayment of subscription
receivable.................. -- -- -- -- -- -- -- --
Compensation expense related
to issuance of stock
options..................... -- -- -- -- -- -- -- --
Non-cash expense related to
issuance of warrant......... -- -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- -- --
-------- ------- -------- ------- ---------- -------- ---------- --------
Balance, December 31, 2000...... 902,414 $ 9,024 996,196 $ 9,962 1,007,186 $ 10,072 1,417,534 $ 14,175
Sale of common stock at
initial public offering..... -- -- -- -- -- -- -- --
Conversion of convertible
preferred stock into common
stock....................... (902,414) (9,024) (996,196) (9,962) (1,007,186) (10,072) (1,417,534) (14,175)
-------- ------- -------- ------- ---------- -------- ---------- --------
Pro Forma Balance, December 31,
2000 (unaudited).............. -- $ -- -- $ -- -- $ -- -- $ --
======== ======= ======== ======= ========== ======== ========== ========
COMMON STOCK TREASURY STOCK
---------------------- --------------------- ADDITIONAL
NUMBER OF $0.01 NUMBER OF $0.01 SUBSCRIPTIONS DEFERRED PAID-IN
SHARES PAR VALUE SHARES PAR VALUE RECEIVABLE COMPENSATION CAPITAL
---------- --------- --------- --------- ------------- ------------ ------------
Balance, December 31, 1998...... 1,445,232 $ 14,452 8,250 $(1,200) $ (43,778) $ (15,991) $ 15,567,566
Exercise of common stock
options..................... 155,491 1,555 -- -- -- -- 57,462
Repayment of subscription
receivable.................. -- -- -- -- 4,072 -- --
Compensation expense related
to issuance of stock
options..................... -- -- -- -- -- (38,491) 52,271
Repurchase of common stock.... -- -- 9,625 (1,400) -- -- --
Retirement of treasury
stock....................... (17,875) (179) (17,875) 2,600 -- -- (2,421)
Net loss...................... -- -- -- -- -- -- --
---------- -------- ------- ------- ----------- ----------- ------------
Balance, December 31, 1999...... 1,582,848 15,828 -- -- (39,706) (54,482) 15,674,878
Sale of Series D convertible
preferred stock, net of
issuance costs of
$171,985.................... -- -- -- -- -- -- 31,708,355
Sale of common stock.......... 48,125 481 -- -- -- -- 17,894
Repurchase of common stock.... -- -- 27,844 (5,215) 5,215 -- --
Retirement of treasury
stock....................... (27,841) (278) (27,844) 5,215 -- -- (4,937)
Exercise of common stock
options..................... 1,186,449 11,865 -- -- (1,022,668) -- 1,176,707
Repayment of subscription
receivable.................. -- -- -- -- 81,716 -- --
Compensation expense related
to issuance of stock
options..................... -- -- -- -- -- (8,523,859) 11,358,768
Non-cash expense related to
issuance of warrant......... -- -- -- -- -- -- 349,478
Net loss...................... -- -- -- -- -- -- --
---------- -------- ------- ------- ----------- ----------- ------------
Balance, December 31, 2000...... 2,789,581 $ 27,896 -- $ -- $ (975,443) $(8,578,341) $ 60,281,143
Sale of common stock at
initial public offering..... 4,000,000 40,000 -- -- -- -- 51,040,000
Conversion of convertible
preferred stock into common
stock....................... 11,889,134 118,892 -- -- -- -- (75,659)
---------- -------- ------- ------- ----------- ----------- ------------
Pro Forma Balance, December 31,
2000 (unaudited).............. 18,678,715 $186,788 -- $ -- $ (975,443) $(8,578,341) $111,245,484
========== ======== ======= ======= =========== =========== ============
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT STOCKHOLDERS'
STAGE EQUITY
------------ -------------
Balance, December 31, 1998...... $ (6,251,636) $ 9,298,471
Exercise of common stock
options..................... -- 59,017
Repayment of subscription
receivable.................. -- 4,072
Compensation expense related
to issuance of stock
options..................... -- 13,780
Repurchase of common stock.... -- (1,400)
Retirement of treasury
stock....................... -- --
Net loss...................... (4,963,925) (4,963,925)
------------ ------------
Balance, December 31, 1999...... (11,215,561) 4,410,015
Sale of Series D convertible
preferred stock, net of
issuance costs of
$171,985.................... -- 31,722,530
Sale of common stock.......... -- 18,375
Repurchase of common stock.... -- --
Retirement of treasury
stock....................... -- --
Exercise of common stock
options..................... -- 165,904
Repayment of subscription
receivable.................. -- 81,716
Compensation expense related
to issuance of stock
options..................... -- 2,834,909
Non-cash expense related to
issuance of warrant......... -- 349,478
Net loss...................... (11,883,119) (11,883,119)
------------ ------------
Balance, December 31, 2000...... $(23,098,680) $ 27,699,808
Sale of common stock at
initial public offering..... -- 51,080,000
Conversion of convertible
preferred stock into common
stock....................... -- --
------------ ------------
Pro Forma Balance, December 31,
2000 (unaudited).............. $(23,098,680) $ 78,779,808
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
36
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
INCEPTION
(FEBRUARY 10,
YEAR ENDED DECEMBER 31, 1995) TO
---------------------------------------- DECEMBER 31,
1998 1999 2000 2000
----------- ----------- ------------ -------------
Cash Flows from Operating Activities:
Net loss........................................ $(3,578,380) $(4,963,925) $(11,883,119) $(23,098,680)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization................. 243,832 424,285 404,142 1,193,104
Non-cash stock-based compensation expense..... 1,902 13,780 2,834,909 2,851,436
Non-cash expense associated with issuance of
warrants.................................... -- -- 349,478 349,478
Changes in assets and liabilities--
Prepaid expenses............................ (5,270) (21,573) (711,632) (738,475)
Accounts payable............................ 137,106 16,330 385,403 582,298
Accrued expenses............................ 166,515 (76,494) 629,403 776,396
----------- ----------- ------------ ------------
Net cash used in operating activities..... (3,034,295) (4,607,597) (7,991,416) (18,084,443)
Cash Flows from Investing Activities:
Purchases of property and equipment............. (355,201) (292,183) (762,647) (1,835,548)
Increase in patent costs and other assets....... (140,312) (429,385) (317,853) (1,190,766)
----------- ----------- ------------ ------------
Net cash used in investing activities..... (495,513) (721,568) (1,080,500) (3,026,314)
Cash Flows from Financing Activities:
Payments on capital lease obligations........... (7,709) (6,405) -- (16,951)
Net proceeds from sale of convertible preferred
stock......................................... 10,538,051 -- 31,722,530 47,157,703
Net proceeds from sale of common stock.......... 8,000 -- 18,375 80,341
Proceeds from exercise of common stock
options....................................... 21,600 59,017 165,904 247,541
Repayment of stock subscription receivable...... 3,802 4,072 81,716 111,989
----------- ----------- ------------ ------------
Net cash provided by financing
activities.............................. 10,563,744 56,684 31,988,525 47,580,623
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... 7,033,936 (5,272,481) 22,916,609 26,469,866
Cash and Cash Equivalents, beginning of period.... 1,791,802 8,825,738 3,553,257 --
