EXACT SCIENCES CORP, 10-Q filed on 8/1/2014
Quarterly Report
Document and Entity Information
3 Months Ended
Jun. 30, 2014
Jul. 30, 2014
Document and Entity Information
 
 
Entity Registrant Name
EXACT SCIENCES CORP 
 
Entity Central Index Key
0001124140 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2014 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
82,934,536 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q2 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Current Assets:
 
 
Cash and cash equivalents
$ 20,708 
$ 12,851 
Marketable securities
214,089 
120,408 
Prepaid expenses and other current assets
3,987 
2,199 
Total current assets
238,784 
135,458 
Property and Equipment, at cost:
 
 
Laboratory equipment
8,127 
5,087 
Assets under construction
6,694 
2,592 
Office and computer equipment
1,260 
1,217 
Leasehold improvements
5,055 
5,043 
Furniture and fixtures
268 
268 
Property and Equipment, gross
21,404 
14,207 
Less-Accumulated depreciation
(4,383)
(3,038)
Property and Equipment, net
17,021 
11,169 
TOTAL ASSETS
255,805 
146,627 
Current Liabilities:
 
 
Accounts payable
357 
761 
Accrued liabilities
8,560 
5,806 
Capital lease obligation, current portion
361 
351 
Lease incentive obligation, current portion
540 
540 
Deferred license fees, current portion
 
294 
Total current liabilities
9,818 
7,752 
Long-term debt
1,000 
1,000 
Long-term accrued interest
95 
84 
Capital lease obligation, less current portion
177 
360 
Lease incentive obligation, less current portion
1,845 
2,115 
Commitments and contingencies
   
   
Stockholders' Equity:
 
 
Preferred stock, $0.01 par value Authorized-5,000,000 shares, Issued and outstanding-no shares at June 30, 2014 and December 31, 2013
   
   
Common stock, $0.01 par value Authorized-100,000,000 shares, Issued and outstanding-71,262,715 and 71,071,838 shares at June 30, 2014 and December 31, 2013
829 
711 
Additional paid-in capital
598,255 
455,239 
Accumulated other comprehensive income
89 
125 
Accumulated deficit
(356,303)
(320,759)
Total stockholders' equity
242,870 
135,316 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 255,805 
$ 146,627 
Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2014
Dec. 31, 2013
Consolidated Balance Sheets
 
 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, Authorized shares
5,000,000 
5,000,000 
Preferred stock, Issued shares
Preferred stock, outstanding shares
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, Authorized shares
100,000,000 
100,000,000 
Common stock, Issued shares
82,920,004 
82,920,004 
Common stock, outstanding shares
71,071,838 
71,071,838 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Revenue:
 
 
 
 
License fees
 
$ 1,036 
$ 294 
$ 2,072 
Operating expenses:
 
 
 
 
Research and development
7,174 
6,457 
14,604 
13,983 
General and administrative
6,230 
3,628 
10,816 
6,276 
Sales and marketing
6,166 
3,302 
10,622 
5,061 
Total operating expenses
19,570 
13,387 
36,042 
25,320 
Loss from operations
(19,570)
(12,351)
(35,748)
(23,248)
Investment income
146 
55 
232 
117 
Interest expense
(13)
(18)
(28)
(37)
Net loss
$ (19,437)
$ (12,314)
$ (35,544)
$ (23,168)
Net loss per share-basic and diluted (in dollars per share)
$ (0.24)
$ (0.19)
$ (0.46)
$ (0.36)
Weighted average common shares outstanding-basic and diluted (in shares)
82,048 
64,699 
76,548 
64,270 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Consolidated Statements of Comprehensive Loss
 
 
 
 
Net loss
$ (19,437)
$ (12,314)
$ (35,544)
$ (23,168)
Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized gain (loss) on available-for-sale investments
(44)
(54)
(36)
(61)
Comprehensive loss
$ (19,481)
$ (12,368)
$ (35,580)
$ (23,229)
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Cash flows from operating activities:
 
 
Net loss
$ (35,544)
$ (23,168)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation of fixed assets
1,344 
646 
Loss on disposal of fixed asset
 
91 
Stock-based compensation
4,478 
3,811 
Amortization of deferred license fees
(294)
(2,072)
Amortization of premium on short-term investments
370 
270 
Changes in assets and liabilities:
 
 
Prepaid expenses and other current assets
(1,788)
(494)
Accounts payable
(404)
(2,568)
Accrued expenses
3,210 
1,254 
Lease incentive obligation
(270)
 
Accrued interest
11 
10 
Net cash used in operating activities
(28,887)
(22,220)
Cash flows from investing activities:
 
 
Purchases of marketable securities
(138,855)
(71,833)
Maturities of marketable securities
44,768 
30,067 
Purchases of property and equipment
(7,196)
(1,726)
Net cash used in investing activities
(101,283)
(43,492)
Cash flows from financing activities:
 
