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EX-32.1 - EX-32.1 - EXACT SCIENCES CORPexas-20170630ex3219350fb.htm
EX-31.2 - EX-31.2 - EXACT SCIENCES CORPexas-20170630ex312547e02.htm
EX-31.1 - EX-31.1 - EXACT SCIENCES CORPexas-20170630ex3114a4c5c.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 June 30, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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)

 

 

 

 

 

Emerging growth company ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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 July 24, 2017, the registrant had 119,096,437 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 June 30, 2017 and December 31, 2016

3

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2017 and 2016

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the Three and Six Months Ended June 30, 2017 and 2016

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2017 and 2016

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

 

 

 

Item 2. 

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

22

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4. 

Controls and Procedures

34

 

 

 

 

Part II - Other Information

 

 

 

 

Item 1. 

Legal Proceedings

35

 

 

 

Item 1A. 

Risk Factors

35

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

Item 3. 

Defaults Upon Senior Securities

35

 

 

 

Item 4. 

Mine Safety Disclosures

35

 

 

 

Item 5 

Other Information

35

 

 

 

Item 6. 

Exhibits

35

 

 

 

 

Signatures

36

 

 

 

 

Exhibit Index

37

 

 

2


 

Part I — Financial Information

 

EXACT SCIENCES CORPORATION

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share data - unaudited)

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2017

 

2016

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

180,407

 

$

48,921

 

Marketable securities

 

 

303,853

 

 

262,179

 

Accounts receivable, net

 

 

22,591

 

 

8,526

 

Inventory, net

 

 

12,410

 

 

6,833

 

Prepaid expenses and other current assets

 

 

6,872

 

 

7,114

 

Total current assets

 

 

526,133

 

 

333,573

 

Property and Equipment, at cost:

 

 

 

 

 

 

 

Computer equipment and computer software

 

 

24,802

 

 

20,767

 

Laboratory equipment

 

 

18,258

 

 

14,749

 

Leasehold improvements

 

 

13,682

 

 

13,549

 

Assets under construction

 

 

9,095

 

 

6,711

 

Buildings

 

 

4,792

 

 

4,792

 

Furniture and fixtures

 

 

2,897

 

 

2,515

 

 

 

 

73,526

 

 

63,083

 

Less—Accumulated depreciation

 

 

(31,478)

 

 

(24,941)

 

Net property and equipment

 

 

42,048

 

 

38,142

 

Other long-term assets

 

 

14,420

 

 

5,325

 

Total assets

 

$

582,601

 

$

377,040

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,237

 

$

710

 

Accrued liabilities

 

 

26,935

 

 

28,106

 

Debt, current portion

 

 

178

 

 

174

 

Other short-term liabilities

 

 

1,943

 

 

1,702

 

Total current liabilities

 

 

31,293

 

 

30,692

 

Long-term debt

 

 

4,552

 

 

4,633

 

Other long-term liabilities

 

 

5,684

 

 

5,734

 

Lease incentive obligation, less current portion

 

 

378

 

 

686

 

     Total liabilities

 

 

41,907

 

 

41,745

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—no shares at June 30, 2017 and December 31, 2016

 

 

 —

 

 

 

Common stock, $0.01 par value Authorized—200,000,000 shares issued and outstanding—119,048,783 and 110,236,127 shares at June 30, 2017 and December 31, 2016

 

 

1,190

 

 

1,102

 

Additional paid-in capital

 

 

1,351,836

 

 

1,080,432

 

Accumulated other comprehensive loss

 

 

(379)

 

 

(418)

 

Accumulated deficit

 

 

(811,953)

 

 

(745,821)

 

Total stockholders’ equity

 

 

540,694

 

 

335,295

 

Total liabilities and stockholders’ equity

 

$

582,601

 

$

377,040

 

 

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 June 30,

 

Six Months Ended June 30,

 

 

 

2017

 

2016

    

2017

    

2016

    

Laboratory service revenue

 

$

57,646

 

$

21,185

 