----------- ----------- ------------ ------------
Cash and Cash Equivalents, end of period.......... $ 8,825,738 $ 3,553,257 $ 26,469,866 $ 26,469,866
=========== =========== ============ ============
Supplemental Disclosure of Non-cash Investing and
Financing Activities:
Sale of restricted stock through issuance of
notes receivable.............................. $ 47,580 $ -- $ 1,022,668 $ 1,070,248
=========== =========== ============ ============
Purchase of treasury shares through forgiveness
of note receivable............................ $ 1,200 $ 1,400 $ 0 $ 2,600
=========== =========== ============ ============
Equipment purchased through capital lease
obligations................................... $ -- $ -- $ -- $ 16,951
=========== =========== ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
37
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
(1) ORGANIZATION
EXACT Sciences Corporation (the Company) was incorporated on February 10,
1995. The Company is in the development stage and applies proprietary genomics
technologies to the early detection of several types of common cancers. The
Company has selected colorectal cancer as the first application of its
technology platform.
The Company is devoting substantially all of its efforts toward product
research and development, raising capital and marketing products under
development. The Company has not generated revenue to date and is subject to a
number of risks similar to those of other development-stage companies, including
dependence on key individuals and the need for the continued development of
commercially usable products. On February 5, 2001, the Company completed an
initial public offering of 4,000,000 shares of its common stock at $14.00 per
share. The Company received proceeds of $52,080,000 after deducting the
underwriters commission and issuance costs. Upon consummation of the initial
public offering, all shares of preferred stock outstanding automatically
converted into 11,889,137 shares of common stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company's
wholly owned subsidiary, EXACT Sciences Securities Corporation, a Massachusetts
securities corporation. All significant intercompany transactions and balances
have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED PRO FORMA PRESENTATION
The unaudited pro forma balance sheet and statement of stockholders' equity
reflect the sale of 4,000,000 shares of common stock at the initial public
offering price of $14.00 per share net of underwriting discount and commissions
and offering expenses as well as the automatic conversion of each outstanding
share of convertible preferred stock which occurred upon consummation of the
Company's initial public offering on February 5, 2001.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
90 days or less at the time of acquisition to be cash equivalents. Cash
equivalents primarily consist of money market funds at December 31, 1999 and
2000.
38
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed using the straight-line method
based on the estimated useful lives of the related assets, as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- ------------------------------------------------------------ -------------
Laboratory equipment........................................ 3 years
Office and computer equipment............................... 3 years
Leasehold improvements...................................... Life of lease
Furniture and fixtures...................................... 3 years
NET LOSS PER SHARE
Basic and diluted net loss per share is presented in conformity with
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE,
for all periods presented. In accordance with SFAS No. 128, basic and diluted
net loss per common share was determined by dividing net loss applicable to
common stockholders by the weighted average common shares outstanding during the
period, less shares subject to repurchase. Basic and diluted net loss per share
are the same because all outstanding common stock equivalents have been excluded
as they are antidilutive. All shares issuable upon conversion of outstanding
preferred stock and options to purchase a total of 1,150,080, 1,097,830 and
1,771,621 common shares and 800,568, 555,900 and 996,806 unvested restricted
shares have therefore been excluded from the computations of diluted weighted
average shares outstanding for the years ended December 31, 1998, 1999 and 2000,
respectively.
In accordance with the Securities Exchange Commission (SEC) Staff Accounting
Bulletin (SAB) No. 98, EARNINGS PER SHARE IN AN INITIAL PUBLIC OFFERING, the
Company has determined that there were no nominal issuances of the Company's
common stock prior to the Company's initial public offering.
The Company's historical capital structure is not indicative of its capital
structure after its initial public offering due to the automatic conversion of
all shares of preferred stock into 11,889,137 shares of common stock concurrent
with the closing of the Company's initial public offering on February 5, 2001.
Accordingly, pro forma net loss per share is presented for the year ended
December 31, 2000, assuming the conversion of all outstanding shares of
preferred stock into common stock upon the closing of the Company's initial
public offering using the if-converted method from the respective dates of
issuance.
39
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table reconciles the weighted average common shares
outstanding to the shares used in the computation of pro forma basic and diluted
net loss per share:
YEAR ENDED
DECEMBER 31, 2000
-----------------
Net loss.................................................... $(11,883,119)
Weighted average shares outstanding......................... 1,461,726
Weighted conversion of preferred stock to common stock...... 10,849,632
------------
Pro forma weighted average shares outstanding........... 12,311,358
============
Pro forma basic and diluted net loss per share.............. $ (0.97)
============
PATENT COSTS AND OTHER ASSETS
Patent costs, which primarily consist of related legal fees, are capitalized
as incurred and are amortized beginning when patents are approved over an
estimated useful life of five years. Capitalized patent costs related to patents
which are not issued or are no longer pursued by the Company are expensed upon
disapproval or upon a decision by the Company to no longer pursue the patent.
Other assets principally consist of license fees and deposits. License fees are
amortized over the five-year period of the license.
The Company applies SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121
requires the Company to continually evaluate whether events or circumstances
have occurred that indicate that the estimated remaining useful life of
long-lived assets and certain identifiable intangibles and goodwill may warrant
revision or that the carrying value of these assets may be impaired. To compute
whether assets have been impaired, the estimated gross cash flows for the
estimated remaining useful life of the assets are compared to the carrying
value. To the extent that the gross cash flows are less than the carrying value,
the assets are written down to the estimated fair value of the asset. The
Company does not believe that its long-lived assets have been impaired.
RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
COMPREHENSIVE INCOME
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of all
components of comprehensive income on an annual and interim basis. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. Comprehensive net loss is the same as reported net loss for all periods
presented.
40
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK SPLIT
The Company effected a 2.75-for-1 common stock split on December 1, 2000.
All common share and per share amounts in the accompanying consolidated
financial statements have been retroactively adjusted to reflect this stock
split.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosures about fair value of financial instruments. Financial
instruments consist of cash equivalents, accounts payable and capital lease
obligations. The estimated fair value of these financial instruments
approximates their carrying value.
CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentration. The Company has no significant off-balance-sheet risk, such as
foreign exchange contracts or other hedging arrangements. Financial instruments
that subject the Company to credit risk consist of cash and cash equivalents.
The Company maintains its cash and cash equivalents with financial institutions
with high credit ratings.
SEGMENT INFORMATION
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which requires companies to report selected
information about operating segments, as well as enterprise-wide disclosures
about products, services, geographic areas and major customers. Operating
segments are determined based on the way management organizes its business for
making operating decisions and assessing performance. The Company's chief
decision-maker, as defined under SFAS No. 131, is a combination of the chairman,
vice president and chief financial officer and president. The Company has
determined that it conducts its operations in one business segment. The Company
conducts its business in the United States. As a result, the financial
information disclosed herein represents all of the material financial
information related to the Company's principal operating segment.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL
OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which defers the effective date
of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, issued in June 1998, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position
41
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and measure those instruments at fair value. The adoption of this statement did
not have any impact on the Company's financial position or results of
operations.
In December 1999, the SEC issued SAB No. 101, REVENUE RECOGNITION. This
bulletin establishes guidelines for revenue recognition and is in effect
beginning October 1, 2000. The adoption of this guidance did not have an impact
on the Company's financial condition or results of operations.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AND INTERPRETATION OF APB OPINION
NO. 25. The interpretation clarifies the application of APB Opinion No. 25 to
accounting for stock issued to employees. The interpretation is effective
July 1, 2000, but covers events occurring during the period between
December 15, 1998 and July 1, 2000. If events covered by the interpretation
occur during the period between December 19, 1998 and July 11, 2000, the effects
of applying the interpretation to the events would be recognized on a
prospective basis from July 1, 2000. As a result, the interpretation will not
require that any adjustments be made to the consolidated financial statements
for periods before July 1, 2000, and no expense would be recognized for any
additional compensation cost measured that is attributable to periods before
July 1, 2000. Management believes the adoption of this interpretation does not
have an impact on the Company's financial position, results of operations or
cash flows.
(3) INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, ACCOUNTING FOR
INCOME TAXES. Under SFAS No. 109, deferred tax assets or liabilities are
computed based on the differences between the financial statement and income tax
bases of assets and liabilities using the enacted tax rates. Deferred income tax
expense or credits are based on changes in the asset or liability from period to
period. At December 31, 2000, the Company had net operating loss and research
tax credit carryforwards of approximately $22,220,000 and $609,000,
respectively, for financial reporting purposes, which may be used to offset
future taxable income. The carryforwards expire through 2020 and are subject to
review and possible adjustment by the Internal Revenue Service. The Internal
Revenue Code contains provisions that may limit the net operating loss and
research tax credit carryforwards in the event of certain changes in the
ownership interests of significant stockholders.
The components of the net deferred tax asset with the approximate income tax
effect of each type of carryforward, credit and temporary difference are as
follows:
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Operating loss carryforwards......................... $4,262,000 $9,206,000
Tax credit carryforwards............................. 389,000 609,000
Temporary differences................................ (127,000) (318,000)
---------- ----------
4,524,000 9,497,000
Less--Valuation allowance............................ (4,524,000) (9,497,000)
---------- ----------
Net deferred tax asset............................. $ 0 $ 0
========== ==========
42
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(3) INCOME TAXES (CONTINUED)
The Company has recorded a full valuation allowance against its deferred tax
assets because, based on the weight of available evidence, the Company believes
it is more likely than not that the deferred tax assets will not be realized in
the near future.
(4) SUBSCRIPTIONS RECEIVABLE
In February 1998, the Company issued full recourse notes receivable to
several employees totaling $47,580 for the exercise of stock options. The notes
bear interest at 8.5% with principal and interest payments due monthly over a
five-year period.
In March 2000, the Company issued full recourse notes receivable to several
employees totaling $262,080 for the exercise of stock options. The notes bear
interest at 9.0% with interest payments due monthly over a five-year period and
are collateralized by the underlying stock. Notes representing an aggregate
principal amount of $69,680 are payable monthly. Notes representing an aggregate
principal amount of $192,400 are payable in March 2005.
In June 2000, the Company issued full recourse notes receivable to an
executive totaling $299,999 to purchase restricted stock. The note bears
interest at 9.5% with interest and principal due on June 23, 2010.
In November 2000, the Company issued full recourse notes receivable to
executives and employees totaling $460,589 to purchase restricted stock. The
notes bear interest at 9.5% with interest and principal due on November 27,
2010.
(5) RELATED PARTY TRANSACTION
In February 1998, the Company entered into a letter agreement with one of
its shareholders. The Company paid approximately $114,000 and $229,000 in
connection with a clinical study during the years ended December 31, 1999 and
2000, respectively, which represents the total amount to be paid under the
agreement. Such amounts have been charged to research and development expenses
as incurred.
In December 2000, the Company issued a warrant to the same shareholder to
purchase 48,125 shares of common stock at an exercise price of $10.9091 per
share (see Note 6).
(6) STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The Company has authorized 4,700,373 shares of $0.01 par value convertible
preferred stock, of which 1,000,000 are designated as Series A convertible
preferred stock (Series A preferred), 1,250,000 are designated as Series B
convertible preferred stock (Series B preferred), 1,015,000 are designated as
Series C convertible preferred stock (Series C preferred) and 1,435,373 are
designated as Series D convertible preferred stock (Series D preferred).
In February 1995 and May through November 1996 the Company issued 159,308
and 743,106 shares, respectively, of Series A preferred for $1.16 per share. In
December 1996 and February 1997, the Company issued 964,551 and 31,645 shares,
respectively, of Series B preferred for $3.95 per share.