 
Proceeds from sale of common stock, net of issuance costs
137,670 
73,302 
Proceeds from exercise of common stock options
193 
486 
Payments on capital lease obligations
(173)
(164)
Proceeds in connection with the Company's employee stock purchase plan
337 
261 
Net cash provided by financing activities
138,027 
73,885 
Net increase in cash and cash equivalents
7,857 
8,173 
Cash and cash equivalents, beginning of period
12,851 
13,345 
Cash and cash equivalents, end of period
20,708 
21,518 
Supplemental disclosure of non-cash investing and financing activities:
 
 
Unrealized loss on available-for-sale investments
36 
61 
Issuance of 32,266 and 30,534 shares of common stock to fund the Company's 401(k) matching contribution for 2013 and 2012, respectively
$ 456 
$ 354 
Consolidated Statements of Cash Flows (Parenthetical)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Consolidated Statements of Cash Flows
 
 
Issuance of shares of common stock to fund the Company's 401(k) matching contribution
32,266 
30,524 
ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND BASIS OF PRESENTATION

(1) ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

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

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements which include the accounts of Exact Sciences Corporation and those of its wholly-owned subsidiary, Exact Sciences Laboratories, LLC, 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, 2013 included in the Company’s Annual Report on Form 10-K (the “2013 Form 10-K”). These condensed financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the results of operations have been included. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. The statements should be read in conjunction with the audited financial statements and related notes included in the 2013 Form 10-K.  Management has evaluated subsequent events for disclosure or recognition in the accompanying financial statements up to the filing of this report.

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company’s wholly-owned subsidiary, Exact Sciences Laboratories, LLC. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers cash on hand, demand deposits in bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. The Company had no restricted cash at June 30, 2014 and December 31, 2013.

 

Marketable Securities

 

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

 

At June 30, 2014 and December 31, 2013, 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. Realized gains were $7.6 thousand and $2.8 thousand, net of insignificant realized losses, for the six months ended June 30, 2014 and 2013, respectively. Unrealized gains or losses on investments are recorded in other comprehensive loss.

 

Available-for-sale securities at June 30, 2014 consisted of the following:

 

 

 

June 30, 2014

 

(In thousands)

 

Amortized
Cost

 

Gains in
Accumulated
Other
Comprehensive
Income

 

Losses in
Accumulated
Other
Comprehensive
Income

 

Estimated
Fair Value

 

U.S. government agency securities

 

$

48,550 

 

$

27 

 

$

 

$

48,577 

 

Corporate bonds

 

118,696 

 

41 

 

 

118,737 

 

Certificates of deposit

 

3,550 

 

 

 

3,551 

 

Asset backed securities

 

43,204 

 

20 

 

 

43,224 

 

Total available-for-sale securities

 

$

214,000 

 

$

89 

 

$

 

$

214,089 

 

 

Available-for-sale securities at December 31, 2013 consisted of the following:

 

 

 

December 31, 2013

 

(In thousands)

 

Amortized
Cost

 

Gains in
Accumulated
Other
Comprehensive
Income

 

Losses in
Accumulated
Other
Comprehensive
Income

 

Estimated
Fair Value

 

Corporate bonds

 

$

54,487 

 

$

67 

 

$

 

$

54,554 

 

U.S. government agency securities

 

34,291 

 

47 

 

 

34,338 

 

Certificates of deposit

 

6,558 

 

 

 

6,561 

 

Commercial paper

 

1,499 

 

 

 

1,499 

 

Asset backed securities

 

23,448 

 

 

 

 

23,456 

 

Total available-for-sale securities

 

$

120,283 

 

$

125 

 

$

 

$

120,408 

 

 

Changes in Accumulated Other Comprehensive Income

 

The amounts recognized in accumulated other comprehensive income (AOCI) were as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Beginning balance

 

$

133

 

$

71

 

$

125

 

$

78

 

Other comprehensive loss before reclassifications

 

(39

)

(52

)

(24

)

(48

)

Amounts reclassified from accumulated other comprehensive income

 

(5

)

(2

)

(12

)

(13

)

Net current period change in accumulated other comprehensive income

 

(44

)

(54

)

(36

)

(61

)

Ending balance

 

$

89

 

$

17

 

$

89

 

$

17

 

 

Amounts reclassified from accumulated other comprehensive income were as follows (in thousands):

 

 

 

Affected Line Item in the

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Details about AOCI Components

 

Statement of Operations

 

2014

 

2013

 

2014

 

2013

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

(5

)

$

(2

)

$

(12

)

$

(13

)

Total reclassifications

 

 

 

$

(5

)

$

(2

)

$

(12

)

$

(13

)

 

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

 

Office and computer equipment

 

3 years

 

Leasehold improvements

 

Lesser of the remaining lease term or useful life

 

Furniture and fixtures

 

3 years

 

 

At June 30, 2014, the Company had $6.7 million of assets under construction which consisted of $4.4 million of capitalized costs related to software projects and $2.3 million of costs related to equipment projects. Depreciation will begin on these assets once they are placed into service. We expect that it will cost $1.0 million to complete the equipment projects and $2.2 million to complete the software projects, and these projects are expected to be completed in 2014.

