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EX-10.1 - EX-10.1 - EXACT SCIENCES CORPexas-20150331ex101d00d8b.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-35092

 

EXACT SCIENCES CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

02-0478229

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

 

 

441 Charmany Drive, Madison WI

 

53719

(Address of principal executive offices)

 

(Zip Code)

 

(608) 284-5700 (Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No  

 

As of May 1, 2015, the registrant had 88,912,667 shares of common stock outstanding.

 

 

 


 

EXACT SCIENCES CORPORATION

 

INDEX

 

 

 

 

 

 

Page

 

 

Number

 

 

 

 

Part I - Financial Information

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2015 and December 31, 2014

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2015 and 2014

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the Three Months Ended March 31, 2015 and 2014

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2015 and 2014

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

28 

 

 

 

Item 4. 

Controls and Procedures

29 

 

 

 

 

Part II - Other Information

 

 

 

 

Item 1. 

Legal Proceedings

29 

 

 

 

Item 1A. 

Risk Factors

29 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

29 

 

 

 

Item 3. 

Defaults Upon Senior Securities

30 

 

 

 

Item 4. 

Mine Safety Disclosures

30 

 

 

 

Item 5 

Other Information

30 

 

 

 

Item 6. 

Exhibits

30 

 

 

 

 

Signatures

31 

 

 

 

 

Exhibit Index

32 

 

 

2


 

Part I — Financial Information

 

EXACT SCIENCES CORPORATION

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share data - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,679 

 

$

58,131 

 

Marketable securities

 

 

204,472 

 

 

224,625 

 

Accounts receivable

 

 

1,581 

 

 

1,376 

 

Inventory, net

 

 

5,423 

 

 

4,017 

 

Prepaid expenses and other current assets

 

 

3,892 

 

 

3,528 

 

Total current assets

 

 

256,047 

 

 

291,677 

 

Property and Equipment, at cost:

 

 

 

 

 

 

 

Laboratory equipment

 

 

10,932 

 

 

10,381 

 

Assets under construction

 

 

2,946 

 

 

1,552 

 

Computer equipment and computer software

 

 

8,818 

 

 

7,577 

 

Leasehold improvements

 

 

5,965 

 

 

5,937 

 

Furniture and fixtures

 

 

933 

 

 

939 

 

 

 

 

29,594 

 

 

26,386 

 

Less—Accumulated depreciation

 

 

(8,027)

 

 

(6,439)

 

Net property and equipment

 

 

21,567 

 

 

19,947 

 

Other long-term assets

 

 

1,200 

 

 

1,200 

 

Total assets

 

$

278,814 

 

$

312,824 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,001 

 

$

2,647 

 

Accrued liabilities

 

 

11,652 

 

 

13,960 

 

Capital lease obligation, current portion

 

 

269 

 

 

360 

 

Lease incentive obligation, current portion

 

 

554 

 

 

554 

 

Total current liabilities

 

 

14,476 

 

 

17,521 

 

Long-term debt

 

 

1,000 

 

 

1,000 

 

Long-term accrued interest

 

 

112 

 

 

106 

 

Other long-term liabilities

 

 

3,541 

 

 

3,599 

 

Lease incentive obligation, less current portion

 

 

1,476 

 

 

1,614 

 

     Total liabilities

 

 

20,605 

 

 

23,840 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value Authorized—5,000,000 shares Issued and outstanding—no shares at March 31, 2015 and December 31, 2014

 

 

 

 

 

Common stock, $0.01 par value Authorized—200,000,000 shares Issued and outstanding88,913,304 and 88,626,042 shares at March 31, 2015 and December 31, 2014

 

 

889 

 

 

887 

 

Additional paid-in capital

 

 

713,858 

 

 

709,019 

 

Accumulated other comprehensive income (loss)

 

 

70 

 

 

(115)

 

Accumulated deficit

 

 

(456,608)

 

 

(420,807)

 

Total stockholders’ equity

 

 

258,209 

 

 

288,984 

 

Total liabilities and stockholders’ equity

 

$

278,814 

 

$

312,824 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

EXACT SCIENCES CORPORATION

Condensed Consolidated Statements of Operations

(Amounts in thousands, except per share data - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

    

Laboratory service revenue

 

$

4,266 

 

$

 —

 

License fees

 

 

 —

 

 

294 

 

Total revenue

 

 

4,266 

 

 

294 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

4,212 

 

 

 —

 

Gross margin

 

 

54 

 

 

294 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

6,571 

 

 

7,430 

 

General and administrative

 

 

12,971 

 

 

4,586 

 

Sales and marketing

 

 

16,524 

 

 

4,456 

 

Total operating expenses

 

 

36,066 

 

 

16,472 

 

Loss from operations

 

 

(36,012)

 

 

(16,178)

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Investment income

 

 

222 

 

 

86 

 

Interest expense

 

 

(11)

 

 

(15)

 

Total other income

 

 

211 

 

 

71 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(35,801)

 

$

(16,107)

 

 

 

 

 

 

 

 

 

Net loss per share—basic and diluted

 

$

(0.40)

 

$

(0.23)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic and diluted

 

 

88,662 

 

 

70,987 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


 

 