43
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(6) STOCKHOLDERS' EQUITY (CONTINUED)
In March 1998, the Company issued 1,007,186 shares of Series C preferred for
$10.50 per share. In April 2000, the Company issued 1,417,534 shares of
Series D preferred for $22.50 per share.
DIVIDENDS
The holders of Series A, B, C and D preferred are entitled to receive
dividends, as defined, if and when declared by the Company's Board of
Directors. To date, no dividends have been declared.
VOTING RIGHTS
Each holder of outstanding shares of Series A, B, C and D preferred is
entitled to a number of votes equal to the number of whole shares of common
stock into which such preferred shares are then convertible. All outstanding
holders of convertible preferred stock shall vote together with the holders
of common stock as a single class.
LIQUIDATION
In the event of any voluntary or involuntary dissolution of the Company and
before any distribution or other payment is made to any holders of any class
or series of capital stock of the Company, the holders of each share of
Series A, B, C and D preferred shall be entitled to receive $1.16, $3.95,
$10.50 and $22.50, respectively, plus any dividends declared but unpaid.
CONVERSION
Each share of Series A, B, C and D preferred is convertible, at the option
of the holder, into such number of shares of common stock as is determined
by dividing $1.16, $3.95, $10.50 and $22.50 per share, respectively, by the
conversion price, as defined. Series A, B, C and D preferred automatically
converted into 11,889,137 shares of common stock upon the closing of the
Company's initial public offering on February 5, 2001.
44
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
(6) STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
The Company has a stock option plan (the Plan) under which the Board of
Directors may grant incentive and nonqualified stock options to purchase an
aggregate of 3,987,500 shares of common stock to employees and consultants of
the Company. Nonqualified stock options may be granted to any employee or
consultant of the Company. The exercise price of each option is determined by
the Board of Directors. Incentive stock options may not be less than the fair
market value of the stock on the date of grant, as defined by the Board of
Directors.
Options granted under the Plan vest over a three-to-five-year period and
expire 10 years from the grant date. At December 31, 2000, 386,175 shares were
available for future grant under the Plan.
Information with respect to activity under the Plan is as follows:
WEIGHTED
NUMBER OF SHARES EXERCISE PRICE
---------------- --------------
Outstanding, December 31, 1997.................. 558,250 $0.09
Granted....................................... 1,122,580 0.32
Exercised..................................... (517,000) 0.13
Canceled...................................... (13,750) 0.15
----------
Outstanding, December 31, 1998.................. 1,150,080 0.30
Granted....................................... 132,000 0.38
Exercised..................................... (155,491) 0.38
Canceled...................................... (28,759) 0.15
----------
Outstanding, December 31,1999................... 1,097,830 0.30
Granted....................................... 1,901,492 3.41
Exercised..................................... (1,186,449) 1.00
Canceled...................................... (41,252) 0.38
----------
Outstanding, December 31, 2000.................. 1,771,621 $3.16
========== =====
Exercisable, December 31, 1998.................. 130,144 $0.08
========== =====
Exercisable, December 31, 1999.................. 623,587 $0.19
========== =====
Exercisable, December 31, 2000.................. 360,722 $0.14
========== =====
45
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 (CONTINUED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information relating to currently outstanding and
exercisable stock options as of December 31, 2000:
OUTSTANDING EXERCISABLE
- ---------------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE
- -------- --------- ------------ -------- --------- --------
$ 0.04 189,750 5.75 $ 0.04 189,750 $ 0.04
0.15 90,750 6.07 0.15 90,674 0.15
0.38 411,359 8.66 0.38 80,298 0.38
2.05 587,512 9.49 2.05 -- 2.05
7.27 316,250 9.80 7.27 -- 7.27
10.91 176,000 9.93 10.91 -- 10.91
--------- ---- ------ ------- ------
1,771,621 8.82 $ 3.16 360,722 $ 0.14
========= ==== ====== ======= ======
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plan under APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, establishes the fair-value-based method of accounting
for stock-based compensation plans. The Company has adopted the disclosure-only
alternative for options granted to employees and directors under SFAS No. 123,
which requires disclosure of the pro forma effects on earnings as if SFAS
No. 123 had been adopted, as well as certain other information. Options granted
to scientific advisory board members and other nonemployees are recorded at fair
value based on the fair value measurement criteria of paragraphs 8-12 of SFAS
No. 123 and Emerging Issues Task Force (EITF) 96-18, ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES. Compensation expense, computed
using the Black-Scholes option pricing model, of $13,780 and $528,593 was
recorded in the accompanying consolidated statements of operations for the years
ended December 31, 1999 and 2000, respectively. The following assumptions were
used for 1999 and 2000: (i) expected lives of the options of seven years;
(ii) no dividend yield; (iii) expected volatility of 70% to 100%; and
(iv) risk-free interest rates of 5.53% to 6.51%.
In connection with certain 1999 and 2000 stock option grants to employees
and directors, the Company recorded deferred compensation of $52,271 and
$11,358,768 during the years ended December 31, 1999 and 2000, respectively. The
deferred compensation represents the aggregate difference between the option
exercise price and the estimated fair value of the common stock on the date of
grant and is being charged to operations over the related vesting period using
the accelerated method prescribed under FASB Interpretation 28, ACCOUNTING FOR
STOCK APPRECIATION RIGHTS AND OTHER VARIABLE STOCK OPTION OR AWARD PLANS--AN
INTERPRETATION OF APB OPINION NOS. 15 AND 25. All stock options granted and
stock sold prior to 1999 were at fair market value, and, therefore, did not
result in a compensation charge.
46
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 (CONTINUED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 2000, the Company expects to recognize amortization
expense of deferred compensation recorded related to employee and director
options of approximately $3,979,000, $2,314,000, $1,382,000, $674,000 and
$230,000 during the years ending December 31, 2001, 2002, 2003, 2004 and 2005,
respectively.
The Company has computed the pro forma disclosures required under SFAS
No. 123 for all stock options granted to employees and directors of the Company
as of December 31, 1998, 1999 and 2000, using the Black-Scholes option pricing
model prescribed by SFAS No. 123.