 

Software Capitalization Policy

 

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

 

Net Loss Per Share

 

Basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period.  Basic and diluted net loss per share are the same because all outstanding common stock equivalents have been excluded, as they are anti-dilutive due to the Company’s losses.

 

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

 

 

 

June 30,

 

(In thousands)

 

2014

 

2013

 

Shares issuable upon exercise of stock options

 

6,221 

 

6,249 

 

Shares issuable upon exercise of outstanding warrants (1)

 

75 

 

155 

 

Shares issuable upon the release of restricted stock awards

 

1,546 

 

875 

 

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

 

24 

 

49 

 

 

 

7,866 

 

7,328 

 

 

 

(1)At June 30, 2014, represents warrants to purchase 75,000 shares of common stock issued under a consulting agreement.  At June 30, 2013, represents warrants to purchase 80,000 shares of common stock issued under a license agreement and warrants to purchase 75,000 shares of common stock issued under a consulting agreement.

 

Revenue Recognition

 

License fees.  License fees for the licensing of product rights are recorded as deferred revenue upon receipt of cash and recognized as revenue on a straight-line basis over the license period. As more fully described in the 2013 Form 10-K, in connection with the Company’s January 2009 strategic transaction with Genzyme Corporation, Genzyme agreed to pay the Company a total of $18.5 million, of which $16.65 million was paid on January 27, 2009 and $1.85 million was subject to a holdback by Genzyme to satisfy certain potential indemnification obligations in exchange for the assignment and licensing of certain intellectual property to Genzyme. The Company’s on-going performance obligations to Genzyme under the Collaboration, License and Purchase Agreement (the “CLP Agreement”), as described below, including its obligation to deliver through licenses certain intellectual property improvements to Genzyme, if improvements are made during the initial five-year collaboration period, were deemed to be undelivered elements of the CLP Agreement on the date of closing. Accordingly, the Company deferred the initial $16.65 million in cash received at closing and amortized that up-front payment on a straight-line basis into revenue over the initial five-year collaboration period which ended in January 2014. The Company received the first holdback amount of $1.0 million, which included accrued interest due, from Genzyme during the first quarter of 2010. The Company received the second holdback amount of $0.9 million, which included accrued interest due, from Genzyme during the third quarter of 2010.  The amounts were deferred at the time of receipt and were amortized on a straight-line basis into revenue over the then remaining term of the collaboration period.

 

In addition, Genzyme purchased 3,000,000 shares of common stock on January 27, 2009 for $2.00 per share, representing a premium of $0.51 per share above the closing price of the Company’s common stock on that date of $1.49 per share. The aggregate premium paid by Genzyme over the closing price of the Company’s common stock on the date of the transaction of $1.53 million is deemed to be a part of the total consideration for the CLP Agreement. Accordingly, the Company deferred the aggregate $1.53 million premium and amortized that amount on a straight-line basis into revenue over the initial five-year collaboration period which ended in January 2014.

 

The Company did not recognize revenue in connection with the amortization of the up-front payments from Genzyme during the three months ended June 30, 2014. The Company recognized approximately $1.0 million in license fee revenue in connection with the amortization of the up-front payments from Genzyme during the three months ended June 30, 2013. The Company recognized approximately $0.3 million and $2.1 million in license fee revenue in connection with the amortization of up-front payments from Genzyme during each of the six months ended June 30, 2014 and June 30, 2013, respectively.

 

Reclassifications

 

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

 

 

MAYO LICENSE AGREEMENT
MAYO LICENSE AGREEMENT

(3) MAYO LICENSE AGREEMENT

 

Overview

 

On June 11, 2009, the Company entered into a license agreement (the “License Agreement”) with MAYO Foundation for Medical Education and Research (“MAYO”). Under the License Agreement, MAYO granted the Company an exclusive, worldwide license within the field (the “Field”) of stool or blood based cancer diagnostics and screening (excluding a specified proteomic target) with regard to certain MAYO patents, and a non-exclusive worldwide license within the Field with regard to certain MAYO know-how. The licensed patents cover advances in sample processing, analytical testing and data analysis associated with non-invasive, stool-based DNA screening for colorectal cancer. Under the License Agreement, the Company assumes the obligation and expense of prosecuting and maintaining the licensed patents and is obligated to make commercially reasonable efforts to bring products covered by the license to market. Pursuant to the License Agreement, the Company granted MAYO two common stock purchase warrants with an exercise price of $1.90 per share covering 1,000,000 and 250,000 shares of common stock, respectively. The Company is also required to make payments to MAYO for up-front fees, fees once certain milestones are reached by the Company, and other payments as outlined in the License Agreement. In addition to the license to intellectual property owned by MAYO, the Company receives product development and research and development efforts from MAYO personnel. The Company is also obligated to make royalty payments to MAYO on potential future net sales of any products developed from the licensed technology. The Company sought rights to the MAYO intellectual property for the specific purpose of developing a non-invasive, stool-based DNA screening test for colorectal cancer. At the time the license agreement was executed, the sole focus of the Company was the development of such a test. Accordingly, the Company recognized the initial payments and expenses related to the warrants at the time of the transaction and the amounts were expensed to research and development as there were no anticipated alternative future uses associated with the intellectual property.