EXACT SCIENCES CORPORATION

Condensed Consolidated Statements of Comprehensive Loss

(Amounts in thousands - unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

    

Net loss

 

$

(35,801)

 

$

(16,107)

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

Unrealized gain on available-for-sale investments

 

 

195 

 

 

 

Foreign currency translation loss

 

 

(10)

 

 

 —

 

Comprehensive loss

 

$

(35,616)

 

$

(16,099)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


 

 

 

EXACT SCIENCES CORPORATION

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands, except share data - unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2015

    

2014

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(35,801)

 

$

(16,107)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization of fixed assets

 

 

1,587 

 

 

656 

 

Stock-based compensation

 

 

3,620 

 

 

1,995 

 

Amortization of deferred license fees

 

 

 —

 

 

(294)

 

Amortization of other long-term liabilities

 

 

(58)

 

 

 —

 

Amortization of premium on short-term investments

 

 

377 

 

 

145 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(364)

 

 

(643)

 

Accounts receivable

 

 

(205)

 

 

 —

 

Inventory, net

 

 

(1,406)

 

 

 —

 

Accounts payable

 

 

(646)

 

 

570 

 

Accrued liabilities

 

 

(1,473)

 

 

1,456 

 

Lease incentive obligation

 

 

(138)

 

 

(135)

 

Accrued interest

 

 

 

 

 

Net cash used in operating activities

 

 

(34,501)

 

 

(12,351)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(11,145)

 

 

(2,352)

 

Maturities of marketable securities

 

 

31,116 

 

 

24,419 

 

Purchases of property and equipment

 

 

(3,207)

 

 

(4,763)

 

Net cash provided by investing activities

 

 

16,764 

 

 

17,304 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

 

386 

 

 

88 

 

Payments on capital lease obligations

 

 

(91)

 

 

(86)

 

Net cash provided by financing activities

 

 

295 

 

 

 

 

 

 

 

 

 

 

 

Effects of exchange rate on cash and cash equivalents

 

 

(10)

 

 

 —

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(17,452)

 

 

4,955 

 

Cash and cash equivalents, beginning of period

 

 

58,131 

 

 

12,851 

 

Cash and cash equivalents, end of period

 

$

40,679 

 

$

17,806 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale investments

 

$

195 

 

$

 

Issuance of 21,826 and 32,666 shares of common stock to fund the Company’s 401(k) matching contribution for 2014 and 2013, respectively

 

$

835 

 

$

456 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


 

EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(1) ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

Exact Sciences Corporation (together with its subsidiaries, “Exact”, “we”, “us” or the “Company”) was incorporated in February 1995. Exact is a molecular diagnostics company currently focused on the early detection and prevention of colorectal cancer. The Company's non-invasive stool-based DNA (sDNA) screening technology includes proprietary and patented methods that isolate and analyze human DNA present in stool to screen for the presence of colorectal pre-cancer and cancer.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements, which include the accounts of Exact Sciences Corporation and those of its wholly-owned subsidiaries, Exact Sciences Laboratories, LLC, Exact Sciences Finance Corporation, Exact Sciences Europe LTD, and variable interest entities are unaudited and have been prepared on a basis substantially consistent with the Company’s audited financial statements and notes as of and for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K (the “2014 Form 10-K”). These condensed financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the results of operations have been included. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. The statements should be read in conjunction with the audited financial statements and related notes included in the 2014 Form 10-K.  Management has evaluated subsequent events for disclosure or recognition in the accompanying financial statements up to the filing of this report.

 

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company’s wholly-owned subsidiaries, Exact Sciences Laboratories, LLC, Exact Sciences Finance Corporation, Exact Sciences Europe LTD, and variable interest entities. All significant intercompany transactions and balances have been eliminated in consolidation.

References to “Exact”, “we”, “us”, “our”, or the “Company” refer to Exact Sciences Corporation and its wholly owned subsidiaries.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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.

 

Cash and Cash Equivalents

The Company considers cash on hand, demand deposits in bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. The Company had no restricted cash at March 31, 2015 and December 31, 2014.

 

7


 

Marketable Securities

 

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Debt securities carried at amortized cost are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive loss. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity computed under the straight-line method, which approximates the effective interest method. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.

 

At March 31, 2015 and December 31, 2014, the Company’s investments were comprised of fixed income investments and all were deemed available-for-sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives.  The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations (including those with a contractual term greater than one year from the date of purchase) are classified as current. All of the Company’s investments are considered current. There were no realized losses for the three months ended March 31, 2015 and 2014.  Realized gains were $3.0 thousand and $6.3 thousand for the three months ended March 31, 2015 and 2014, respectively. Unrealized gains or losses on investments are recorded in other comprehensive loss.

 

We periodically review our investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, our intent not to sell the security, and whether it is more likely than not that we will have to sell the security before recovery of its cost basis. For the three months ended March 31, 2015, no investments were identified with other-than-temporary declines in value.