The assumptions used for the years ended December 31, 1998, 1999 and 2000
are as follows:
DECEMBER 31,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
Risk-free interest rates.......... 4.65%-5.62% 5.44%-5.97% 4.98%-6.16%
Expected lives.................... 7 years 7 years 7 years
Expected volatility............... 0% 0% 100%
Dividend yield.................... 0% 0% 0%
Weighted average remaining
contractual life of options
outstanding..................... 9.30 8.33 8.82
Weighted average fair value
of grants....................... $0.11 $0.13 $2.91
The effect of applying SFAS No. 123 would be as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1999 2000
----------- ----------- ------------
Net loss as reported.................. $(3,578,380) $(4,963,925) $(11,883,119)
Pro forma............................. (3,581,433) (4,993,586) (11,955,270)
Basic and Diluted Net Loss Per Share--
As reported......................... $ (6.08) $ (5.32) $ (8.13)
Pro forma........................... $ (6.08) $ (5.35) $ (8.18)
RESTRICTED COMMON STOCK
On May 10, 1996, the Company sold 550,000 shares of restricted common stock
to a key employee. In 1997, the Company sold 68,750 shares of restricted common
stock to a key employee and 134,857 restricted common shares to another
employee. In February 1998, the Company sold 492,250 shares of restricted common
stock to employees of the Company pursuant to the exercise of options, 368,500
shares of which were purchased through issuance of notes receivable (See
Note 4). During 2000, the Company sold 1,080,952 shares of restricted common
stock to employees of the Company pursuant to the exercise of options, 968,202
shares of which were purchased through issuance of notes receivable (see
Note 4). The shares were sold at the then fair market value and vest over a
five-to-seven-year period. At December 31, 2000, 511,874 shares were vested.
47
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 (CONTINUED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
WARRANT
In December 2000, the Company issued a warrant to the Mayo Foundation to
purchase 48,125 shares of common stock at an exercise price of $10.9091 per
share. The warrant is exercisable immediately. The Company has valued the
warrant using the Black-Scholes model in accordance with EIFT 96-18 and recorded
research and development stock-based compensation of $349,478 in 2000.
(7) COMMITMENTS
The Company leases certain equipment and conducts its operations in a leased
facility under noncancelable operating leases expiring through June 2003. Future
minimum rental payments under the operating leases as of December 31, 2000 are
approximately as follows:
Year Ending December 31,
2001...................................................... $236,000
2002...................................................... 236,000
2003...................................................... 118,000
--------
Total lease payments.................................... $590,000
========
Rent expense included in the accompanying consolidated statements of
operations was approximately $84,000, $146,000 and $216,000 for the years ended
December 31, 1998, 1999 and 2000, respectively.
(8) ROYALTY AGREEMENTS
ROCHE LICENSE
The Company licenses, on a non-exclusive basis, technology for performing a
step in its testing methods from Roche Molecular Systems, Inc. (Roche). This
license relates to a gene amplification process used in almost all genetic
testing, and the patent that the Company utilizes expires in mid-2004. In
exchange for the license, the Company agreed to pay Roche a royalty based on net
revenues received from tests using the Company's technologies. Roche may
terminate this license upon notice if the Company fails to pay royalties, fails
to submit reports or breaches a material term of the license. Royalty payments
will be expensed as they become due.
GENZYME LICENSE
The Company licenses, on a non-exclusive basis, technology for performing a
step in its testing methods from Genzyme Corporation (Genzyme), the exclusive
licensee of patents owned by The Johns Hopkins University and of which
Dr. Vogelstein is an inventor. This license relates to the use of the APCand P53
genes and methodologies related thereto in connection with its products and
services and lasts for the life of the patent term of the last licensed Genzyme
patent. In exchange for the license, the Company has agreed to pay Genzyme a
royalty based on net revenues received from performing the Company's tests and
the sale of its reagents and diagnostic test kits, as well as certain milestone
payments and maintenance fees. In addition, the Company must use reasonable
efforts to make
48
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 (CONTINUED)
(8) ROYALTY AGREEMENTS (CONTINUED)
products and services based on these patents available to the public. Genzyme
may terminate this license upon notice if the Company fails to pay milestone
payments and royalties, achieve a stated level of sales and submit reports. In
addition, if the Company fails to request FDA clearance for a diagnostic test as
required by the agreement, Genzyme may terminate the license. To date, the
Company has paid an initial license fee, which was charged to research and
development expense in the accompanying consolidated statement of operations for
the year ended December 31, 1999. Milestone payments will be expensed as
milestones are achieved. Royalties will be expensed as they become due.
(9) EMPLOYEE BENEFIT PLAN
The Company maintains a qualified 401(k) retirement savings plan (the 401(k)
Plan) covering all employees. Under the 401(k) Plan, the participants may elect
to defer a portion of their compensation, subject to certain limitations.
Company matching contributions may be made at the discretion of the Board of
Directors. There have been no discretionary contributions made by the Company to
the 401(k) Plan through December 31, 2000.
(10) 2000 STOCK OPTION AND INCENTIVE PLAN
The Company adopted the 2000 Stock Option and Incentive Plan (the 2000
Option Plan) on October 17, 2000. A total of 1,000,000 shares of common stock
have been authorized and reserved for issuance under the 2000 Option Plan. The
2000 Option Plan provides that the number of shares authorized for issuance will
automatically increase on each January 1, by the greater of 5% of the
outstanding number of shares of common stock on the preceding December 31, or
that number of shares underlying option awards issued during the one-year period
prior to such January 1, or such lesser number as may be approved by the Board
of Directors. Under the terms of the 2000 Option Plan, the Company is authorized
to grant incentive stock options as defined under the Internal Revenue Code,
non-qualified options, stock awards or opportunities to make direct purchases of
common stock to employees, officers, directors, consultants and advisors.
The 2000 Option Plan is administered by the compensation committee of the
Board of Directors, which selects the individuals to whom equity-based awards
will be granted and determines the option exercise price and other terms of each
award, subject to the provisions of the 2000 Option Plan. The 2000 Option Plan
provides that upon an acquisition, all options to purchase common stock will
accelerate by a period of one year. In addition, upon the termination of an
employee without cause or for good reason prior to the first anniversary of the
completion of the acquisition, all options then outstanding under the 2000
Option Plan held by that employee will immediately become exercisable. Through
December 31, 2000, no options have been granted under the 2000 Option Plan.