 

Warrants

 

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

 

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

 

In January of 2013, MAYO partially exercised its warrant covering 250,000 shares by utilizing the cashless exercise provision contained in the warrant. As a result of this exercise for a gross amount of 85,000 shares, in lieu of paying a cash exercise price, MAYO forfeited its right with respect to 14,008 shares leaving it with a net amount of 70,992 shares.

 

In June of 2013, MAYO partially exercised this warrant by utilizing the cashless exercise provision contained in the warrant. As a result of this exercise for a gross amount of 85,000 shares, in lieu of paying a cash exercise price, MAYO forfeited its right with respect to 12,765 shares leaving it with a net amount of 72,235 shares.

 

In June of 2014, MAYO exercised the remaining shares of this warrant by utilizing the cashless exercise provision contained in the warrant. As a result of this exercise for a gross amount of 80,000 shares, in lieu of paying a cash exercise price, MAYO forfeited its right with respect to 10,587 shares leaving it with a net amount of 69,413 shares. Following this exercise, all of MAYO’s warrants to purchase the Company’s common stock were fully exercised.

 

Royalty Payments

 

The Company will make royalty payments to MAYO based on a percentage of net sales of products developed from the licensed technology starting in the third year of the agreement. In 2012, minimum royalty payments were $10,000. For each year from 2013 through 2029 (the year the last patent expires), the minimum royalty payments are $25,000 per year.

 

Other Payments

 

Other payments under the License Agreement include an upfront payment of $80,000, a milestone payment of $250,000 on the commencement of patient enrollment in a human cancer screening clinical trial, and a $500,000 payment upon FDA approval of the Company’s Cologuard test.  The upfront payment of $80,000 was made in the third quarter of 2009 and expensed to research and development in the second quarter of 2009. The Company began enrollment in a human cancer screening clinical trial in June 2011 and the milestone payment of $250,000 was made and expensed to research and development in June 2011.  It is uncertain as to when or if the FDA will approve the Company’s Cologuard test; therefore the $500,000 milestone payment has not been recorded as a liability. The Company evaluates the status of the FDA trial at each reporting date to determine if a liability should be recorded for the milestone payment.

 

In addition, the Company is paying MAYO for research and development efforts. During the three and six months ended June 30, 2014, the Company made payments of $0.2 million and $0.7 million, respectively. At June 30, 2014 the Company recorded an estimated liability in the amount of $1.0 million for research and development efforts. During the three and six months ended June 30, 2013, the Company made payments of $0.3 million and $0.5 million, respectively. At June 30, 2013 the Company recorded an estimated liability in the amount of $0.5 million for research and development efforts.

 

May 2012 Amendment

 

In May 2012 the Company expanded the relationship with MAYO through an amendment to the License Agreement. As part of the amendment, MAYO expanded the Company’s license to include all gastrointestinal cancers and diseases, and new cancer screening applications of stool- and blood-based testing. As consideration for the expanded license, the Company granted MAYO 97,466 shares of restricted stock, one quarter of which vested immediately, with the remainder to vest in three equal annual installments. The Company recognized $1.0 million in research and development licensing expense during the twelve months ended December 31, 2012 in connection with the restricted stock grant. The Company sought rights to the MAYO intellectual property for the specific purpose of developing future non-invasive, stool-based DNA screening tests for gastrointestinal diseases other than colorectal cancer. The Company does not believe there are alternative future uses for the intellectual property. In addition, at the time the restricted stock grant expense was recorded for the intellectual property license, the Company believed it was unlikely that the Company would proceed with the tests for other gastrointestinal diseases until following receipt of FDA approval for the Company’s Cologuard test. Because of the significant uncertainty of receiving this FDA approval, coupled with the uncertainty associated with funding future development of tests for other gastrointestinal diseases, the Company could not conclude that commencement of any future projects related to the acquired intellectual property was reasonably expected at the time of this license agreement amendment.

 

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

STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION

 

(4) STOCK-BASED COMPENSATION

 

Stock-Based Compensation Plans

 

The Company maintains the 2010 Omnibus Long-Term Incentive Plan, the 2010 Employee Stock Purchase Plan and the 2000 Stock Option and Incentive Plan(collectively, as each has been amended, the “Stock Plans”).