 

Available-for-sale securities at March 31, 2015 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

133,395 

 

$

59 

 

$

(16)

 

$

133,438 

 

U.S. government agency securities

 

 

14,151 

 

 

 

 

 —

 

 

14,158 

 

Asset backed securities

 

 

52,850 

 

 

37 

 

 

(8)

 

 

52,879 

 

Commercial paper

 

 

3,996 

 

 

 

 

 

 

3,997 

 

Total available-for-sale securities

 

$

204,392 

 

$

104 

 

$

(24)

 

$

204,472 

 

 

Available-for-sale securities at December 31, 2014 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

141,239 

 

$

21 

 

$

(136)

 

$

141,124 

 

U.S. government agency securities

 

 

18,687 

 

 

 

 

(7)

 

 

18,688 

 

Certificates of deposit

 

 

60,821 

 

 

17 

 

 

(18)

 

 

60,820 

 

Commercial paper

 

 

3,993 

 

 

 

 

 

 

3,993 

 

Total available-for-sale securities

 

$

224,740 

 

$

46 

 

$

(161)

 

$

224,625 

 

 

8


 

Changes in Accumulated Other Comprehensive Income (Loss)

The amounts recognized in accumulated other comprehensive income (loss) (AOCI) for the three months ended March 31, 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

 

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2014

 

$

 —

 

$

(115)

 

$

(115)

 

Other comprehensive (loss) income before reclassifications

 

 

(10)

 

 

192 

 

 

182 

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

 

 

 

Net current period change in accumulated other comprehensive income (loss)

 

 

(10)

 

 

195 

 

 

185 

 

Balance at March 31, 2015

 

$

(10)

 

$

80 

 

$

70 

 

 

The amounts recognized in AOCI for the three months ended March 31, 2014 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

 

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2013

 

$

 —

 

$

125 

 

$

125 

 

Other comprehensive (loss) income before reclassifications

 

 

 —

 

 

14 

 

 

14 

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

(6)

 

 

(6)

 

Net current period change in accumulated other comprehensive income (loss)

 

 

 —

 

 

 

 

 

Balance at March 31, 2014

 

$

 —

 

$

133 

 

$

133 

 

 

Amounts reclassified from accumulated other comprehensive income (loss) for the three months ended March 31, 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Three Months Ended March 31,

 

Details about AOCI  Components

 

Statement of Operations

 

2015

 

2014

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

 

$

(6)

 

Total reclassifications

 

 

 

$

 

$

(6)

 

 

Property and Equipment

 

Property and equipment are stated at cost and depreciated using the straight-line method over the assets’ estimated useful lives. Maintenance and repairs are expensed when incurred; additions and improvements are capitalized. The estimated useful lives of fixed assets are as follows:

 

 

 

 

 

 

 

 

Estimated

 

Asset Classification

    

Useful Life

 

Laboratory equipment

 

3 - 5 years

 

Computer equipment and computer software

 

3 years

 

Leasehold improvements

 

Lesser of the remaining lease term or useful life

 

Furniture and fixtures

 

3 years

 

 

At March 31, 2015, the Company had $2.9 million of assets under construction which consisted of $1.6 million of capitalized costs related to software projects, $0.9 million of costs related to machinery and equipment, and $0.4 million of costs related to leasehold improvement projects. Depreciation will begin on these assets once they are placed into

9


 

service. We expect to incur minimal costs to complete the leasehold improvement, machinery and equipment, and the software projects, and these projects are expected to be completed in 2015.

 

Software Capitalization Policy

Software development costs related to internal use software are incurred in three stages of development: the preliminary project stage, the application development stage, and the post-implementation stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Costs in the application development stage that meet the criteria for capitalization are capitalized and amortized using the straight-line basis over the estimated economic useful life of the software.

 

Net Loss Per Share

 

Basic 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.  Basic and diluted net loss per share are the same because all outstanding common stock equivalents have been excluded, as they are anti-dilutive due to the Company’s losses.

 

The following potentially issuable common shares were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect due to net losses for each period:

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

    

2015

    

2014

    

Shares issuable upon exercise of stock options

 

5,222 

 

6,261 

 

Shares issuable upon exercise of outstanding warrants(1)

 

 —

 

155 

 

Shares issuable upon the release of restricted stock awards

 

2,305 

 

1,519 

 

Shares issuable upon the vesting of restricted stock awards related to licensing agreement

 

24 

 

49 

 

 

 

7,551 

 

7,984 

 

 


(1)

At March 31, 2014, represents warrants to purchase 80,000 shares of common stock issued under a license agreement and warrants to purchase 75,000 shares of common stock issued under a consulting agreement.

 

Revenue Recognition

 

Laboratory Service Revenue. The Company’s revenues will be generated primarily by the Cologuard test. Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. The Company assesses whether the fee is fixed or determinable and if the collectability is reasonably assured based on the nature of the fee charged for the laboratory services delivered and whether there are existing contractual arrangements with customers, third-party commercial payors (insurance carriers and health plans) or coverage of the test by Centers for Medicare & Medicaid Services (CMS). In addition, when evaluating collectability, the Company considers factors such as collection experience for the healthcare industry, the financial standing of customers or third-party commercial payors, and whether it has sufficient collection history to reliably estimate a payor's individual payment patterns.