$

106,009

 

$

36,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

17,991

 

 

10,097

 

 

34,972

 

 

19,156

 

Gross margin

 

 

39,655

 

 

11,088

 

 

71,037

 

 

16,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,737

 

 

8,640

 

 

17,739

 

 

18,766

 

General and administrative

 

 

24,609

 

 

17,284

 

 

44,679

 

 

35,108

 

Sales and marketing

 

 

36,728

 

 

30,301

 

 

75,529

 

 

56,012

 

Total operating expenses

 

 

71,074

 

 

56,225

 

 

137,947

 

 

109,886

 

Loss from operations

 

 

(31,419)

 

 

(45,137)

 

 

(66,910)

 

 

(93,022)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

 

683

 

 

425

 

 

1,278

 

 

891

 

Interest expense

 

 

(54)

 

 

(53)

 

 

(104)

 

 

(107)

 

Total other income

 

 

629

 

 

372

 

 

1,174

 

 

784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(30,790)

 

$

(44,765)

 

$

(65,736)

 

$

(92,238)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share—basic and diluted

 

$

(0.27)

 

$

(0.46)

 

$

(0.59)

 

$

(0.95)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic and diluted

 

 

112,847

 

 

97,902

 

 

111,721

 

 

 97,578

 

 

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 June 30,

 

Six Months Ended June 30,

 

 

2017

 

2016

    

2017

    

2016

    

Net loss

 

$

(30,790)

 

$

(44,765)

 

$

(65,736)

 

$

(92,238)

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(37)

 

 

82

 

 

(42)

 

 

555

 

Foreign currency translation gain (loss)

 

 

89

 

 

(82)

 

 

81

 

 

(139)

 

Comprehensive loss

 

$

(30,738)

 

$

(44,765)

 

$

(65,697)

 

$

(91,822)

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

    

2017

    

2016

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(65,736)

 

$

(92,238)

 

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

 

 

 

 

 

 

 

Depreciation and amortization of fixed assets

 

 

6,756

 

 

5,289

 

Loss on disposal of property and equipment

 

 

91

 

 

44

 

Stock-based compensation

 

 

12,224

 

 

10,607

 

Amortization of other liabilities

 

 

(769)

 

 

(445)

 

Amortization of deferred financing costs

 

 

26

 

 

26

 

Amortization of premium on short-term investments

 

 

57

 

 

346

 

Amortization of intangible assets

 

 

290

 

 

100

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(14,065)

 

 

(2,508)

 

Inventory, net

 

 

(5,577)

 

 

(1,727)

 

Prepaid expenses and other current assets

 

 

242

 

 

80

 

Accounts payable

 

 

1,527

 

 

(173)

 

Accrued liabilities

 

 

(268)

 

 

2,651

 

Lease incentive obligation

 

 

(308)

 

 

(23)

 

Net cash used in operating activities

 

 

(65,510)

 

 

(77,971)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(188,248)

 

 

(6,118)

 

Maturities of marketable securities

 

 

146,475

 

 

97,004

 

Purchases of property and equipment

 

 

(8,648)

 

 

(6,415)

 

Purchases of intangible assets

 

 

(8,442)

 

 

 —

 

Net cash (used in) provided by investing activities

 

 

(58,863)

 

 

84,471

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

 

772

 

 

549

 

Proceeds from sale of common stock, net of issuance costs

 

 

253,463

 

 

 —

 

Payments on mortgage payable

 

 

(86)

 

 

(82)

 

Proceeds in connection with the Company's employee stock purchase plan

 

 

1,629

 

 

1,047

 

Net cash provided by financing activities

 

 

255,778

 

 

1,514

 

 

 

 

 

 

 

 

 

Effects of exchange rate changes on cash and cash equivalents

 

 

81

 

 

(139)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

131,486

 

 

7,875

 

Cash and cash equivalents, beginning of period

 

 

48,921

 

 

41,135

 

Cash and cash equivalents, end of period

 

$

180,407

 

$

49,010

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Property and equipment acquired but not paid

 

$

2,105

 

$

1,055

 

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

 

$

(42)

 

$

555

 

Issuance of 158,717 and 341,507 shares of common stock to fund the Company’s 401(k) matching contribution for 2016 and 2015, respectively

 

$

3,008

 

$

2,151

 

Interest paid

 

$

101

 

$

105

 

 

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 (“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 other types of 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, 2016 included in the Company’s Annual Report on Form 10-K (the “2016 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 2016 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 condensed 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.

