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EX-32.1 - EX-32.1 - EXACT SCIENCES CORPexas-20180930ex3210378e2.htm
EX-31.2 - EX-31.2 - EXACT SCIENCES CORPexas-20180930ex31256bcc5.htm
EX-31.1 - EX-31.1 - EXACT SCIENCES CORPexas-20180930ex311c0b453.htm
EX-10.2 - EX-10.2 - EXACT SCIENCES CORPexas-20180930ex102f6350e.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 September 30, 2018

 

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, if any, every Interactive Data File required to be submitted 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 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 ☐

 

 

 

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 October 29, 2018, the registrant had 122,900,430 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 September 30, 2018 and December 31, 2017

3

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2018 and 2017

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

 

 

 

Item 2. 

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

30

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

46

 

 

 

Item 4. 

Controls and Procedures

46

 

 

 

 

Part II - Other Information

 

 

 

 

Item 1. 

Legal Proceedings

47

 

 

 

Item 1A. 

Risk Factors

47

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

 

Item 3. 

Defaults Upon Senior Securities

47

 

 

 

Item 4. 

Mine Safety Disclosures

48

 

 

 

Item 5 

Other Information

48

 

 

 

Item 6. 

Exhibits

48

 

 

 

 

Signatures

49

 

 

2


 

Part I — Financial Information

 

EXACT SCIENCES CORPORATION

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share data - unaudited)

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2018

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

161,705

 

$

77,491

 

Marketable securities

 

 

1,023,512

 

 

347,224

 

Accounts receivable, net

 

 

41,916

 

 

26,419

 

Inventory, net

 

 

38,617

 

 

26,027

 

Prepaid expenses and other current assets

 

 

23,832

 

 

10,055

 

Total current assets

 

 

1,289,582

 

 

487,216

 

Long-term Assets:

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

188,486

 

 

79,986

 

Intangibles, net

 

 

22,493

 

 

24,205

 

Other long-term assets, net

 

 

9,015

 

 

7,153

 

Total assets

 

$

1,509,576

 

$

598,560

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

32,738

 

$

16,135

 

Accrued liabilities

 

 

68,938

 

 

49,126

 

Accrued interest

 

 

1,901

 

 

 —

 

Debt, current portion

 

 

 —

 

 

182

 

Other short-term liabilities

 

 

3,158

 

 

2,681

 

Total current liabilities

 

 

106,735

 

 

68,124

 

Convertible notes, net

 

 

656,341

 

 

 —

 

Long-term debt, less current portion

 

 

17,080

 

 

4,269

 

Other long-term liabilities

 

 

12,691

 

 

5,749

 

     Total liabilities

 

 

792,847

 

 

78,142

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—no shares at September 30, 2018 and December 31, 2017

 

 

 —

 

 

 

Common stock, $0.01 par value Authorized—200,000,000 shares issued and outstanding—122,889,854 and 120,497,426 shares at September 30, 2018 and December 31, 2017

 

 

1,229

 

 

1,205

 

Additional paid-in capital

 

 

1,698,695

 

 

1,380,577

 

Accumulated other comprehensive loss

 

 

(1,406)

 

 

(750)

 

Accumulated deficit

 

 

(981,789)

 

 

(860,614)

 

Total stockholders’ equity

 

 

716,729

 

 

520,418

 

Total liabilities and stockholders’ equity

 

$

1,509,576

 

$

598,560

 

 

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 September 30,

 

Nine Months Ended September 30,

 

 

 

 

2018

 

2017

    

2018

    

2017

    

 

Laboratory service revenue

 

$

118,291

 

$

72,574

 

$

311,481

 

$

178,583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

30,020

 

 

20,729

 

 

79,822

 

 

55,701

 

 

Gross margin

 

 

88,271

 

 

51,845

 

 

231,659

 

 

122,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

17,631

 

 

11,725

 

 

47,278

 

 

29,464

 

 

General and administrative

 

 

46,729

 

 

30,763

 

 

121,861

 

 

75,442

 

 

Sales and marketing

 

 

64,836

 

 

37,768

 

 

172,675

 

 

113,297

 

 

Total operating expenses

 

 

129,196

 

 

80,256

 

 

341,814

 

 

218,203

 

 

Loss from operations

 

 

