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EX-31.2 - EX-31.2 - EXACT SCIENCES CORPexas-20160331ex31210d7a7.htm
EX-32.1 - EX-32.1 - EXACT SCIENCES CORPexas-20160331ex321aadeeb.htm
EX-10.3 - EX-10.3 - EXACT SCIENCES CORPexas-20160331ex103cc8677.htm
EX-10.2 - EX-10.2 - EXACT SCIENCES CORPexas-20160331ex102f90cb3.htm
EX-31.1 - EX-31.1 - EXACT SCIENCES CORPexas-20160331ex311592d9a.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, 2016

 

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 2, 2016, the registrant had 97,791,900 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, 2016 and December 31, 2015

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2016 and 2015

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the Three Months Ended March 31, 2016 and 2015

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2016 and 2015

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

Item 2. 

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

21 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

31 

 

 

 

Item 4. 

Controls and Procedures

32 

 

 

 

 

Part II - Other Information

 

 

 

 

Item 1. 

Legal Proceedings

32 

 

 

 

Item 1A. 

Risk Factors

32 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

32 

 

 

 

Item 3. 

Defaults Upon Senior Securities

32 

 

 

 

Item 4. 

Mine Safety Disclosures

32 

 

 

 

Item 5 

Other Information

32 

 

 

 

Item 6. 

Exhibits

32 

 

 

 

 

Signatures

33 

 

 

 

 

Exhibit Index

34 

 

 

2


 

Part I — Financial Information

 

EXACT SCIENCES CORPORATION

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share data - unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,151

 

$

41,135

 

Marketable securities

 

 

210,441

 

 

265,744

 

Accounts receivable, net

 

 

5,621

 

 

4,933

 

Inventory, net

 

 

8,157

 

 

6,677

 

Prepaid expenses and other current assets

 

 

7,722

 

 

7,375

 

Total current assets

 

 

284,092

 

 

325,864

 

Property and Equipment, at cost:

 

 

 

 

 

 

 

Computer equipment and computer software

 

 

15,827

 

 

14,025

 

Laboratory equipment

 

 

13,496

 

 

12,786

 

Leasehold improvements

 

 

10,757

 

 

7,118

 

Buildings

 

 

4,792

 

 

4,777

 

Assets under construction

 

 

4,735

 

 

8,038

 

Furniture and fixtures

 

 

1,825

 

 

1,265

 

 

 

 

51,432

 

 

48,009

 

Less—Accumulated depreciation

 

 

(16,386)

 

 

(13,913)

 

Net property and equipment

 

 

35,046

 

 

34,096

 

Other long-term assets

 

 

4,650

 

 

4,070

 

Total assets

 

$

323,788

 

$

364,030

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,841

 

$

3,308

 

Accrued liabilities

 

 

20,477

 

 

22,253

 

Debt and capital lease obligation, current portion

 

 

169

 

 

166

 

Other short-term liabilities

 

 

1,191

 

 

996

 

Total current liabilities

 

 

24,678

 

 

26,723

 

Long-term debt

 

 

4,750

 

 

4,789

 

Other long-term liabilities

 

 

4,893

 

 

4,601

 

Lease incentive obligation, less current portion

 

 

1,134

 

 

1,061

 

     Total liabilities

 

 

35,455

 

 

37,174

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—no shares at March 31, 2016 and December 31, 2015

 

 

 —

 

 

 

Common stock, $0.01 par value Authorized—200,000,000 shares issued and outstanding—97,737,710 and 96,674,786 shares at March 31, 2016 and December 31, 2015

 

 

978

 

 

968

 

Additional paid-in capital

 

 

913,455

 

 

904,931

 

Accumulated other comprehensive loss

 

 

(17)

 

 

(433)

 

Accumulated deficit

 

 

(626,083)

 

 

(578,610)

 

Total stockholders’ equity

 

 

288,333

 

 

326,856

 

Total liabilities and stockholders’ equity

 

$

323,788

 

$

364,030

 

 

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,

 

 

 

2016

 

2015

    

Laboratory service revenue

 

$

14,835

 

$

4,266

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

9,059

 

 

4,212

 

Gross margin

 

 

5,776

 

 