 

Stock-Based Compensation Expense

 

The Company recorded $2.5 million and $4.5 million in stock-based compensation expense during the three and six months ended June 30, 2014 in connection with the amortization of restricted stock and restricted stock unit awards, stock purchase rights granted under the Company’s employee stock purchase plan and stock options granted to employees, non-employee consultants and non-employee directors.  The Company recorded $2.8 million and $3.8 million in stock-based compensation expense during the three and six months ended June 30, 2013 in connection with the amortization of restricted stock and restricted stock unit awards, stock purchase rights granted under the Company’s employee stock purchase plan and stock options granted to employees, non-employee consultants and non-employee directors.

 

Determining Fair Value

 

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

 

Expected Term — The Company uses the simplified calculation of expected life, described in the SEC’s Staff Accounting Bulletins 107 and 110, as the Company does not currently have sufficient historical exercise data on which to base an estimate of expected life.  Using this method, the expected term is determined using the average of the vesting period and the contractual life of the stock options granted.

 

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

 

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

 

Forfeitures — The Company records stock-based compensation expense only for those awards that are expected to vest.  A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.  The Company’s forfeiture rate used in the six months ended June 30, 2014 was 4.99%. The Company’s forfeiture rate used in the six months ended June 30, 2013 was 2.76%.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Option Plan Shares

 

 

 

 

 

 

 

 

 

Risk-free interest rates

 

(1)

 

0.94% 

 

1.96% 

 

0.94% - 1.15%

 

Expected term (in years)

 

(1)

 

 

 

 

Expected volatility

 

(1)

 

82.9% 

 

80.8% 

 

82.9% - 84.0%

 

Dividend yield

 

(1)

 

0% 

 

0% 

 

0% 

 

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

 

(1)

 

$

6.55 

 

$

9.86 

 

$

7.66 

 

 

 

 

 

 

 

 

 

 

 

ESPP Shares

 

 

 

 

 

 

 

 

 

Risk-free interest rates

 

0.10% - 0.41%

 

0.11% - 0.20%

 

0.10% - 0.41%

 

0.11% - 0.20%

 

Expected term (in years)

 

0.5 - 2

 

0.5 - 2

 

0.5 - 2

 

0.5 - 2

 

Expected volatility

 

42.5% - 49.5%

 

39.1% - 45.6%

 

42.5% - 49.5%

 

39.1% - 45.6%

 

Dividend yield

 

0% 

 

0% 

 

0% 

 

0% 

 

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

 

$

3.76 

 

$

2.80 

 

$

3.76 

 

$

2.80 

 

 

 

(1) The Company did not grant options under its 2010 Option Plan during the period indicated.

 

Stock Option and Restricted Stock Activity

 

A summary of stock option activity under the Stock Plans during the six months ended June 30, 2014 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, 2014

 

6,062,587

 

$

2.78

 

6.6

 

 

 

Granted

 

233,000

 

$

13.96

 

 

 

 

 

Exercised

 

(69,064

)

$

2.79

 

 

 

 

 

Forfeited

 

(5,125

)

$

7.80

 

 

 

 

 

Outstanding, June 30, 2014

 

6,221,398

 

$

3.19

 

5.5

 

$

86,097

 

 

 

 

 

 

 

 

 

 

 

Exercisable, June 30, 2014

 

5,374,375

 

$

2.06

 

5.1

 

$

80,441

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest, June 30, 2014

 

6,179,132

 

$

3.14

 

5.5

 

$

85,815

 

 

 

(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 $17.03 market price of the Company’s common stock at June 30, 2014.  The total intrinsic value of options exercised during the six months ended June 30, 2014 and 2013 was $0.7 million and $0.5 million, respectively.

 

As of June 30, 2014, there was $18.9 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all Stock Plans.  Total unrecognized compensation cost will be adjusted for future changes in forfeitures.  The Company expects to recognize that cost over a weighted average period of 2.92 years.

 

A summary of restricted stock activity under the Stock Plans during the six months ended June 30, 2014 is as follows:

 

 

 

 

 

Weighted

 

 

 

Restricted

 

Average Grant

 

 

 

Shares

 

Date Fair Value

 

Outstanding, January 1, 2014

 

1,150,694

 

$

11.24

 

Granted

 

576,794

 

$

13.81

 

Released

 

(166,756

)

$

8.99

 

Forfeited

 

(14,599

)

$

12.05

 

Outstanding, June 30, 2014

 

1,546,133

 

$

12.43

 

 

FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS

(5) FAIR VALUE MEASUREMENTS

 

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

 

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

 

Level 1

 

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

 

 

 

Level 2

 

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

 

 

 

Level 3

 

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

 

Fixed-income securities and mutual funds are valued using a third party pricing agency. The valuation is based on observable inputs including pricing for similar assets and other observable market factors. There has been no material change from period to period.  The estimated fair value of the Company’s long-term debt based on a market approach was approximately $1.0 million as of June 30, 2014 and December 31, 2013 and represent Level 2 measurements.  When determining the estimated fair value of the Company’s long-term debt, the Company used market-based risk measurements, such as credit risk.