(40,925)

 

 

(28,411)

 

 

(110,155)

 

 

(95,321)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

 

6,292

 

 

1,334

 

 

14,882

 

 

2,612

 

 

Interest expense

 

 

(10,704)

 

 

(51)

 

 

(25,817)

 

 

(155)

 

 

Total other income (expense)

 

 

(4,412)

 

 

1,283

 

 

(10,935)

 

 

2,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss before tax

 

 

(45,337)

 

 

(27,128)

 

 

(121,090)

 

 

(92,864)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense)

 

 

(27)

 

 

231

 

 

(85)

 

 

231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(45,364)

 

$

(26,897)

 

$

(121,175)

 

$

(92,633)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share—basic and diluted

 

$

(0.37)

 

$

(0.23)

 

$

(0.99)

 

$

(0.81)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic and diluted

 

 

122,671

 

 

119,215

 

 

121,946

 

 

114,246

 

 

 

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2018

 

2017

    

2018

    

2017

 

Net loss

 

$

(45,364)

 

$

(26,897)

 

$

(121,175)

 

$

(92,633)

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

462

 

 

49

 

 

(668)

 

 

 7

 

Foreign currency translation gain

 

 

10

 

 

16

 

 

12

 

 

97

 

Comprehensive loss

 

$

(44,892)

 

$

(26,832)

 

$

(121,831)

 

$

(92,529)

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2018

    

2017

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(121,175)

 

$

(92,633)

 

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

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

14,349

 

 

10,507

 

Loss on disposal of property and equipment

 

 

853

 

 

301

 

Deferred tax benefit

 

 

 —

 

 

(231)

 

Stock-based compensation

 

 

44,554

 

 

23,002

 

Amortization of debt discount

 

 

18,559

 

 

 —

 

Amortization of debt issuance costs

 

 

1,597

 

 

 —

 

Amortization of other liabilities

 

 

(1,809)

 

 

(1,199)

 

Amortization of deferred financing costs

 

 

86

 

 

40

 

Amortization of premium on short-term investments

 

 

(2,581)

 

 

56

 

Amortization of intangible assets

 

 

1,847

 

 

645

 

Changes in assets and liabilities, net of effects of acquisition:

 

 

 

 

 

 

 

Accrued interest

 

 

1,901

 

 

 —

 

Accounts receivable, net

 

 

(15,497)

 

 

(15,663)

 

Inventory, net

 

 

(12,590)

 

 

(11,231)

 

Prepaid expenses and other current assets

 

 

(13,777)

 

 

(1,391)

 

Accounts payable

 

 

16,603

 

 

8,022

 

Accrued liabilities

 

 

(1,600)

 

 

9,306

 

Other short-term liabilities

 

 

87

 

 

(29)

 

Lease incentive obligation

 

 

504

 

 

(462)

 

Net cash used in operating activities

 

 

(68,089)

 

 

(70,960)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(1,081,662)

 

 

(345,039)

 

Maturities of marketable securities

 

 

407,287

 

 

195,485

 

Purchases of property and equipment

 

 

(97,987)

 

 

(24,442)

 

Business acquisition, net of cash acquired

 

 

 —

 

 

(2,996)

 

Purchases of intangible assets

 

 

 —

 

 

(8,442)

 

Internally developed software

 

 

(135)

 

 

(25)

 

Net cash used in investing activities

 

 

(772,497)

 

 

(185,459)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of convertible notes, net

 

 

896,431

 

 

 —

 

Proceeds from financing obligation

 

 

6,750

 

 

 —

 

Proceeds from exercise of common stock options

 

 

6,376

 

 

3,350

 

Proceeds from sale of common stock, net of issuance costs

 

 

 —

 

 

253,389

 

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

 

 

2,663

 

 

1,629

 

Payments of deferred financing costs

 

 

(25)

 

 

 —

 

Proceeds from construction loan

 

 

17,271

 

 

 —

 

Payments on mortgage payable

 

 

(4,678)

 

 

(130)

 

Net cash provided by financing activities

 

 

924,788

 

 

258,238

 

 

 

 

 

 

 

 

 

Effects of exchange rate changes on cash and cash equivalents

 

 

12

 

 

97

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

84,214

 

 

1,916

 