54

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

10,126

 

 

6,571

 

General and administrative

 

 

17,824

 

 

12,971

 

Sales and marketing

 

 

25,711

 

 

16,524

 

Total operating expenses

 

 

53,661

 

 

36,066

 

Loss from operations

 

 

(47,885)

 

 

(36,012)

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Investment income

 

 

466

 

 

222

 

Interest expense

 

 

(54)

 

 

(11)

 

Total other income

 

 

412

 

 

211

 

 

 

 

 

 

 

 

 

Net loss

 

$

(47,473)

 

$

(35,801)

 

 

 

 

 

 

 

 

 

Net loss per share—basic and diluted

 

$

(0.49)

 

$

(0.40)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic and diluted

 

 

97,246

 

 

88,662

 

 

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,

 

 

 

2016

 

2015

    

Net loss

 

$

(47,473)

 

$

(35,801)

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

Unrealized gain on available-for-sale investments

 

 

473

 

 

195

 

Foreign currency translation loss

 

 

(57)

 

 

(10)

 

Comprehensive loss

 

$

(47,057)

 

$

(35,616)

 

 

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,

 

    

2016

    

2015

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(47,473)

 

$

(35,801)

 

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

 

 

 

 

 

 

 

Depreciation and amortization of fixed assets

 

 

2,473

 

 

1,587

 

Stock-based compensation

 

 

6,100

 

 

3,620

 

Amortization of other liabilities

 

 

(208)

 

 

(58)

 

Amortization of deferred financing costs

 

 

13

 

 

 —

 

Amortization of premium on short-term investments

 

 

214

 

 

377

 

Amortization of intangible assets

 

 

50

 

 

 —

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(688)

 

 

(205)

 

Inventory, net

 

 

(1,480)

 

 

(1,406)

 

Prepaid expenses and other current assets

 

 

(347)

 

 

(364)

 

Accounts payable

 

 

(467)

 

 

(646)

 

Accrued liabilities

 

 

(664)

 

 

(2,309)

 

Lease incentive obligation

 

 

130

 

 

(138)

 

Accrued interest

 

 

 —

 

 

6

 

Net cash used in operating activities

 

 

(42,347)

 

 

(35,337)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(6,118)

 

 

(11,145)

 

Maturities of marketable securities

 

 

61,680

 

 

31,116

 

Purchases of property and equipment

 

 

(2,389)

 

 

(2,371)

 

Net cash provided by investing activities

 

 

53,173

 

 

17,600

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

 

288

 

 

386

 

Payments on capital lease obligations

 

 

 —

 

 

(91)

 

Payments on mortgage payable

 

 

(41)

 

 

 —

 

Net cash provided by financing activities

 

 

247

 

 

295

 

 

 

 

 

 

 

 

 

Effects of exchange rate on cash and cash equivalents

 

 

(57)

 

 

(10)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

11,016

 

 

(17,452)

 

Cash and cash equivalents, beginning of period

 

 

41,135

 

 

58,131

 

Cash and cash equivalents, end of period

 

$

52,151

 

$

40,679

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Property and equipment acquired but not paid

 

$

1,034

 

$

836

 

Unrealized gain on available-for-sale investments

 

$

473

 

$

195

 

Issuance of 340,950 and 21,826 shares of common stock to fund the Company’s 401(k) matching contribution for 2015 and 2014, respectively

 

$

2,146

 

$

835

 

Interest paid

 

$

53

 

$

4

 

 

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

6


 

EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in thousands, except share and per share data, unless otherwise noted or instances where expressed in millions)

 

(1) ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

Exact Sciences Corporation (“Exact” or the “Company”) was incorporated in February 1995. Exact is a molecular diagnostics company currently focused on the early detection and prevention of some of the deadliest forms of cancer. The Company has developed an accurate, non-invasive, patient-friendly screening test called Cologuard for the early detection of colorectal cancer and pre-cancer, and is currently working on the development of tests for lung cancer, pancreatic cancer and esophageal 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, Beijing Exact Sciences Medical Technology Company Limited, 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, 2015 included in the Company’s Annual Report on Form 10-K (the “2015 Form 10-K”). These condensed consolidated 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 2015 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, Beijing Exact Sciences Medical Technology Company Limited, 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.