 

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.

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. 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 June 30, 2017 and December 31, 2016, 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 six months ended June 30, 2017 and 2016. Realized gains were $10,000 and $18,000 for the six months ended June 30, 2017 and 2016, 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 six months ended June 30, 2017, no investments were identified with other-than-temporary declines in value.

 

Available-for-sale securities at June 30, 2017 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

135,469

 

$

11

 

$

(71)

 

$

135,409

 

Asset backed securities

 

 

94,705

 

 

 2

 

 

(58)

 

 

94,649

 

U.S. government agency securities

 

 

62,964

 

 

 —

 

 

(144)

 

 

62,820

 

Commercial paper

 

 

7,175

 

 

 —

 

 

(1)

 

 

7,174

 

Certificates of deposit

 

 

3,800

 

 

 1

 

 

 —

 

 

3,801

 

Total available-for-sale securities

 

$

304,113

 

$

14

 

$

(274)

 

$

303,853

 

 

8


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

137,013

 

$

17

 

$

(93)

 

$

136,937

 

Asset backed securities

 

 

55,667

 

 

 3

 

 

(30)

 

 

55,640

 

U.S. government agency securities

 

 

49,591

 

 

 3

 

 

(120)

 

 

49,474

 

Commercial paper

 

 

19,069

 

 

 8

 

 

(1)

 

 

19,076

 

Certificates of deposit

 

 

1,053

 

 

 —

 

 

(1)

 

 

1,052

 

Total available-for-sale securities

 

$

262,393

 

$

31

 

$

(245)

 

$

262,179

 

 

Changes in Accumulated Other Comprehensive Income (Loss)

The amounts recognized in accumulated other comprehensive income (loss) (“AOCI”) for the six months ended June 30, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

(In thousands)

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2016

 

$

(204)

 

$

(214)

 

$

(418)

 

Other comprehensive loss before reclassifications

 

 

81

 

 

(38)

 

 

43

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

(4)

 

 

(4)

 

Net current period change in accumulated other comprehensive loss

 

 

81

 

 

(42)

 

 

39

 

Balance at June 30, 2017

 

$

(123)

 

$

(256)

 

$

(379)

 

 

The amounts recognized in AOCI for the six months ended June 30, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

(In thousands)

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2015

 

$

11

 

$

(444)

 

$

(433)

 

Other comprehensive (loss) income before reclassifications

 

 

(139)

 

 

516

 

 

377

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

39

 

 

39

 

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

 

 

(139)

 

 

555

 

 

416

 

Balance at June 30, 2016

 

$

(128)

 

$

111

 

$

(17)

 

 

Amounts reclassified from AOCI for the six months ended June 30, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Six Months Ended June 30,

 

Details about AOCI Components (In thousands)

 

Statement of Operations

 

2017

 

2016

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

(4)

 

$

39

 

Total reclassifications

 

 

 

$

(4)

 

$

39

 

 

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

 

Building Improvements

 

Lesser of the remaining building life or useful life

 

Furniture and fixtures

 

3 years

 

Buildings

 

30 years

 

 

At June 30, 2017, the Company had $9.1 million of assets under construction which consisted of $1.2 million related to leasehold improvements, $2.7 million related to computer equipment and computer software projects and $5.2 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 $13.2 million to complete the leasehold improvements, $0.3 million to complete the computer equipment and computer software projects, and $10.6 million to complete the machinery and equipment. These projects are expected to be completed in 2017 and 2018. There were no impairment losses for the periods ended June 30, 2017 and December 31, 2016.