 

The following table presents the Company’s fair value measurements as of June 30, 2014 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.  Amounts in the table are in thousands.

 

 

 

 

 

Fair Value Measurement at June 30, 2014 Using:

 

 

 

 

 

Quoted Prices in Active

 

Significant Other

 

Significant Unobservable

 

 

 

Fair Value at

 

Markets for Identical Assets

 

Observable Inputs

 

Inputs

 

Description

 

June 30, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

20,708 

 

$

20,708 

 

$

 

$

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

48,577 

 

 

48,577 

 

 

Corporate bonds

 

118,737 

 

 

118,737 

 

 

Certificates of deposit

 

3,551 

 

 

3,551 

 

 

Asset backed securities

 

43,224 

 

 

43,224 

 

 

Total

 

$

234,797 

 

$

20,708 

 

$

214,089 

 

$

 

 

The following table presents the Company’s fair value measurements as of December 31, 2013 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.  Amounts in the table are in thousands.

 

 

 

 

 

Fair Value Measurement at December 31, 2013 Using:

 

 

 

 

 

Quoted Prices in Active

 

Significant Other

 

Significant Unobservable

 

 

 

Fair Value at

 

Markets for Identical Assets

 

Observable Inputs

 

Inputs

 

Description

 

December 31, 2013

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

12,851 

 

$

12,851 

 

$

 

$

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

Corporate bonds

 

54,554 

 

 

54,554 

 

 

U.S. government agency securities

 

34,338 

 

 

34,338 

 

 

Certificates of deposit

 

6,561 

 

 

6,561 

 

 

Commercial paper

 

1,499 

 

 

1,499 

 

 

Asset backed securities

 

23,456 

 

 

 

23,456 

 

 

 

Total

 

$

133,259 

 

$

12,851 

 

$

120,408 

 

$

 

 

As of June 30, 2014 and December 31, 2013 the Company held available-for-sale securities which had been in a continuous unrealized loss position for less than twelve months, the total unrealized losses of which were $51.4 thousand, as of June 30, 2014, and $7.2 thousand, as of December 31, 2013. The total fair value of the securities in a continuous unrealized loss position were $83.5 million, as of June 30, 2014 and $13.9 million as of December 31, 2013. At June 30, 2014 and December 31, 2013 there were no available-for-sale securities in a continuous loss position for greater than twelve months.

 

The following summarizes contractual underlying maturities of the Company’s available-for-sale investments in debt securities at June 30, 2014 (in thousands):

 

 

 

Due in one year or less

 

Due after one year through two years

 

Description

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

Marketable Securities

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

$

32,906 

 

$

32,932 

 

$

15,644 

 

$

15,645 

 

Corporate bonds

 

29,096 

 

29,134 

 

89,600 

 

89,603 

 

Certificates of deposit

 

3,550 

 

3,551 

 

 

 

Asset backed securities

 

33,932 

 

33,947 

 

9,272 

 

9,277 

 

Total

 

$

99,484 

 

$

99,564 

 

$

114,516 

 

$

114,525 

 

 

EQUITY
ISSUANCES OF EQUITY

 

(6) EQUITY

 

On April 2, 2014, the Company completed an underwritten public offering of 11,500,000 shares of common stock at a price of $12.75 per share to the public. The Company received approximately $137.7 million of net proceeds from the offering, after deducting the $8.9 million for the underwriting discount and other stock issuance costs paid by the Company.

 

In February 2011, we adopted a rights agreement and subsequently distributed to our stockholders preferred stock purchase rights.  Under certain circumstances, each right can be exercised for one one-thousandth of a share of Series A Junior Participating Preferred Stock.  In general, the rights will become exercisable in the event of an announcement of an acquisition of 15% or more of our outstanding common stock or the commencement or announcement of an intention to make a tender offer or exchange offer for 15% or more of our outstanding common stock.  If any person or group acquires 15% or more of our common stock, our stockholders, other than the acquiror, will have the right to purchase additional shares of our common stock (in lieu of the Series A Junior Participating Preferred Stock) at a substantial discount to the then prevailing market price. The rights agreement could significantly dilute such acquiror’s ownership position in our shares, thereby making a takeover prohibitively expensive and encouraging such acquiror to negotiate with our board of directors. The ability to exercise these rights is contingent on events that the Company has determined to be unlikely at this time, and therefore this provision has not been considered in the computation of equity or earnings per share.

RECENT ACCOUNTING PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS

 

(7) RECENT ACCOUNTING PRONOUNCEMENTS

 

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company’s wholly-owned subsidiary, Exact Sciences Laboratories, LLC. All significant intercompany transactions and balances have been eliminated in consolidation.