 

7


 

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. no

 

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. 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, 2016 and December 31, 2015, 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, 2016 and 2015. Realized gains were $3.3 thousand and $3.0 thousand for the three months ended March 31, 2016 and 2015, respectively.

 

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, 2016, no investments were identified with other-than-temporary declines in value.

 

Available-for-sale securities at March 31, 2016 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

132,854

 

$

93

 

$

(41)

 

$

132,906

 

Asset backed securities

 

 

62,380

 

 

12

 

 

(44)

 

 

62,348

 

U.S. government agency securities

 

 

7,057

 

 

8

 

 

 —

 

 

7,065

 

Certificates of deposit

 

 

5,500

 

 

2

 

 

 —

 

 

5,502

 

Commercial paper

 

 

2,621

 

 

 —

 

 

(1)

 

 

2,620

 

Total available-for-sale securities

 

$

210,412

 

$

115

 

$

(86)

 

$

210,441

 

 

8


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

179,471

 

$

2

 

$

(262)

 

$

179,211

 

Asset backed securities

 

 

77,661

 

 

 —

 

 

(166)

 

 

77,495

 

U.S. government agency securities

 

 

7,057

 

 

 —

 

 

(18)

 

 

7,039

 

Certificates of deposit

 

 

1,999

 

 

 —

 

 

 —

 

 

1,999

 

Total available-for-sale securities

 

$

266,188

 

$

2

 

$

(446)

 

$

265,744

 

 

Changes in Accumulated Other Comprehensive Income (Loss)

The amounts recognized in accumulated other comprehensive income (loss) (“AOCI”) for the three months ended March 31, 2016 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

 

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2015

 

$

11

 

$

(444)

 

$

(433)

 

Other comprehensive (loss) income before reclassifications

 

 

(57)

 

 

456

 

 

399

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

17

 

 

17

 

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

 

 

(57)

 

 

473

 

 

416

 

Balance at March 31, 2016

 

$

(46)

 

$

29

 

$

(17)

 

 

The amounts recognized in 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

 

 

 —

 

 

3

 

 

3

 

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

 

 

(10)

 

 

195

 

 

185

 

Balance at March 31, 2015

 

$

(10)

 

$

80

 

$

70

 

 

Amounts reclassified from AOCI for the three months ended March 31, 2016 and 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Three Months Ended March 31,

 

Details about AOCI  Components

 

Statement of Operations

 

2016

 

2015

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

17

 

$

3

 

Total reclassifications

 

 

 

$

17

 

$

3

 

 

9


 

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

 

Buildings

 

30 years

 

 

At March 31, 2016, the Company had $4.7 million of assets under construction which consisted of $1.8 million related to leasehold improvements, $1.5 million related to software projects and $1.4 million related to machinery and equipment. Depreciation will begin on these assets once they are placed into service. The Company expects to incur an additional $1.2 million to complete the leasehold improvements, $0.2 million to complete the machinery and equipment, and minimal costs to complete the software projects. These projects are expected to be completed in 2016. There were no impairment losses for the periods ended March 31, 2016 and December 31, 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 incurred during the application development stage that meet the criteria for capitalization are capitalized and amortized, when the software is ready for its intended use, using the straight-line basis over the estimated useful life of the software.

 

Patent Costs and Intangible Assets

 

Patent costs, which have historically consisted of related legal fees, are capitalized as incurred, only if the Company determines that there is some probably future economic benefit derived from the transaction. The capitalized patents are amortized beginning when patents are approved over an estimated useful life. Capitalized patent costs are expensed upon disapproval, upon a decision by the Company to no longer pursue the patent or when the related intellectual property is either sold or deemed to be no longer of value to the Company. The Company determined that all patent costs incurred during the three months ended March 31, 2016 should be expensed and not capitalized as the future economic benefit derived from the transactions cannot be determined.