 

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 probable future economic benefit to be derived from the transaction. A capitalized patent is amortized over its estimated useful life, beginning when such patent is approved. 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 six months ended June 30, 2017 should be expensed and not capitalized as the future economic benefit to be derived from the transactions cannot be determined.

 

Under a technology license and royalty agreement entered into with MDxHealth (“MDx”), dated July 26, 2010 (as subsequently amended, the “License Agreement”), the Company was required to pay MDx milestone-based royalties on sales of products or services covered by the licensed intellectual property. Once the achievement of a milestone occurred or was considered probable, an intangible asset and corresponding liability was reported in other long-term assets and accrued liabilities, respectively. The intangible asset is being amortized over the estimated ten-year useful life of the licensed intellectual property through 2024, and such amortization is reported in cost of sales. The liability was relieved once the milestone was achieved and payment was made. Payment for all remaining milestones under the License Agreement was made as part of the Royalty Buy-Out agreement outlined below.

 

Effective April 25, 2017, the Company and MDx entered into a Royalty Buy-Out Agreement (“Royalty Buy-Out Agreement”), which terminated the License Agreement.  Pursuant to the Royalty Buy-Out Agreement, the Company paid MDx a one-time fee of $8.0 million in exchange for an assignment of certain patents covered by the License Agreement and the elimination of all ongoing royalties and other payments by the Company to MDx under the License Agreement.  Also included in the Royalty Buy-Out Agreement is a mutual release of liabilities, which includes all

10


 

amounts previously accrued under the License Agreement.  Concurrently with entering into the Royalty Buy-Out Agreement, the Company entered into a Patent Purchase Agreement (“Patent Purchase Agreement”) with MDx under which it paid MDx an additional $7.0 million in exchange for the assignment of certain other patent rights that were not covered by the License Agreement. The total $15.0 million paid by the Company pursuant to the Royalty Buy-Out Agreement and Patent Purchase Agreement, net of liabilities relieved of $6.6 million, was recorded as an intangible asset and is being amortized over the estimated ten-year useful life of the licensed intellectual property, and such amortization is reported in cost of sales. The $6.6 million of liabilities relieved were related to historical milestones and accrued royalties under the License Agreement.

 

As of June 30, 2017, an intangible asset of $9.7 million related to historical milestone payments made under the License Agreement and intangible assets acquired as part of the Royalty Buy-Out Agreement and Patent Purchase Agreement is reported in other long-term assets.  As of December 31, 2016, an intangible asset of $1.6 million and a liability of $1.3 million related to historical milestone payments made under the License Agreement, were reported in other long-term assets and accrued liabilities, respectively.  Amortization expense was $0.2 million and $0.1 million for the three months ended June 30, 2017 and June 30, 2016, respectively.  Amortization expense was $0.3 million and $0.1 million for the six months ended June 30, 2017 and June 30, 2016, respectively. 

 

The estimated remaining useful life of the intangible asset is seven years. The table below represents future amortization expense as of June 30, 2017:

 

 

 

 

 

 

(In thousands)

    

 

    

 

2017

 

$

669

 

2018

 

 

1,338

 

2019

 

 

1,338

 

2020

 

 

1,338

 

2021

 

 

1,338

 

Thereafter

 

 

3,680

 

 

 

$

9,701

 

 

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no impairment losses for the periods ended June 30, 2017 and December 31, 2016.