 

A significant portion of laboratory service revenues earned by the Company will be initially recognized on a cash basis because the above criteria will not have been met at the time the test results are delivered. The Company generally bills third-party payors upon generation and delivery of a test result to the ordering physician following completion of a test. As such, the Company takes assignment of benefits and risk of collection with the third-party payor. Patients may have out-of-pocket costs for amounts not covered by their insurance carrier and the Company bills the patient directly for these amounts in the form of co-pays and deductibles in accordance with their insurance carrier and health plans. Some third-party payors may not cover the Cologuard test as ordered by the physician under their reimbursement policies. Consequently, the Company pursues reimbursement on a case-by-case basis directly from the patient.

 

10


 

For laboratory services performed, where the collectability is not reasonably assured, the Company will continue to recognize revenues upon cash collection until it can reliably estimate the amount that would be ultimately collected for the Cologuard test. In order to begin to record revenue on an accrual basis in these scenarios, the Company expects to use at least several months of payment history, review the number of tests paid against the number of tests billed, and consider the payor's outstanding balance for unpaid tests to determine whether payments are being made for a consistently high percentage of tests billed and at appropriate amounts given the contracted or historical payment amount.  With regard to Cologuard tests covered by Medicare, the national coverage determination for Cologuard was released by CMS on October 9, 2014.

 

The Company recognized approximately $4.3 million in laboratory service revenue for the three months ended March 31, 2015.

License fees.  License fees for the licensing of product rights are recorded as deferred revenue upon receipt of cash and recognized as revenue on a straight-line basis over the license period. As more fully described in the 2014 Form 10-K, in connection with the Company’s January 2009 strategic transaction with Genzyme Corporation, the Company deferred the initial $16.65 million in cash received at closing and amortized that up-front payment on a straight-line basis into revenue over the initial five-year collaboration period which ended in January 2014. In addition, in 2010 the Company received holdback amounts of $1.85 million, which were deferred at the time of receipt and were amortized on a straight-line basis into revenue over the then remaining term of the collaboration period.

 

In addition, the Company deferred $1.53 million premium related to common stock purchased by Genzyme and amortized that amount on a straight-line basis into revenue over the initial five-year collaboration period which ended in January 2014.

 

The Company did not recognize revenue in connection with the amortization of the up-front payments from Genzyme during the three months ended March 31, 2015. The Company recognized approximately $0.3 million in license fee revenue in connection with the amortization of the up-front payments from Genzyme during the three months ended March 31, 2014.

Inventory

 

Inventory is stated at the lower of cost or market value (net realizable value). The Company determines the cost of inventory using the first-in, first out method (FIFO). The Company estimates the recoverability of inventory by reference to internal estimates of future demands and product life cycles, including expiration. The Company periodically analyzes its inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value, and records a charge to cost of sales for such inventory as appropriate. In addition, the Company's products are subject to strict quality control and monitoring which the Company performs throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or become obsolete due to expiration, the Company records a charge to cost of sales to write down such unmarketable inventory to its estimated realizable value.

 

Direct and indirect manufacturing costs incurred during process validation and for other research and development activities, which are not permitted to be sold, have been expensed to research and development.  Raw material inventory that was purchased in prior periods, and expensed to research and development, may still be on hand and used toward the production of commercial Cologuard, provided it has an appropriate remaining shelf life.  This inventory is expected to provide a gross margin benefit to the Company in future periods of $0.6 million if the entirety of those balances were allocated to inventory produced for resale and not allocated to research and development activities.

 

11


 

Inventory consist of the following (amount in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

    

2015

    

2014

 

Raw Materials

 

$

2,305 

 

$

 —

 

Semi-finished and finished goods

 

 

3,118 

 

 

 —

 

Total inventory

 

$

5,423 

 

$

 —

 

 

Foreign Currency Translation

 

For the Company’s international subsidiary, the local currency is the functional currency. Assets and liabilities of this subsidiary are translated into United States dollars at the period-end exchange rate or historical rates as appropriate. Consolidated statements of earnings amounts are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheet as a component of accumulated other comprehensive income in total Exact Sciences Corporation’s shareholders’ equity. Transaction gains and losses are included in the consolidated statement of operations in 2015.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation in the consolidated financial statements and accompanying notes to the consolidated financial statements.

 

 

(3) MAYO LICENSE AGREEMENT

 

Overview

 

As more fully described in the 2014 Form 10-K, in June 2009 the Company entered into a license agreement (the “MAYO Agreement”) with MAYO Foundation for Medical Education and Research (“MAYO”). Pursuant to the MAYO Agreement, the Company granted MAYO two common stock purchase warrants with an exercise price of $1.90 per share covering 1,000,000 and 250,000 shares of common stock, respectively. The MAYO Agreement required the Company to make payments to MAYO for up-front fees, fees upon the achievement of certain milestones, and certain other payments. In addition to the license to intellectual property owned by MAYO, MAYO agreed to make available personnel to provide the Company product development and research and development assistance. The Company agreed to make royalty payments to MAYO on potential future net sales of any products developed from the licensed technology. The Company sought rights to the MAYO intellectual property for the specific purpose of developing a non-invasive, stool-based DNA screening test for colorectal cancer.  At the time the MAYO Agreement was executed, the Company’s sole focus was the development of such a test.  Accordingly, the Company recognized the initial payments and expenses related to the warrants at the time of the transaction and the amounts were expensed to research and development as there were no anticipated alternative future uses associated with the intellectual property.