Cash and cash equivalents, beginning of period

 

 

77,491

 

 

48,921

 

Cash and cash equivalents, end of period

 

$

161,705

 

$

50,837

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Property and equipment acquired but not paid

 

$

25,714

 

$

3,930

 

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

 

$

(668)

 

$

 7

 

Issuance of 86,882 and 158,717 shares of common stock to fund the Company’s 401(k) matching contribution for 2017 and 2016, respectively

 

$

4,303

 

$

3,008

 

Interest paid

 

$

4,638

 

$

151

 

 

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, with the goal of becoming a leader in cancer diagnostics.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements, which include the accounts of Exact Sciences Corporation and those of its wholly owned subsidiaries 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, 2017 included in the Company’s Annual Report on Form 10-K (the “2017 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 2017 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 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 September 30, 2018 and December 31, 2017, 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 nine months ended September 30, 2018 and 2017. Realized gains were $0.2 million and $17,000 for the nine months ended September 30, 2018 and 2017, respectively.

 

The Company periodically reviews its 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, the Company’s intent not to sell the security, and whether it is more likely than not that the Company will have to sell the security before recovery of its cost basis. For the nine months ended September 30, 2018, no investments were identified with other-than-temporary declines in value.

 

Available-for-sale securities at September 30, 2018 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income (Loss)

 

Income (Loss)

 

Value

 

Corporate bonds

 

$

415,828

 

 

104

 

 

(473)

 

$

415,459

 

Asset backed securities

 

 

288,286

 

 

 3

 

 

(547)

 

 

287,742

 

U.S. government agency securities

 

 

265,563

 

 

 —

 

 

(432)

 

 

265,131

 

Commercial paper

 

 

12,081

 

 

 —

 

 

(5)

 

 

12,076

 

Certificates of deposit

 

 

43,111

 

 

15

 

 

(22)

 

 

43,104

 

Total available-for-sale securities

 

$

1,024,869

 

$

122

 

$

(1,479)

 

$

1,023,512

 

 

8


 

Available-for-sale securities at December 31, 2017 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income (Loss)

 

Income (Loss)

 

Value

 

Corporate bonds

 

$

181,639

 

$

10

 

$

(344)

 

$

181,305

 

Asset backed securities

 

 

94,700

 

 

 —

 

 

(185)

 

 

94,515

 

U.S. government agency securities

 

 

54,974

 

 

 —

 

 

(162)

 

 

54,812

 

Commercial paper

 

 

9,953

 

 

 —

 

 

(7)

 

 

9,946

 

Certificates of deposit

 

 

6,647

 

 

 1

 

 

(2)

 

 

6,646

 

Total available-for-sale securities

 

$

347,913

 

$

11

 

$

(700)

 

$

347,224

 

 

Changes in Accumulated Other Comprehensive Income (Loss)

The amounts recognized in accumulated other comprehensive income (loss) (“AOCI”) for the nine months ended September 30, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

(In thousands)

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2017

 

$

(61)

 

$

(689)

 

$

(750)

 

Other comprehensive income (loss) before reclassifications

 

 

12

 

 

(883)

 

 

(871)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

215

 

 

215

 

Net current period change in accumulated other comprehensive loss

 

 

12

 

 

(668)

 

 

(656)

 

Balance at September 30, 2018

 

$

(49)

 

$

(1,357)

 

$

(1,406)

 

 

The amounts recognized in AOCI for the nine months ended September 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

 

 

97

 

 

(3)

 

 

94

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

10

 

 

10

 

Net current period change in accumulated other comprehensive loss

 

 

97

 

 

 7

 

 

104

 

Balance at September 30, 2017

 

$

(107)

 

$

(207)

 

$

(314)

 

 

Amounts reclassified from AOCI for the nine months ended September 30, 2018 and 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Nine Months Ended September 30,

 

Details about AOCI Components (In thousands)

 

Statement of Operations

 

2018

 

2017

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

215

 

$

10

 

Total reclassifications

 

 

 

$

215

 

$

10

 

 

9


 

Property, Plant and Equipment

 

Property, plant 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. Property and equipment consisted of the following as of September 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

September 30,

 

December 31,

 

(In thousands)

 

Useful Life

 

2018

 

2017

    

Property, plant and equipment

 