 

Under a technology license and royalty agreement entered into with MDx Health, the Company is required to pay MDx Health milestone-based royalties on sales of products or services covered by the licensed intellectual property. Once the achievement of a milestone has occurred or is considered probable, an intangible asset and corresponding liability is reported in other long-term assets and accrued expenses, respectively. The intangible asset is amortized over the estimated ten-year useful life of the licensed intellectual property, and such amortization is reported in cost of sales. As of March 31, 2016, an intangible asset of $1.7 million and a liability of $2.0 million are reported in other long-term assets and accrued expenses, respectively. As of December 31, 2015, an intangible asset of $1.8 million and a liability of $2.0 million were reported in other long-term assets and accrued expenses, respectively. Amortization expense for the three months ended March 31, 2016 was $50.0 thousand. There was no amortization expense recorded for the three months ended March 31, 2015.

 

10


 

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 (amounts are in thousands):

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

    

2016

    

2015

    

Shares issuable upon exercise of stock options

 

5,475

 

5,222

 

Shares issuable upon the release of restricted stock awards

 

6,202

 

2,305

 

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

 

 —

 

24

 

 

 

11,677

 

7,551

 

 

Revenue Recognition

 

Laboratory Service Revenue. The Company’s revenues are generated by performing diagnostic services using its Cologuard test, and the service is completed upon delivery of a test result to an ordering physician. The Company recognizes revenue in accordance with the provisions of ASC 954-605, Health Care Entities – Revenue Recognition. The Company recognizes revenue related to billings for Medicare and other payors on an accrual basis, net of contractual and other adjustments, when amounts that will ultimately be realized can be estimated. Contractual and other adjustments represent the difference between the list price (the billing rate) and the estimated reimbursement rate for each payor. Upon ultimate collection, the amount received from Medicare and other payors where reimbursement was estimated is compared to previous collection estimates and, if necessary, the contractual allowance is adjusted.

 

The estimates of amounts that will ultimately be realized require significant judgment by management. Some patients have out-of-pocket costs for amounts not covered by their insurance carrier, and the Company may bill the patient directly for these amounts in the form of co-payments and co-insurance in accordance with their insurance carrier and health plans. Some payors may not cover Cologuard as ordered by the prescribing physician under their reimbursement policies. The Company pursues reimbursement from such patients on a case-by-case basis. In the absence of contracted reimbursement coverage or the ability to estimate the amount that will ultimately be realized for the Company’s services, revenue is recognized upon cash receipt.

 

The Company uses judgment in determining if it is able to make an estimate of what will ultimately be realized. The Company also uses judgment in estimating the amounts it expects to collect by payor. The Company’s judgments will continue to evolve in the future as it continues to gain payment experience with payors and patients.

 

The Company recognized approximately $14.8 million and $4.3 million in laboratory service revenue for the three months ended March 31, 2016 and 2015, respectively.

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 net 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 net realizable value.

 

11


 

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. 

 

Inventory consists of the following (amount in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

March 31,

 

 

    

2016

    

2015

 

Raw materials

 

$

2,066

 

$

2,305

 

Semi-finished and finished goods

 

 

6,091

 

 

3,118

 

Total inventory

 

$

8,157

 

$

5,423

 

 

Foreign Currency Translation

 

For the Company’s international subsidiaries, the local currency is the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at the period-end exchange rate or historical rates as appropriate. Consolidated statements of operations amounts are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the condensed consolidated balance sheet as a component of accumulated other comprehensive income in total Exact Sciences Corporation’s stockholders’ equity. Transaction gains and losses are included in the condensed consolidated statement of operations in 2016.

 

Reclassifications

 

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

 

(3) MAYO LICENSE AGREEMENT

 

Overview

 

As more fully described in the 2015 Form 10-K, in June 2009 the Company entered into a patent license agreement (the “MAYO Agreement”) with MAYO Foundation for Medical Education and Research (“MAYO”). The Company’s license agreement with MAYO was amended and restated in February 2015 and further amended in January 2016. Under the license agreement, MAYO granted the Company an exclusive, worldwide license to certain MAYO patents and patent applications, as well as a non-exclusive, worldwide license with regard to certain MAYO know-how. As expanded by the January 2016 amendment to the license agreement, the scope of the license includes any screening, surveillance or diagnostic tests or tools for use in connection with any type of cancers, pre-cancers, diseases or conditions.