 

Warrants

 

The warrants granted to MAYO were valued based on a Black-Scholes pricing model at the date of the grant. The warrants were granted with an exercise price of $1.90 per share of common stock. The grant to purchase 1,000,000 shares was immediately exercisable and the grant to purchase 250,000 shares vests and becomes exercisable over a four year period.

 

MAYO exercised the warrant to purchase 1,000,000 shares through several partial exercises. As of September 2011, the warrant covering 1,000,000 shares was fully exercised.

 

MAYO exercised the warrant to purchase 250,000 shares through partial exercises, the last of which occurred in June 2014. In June 2014, MAYO exercised the remaining shares of this warrant by utilizing the cashless exercise provision contained in the warrant. As a result of this exercise for a gross amount of 80,000 shares, in lieu of paying a

12


 

cash exercise price, MAYO forfeited its right with respect to 10,587 shares leaving it with a net amount of 69,413 shares. Following this exercise, all of MAYO’s warrants to purchase the Company’s common stock were fully exercised.

 

Royalty Payments

 

Under the MAYO Agreement, the Company agreed to make royalty payments to MAYO based on a percentage of net sales of products developed from the licensed technology starting in the third year of the agreement.  In 2012, minimum royalty payments were $10,000. For each year from 2015 through 2033 (the year the last patent expires), the minimum royalty payments are $25,000 per year.

 

Other Payments

 

Other payments under the MAYO Agreement include an upfront payment of $80,000, a milestone payment of $250,000 on the commencement of patient enrollment in a human cancer screening clinical trial, and a $500,000 payment upon FDA approval of the Company’s Cologuard test.  The upfront payment of $80,000 was made in the third quarter of 2009 and expensed to research and development in the second quarter of 2009. The Company began enrollment in human cancer screening clinical trial in June 2011 and the milestone payment of $250,000 was made and expensed to research and development in June 2011.  The Company received FDA approval for its Cologuard test in August 2014, and the milestone payment of $500,000 was made and expensed to research and development in August 2014.

 

In addition, the Company pays MAYO for research and development efforts.  During the three months ended March 31, 2015, the Company made payments of $1.2 million. At March 31, 2015 the Company recorded an estimated liability in the amount of $0.5 million for MAYO’s research and development efforts.  During the three months ended March 31, 2014, the Company made research and development payments to MAYO of $0.3 million. At March 31, 2014 the Company recorded an estimated liability in the amount of $0.7 million for research and development efforts.

 

May 2012 Amendment

 

In May 2012 the Company expanded the relationship with MAYO through an amendment to the MAYO Agreement. As part of the amendment, MAYO expanded the Company’s license to include all gastrointestinal cancers and diseases, and new cancer screening applications of stool- and blood-based testing.

 

As part of the amendment, the Company agreed to make restricted stock grants to MAYO upon the achievement of certain milestones with respect to commercial launch of the Company’s second and third licensed products. Additionally, the Company agreed to make milestone payments once certain sales levels are reached on licensed products. It is uncertain as to when or if these milestones will be met; therefore, the milestone payments have not been recorded as a liability. The Company evaluates the status of the milestone payments at each reporting date to determine if a liability should be recorded for the milestone payment.

 

February 2015 Amendment

 

In February 2015 the Company amended and restated the MAYO Agreement to extend the Company’s arrangement with MAYO for an additional five years and to broaden the Company’s and MAYO’s collaboration efforts to develop screening, surveillance and diagnostic tests and tools for use in connection with gastrointestinal cancers, precancers, diseases and conditions.  Under the amended and restated agreement (the “Restated MAYO Agreement”), MAYO agreed to continue to make personnel available during the additional five year period to provide the Company product development and research and development assistance. The Restated MAYO Agreement defines “gastrointestinal” to include certain airway organs (including the pharynx, larynx, trachea, bronchi and lungs) and certain head and neck organs (including nasal passages, mouth and throat).  The Restated MAYO Agreement also reflects an expanded list of patent rights that MAYO licenses to the Company.

Pursuant to the Restated MAYO Agreement, the Company agreed to pay MAYO an additional $5.0 million payable in five annual $1.0 million installments, the first of which was due February 10, 2015. The first $1.0 million payment was made to MAYO in February 2015 and was capitalized to pre-paid assets and will be amortized to research and

13


 

development expenses straight-line over the initial 12 month research period.  Additionally, the Company will make milestone payments once certain sales levels are reached on licensed products. It is uncertain as to when or if these milestones will be met; therefore, the milestone payments have not been recorded as a liability. The Company evaluates the status of the milestone payments at each reporting date to determine if a liability should be recorded for the milestone payment.

 

(4) STOCK-BASED COMPENSATION

 

Stock-Based Compensation Plans

 

The Company’s stock-based compensation plans include the 2010 Omnibus Long-Term Incentive Plan, the 2010 Employee Stock Purchase Plan, the 2015 Inducement Grant Plan and the 2000 Stock Option and Incentive Plan (collectively, the “Stock Plans”).