 

 

 

 

 

 

 

 

 

Land

 

 

(1)

 

$

4,466

 

$

4,466

 

Leasehold and building improvements

 

 

(2)

 

 

35,264

 

 

17,629

 

Land improvements

 

 

15 years

 

 

1,530

 

 

1,419

 

Buildings

 

 

30 - 40 years

 

 

9,886

 

 

7,928

 

Computer equipment and computer software

 

 

3 years

 

 

35,355

 

 

30,148

 

Laboratory equipment

 

 

3 - 5 years

 

 

34,720

 

 

23,296

 

Furniture and fixtures

 

 

3 years

 

 

7,608

 

 

4,531

 

Assets under construction

 

 

(3)

 

 

110,928

 

 

28,655

 

Property, plant and equipment, at cost

 

 

 

 

 

239,757

 

 

118,072

 

Accumulated depreciation

 

 

 

 

 

(51,271)

 

 

(38,086)

 

Property, plant and equipment, net

 

 

 

 

$

188,486

 

$

79,986

 


(1)

Not depreciated.

(2)

Lesser of the remaining lease term, building life, or useful life.

(3)

Not depreciated until placed into service.

 

At September 30, 2018, the Company had $110.9 million of assets under construction which consisted of $28.1 million related to laboratory equipment, $79.9 million related to leasehold and building improvements, and $2.9 million related to computer equipment and computer software projects. Depreciation will begin on these assets once they are placed into service. The Company expects to incur an additional $7.0 million to complete the laboratory equipment, $188.7 million to complete the building projects, and $2.8 million to complete the computer equipment and computer software projects. These projects are expected to be completed throughout 2018, 2019 and 2020. The Company assesses its long-lived assets, consisting primarily of property and equipment, for impairment when material events and changes in circumstances indicate that the carrying value may not be recoverable. There were no impairment losses for the periods ended September 30, 2018 and December 31, 2017.

 

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 method over the estimated useful life of the software.

 

10


 

Intangible Assets

 

Intangible Assets

 

Intangible assets consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

(In thousands)

    

2018

    

2017

 

Finite-lived intangible assets

 

 

 

 

 

 

 

Finite-lived intangible assets

 

$

23,856

 

$

23,731

 

Less: Accumulated amortization

 

 

(3,342)

 

 

(1,505)

 

Finite-lived intangible assets, net

 

 

20,514

 

 

22,226

 

Indefinite-lived intangible assets

 

 

 

 

 

 

 

Goodwill

 

 

1,979

 

 

1,979

 

Net carrying value

 

$

22,493

 

$

24,205

 

 

Finite-Lived Intangible Assets

 

The following table summarizes the net-book-value and estimated remaining life of the Company’s finite-lived intangible assets as of September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Net Balance at

 

Average

 

 

 

September 30,

 

Remaining

 

(In thousands)

    

2018

    

Life (Years)

 

Licensed intellectual property and patents

 

$

19,544

 

 

9.8

 

Developed technology

 

 

970

 

 

6.2

 

Total

 

$

20,514

 

 

 

 

 

The table below represents estimated future amortization expense associated with the Company’s finite-lived intangible assets as of September 30, 2018:

 

 

 

 

 

 

(In thousands)

    

 

    

 

2018

 

$

618

 

2019

 

 

2,472

 

2020

 

 

2,467

 

2021

 

 

2,391

 

2022

 

 

2,370

 

Thereafter

 

 

10,196

 

 

 

$

20,514

 

 

The Company reviews long-lived assets and certain identifiable intangible assets 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 periods ended September 30, 2018 and December 31, 2017.

 

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. Other than the transactions discussed below, the Company determined that all patent costs incurred during the nine months ended September 30, 2018 and 2017

11


 

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 “MDx 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 liability was relieved once the milestone was achieved and payment made. 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. Payment for all remaining milestones under the MDx 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 MDx 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 MDx License Agreement and the elimination of all ongoing royalties and other payments by the Company to MDx under the MDx License Agreement.  Also included in the Royalty Buy-Out Agreement is a mutual release of liabilities, which includes all amounts previously accrued under the MDx 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 MDx 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 useful life of the licensed intellectual property through 2024, 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 MDx License Agreement.