 

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:

 

 

 

 

 

 

 

 

 

 

June 30,

 

(In thousands)

    

2017

    

2016

    

Shares issuable upon exercise of stock options

 

3,513

 

5,181

 

Shares issuable upon the release of restricted stock awards

 

5,424

 

5,977

 

 

 

8,937

 

11,158

 

 

11


 

Revenue Recognition

 

Laboratory Service Revenue. The Company’s laboratory service revenues are generated by performing diagnostic services using our 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 on an accrual basis, net of contractual and other adjustments, when amounts that will ultimately be collected can be reasonably estimated. Contractual and other adjustments represent the difference between the list price (the billing rate) and the estimated aggregate reimbursement rate from payers and patients. Upon ultimate collection, the aggregate amount received from payers and patients 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 collected requires significant judgment by management, and the Company’s judgments will continue to evolve as it gains payment experience with payers and patients.  Historically, in the absence of the ability to reasonably estimate the amount that will ultimately be collected for services, revenue was recognized upon cash receipt. Effective during the first quarter of 2017, the Company determined that it had the ability to reasonably estimate the amount that will ultimately be collected from all payers, including the impact of patient cost-share collections. Accordingly, the Company now recognizes revenue on an accrual basis for all billed claims.

The components of laboratory service revenue, as recognized upon accrual or cash receipt, for the three and six months ended June 30, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(In thousands)

    

2017

    

2016

 

2017

    

2016

    

Revenue recognized on an accrual basis

 

$

57,646

 

$

19,579

 

$

101,500

 

$

33,255

 

Revenue recognized when cash is received

 

 

 —

 

 

1,606

 

 

4,509

 

 

2,765

 

Total

 

$

57,646

 

$

21,185

 

$

106,009

 

$

36,020

 

 

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.

 

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:

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

(In thousands)

    

2017

    

2016

 

Raw materials

 

$

5,009

 

$

2,408

 

Semi-finished and finished goods

 

 

7,401

 

 

4,425

 

Total inventory

 

$

12,410

 

$

6,833

 

 

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. Condensed consolidated statements of operations are translated at average exchange rates for the period.

12


 

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 loss in total Exact Sciences Corporation’s stockholders’ equity. Transaction gains and losses are included in the condensed consolidated statement of operations.

 

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 2016 Form 10-K, in June 2009 the Company entered into a patent license 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 $25,000 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, but, pursuant to the terms of the January 2016 amendment, would remain a low-single-digit percentage of net sales.

 

In addition to royalties, the Company is required to pay MAYO cash of $0.2 million, $0.8 million and $2.0 million upon each product reaching $5.0 million, $20.0 million and $50.0 million in cumulative net sales, respectively.

 

As part of the February 2015 amendment and restatement of the license agreement, the Company agreed to pay MAYO an additional $5.0 million, payable in five annual installments, through 2019. The Company paid MAYO the annual installment of $1.0 million in the first quarter of each of 2015 and 2016. The Company paid MAYO the 2017 installment in December 2016. The Company records the $1.0 million installments to prepaid expenses and other current assets and amortizes each installment over a twelve-month period commencing on February 1 of each year. For the three and six months ended June 30, 2017 and 2016 the Company has recorded $0.3 million and $0.5 million in amortization of the installments, respectively.

 

In addition, the Company is paying MAYO for research and development efforts. As part of the Company’s research collaboration with MAYO, the Company incurred charges of $1.1 million and $2.2 million for the three and six months ended June 30, 2017, respectively. The Company made payments of $0.5 million and $1.8 million for the three and six months ended June 30, 2017, respectively. The Company recorded an estimated liability of $1.2 million for research and development efforts as of June 30, 2017. The Company incurred charges of $0.8 million and $1.8 million for the three and six months ended June 30, 2016, respectively. The Company made payments of $1.3 million and $2.4 million for the three and six months ended June 30, 2016, respectively. The Company recorded an estimated liability of $0.7 million for research and development efforts as of June 30, 2016.

 

13


 

(4) STOCK-BASED COMPENSATION

 

Stock-Based Compensation Plans

 

The Company maintains 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 records stock-based compensation expense 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. The Company recorded $6.1 million and $12.2 million in stock-based compensation expense during the three and six months ended June 30, 2017, respectively. The Company recorded $4.5 million and $10.6 million in stock-based compensation expense during the three and six months ended June 30, 2016, respectively.