(11) 2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan (the 2000 Purchase Plan) was adopted
on October 17, 2000. The 2000 Purchase Plan provides for the issuance of up to
an aggregate of 300,000 shares of common stock to participating employees. The
2000 Purchase Plan provides that the number of shares authorized for issuance
will automatically increase on each February 1, by the greater of 0.75% of the
outstanding number of shares of common stock on the immediately preceding
December 31, or that
49
EXACT SCIENCES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 (CONTINUED)
(11) 2000 EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
number of shares issued during the one-year period prior to such February 1, or
such lesser number as may be approved by the Board of Directors.
The 2000 Purchase Plan is administered by the compensation committee of the
Board of Directors. Generally, all employees who have completed three months of
employment and whose customary employment is more than 20 hours per week and for
more than five months in any calendar year are eligible to participate in the
2000 Purchase Plan. The right to purchase common stock under the 2000 Purchase
Plan will be made available through a series of offerings. Participating
employees will be required to authorize an amount, between 1% and 10% of the
employee's compensation, to be deducted from the employee's pay during the
offering period. On the last day of the offering period, the employee will be
deemed to have exercised the option, at the option exercise price, to the extent
of accumulated payroll deductions. Under the terms of the 2000 Purchase Plan,
the option exercise price is an amount equal to 85% of the fair market value of
one share of common stock on either the first or last day of the offering
period, whichever is lower. No employee may be granted an option that would
permit the employee's rights to purchase common stock to accrue in excess of
$25,000 in any calendar year. The first offering period under the 2000 Purchase
Plan commenced on the date the shares issued in connection with the Company's
initial public offering of its common stock on January 30, 2001 and continues
through July 31, 2001. Thereafter, the offering periods will begin on each
February 1 and August 1. Options granted under the 2000 Purchase Plan terminate
upon an employee's voluntary withdrawal from the plan at any time or upon
termination of employment.
(12) ACCRUED EXPENSES
Accrued expenses at December 31, 1999 and 2000 consisted of the following:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Consulting.............................................. $ 20,000 $246,899
Professional fees....................................... 48,265 194,440
Shareholder services.................................... -- 100,000
Payroll and payroll-related............................. 47,000 93,667
Research................................................ -- 48,926
Occupancy............................................... 19,500 45,770
Other................................................... 5,428 32,293
Travel and entertainment................................ 6,800 14,401
-------- --------
$146,993 $776,396
======== ========
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during our two most recent fiscal
years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the Sections "Election of Directors," "Occupations of
Directors, The Nominee for Director and Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" from the registrant's definitive proxy statement
for the annual meeting of stockholders to be held on May 16, 2001, which is to
be filed with the Securities and Exchange Commission not later than 120 days
after the close of the registrant's fiscal year ended December 31, 2000, is
hereby incorporated by reference.
Our policy governing transactions in our securities by directors, officers
and employees permits our officers, directors and certain other persons to enter
into trading plans complying with Rule 10b5-1 under the Securities Exchange Act
of 1934, as amended. We have been advised that our Vice President of Molecular
Biology, Anthony P. Shuber, has entered into a trading plan in accordance with
Rule 10b5-1 and our policy governing transactions in our securities. We
anticipate that, as permitted by Rule 10b5-1 and our policy governing
transactions in our securities, some or all of our officers, directors and
employees may establish trading plans in the future. We intend to disclose the
names of any officers and directors who establish a trading plan in compliance
with Rule 10b5-1 and the requirements of our policy governing transactions in
our securities in our future quarterly and annual reports on Form 10-Q and 10-K
filed with the Securities and Exchange Commission. However, we undertake no
obligation to update or revise the information provided herein, including for
revision or termination of an established trading plan, other than in such
quarterly and annual reports.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The information under the Section "Compensation and Other Information
Concerning Directors and Officers" from the registrant's definitive proxy
statement for the annual meeting of stockholders to be held on May 16, 2001,
which is to be filed with the Securities and Exchange Commission not later than
120 days after the close of the registrant's fiscal year ended December 31,
2000, is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the Section "Securities Ownership of Certain
Beneficial Owners and Management" from the registrant's definitive proxy
statement for the annual meeting of stockholders to be held on May 16, 2001,
which is to be filed with the Securities and Exchange Commission not later than
120 days after the close of the registrant's fiscal year ended December 31,
2000, is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the Sections "Compensation and Other Information
Concerning Directors and Officers" and "Compensation Committee Interlocks,
Insider Participation and Other Related Transactions" from the registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
May 16, 2001, which is to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the registrant's fiscal year ended
December 31, 2000, is hereby incorporated by reference.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements (see "Financial Statements and Supplementary
Data" at Item 8 and incorporated herein by reference).
(2) Financial Statement Schedules (Schedules to the Financial Statements
have been omitted because the information required to be set forth
therein is not applicable or is shown in the accompanying Financial
Statements or notes thereto).
(3) Exhibits
The following exhibits are filed as part of and incorporated by reference
into this Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------
3.1 Sixth Amended and Restated Certificate of Incorporation of
the Registrant (previously filed as Exhibit 3.3 to our
Registration Statement on Form S-1 File No. 333-48812),
which is incorporated herein by reference)
3.2 Amended and Restated By-Laws of the Registrant (previously
filed as Exhibit 3.4 to our Registration Statement on Form
S-1 (File No. 333-48812), which is incorporated herein by
reference)
4.1 Specimen certificate representing the Registrant's Common
Stock (previously filed as Exhibit 4.1 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
4.2 Warrant issued to The Mayo Foundation for Medical Research
dated December 28, 2000 (previously filed as Exhibit 4.2 to
our Registration Statement on Form S-1 (File No. 333-48812),
which is incorporated herein by reference)
10.1* 1995 Stock Option Plan (previously filed as Exhibit 10.1 to
our Registration Statement on Form S-1 (File No. 333-48812),
which is incorporated herein by reference)
10.2* 2000 Stock Option and Incentive Plan (previously filed as
Exhibit 10.2 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
10.3* 2000 Employee Stock Purchase Plan (previously filed as
Exhibit 10.3 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
10.4* Sixth Amended and Restated Registration Rights Agreement
between the Registrant and the parties named therein dated
as of April 7, 2000 (previously filed as Exhibit 10.4 to our
Registration Statement on Form S-1 (File No. 333-48812),
which is incorporated herein by reference)
10.5* Restricted Stock Purchase Agreement between the Registrant
and Stanley N. Lapidus dated February 11, 1998 (previously
filed as Exhibit 10.5 to our Registration Statement on Form
S-1 (File No. 333-48812), which is incorporated herein by
reference)
10.6* Restricted Stock Purchase Agreement between the Registrant
and Stanley N. Lapidus dated as of March 31, 2000
(previously filed as Exhibit 10.6 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
10.7* Restricted Stock Purchase Agreement between the Registrant
and Don M. Hardison dated as of June 23, 2000, as amended
(previously filed as Exhibit 10.7 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
52
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------
10.8* Secured Promissory Note between the Registrant and
Stanley N. Lapidus dated as of March 31, 2000 (previously
filed as Exhibit 10.8 to our Registration Statement on Form
S-1 (File No. 333-48812), which is incorporated herein by
reference)
10.9* Pledge Agreement between the Registrant and Stanley N.