 

As of September 30, 2018, and December 31, 2017, an intangible asset of $8.0 million and $9.0 million, respectively, related to historical milestone payments made under the MDx License Agreement and intangible assets acquired as part of the Royalty Buy-Out Agreement and Patent Purchase Agreement is reported in intangible assets in the Company’s condensed consolidated balance sheets.  Amortization expense was $0.3 million and $0.3 million for the three months ended September 30, 2018 and 2017, respectively. Amortization expense was $1.0 million and $0.6 million for the nine months ended September 30, 2018 and 2017, respectively. 

 

On December 15, 2017, the Company entered into an asset purchase agreement (the “Armune Purchase Agreement”) with Armune BioScience, Inc. (“Armune”), pursuant to which the Company acquired intellectual property and certain other assets underlying Armune’s APIFINY®, APIFINY® PRO and APIFINY® ACTIVE SURVEILLANCE prostate cancer diagnostic tests. The Company has utilized the Armune assets in its research and development program. The total consideration was comprised of an up-front cash payment of $12.0 million and $17.5 million in contingent payment obligations that will become payable upon the Company’s achievement of development and commercial milestones using the acquired intellectual property.  The ability to meet these events is subject to many risks and is therefore uncertain.  The Company will not record the contingent consideration until it is probable that the milestones will be met.  There is no other consideration due to Armune beyond the milestone payments and the Company is not subject to future royalty obligations should a product be developed and commercialized. In connection with the Armune Purchase Agreement, Armune terminated a license agreement pursuant to which it licensed certain patent rights and know-how from the Regents of the University of Michigan (“University of Michigan”), and the Company entered into a license agreement with the University of Michigan with respect to such patent rights and know-how, as well as certain additional intellectual property rights. Pursuant to the Company’s agreement with the University of Michigan, it is required to pay the University of Michigan a low single-digit royalty on its net sales of products using the licensed intellectual property.

 

The Company accounted for the transaction as an asset acquisition under GAAP. The asset is comprised of a portfolio of biomarkers and related technology and know-how, which is a group of complementary assets concentrated in a single identifiable asset.  The transaction costs directly related to the asset acquisition were added to the asset in accordance with GAAP.  As such, the collective asset value from the acquisition resulted in an intangible asset of $12.2 million.  The intellectual property asset, which includes related transaction costs, is being amortized on a straight-line

12


 

basis over the period the Company expects to be benefited, which is in line with the legal life of the patents acquired.  The Company capitalized these costs as there is a reasonable expectation that the assets acquired will be used in an alternative manner in the future, that is not contingent on future development subsequent to acquisition, and the Company anticipates there to be economic benefit from these alternative uses.  For the three and nine months ended September 30, 2018, the Company recorded amortization expense of $0.2 million and $0.7 million, respectively. At September 30, 2018 and December 31, 2017, the net balance of $11.5 million and $12.2 million, respectively, is reported in net intangible assets in the Company’s condensed consolidated balance sheets.

 

During the third quarter of 2017, the Company acquired all of the equity interests of Sampleminded, Inc. (“Sampleminded”).  As a result of the acquisition, the Company recorded an intangible asset of $1.0 million, which was comprised of developed technology acquired of $0.9 million, customer relationships of $0.1 million, and non-compete agreements of $32,000. The intangible assets acquired are being amortized over the remaining useful life, which was determined to be eight years for developed technology acquired, three years for customer relationships, and five years for non-compete agreements. For the three months ended September 30, 2018 and 2017, the Company recorded amortization expense of $36,000 and $20,000, respectively. For the nine months ended September 30, 2018, and 2017 the Company recorded amortization expense of $0.1 million and $20,000, respectively. At September 30, 2018 and December 31, 2017 the net balance of $0.8 million and $0.9 million, respectively, is reported in net intangible assets in the Company’s condensed consolidated balance sheets. 

 

Goodwill

During the third quarter of 2017, the Company recognized goodwill of $2.0 million from the acquisition of Sampleminded. Goodwill is reported in net intangible assets in the Company’s condensed consolidated balance sheets. The Company evaluates goodwill impairment on an annual basis, or more frequently should an event or change in circumstance occur that indicate the carrying amount is in excess of the fair value. There were no impairment losses for the periods ended September 30, 2018 and December 31, 2017.