 

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and Cash Equivalents

 

The Company considers cash on hand, demand deposits in bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. The Company had no restricted cash at June 30, 2014 and December 31, 2013.

Marketable Securities

 

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

 

At June 30, 2014 and December 31, 2013, 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. Realized gains were $7.6 thousand and $2.8 thousand, net of insignificant realized losses, for the six months ended June 30, 2014 and 2013, respectively. Unrealized gains or losses on investments are recorded in other comprehensive loss.

 

Available-for-sale securities at June 30, 2014 consisted of the following:

 

 

 

June 30, 2014

 

(In thousands)

 

Amortized
Cost

 

Gains in
Accumulated
Other
Comprehensive
Income

 

Losses in
Accumulated
Other
Comprehensive
Income

 

Estimated
Fair Value

 

U.S. government agency securities

 

$

48,550 

 

$

27 

 

$

 

$

48,577 

 

Corporate bonds

 

118,696 

 

41 

 

 

118,737 

 

Certificates of deposit

 

3,550 

 

 

 

3,551 

 

Asset backed securities

 

43,204 

 

20 

 

 

43,224 

 

Total available-for-sale securities

 

$

214,000 

 

$

89 

 

$

 

$

214,089 

 

 

Available-for-sale securities at December 31, 2013 consisted of the following:

 

 

 

December 31, 2013

 

(In thousands)

 

Amortized
Cost

 

Gains in
Accumulated
Other
Comprehensive
Income

 

Losses in
Accumulated
Other
Comprehensive
Income

 

Estimated
Fair Value

 

Corporate bonds

 

$

54,487 

 

$

67 

 

$

 

$

54,554 

 

U.S. government agency securities

 

34,291 

 

47 

 

 

34,338 

 

Certificates of deposit

 

6,558 

 

 

 

6,561 

 

Commercial paper

 

1,499 

 

 

 

1,499 

 

Asset backed securities

 

23,448 

 

 

 

 

23,456 

 

Total available-for-sale securities

 

$

120,283 

 

$

125 

 

$

 

$

120,408 

 

 

Changes in Accumulated Other Comprehensive Income

 

The amounts recognized in accumulated other comprehensive income (AOCI) were as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Beginning balance

 

$

133

 

$

71

 

$

125

 

$

78

 

Other comprehensive loss before reclassifications

 

(39

)

(52

)

(24

)

(48

)

Amounts reclassified from accumulated other comprehensive income

 

(5

)

(2

)

(12

)

(13

)

Net current period change in accumulated other comprehensive income

 

(44

)

(54

)

(36

)

(61

)

Ending balance

 

$

89

 

$

17

 

$

89

 

$

17

 

 

Amounts reclassified from accumulated other comprehensive income were as follows (in thousands):

 

 

 

Affected Line Item in the

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Details about AOCI Components

 

Statement of Operations

 

2014

 

2013

 

2014

 

2013

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

(5

)

$

(2

)

$

(12

)

$

(13

)

Total reclassifications

 

 

 

$

(5

)

$

(2

)

$

(12

)

$

(13

)

 

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

 

Office and computer equipment

 

3 years

 

Leasehold improvements

 

Lesser of the remaining lease term or useful life

 

Furniture and fixtures

 

3 years

 

 

At June 30, 2014, the Company had $6.7 million of assets under construction which consisted of $4.4 million of capitalized costs related to software projects and $2.3 million of costs related to equipment projects. Depreciation will begin on these assets once they are placed into service. We expect that it will cost $1.0 million to complete the equipment projects and $2.2 million to complete the software projects, and these projects are expected to be completed in 2014.

Software Capitalization Policy

 

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

Net Loss Per Share

 

Basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period.  Basic and diluted net loss per share are the same because all outstanding common stock equivalents have been excluded, as they are anti-dilutive due to the Company’s losses.

 

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

 

 

 

June 30,

 

(In thousands)

 

2014

 

2013

 

Shares issuable upon exercise of stock options

 

6,221 

 

6,249 

 

Shares issuable upon exercise of outstanding warrants (1)

 

75 

 

155 

 

Shares issuable upon the release of restricted stock awards

 

1,546 

 

875 

 

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

 

24 

 

49 

 

 

 

7,866 

 

7,328 

 

 

(1)At June 30, 2014, represents warrants to purchase 75,000 shares of common stock issued under a consulting agreement.  At June 30, 2013, represents warrants to purchase 80,000 shares of common stock issued under a license agreement and warrants to purchase 75,000 shares of common stock issued under a consulting agreement.