 

Stock-Based Compensation Expense

 

The Company recorded $3.6 million in stock-based compensation expense during the three months ended March 31, 2015 in connection with the amortization of restricted stock and restricted stock unit awards, stock purchase rights granted under the Company’s employee stock purchase plan and stock options granted to employees, non-employee consultants and non-employee directors, and warrants granted to non-employee consultants.   The Company recorded $2.0 million in stock-based compensation expense during the three months ended March 31, 2014 in connection with the amortization of restricted stock and restricted stock unit awards, stock purchase rights granted under the Company’s employee stock purchase plan and stock options granted to employees and non-employee directors.

 

Warrant Expense

Warrants to purchase 75,000 shares of common stock were issued in connection with a consulting agreement in 2009 to provide specific assistance to the Company in attaining FDA approval of Cologuard. The 75,000 warrants vested in the third quarter of 2014 upon successful FDA approval for Cologuard. The Company recorded $1.3 million, the fair value of the warrant on the vesting date as stock-based compensation expense during the third quarter of 2014 in connection with the vesting of this warrant.

Determining Fair Value

 

Valuation and Recognition – The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions in the table below. The estimated fair value of employee stock options is recognized to expense using the straight-line method over the vesting period.

 

Expected Term – Expected term is based on the Company’s historical life data and is determined using the average of the vesting period and the contractual life of the stock options granted.

 

Expected Volatility - Expected volatility is based on the Company’s historical stock volatility data over the expected term of the awards.

 

Risk-Free Interest Rate - The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent expected term.

 

Forfeitures - The Company records stock-based compensation expense only for those awards that are expected to vest.  A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.  The Company’s forfeiture rate used in the three months ended March 31, 2015 and 2014 was 4.99%.  

 

14


 

The fair value of each restricted stock and restricted stock unit award is determined on the date of grant using the closing stock price on that day.

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

    

2015

    

2014

    

Option Plan Shares

 

 

 

 

 

Risk-free interest rates

 

1.5%  -  1.92%

 

1.96%

 

Expected term (in years)

 

6.25  -  6.6

 

6.25

 

Expected volatility

 

67.1%  -  73.2%

 

80.8%

 

Dividend yield

 

0 %

 

0%

 

Weighted average fair value per share of options granted during the period

 

$ 15.81

 

$ 9.86

 

ESPP Shares

 

 

 

 

 

Risk-free interest rates

 

(1)

 

(1)

 

Expected term (in years)

 

(1)

 

(1)

 

Expected volatility

 

(1)

 

(1)

 

Dividend yield

 

(1)

 

(1)

 

Weighted average fair value per share of stock purchase rights granted during the period

 

(1)

 

(1)

 

 


(1)

The Company did not issue stock purchase rights under its 2010 Employee Stock Purchase Plan during the respective period.

 

Stock Option and Restricted Stock Activity

 

A summary of stock option activity under the Stock Plans during the three months ended March 31, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

Options

 

Shares

 

Price

 

Term (Years)

 

Value(1)

 

(Aggregate intrinsic value in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2014

 

4,934,317 

 

$

3.63 

 

5.2 

 

 

 

 

Granted

 

340,978 

 

 

23.51 

 

 

 

 

 

 

Exercised

 

(28,375)

 

 

10.72 

 

 

 

 

 

 

Forfeited

 

(25,000)

 

 

14.44 

 

 

 

 

 

 

Outstanding, March 31, 2015

 

5,221,920 

 

$

4.83 

 

5.2 

 

$

90,249 

 

Exercisable, March 31, 2015

 

4,419,801 

 

$

2.66 

 

4.6 

 

$

85,576 

 

Vested and expected to vest, March 31, 2015

 

5,181,894 

 

$

4.74 

 

5.2 

 

$

89,532 

 

 


(1)

The aggregate intrinsic value of options outstanding, exercisable and vested and expected to vest is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s common stock for options that had exercise prices that were lower than the $22.02 market price of the Company’s common stock at March 31, 2015.  The total intrinsic value of options exercised during the three months ended March 31, 2015 and 2014 was $0.4 million and $0.3 million, respectively.

 

As of March 31, 2015, there was $42.3 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all Stock Plans.  Total unrecognized compensation cost will be adjusted for future changes in forfeitures.  The Company expects to recognize that cost over a weighted average period of 3.3 years.

 

15


 

A summary of restricted stock activity under the Stock Plans during the three months ended March 31, 2015 is as follows:

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

Restricted

 

Average Grant

 

 

 

Shares

 

Date Fair Value

 

Outstanding, January 1, 2015

 

1,541,114 

 

$

13.86 

 

Granted

 

1,045,486 

 

 

23.67 

 

Released

 

(237,061)

 

 

11.98 

 

Forfeited

 

(44,556)

 

 

14.01 

 

Outstanding, March 31, 2015

 

2,304,983 

 

$

20.28 

 

 

 

 

 

(5) FAIR VALUE MEASUREMENTS

 

The FASB has issued authoritative guidance which requires that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  Under the standard, fair value measurements are separately disclosed by level within the fair value hierarchy.  The fair value hierarchy establishes and prioritizes the inputs used to measure fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs.  Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 

The three levels of the fair value hierarchy established are as follows:

 

 

 

 

Level 1

 

Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date.  Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

 

 

Level 2

 

Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

 

 

Level 3

 

Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

 

Fixed-income securities and mutual funds are valued using a third party pricing agency. The valuation is based on observable inputs including pricing for similar assets and other observable market factors. There has been no material change from period to period.  The estimated fair value of the Company’s long-term debt based on a market approach was approximately $1.0 million as of March 31, 2015 and December 31, 2014 and represent Level 2 measurements.  When determining the estimated fair value of the Company’s long-term debt, the Company used market-based risk measurements, such as credit risk.