 

Investment in Privately-Held Company 

On November 30, 2017, the Company made a $3.0 million cash investment (the “2017 Biomatrica Investment”) in Biomatrica, Inc. (“Biomatrica”), then a privately held company specializing in the collection and preservation of biological materials. The Company made the 2017 Biomatrica Investment in connection with entering into an agreement for Biomatrica to supply certain products to the Company. In the 2017 Biomatrica Investment, the Company acquired shares of Biomatrica’s Series E Preferred Stock representing 10 percent, of Biomatrica’s then-outstanding shares of capital stock on an as-converted basis.  

The 2017 Biomatrica Investment  did not constitute a variable interest entity, as the Company did not have control over the supplier’s business.  Additionally, as the ownership percentage was below 20 percent, the equity method was not used to account for the investment. There were no quoted prices or observable pricing inputs available for Biomatrica’s stock. Therefore, the Company has accounted for the 2017 Biomatrica Investment at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment. The carrying value of the 2017 Biomatrica Investment was  $3.0 million as of September 30, 2018, and is reported in other long-term assets in the Company’s condensed consolidated balance sheets. There were no adjustments to the carrying value, upward or downward, during the three and nine months ended September 30, 2018.

On October 2, 2018, the Company completed an acquisition of all of Biomatrica’s outstanding equity interests for an aggregate purchase price of $20.0 million net of cash received,  debt repaid and certain other adjustments. The transaction is subject to a post-closing working capital adjustment, which the Company will fund with cash on hand  (to the extent any additional amounts are payable by the Company) (the “2018 Biomatrica Acquisition”). Contingent consideration for an additional $20.0 million could be earned based upon certain revenue milestones being met.  The purchase price was also reduced by the value attributable to the 2017 Biomatrica Investment discussed above. The purchase price for the 2018 Biomatrica Acquisition will be preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition and is subject to change as the Company completes its analysis of their fair values during the measurement period, not to exceed one year as permitted

13


 

under GAAP. Due to the transaction closing subsequent to September 30, 2018, the Company will complete the preliminary purchase price allocation and include the applicable disclosures in its 2018 Annual Report on Form 10-K.

 

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:

 

 

 

 

 

 

 

 

 

September 30,

 

(In thousands)

    

2018

    

2017

    

Shares issuable upon exercise of stock options

 

2,856

 

4,042

 

Shares issuable upon the release of restricted stock awards

 

6,280

 

6,164

 

Shares issuable upon conversion of convertible notes

 

12,044

 

 —

 

 

 

21,180

 

10,206

 

 

Revenue Recognition

 

The Company’s laboratory service revenues are generated from laboratory services using its Cologuard test, and the service is completed upon delivery of a patient’s test result to the ordering physician.  The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), which it adopted on January 1, 2018, using the modified retrospective method, which it elected to apply to all contracts.  Application of the modified retrospective method did not impact amounts previously reported by the Company, nor did it require a cumulative effect adjustment upon adoption, as the Company’s method of recognizing revenue under ASC 606 was analogous to the method utilized immediately prior to adoption.  Accordingly, there is no need for the Company to disclose the amount by which each financial statement line item was affected as a result of applying the new standard and an explanation of significant changes.

 

The core principle of ASC 606 is that the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.  The Company recognizes revenue in accordance with that core principle, and key aspects considered by the Company include the following:

 

Contracts

 

The Company’s customer is the patient. However, the Company does not enter into a formal reimbursement contract with a patient, as formal reimbursement contracts, including national coverage determination for Cologuard, are established with payers.  Accordingly, the Company establishes a contract with a patient in accordance with other customary business practices.

 

·

Approval of a contract is established via the order submitted by the patient’s physician and the return of a sample by the patient.

·

The Company is obligated to perform its laboratory services upon receipt of a sample from a patient, and the patient and/or applicable payer are obligated to reimburse the Company for services rendered based on the patient’s insurance benefits.

·

Payment terms are a function of a patient’s existing insurance benefits, including the impact of coverage decisions with CMS and applicable reimbursement contracts established between the Company and payers, unless the patient is a self-pay patient, whereby the Company requires payment from the patient prior to the Company shipping a collection kit to the patient.