 

Pursuant to the Company’s agreement with MAYO, the Company is required to pay MAYO a low single digit royalty on the Company’s net sales of products using the licensed MAYO intellectual property, with minimum annual royalty fees of $25.0 thousand each year through 2033, the year the last patent expires. The January 2016 amendment to the MAYO license agreement established various low single digit royalty rates on net sales of current and future products and clarified how net sales will be calculated.  As part of the amendment, the royalty rate on the Company’s net sales of Cologuard increased and, if in the future, improvements are made to the Cologuard product, the royalty rate may further increase. However, the amendment provides that the Cologuard royalty will remain a low single digit percentage of net sales.

 

The Company is also required to issue MAYO shares of the Company’s common stock with a value of $200.0 thousand upon commercial launch of our second and third products that use the licensed MAYO intellectual property, as well as to pay MAYO, for each of the Company’s products that use licensed MAYO intellectual property, $200.0 thousand cash upon such product reaching $5 million in cumulative net sales, $750.0 thousand cash upon such product reaching $20 million in cumulative net sales, and $2 million cash upon such product reaching $50 million in cumulative net sales.

 

12


 

As part of the February 2015 amendment and restatement of the license agreement, the Company agreed to pay MAYO an additional $5 million, payable in five annual installments, through 2019. The Company paid MAYO the annual installment of $1 million in the first quarter of 2015 and 2016.

 

In addition, the Company is paying MAYO for research and development efforts. As part of the Company’s research collaboration with MAYO, the Company has incurred charges of $1.0 million and has made payments of $1.0 million for the three months ended March 31, 2016. The Company has recorded an estimated liability in the amount of $1.2 million for research and development efforts as of March 31, 2016. The Company incurred charges of $0.5 million and made payments of $1.2 million for the three months ended March 31, 2015.

 

(4) STOCK-BASED COMPENSATION

 

Stock-Based Compensation Plans

 

The Company’s stock-based compensation plans include the 2010 Omnibus Long-Term Incentive Plan (As Amended and Restated Effective April 28, 2015), the 2010 Employee Stock Purchase Plan, the 2015 Inducement Award Plan, the 2016 Inducement Award Plan and the 2000 Stock Option and Incentive Plan (collectively, the “Stock Plans”).

 

Stock-Based Compensation Expense

 

The Company recorded $6.1 million and $3.6 million in stock-based compensation expense during the three months ended March 31, 2016 and 2015, respectively, 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.  

 

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. The fair value of each market measure-based award is estimated on the date of grant using a Monte Carlo simulation pricing model. The fair value of service-based awards for each restricted stock unit award is determined on the date of grant using the closing stock price on that day. The estimated fair value of these awards is recognized to expense using the straight-line method over the vesting period. The Black-Scholes and Monte Carlo pricing models utilize the following assumptions:

 

Expected Term – Expected life of an option award is the average length of time over which the Company expects employees will exercise their options, which is based on historical experience with similar grants. Expected life of a market measure-based award is based on the applicable performance period.

 

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 and Monte Carlo valuation models 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, 2016 and 2015 was 3.48% and 4.99%, respectively.

 

13


 

The fair value of each option and market measure-based award is based on the assumptions in the following table:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2016

    

2015

    

Option Plan Shares

 

 

 

 

 

Risk-free interest rates

 

1.48%  - 1.69%

 

1.5%  - 1.92%

 

Expected term (in years)

 

6.25  - 6.74

 

6.25 - 6.6

 

Expected volatility

 

58.9%  - 59.4%

 

67.1%  - 73.2%

 

Dividend yield

 

0%

 

0%

 

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

 

$3.17

 

$ 15.81

 

Market Measure-Based Shares

 

   

 

 

 

Risk-free interest rates

 

0.91%

 

(1)

 

Expected term (in years)

 

2.84

 

(1)

 

Expected volatility

 

68.3%

 

(1)

 

Dividend yield

 

0%

 

(1)

 

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

 

$2.32

 

(1)

 

ESPP Shares

 

   

 

 

 

Risk-free interest rates

 

(2)

 

(2)

 

Expected term (in years)

 

(2)

 

(2)

 

Expected volatility

 

(2)

 

(2)

 

Dividend yield

 

(2)

 

(2)

 

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

 

(2)

 

(2)

 

 


(1)

The Company did not issue market measure-based shares during the respective period.