 

16


 

The following table presents the Company’s fair value measurements as of March 31, 2015 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.  Amounts in the table are in thousands.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at March 31, 2015 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

Description

 

March 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

40,679 

 

$

40,679 

 

$

 —

 

$

 —

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

133,438 

 

 

 —

 

 

133,438 

 

 

 —

 

U.S. government agency securities

 

 

14,158 

 

 

 —

 

 

14,158 

 

 

 —

 

Asset backed securities

 

 

52,879 

 

 

 —

 

 

52,879 

 

 

 —

 

Commercial paper

 

 

3,997 

 

 

 —

 

 

3,997 

 

 

 —

 

Total

 

$

245,151 

 

$

40,679 

 

$

204,472 

 

$

 —

 

 

The following table presents the Company’s fair value measurements as of December 31, 2014 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.  Amounts in the table are in thousands.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at December 31, 2014 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

Description

 

December 31, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

53,569 

 

$

53,569 

 

$

 —

 

$

 —

 

Corporate bonds

 

 

4,562 

 

 

 —

 

 

4,562 

 

 

 —

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

141,124 

 

 

 —

 

 

141,124 

 

 

 —

 

U.S. government agency securities

 

 

18,688 

 

 

 —

 

 

18,688 

 

 

 —

 

Asset backed securities

 

 

60,820 

 

 

 —

 

 

60,820 

 

 

 —

 

Commercial paper

 

 

3,993 

 

 

 —

 

 

3,993 

 

 

 —

 

Total

 

$

282,756 

 

$

53,569 

 

$

229,187 

 

$

 —

 

 

17


 

The following table summarizes gross unrealized losses and fair values of our investments in an unrealized loss position as of March 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

 

 

Less than 12 months

 

12 months or greater

 

Total

 

(In thousands)

    

 

Fair Value

    

 

Gross Unrealized Loss

    

 

Fair Value

    

 

Gross Unrealized Loss

    

 

Fair Value

    

 

Gross Unrealized Loss

 

Marketable Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

47,902 

 

$

(16)

 

$

 —

 

$

 —

 

$

47,902 

 

$

(16)

 

Asset backed securities

 

 

23,755 

 

 

(8)

 

 

 —

 

 

 —

 

 

23,755 

 

 

(8)

 

Total

 

$

71,657 

 

$

(24)

 

$

 —

 

$

 —

 

$

71,657 

 

$

(24)

 

 

The following summarizes contractual underlying maturities of the Company’s available-for-sale investments in debt securities at March 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due one year or less

 

Due after one year through two years

Description

    

 

Cost

    

 

Fair Value

 

 

Cost

    

 

Fair Value

Marketable Securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

$

10,252 

 

$

10,257 

 

$

3,899 

 

$

3,901 

Corporate bonds

 

 

116,067 

 

 

116,091 

 

 

17,328 

 

 

17,347 

Commercial paper

 

 

3,996 

 

 

3,997 

 

 

 —

 

 

 —

Asset backed securities

 

 

 —

 

 

 —

 

 

52,850 

 

 

52,879 

Total

 

$

130,315 

 

$

130,345 

 

$

74,077 

 

$

74,127 

 

 

(6) NEW MARKET TAX CREDIT

During the fourth quarter of 2014, the Company received approximately $2.4 million in net proceeds from financing agreements related to working capital and capital improvements at one of its Madison, Wisconsin facilities.  This financing arrangement was structured with an unrelated third party financial institution (the “Investor”), an investment fund, and its majority owned community development entity in connection with the Company’s participation in transactions qualified under the federal New Markets Tax Credit (NMTC) program, pursuant to Section 45D of the Internal Revenue Code of 1986, as amended. Through its participation in this program, the Company has secured low interest financing and the potential for future debt forgiveness related to the Madison, Wisconsin facility.  Upon closing of this transaction, the Company provided an aggregate of approximately $5.1 million to the Investor, in the form of a loan receivable, with a term of seven years, bearing an interest rate of 2.74% per annum. This $5.1 million in proceeds plus capital from the Investor was used to make an aggregate $7.5 million loan to a subsidiary of the Company. This financing arrangement is not secured by any assets of the Company. On December 1, 2021, the Company would receive a repayment of its approximately $5.1 million loan. The $5.1 million is eliminated in the consolidation of the financial statements. This transaction also includes a put/call feature that becomes enforceable at the end of the seven-year compliance period. The Investor may exercise its put option or the Company can exercise the call, both of which will serve to trigger forgiveness of the net debt. The value attributable to the put/call is nominal. The $2.4 million is recorded in Other Long-Term Liabilities on the consolidated balance sheets. The benefit of this net $2.4 million contribution will be recognized as a decrease in expenses, included in cost of sales, as we amortize the contribution liability over the seven-year compliance period as it is being earned through our on-going compliance with the conditions of the NMTC program. At March 31, 2015, the remaining balance is $2.3 million. The Company incurred approximately $0.2 million of debt issuance costs related to the above transactions, which are being amortized over the life of the agreements.