 

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. For awards issued to non-employees, the measurement date is the date when the performance is complete or when the award vests, whichever is the earliest. Accordingly, non-employee awards are re-measured at each reporting period until the final measurement date. The fair value of the award is recognized as stock-based compensation expense over the requisite service period, generally 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 – Beginning in 2017, the Company adopted Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“Update 2016-09”). With the adoption of Update 2016-09, forfeiture estimates are no longer required, and the effects of actual forfeitures are recorded at the time they occur. The impact on the condensed consolidated balance sheet was a cumulative-effect adjustment of $0.4 million, increasing opening accumulated deficit and additional paid-in capital.

 

14


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2017

    

2016

    

2017

    

2016

    

Option Plan Shares

 

 

 

 

 

 

 

 

 

Risk-free interest rates

 

2.13 %

 

1.48%  -  1.69%

 

2.13 %

 

1.48%  -  1.69%

 

Expected term (in years)

 

6.59

 

6.25  -  6.74

 

6.59

 

6.25  -  6.74

 

Expected volatility

 

62.9 %

 

58.9%  -  59.4%

 

62.9 %

 

58.9%  -  59.4%

 

Dividend yield

 

0 %

 

0 %

 

0 %

 

0 %

 

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

 

$ 13.20

 

$ 3.17

 

$ 13.20

 

$ 3.17

 

Market Measure-Based Shares

 

   

 

 

 

   

 

   

 

Risk-free interest rates

 

(1)

 

0.91 %

 

(1)

 

0.91 %

 

Expected term (in years)

 

(1)

 

2.84

 

(1)

 

2.84

 

Expected volatility

 

(1)

 

68.3 %

 

(1)

 

68.3 %

 

Dividend yield

 

(1)

 

0 %

 

(1)

 

0 %

 

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

 

(1)

 

$ 2.32

 

(1)

 

$ 2.32

 

ESPP Shares

 

   

 

 

 

   

 

   

 

Risk-free interest rates

 

0.98%  -  1.28%

 

0.41%  -  0.8%

 

0.98%  -  1.28%

 

0.41%  -  0.8%

 

Expected term (in years)

 

0.5  -  2

 

0.5  -  2

 

0.5  -  2

 

0.5  -  2

 

Expected volatility

 

66.4%  -  85.5%

 

70.1%  -  92.7%

 

66.4%  -  85.5%

 

70.1%  -  92.7%

 

Dividend yield

 

0 %

 

0 %

 

0 %

 

0 %

 

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

 

$ 13.05

 

$ 3.08

 

$ 13.05

 

$ 3.08

 

 


(1)

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

 

Stock Option and Restricted Stock Activity

 

A summary of stock option activity under the Stock Plans during the six months ended June 30, 2017 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, January 1, 2017

 

3,505,481

 

$

7.00

 

5.5

 

 

 

 

Granted

 

125,978

 

 

21.68

 

 

 

 

 

 

Exercised

 

(108,205)

 

 

7.16

 

 

 

 

 

 

Forfeited

 

(10,035)

 

 

14.48

 

 

 

 

 

 

Outstanding, June 30, 2017

 

3,513,219

 

$

7.50

 

5.2

 

$

97,900

 

Exercisable, June 30, 2017

 

2,551,473

 

$

6.17

 

4.0

 

$

74,503

 

 


(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 $35.37 market price of the Company’s common stock at June 30, 2017.  The total intrinsic value of options exercised during the six months ended June 30, 2017 and 2016 was $2.6 million and $4.6 million, respectively.

 

15


 

As of June 30, 2017, there was $49.7 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 2.7 years.

 

A summary of restricted stock and restricted stock unit activity under the Stock Plans during the six months ended June 30, 2017 is as follows:

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

Restricted

 

Average Grant

 

 

 

Shares

 

Date Fair Value

 

Outstanding, January 1, 2017

 

5,601,316

 

$

9.19

 

Granted

 

915,492

 

 

23.26

 

Released

 

(839,252)

 

 

12.38

 

Forfeited

 

(253,133)

 

 

18.79