Lapidus dated as of March 31, 2000 (previously filed as
Exhibit 10.9 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)ed
10.10* Secured Promissory Note between the Registrant and Don M.
Hardison dated as of June 23, 2000 (previously filed as
Exhibit 10.10 to our Registration Statement on Form S-1
(File No. 333-48812), which is incorporated herein by
reference)
10.11 Lease Agreement, dated December 10, 1996, between C.B.
Realty Limited Partnership and the Registrant, as amended
(previously filed as Exhibit 10.11 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
10.12 Fourth Amendment to Lease Agreement, dated February 7, 2001,
between C.B. Realty Limited Partnership and the Registrant
10.13 License Agreement between the Registrant and Genzyme
Corporation dated as of March 25, 1999 (previously filed as
Exhibit 10.12 to our Registration Statement on Form S-1
(File No. 333-48812), which is incorporated herein by
reference) (certain portions of this agreement have been
accorded confidential treatment until March 25, 2003)
10.14 PCR Diagnostic Services Agreement between the Registrant and
Roche Molecular Systems, Inc. (previously filed as Exhibit
10.13 to our Registration Statement on Form S-1 (File No.
333-48812), which is incorporated herein by reference)
(certain portions of this agreement have been accorded
confidential treatment until July 2004)
10.15 Mayo Foundation for Medical Education and Research (the
"Foundation") Technology License Contract between the
Registrant and the Foundation dated as of July 7, 1998, as
amended (previously filed as Exhibit 10.14 to our
Registration Statement on Form S-1 (File No. 333-48812),
which is incorporated herein by reference)
10.16 Letter Agreement by and between The Mayo Foundation for
Medical Education and Research and the Registrant dated
February 4, 1998 (previously filed as Exhibit 10.15 to our
Registration Statement on Form S-1 (File No. 333-48812),
which is incorporated herein by reference)
10.17 Form of Consulting Agreement by and between the Registrant
and certain members of the scientific advisory board
(previously filed as Exhibit 10.16 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
10.18* Restricted Stock Purchase Agreement between the Registrant
and John A. McCarthy, Jr. dated as of November 28, 2000
(previously filed as Exhibit 10.17 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
10.19* Full Recourse Promissory Note between the Registrant and
John A. McCarthy, Jr. dated as of November 28, 2000
(previously filed as Exhibit 10.18 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
10.20* Pledge Agreement between the Registrant and John A.
McCarthy, Jr. dated as of November 30, 2000 (previously
filed as Exhibit 10.19 to our Registration Statement on Form
S-1 (File No. 333-48812), which is incorporated herein by
reference)
10.21* Severance Agreement between the Registrant and Stanley N.
Lapidus dated January 4, 2001 (previously filed as
Exhibit 10.20 to our Registration Statement on Form S-1
(File No. 333-48812), which is incorporated herein by
reference)
53
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------
10.22* Severance Agreement between the Registrant and Don M.
Hardison dated January 4, 2001 (previously filed as Exhibit
10.21 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
10.23* Severance Agreement between the Registrant and John A.
McCarthy, Jr. dated January 4, 2001 (previously filed as
Exhibit 10.22 to our Registration Statement on Form S-1
(File No. 333-48812), which is incorporated herein by
reference)
10.24* Severance Agreement between the Registrant and Anthony P.
Shuber dated January 4, 2001 (previously filed as
Exhibit 10.23 to our Registration Statement on Form S-1
(File No. 333-48812), which is incorporated herein by
reference)
10.25 Warrant Agreement between the Registrant and The Mayo
Foundation for Medical Research dated December 28, 2000
(previously filed as Exhibit 10.26 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
21.1 Subsidiaries of the Registrant (previously filed as
Exhibit 21.1 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page)
- ------------------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
(b) Reports on Form 8-K.
No reports on form 8-K were filed on behalf of EXACT Sciences Corporation
during the quarter ended December 31, 2000.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
EXACT SCIENCES CORPORATION
(Registrant)
Date: March 29, 2001 By: /s/ JOHN A. MCCARTHY, JR.
----------------------------------------------
VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of EXACT Sciences Corporation,
hereby severally constitute and appoint Stanley N. Lapidus, Don M. Hardison and
John A. McCarthy, Jr., and each of them singly, our true and lawful attorneys,
with full power to them and each of them singly, to sign for us and in our names
in the capacities indicated below, any amendments to this Annual Report on
Form 10-K, and generally to do all things in our names and on our behalf in such
capacities to enable EXACT Sciences Corporation to comply with the provisions of
the Securities Exchange Act of 1934, as amended, and all the requirements of the
Securities Exchange Commission.
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STANLEY N. LAPIDUS
------------------------------------------------ Chairman of the Board and Director March 29, 2001
Stanley N. Lapidus (Principal Executive Officer)
/s/ DON M. HARDISON
------------------------------------------------ President and Director March 29, 2001
Don M. Hardison
/s/ JOHN A. MCCARTHY, JR. Vice President and Chief Financial
------------------------------------------------ Officer (Principal Financial and March 29, 2001
John A. McCarthy, Jr. Accounting Officer)
/s/ NOUBAR B. AFEYAN
------------------------------------------------ Director March 29, 2001
Noubar B. Afeyan
/s/ RICHARD W. BARKER
------------------------------------------------ Director March 29, 2001
Richard W. Barker
/s/ SALLY W. CRAWFORD
------------------------------------------------ Director March 29, 2001
Sally W. Crawford
/s/ WYCLIFFE K. GROUSBECK
------------------------------------------------ Director March 29, 2001
Wycliffe K. Grousbeck
/s/ WILLIAM W. HELMAN
------------------------------------------------ Director March 29, 2001
William W. Helman
/s/ EDWIN M. KANIA, JR.