The Investor is subject to 100% recapture of the NMTC it receives for a period of seven years as provided in the Internal Revenue Code and applicable U.S. Treasury regulations.  The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement.  Noncompliance with applicable

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requirements could result in the Investor’s projected tax benefits not being realized and, therefore, require the Company to indemnify the Investor for any loss or recapture of NMTC related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations.  The Company does not anticipate any credit recapture will be required in connection with this financing arrangement. 

 

The investment fund and the community development entity are considered Variable Interest Entities (VIEs) and the Company is the primary beneficiary of the VIEs.  This conclusion was reached based on the following:

 

·

The ongoing activities of the VIEs—collecting and remitting interest and fees and NMTC compliance—were all considered in the initial design and are not expected to significantly affect performance throughout the life of the VIE;

·

Contractual arrangements obligate the Company to comply with NMTC rules and regulations and provide various other guarantees to the Investor and community development entity;

·

The Investor lacks a material interest in the underling economics of the project; and

·

The Company is obligated to absorb losses of the VIEs.

 

Because the Company is the primary beneficiary of the VIEs, they have been included in the consolidated financial statements. There are no other assets, liabilities or transactions in these VIEs outside of the financing transactions executed as part of the NMTC arrangement. The $5.1 million is eliminated in consolidation of the financial statements.

 

Also in December 2014, in connection with the NMTC transaction, the Company entered into a land purchase option agreement with the owner of certain real property (land) adjacent to the Company’s current Madison, Wisconsin facilities. The option is renewable annually in exchange for a fee. If the Company exercises its land purchase option, they will pay a fixed amount for the land.  That fixed amount approximates the current fair value of the land.  If the Company decides not to exercise its option, then on December 31, 2021 (which is after the seven year compliance period of the NMTC program) the Company must pay $1.2 million to the community development entity. As discussed below, the community development entity is a variable interest entity consolidated into the Company.  The community development entity would then distribute this money to its members.  The majority member of the community development entity is also the owner of the land subject to the land purchase option.  The Company has recorded the obligation and the land purchase option asset for $1.2 million to reflect the Company’s assessment that it is probable that at least $1.2 million will be paid in the future based on resolution of the land purchase option. The asset is included in Other Long-Term Assets and the liability is included in Other Long-Term Liabilities on the consolidated balance sheet.

 

(7) RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. We are currently evaluating the impact of this amendment on our financial position and results of operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of the financial condition and results of operations of Exact Sciences Corporation (together with its subsidiaries, “Exact,” “we,” “us”, “our” or the “Company”)  should be read in conjunction with the condensed financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2014, which has been filed with the SEC (the “2014 Form 10-K”).

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections.  Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as “believe,” “expect,” “may,” “will,” “should,” “could,” “seek,” “intend,” “plan,” “estimate,” “anticipate” or other comparable terms.  All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q regarding our strategies, prospects, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding expected future operating results, anticipated results of our sales and marketing efforts, expectations concerning payor reimbursement and the anticipated results of our product development efforts.  Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: our ability to successfully and profitably market our products; the acceptance of our products by patients and health care providers; the amount and nature of competition from other cancer screening products and procedures; our ability to maintain regulatory approvals and comply with applicable regulations; our success establishing and maintaining collaborative and licensing arrangements; our ability to successfully develop new products; and the other risks and uncertainties described in the Risk Factors and in Management's Discussion and Analysis of Financial Condition and Results of Operations sections of our most recent Annual Report on Form 10K and our subsequently filed Quarterly Reports on Form 10-Q. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

 

Overview

 

We are a molecular diagnostics company currently focused on the early detection and prevention of colorectal cancer. We have developed a non-invasive, patient friendly screening test called Cologuard® to meet our primary goal of becoming the market leader in non-invasive colorectal cancer screening products.

 

Our strategic roadmap to achieve this goal includes the following key components:

 

·

commercialize an FDA-approved product that detects colorectal pre-cancer and cancer;

·

successfully operate a Federal Clinical Laboratory Improvement Amendments (CLIA) certified laboratory facility to process Cologuard tests and provide patient results; and

·

secure favorable reimbursement for our laboratory services from payors.

 

Our Cologuard test is a non-invasive stool-based DNA (sDNA) screening test designed to detect DNA markers, which in published studies have been shown to be associated with colorectal cancer. In addition to DNA markers, our test includes a protein marker to detect blood in the stool, utilizing an antibody-based fecal immunochemical test (FIT).

 

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On August 11, 2014 the U.S. Food and Drug Administration (FDA) approved Cologuard for use as the first and only sDNA non-invasive colorectal cancer screening test. In addition, on October 9, 2014 the Centers for Medicare and Medicaid Services (CMS) issued a final National Coverage Determination (NCD) extending coverage for Cologuard as a colorectal cancer screening test for asymptomatic, average risk Medicare beneficiaries, aged 50 to 85 years. CMS has established reimbursement for Cologuard (CPT Code G0464) at $492.72 in the CMS 2015 Clinical La