14


 

·

Once the Company delivers a patient’s test result to the ordering physician the contract with a patient has commercial substance, as the Company is legally able to collect payment and bill an insurer and/or patient, depending on payer contract status or patient insurance benefit status.

·

The Company’s consideration is deemed to be variable, and the Company considers collection of such consideration to be probable to the extent that it is unconstrained.

 

Performance obligations

 

A performance obligation is a promise in a contract to transfer a distinct good or service (or a bundle of goods or services) to the customer.  Our contracts have a single performance obligation, which is satisfied upon rendering of services, which culminates in the delivery of a patient’s Cologuard test result to the ordering physician.  The duration of time between sample receipt and delivery of a valid test result to the ordering physician is typically less than two weeks. Accordingly, the Company elects the practical expedient and therefore, does not disclose the value of unsatisfied performance obligations.

 

Transaction price

 

The transaction price is the amount of consideration that the Company expects to collect in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration expected from a contract with a customer may include fixed amounts, variable amounts, or both.

 

The consideration derived from the Company’s contracts is deemed to be variable, though the variability is not explicitly stated in any contract. Rather, the implied variability is due to several factors, such as the amount of contractual adjustments, any patient co-payments, deductibles or compliance incentives, the existence of secondary payers and claim denials. 

 

The Company estimates the amount of variable consideration using the expected value method, which represents the sum of probability-weighted amounts in a range of possible consideration amounts. When estimating the amount of variable consideration, the Company considers several factors, such as historical collections experience, patient insurance eligibility and payer reimbursement contracts.  

 

The Company limits the amount of variable consideration included in the transaction price to the unconstrained portion of such consideration.  In other words, the Company recognizes revenue up to the amount of variable consideration that is not subject to a significant reversal until additional information is obtained or the uncertainty associated with the additional payments or refunds is subsequently resolved.  Differences between original estimates and subsequent revisions, including final settlements, represent changes in the estimate of variable consideration and are included in the period in which such revisions are made. Revenue recognized from changes in transaction prices was $2.4 million and $14.2 million for the three and nine months ended September 30, 2018.

 

The Company monitors its estimates of transaction price to depict conditions that exist at each reporting date.  If the Company subsequently determines that it will collect more consideration than it originally estimated for a contract with a patient, it will account for the change as an increase in the estimate of the transaction price (i.e., an upward revenue adjustment) in the period identified.  Similarly, if the Company subsequently determines that the amount it expects to collect from a patient is less than it originally estimated, it will generally account for the change as a decrease in the estimate of the transaction price (i.e., a downward revenue adjustment), provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized.  

 

When the Company does not have significant historical experience or that experience has limited predictive value, the constraint over estimates of variable consideration may result in no revenue being recognized upon delivery of a patient’s Cologuard test result to the ordering physician, with recognition, generally occurring at the date of cash receipt. Since the first quarter of 2017, the Company has determined that its historical experience has sufficient predictive value, such that there are no longer any contracts for which no revenue is recognized upon delivery of a Cologuard test result to an ordering physician. Of the revenue recognized in the twelve months ended December 31, 2017, approximately $4.3 million relates to the one-time impact of certain payers meeting the Company’s revenue recognition criteria for accrual-

15


 

basis revenue recognition beginning with the period ended March 31, 2017. Approximately $1.0 million of this one-time impact relates to tests completed in the prior year and for which the Company’s accrual revenue recognition criteria were not met until 2017. 

 

Allocate transaction price

 

The entire transaction price is allocated to the single performance obligation contained in a contract with a patient.

 

Point in time recognition

 

The Company’s single performance obligation is satisfied at a point in time, and that point in time is defined as the date a patient’s successful test result is delivered to the patient’s ordering physician. The Company considers this date to be the time at which the patient obtains control of the promised Cologuard test service. 

 

Disaggregation of Revenue

 

The following tables present our revenues disaggregated by revenue source for the three and nine months ended September 30, 2018 and 2017, respectively:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

(In thousands)

    

2018

    

2017

 

Medicare Parts B & C

 

$

65,870

 

$

47,041

 

Commercial

 

 

48,624

 

 

22,838

 

Other

 

 

3,797

 

 

2,695

 

Total

 

$

118,291

 

$

72,574

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

(In thousands)

    

2018

    

2017