------------------------------------------------ Director March 29, 2001
Edwin M. Kania, Jr.
/s/ LANCE WILLSEY
------------------------------------------------ Director March 29, 2001
Lance Willsey
55
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2000
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------
3.1 Sixth Amended and Restated Certificate of Incorporation of
the Registrant (previously filed as Exhibit 3.3 to our
Registration Statement on Form S-1 File No. 333-48812),
which is incorporated herein by reference)
3.2 Amended and Restated By-Laws of the Registrant (previously
filed as Exhibit 3.4 to our Registration Statement on Form
S-1 (File No. 333-48812), which is incorporated herein by
reference)
4.1 Specimen certificate representing the Registrant's Common
Stock (previously filed as Exhibit 4.1 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
4.2 Warrant issued to The Mayo Foundation for Medical Research
dated December 28, 2000 (previously filed as Exhibit 4.2 to
our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
10.1* 1995 Stock Option Plan (previously filed as Exhibit 10.1 to
our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
10.2* 2000 Stock Option and Incentive Plan (previously filed as
Exhibit 10.2 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
10.3* 2000 Employee Stock Purchase Plan (previously filed as
Exhibit 10.3 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
10.4* Sixth Amended and Restated Registration Rights Agreement
between the Registrant and the parties named therein dated
as of April 7, 2000 (previously filed as Exhibit 10.4 to our
Registration Statement on Form S-1 (File No. 333-48812),
which is incorporated herein by reference)
10.5* Restricted Stock Purchase Agreement between the Registrant
and Stanley N. Lapidus dated February 11, 1998 (previously
filed as Exhibit 10.5 to our Registration Statement on Form
S-1 (File No. 333-48812), which is incorporated herein by
reference)
10.6* Restricted Stock Purchase Agreement between the Registrant
and Stanley N. Lapidus dated as of March 31, 2000
(previously filed as Exhibit 10.6 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
10.7* Restricted Stock Purchase Agreement between the Registrant
and Don M. Hardison dated as of June 23, 2000, as amended
(previously filed as Exhibit 10.7 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
10.8* Secured Promissory Note between the Registrant and Stanley
N. Lapidus dated as of March 31, 2000 (previously filed as
Exhibit 10.8 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
10.9* Pledge Agreement between the Registrant and Stanley N.
Lapidus dated as of March 31, 2000 (previously filed as
Exhibit 10.9 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
10.10* Secured Promissory Note between the Registrant and Don M.
Hardison dated as of June 23, 2000 (previously filed as
Exhibit 10.10 to our Registration Statement on Form S-1
(File No. 333-48812), which is incorporated herein by
reference)
10.11 Lease Agreement, dated December 10, 1996, between C.B.
Realty Limited Partnership and the Registrant, as amended
(previously filed as Exhibit 10.11 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
10.12 Fourth Amendment to Lease Agreement, dated February 7, 2001,
between C.B. Realty Limited Partnership and the Registrant
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------
10.13 License Agreement between the Registrant and Genzyme
Corporation dated as of March 25, 1999 (previously filed as
Exhibit 10.12 to our Registration Statement on Form S-1
(File No. 333-48812), which is incorporated herein by
reference) (certain portions of this agreement have been
accorded confidential treatment until March 25, 2003)
10.14 PCR Diagnostic Services Agreement between the Registrant and
Roche Molecular Systems, Inc. (previously filed as Exhibit
10.13 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
(certain portions of this agreement have been accorded
confidential treatment until July 2004)
10.15 Mayo Foundation for Medical Education and Research (the
"Foundation") Technology License Contract between the
Registrant and the Foundation dated as of July 7, 1998, as
amended (previously filed as Exhibit 10.14 to our
Registration Statement on Form S-1 (File No. 333-48812),
which is incorporated herein by reference)
10.16 Letter Agreement by and between The Mayo Foundation for
Medical Education and Research and the Registrant dated
February 4, 1998 (previously filed as Exhibit 10.15 to our
Registration Statement on Form S-1 (File No. 333-48812),
which is incorporated herein by reference)
10.17 Form of Consulting Agreement by and between the Registrant
and certain members of the scientific advisory board
(previously filed as Exhibit 10.16 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
10.18* Restricted Stock Purchase Agreement between the Registrant
and John A. McCarthy, Jr. dated as of November 28, 2000
(previously filed as Exhibit 10.17 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
10.19* Full Recourse Promissory Note between the Registrant and
John A. McCarthy, Jr. dated as of November 28, 2000
(previously filed as Exhibit 10.18 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
10.20* Pledge Agreement between the Registrant and John A.
McCarthy, Jr. dated as of November 30, 2000 (previously
filed as Exhibit 10.19 to our Registration Statement on Form
S-1 (File No. 333-48812), which is incorporated herein by
reference)
10.21* Severance Agreement between the Registrant and Stanley N.
Lapidus dated January 4, 2001 (previously filed as Exhibit
10.20 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
10.22* Severance Agreement between the Registrant and Don M.
Hardison dated January 4, 2001 (previously filed as
Exhibit 10.21 to our Registration Statement on Form S-1
(File No. 333-48812), which is incorporated herein by
reference)
10.23* Severance Agreement between the Registrant and John A.
McCarthy, Jr. dated January 4, 2001 (previously filed as
Exhibit 10.22 to our Registration Statement on Form S-1
(File No. 333-48812), which is incorporated herein by
reference)
10.24* Severance Agreement between the Registrant and Anthony P.
Shuber dated January 4, 2001 (previously filed as
Exhibit 10.23 to our Registration Statement on Form S-1
(File No. 333-48812), which is incorporated herein by
reference)
10.25 Warrant Agreement between the Registrant and The Mayo
Foundation for Medical Research dated December 28, 2000
(previously filed as Exhibit 10.26 to our Registration
Statement on Form S-1 (File No. 333-48812), which is
incorporated herein by reference)
21.1 Subsidiaries of the Registrant (previously filed as
Exhibit 21.1 to our Registration Statement on Form S-1 (File
No. 333-48812), which is incorporated herein by reference)
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page)
- ------------------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.