(2)

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, 2016 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, 2015

 

4,936,594

 

$

4.80

 

4.5

 

 

 

 

Granted

 

883,889

 

 

5.48

 

 

 

 

 

 

Exercised

 

(332,924)

 

 

0.87

 

 

 

 

 

 

Forfeited

 

(12,150)

 

 

16.52

 

 

 

 

 

 

Outstanding, March 31, 2016

 

5,475,409

 

$

5.10

 

5.1

 

$

18,052

 

Exercisable, March 31, 2016

 

4,175,037

 

$

3.66

 

3.9

 

$

16,974

 

Vested and expected to vest, March 31, 2016

 

5,309,942

 

$

5.05

 

5.1

 

$

17,964

 

 


(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 $6.74 market price of the Company’s common stock at March 31, 2016.  The total intrinsic value of options exercised during the three months ended March 31, 2016 and 2015 was $2.1 million and $0.4 million, respectively.

14


 

As of March 31, 2016, there was $52.6 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 forfeitures.  The Company expects to recognize that cost over a weighted average period of 3.0 years.

 

A summary of restricted stock and restricted stock unit activity under the Stock Plans during the three months ended March 31, 2016 is as follows:

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

Restricted

 

Average Grant

 

 

 

Shares

 

Date Fair Value

 

Outstanding, January 1, 2016

 

3,444,694

 

$

14.19

 

Granted

 

3,244,764

 

 

4.37

 

Released

 

(422,379)

 

 

16.73

 

Forfeited

 

(64,840)

 

 

20.18

 

Outstanding, March 31, 2016

 

6,202,239

 

$

8.61

 

 

 

 

 

(5) FAIR VALUE MEASUREMENTS

 

The Financial Accounting Standards Board 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 $4.8 million as of March 31, 2016 and December 31, 2015, 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.

 

15


 

The following table presents the Company’s fair value measurements as of March 31, 2016 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, 2016 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

Description

 

March 31, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

38,151

 

$

38,151

 

$

 —

 

$

 —

 

Certificates of deposit

 

 

14,000

 

 

 —

 

 

14,000

 

 

 —

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

132,906

 

 

 —

 

 

132,906

 

 

 —

 

Asset backed securities

 

 

62,348

 

 

 —

 

 

62,348

 

 

 —

 

U.S. government agency securities

 

 

7,065

 

 

 —

 

 

7,065

 

 

 —

 

Certificates of deposit

 

 

5,502

 

 

 —

 

 

5,502

 

 

 —

 

Commercial paper

 

 

2,620

 

 

 —

 

 

2,620

 

 

 —

 

Total

 

$

262,592

 

$

38,151

 

$

224,441

 

$

 —

 

 

The following table presents the Company’s fair value measurements as of December 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 December 31, 2015 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

Description

 

December 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

37,435

 

$

37,435

 

$

 —

 

$

 —

 

Commercial Paper

 

 

3,700

 

 

 —

 

 

3,700

 

 

 —

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

179,211

 

 

 —

 

 

179,211

 

 

 —

 

Asset backed securities

 

 

77,495

 

 

 —

 

 

77,495

 

 

 —

 

U.S. government agency securities

 

 

7,039

 

 

 —

 

 

7,039

 

 

 —

 

Certificates of deposit

 

 

1,999

 

 

 —

 

 

1,999

 

 

 —

 

Total

 

$

306,879

 

$

37,435

 

$

269,444

 

$

 —

 

 

16


 

The following table summarizes gross unrealized losses and fair values of our investments in an unrealized loss position as of March 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset backed securities

 

$

43,177

 

$

(44)

 

$

 —

 

$

 —

 

$

43,177

 

$

(44)

 

Corporate bonds

 

 

41,402

 

 

(41)

 

 

 —

 

 

 —

 

 

41,402

 

 

(41)

 

Commercial Paper

 

 

2,620

 

 

(1)

 

 

 —

 

 

 —

 

 

2,620

 

 

(1)

 

U.S. government agency securities

 

 

2,499

 

 

 —

 

 

 —