Revenue Recognition

 

License fees.  License fees for the licensing of product rights are recorded as deferred revenue upon receipt of cash and recognized as revenue on a straight-line basis over the license period. As more fully described in the 2013 Form 10-K, in connection with the Company’s January 2009 strategic transaction with Genzyme Corporation, Genzyme agreed to pay the Company a total of $18.5 million, of which $16.65 million was paid on January 27, 2009 and $1.85 million was subject to a holdback by Genzyme to satisfy certain potential indemnification obligations in exchange for the assignment and licensing of certain intellectual property to Genzyme. The Company’s on-going performance obligations to Genzyme under the Collaboration, License and Purchase Agreement (the “CLP Agreement”), as described below, including its obligation to deliver through licenses certain intellectual property improvements to Genzyme, if improvements are made during the initial five-year collaboration period, were deemed to be undelivered elements of the CLP Agreement on the date of closing. Accordingly, the Company deferred the initial $16.65 million in cash received at closing and amortized that up-front payment on a straight-line basis into revenue over the initial five-year collaboration period which ended in January 2014. The Company received the first holdback amount of $1.0 million, which included accrued interest due, from Genzyme during the first quarter of 2010. The Company received the second holdback amount of $0.9 million, which included accrued interest due, from Genzyme during the third quarter of 2010.  The amounts were deferred at the time of receipt and were amortized on a straight-line basis into revenue over the then remaining term of the collaboration period.

 

In addition, Genzyme purchased 3,000,000 shares of common stock on January 27, 2009 for $2.00 per share, representing a premium of $0.51 per share above the closing price of the Company’s common stock on that date of $1.49 per share. The aggregate premium paid by Genzyme over the closing price of the Company’s common stock on the date of the transaction of $1.53 million is deemed to be a part of the total consideration for the CLP Agreement. Accordingly, the Company deferred the aggregate $1.53 million premium and amortized that amount on a straight-line basis into revenue over the initial five-year collaboration period which ended in January 2014.

 

The Company did not recognize revenue in connection with the amortization of the up-front payments from Genzyme during the three months ended June 30, 2014. The Company recognized approximately $1.0 million in license fee revenue in connection with the amortization of the up-front payments from Genzyme during the three months ended June 30, 2013. The Company recognized approximately $0.3 million and $2.1 million in license fee revenue in connection with the amortization of up-front payments from Genzyme during each of the six months ended June 30, 2014 and June 30, 2013, respectively.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

 

 

 

June 30, 2014

 

(In thousands)

 

Amortized
Cost

 

Gains in
Accumulated
Other
Comprehensive
Income

 

Losses in
Accumulated
Other
Comprehensive
Income

 

Estimated
Fair Value

 

U.S. government agency securities

 

$

48,550 

 

$

27 

 

$

 

$

48,577 

 

Corporate bonds

 

118,696 

 

41 

 

 

118,737 

 

Certificates of deposit

 

3,550 

 

 

 

3,551 

 

Asset backed securities

 

43,204 

 

20 

 

 

43,224 

 

Total available-for-sale securities

 

$

214,000 

 

$

89 

 

$

 

$

214,089 

 

 

 

 

 

 

December 31, 2013

 

(In thousands)

 

Amortized
Cost

 

Gains in
Accumulated
Other
Comprehensive
Income

 

Losses in
Accumulated
Other
Comprehensive
Income

 

Estimated
Fair Value

 

Corporate bonds

 

$

54,487 

 

$

67 

 

$

 

$

54,554 

 

U.S. government agency securities

 

34,291 

 

47 

 

 

34,338 

 

Certificates of deposit

 

6,558 

 

 

 

6,561 

 

Commercial paper

 

1,499 

 

 

 

1,499 

 

Asset backed securities

 

23,448 

 

 

 

 

23,456 

 

Total available-for-sale securities

 

$

120,283 

 

$

125 

 

$

 

$

120,408 

 

 

The amounts recognized in accumulated other comprehensive income (AOCI) were as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Beginning balance

 

$

133

 

$

71

 

$

125

 

$

78

 

Other comprehensive loss before reclassifications

 

(39

)

(52

)

(24

)

(48

)

Amounts reclassified from accumulated other comprehensive income

 

(5

)

(2

)

(12

)

(13

)

Net current period change in accumulated other comprehensive income

 

(44

)

(54

)

(36

)

(61

)

Ending balance

 

$

89

 

$

17

 

$

89

 

$

17

 

 

Amounts reclassified from accumulated other comprehensive income were as follows (in thousands):

 

 

 

Affected Line Item in the

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Details about AOCI Components

 

Statement of Operations

 

2014

 

2013

 

2014

 

2013

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

(5

)

$

(2

)

$

(12

)

$

(13

)

Total reclassifications

 

 

 

$

(5

)

$

(2

)

$

(12

)

$

(13

)

 

 

 

 

 

 

 

Estimated

 

Asset Classification

 

Useful Life

 

Laboratory equipment

 

3 - 5 years

 

Office and computer equipment

 

3 years

 

Leasehold improvements

 

Lesser of the remaining lease term or useful life

 

Furniture and fixtures

 

3 years

 

 

 

 

 

June 30,

 

(In thousands)

 

2014

 

2013

 

Shares issuable upon exercise of stock options

 

6,221 

 

6,249 

 

Shares issuable upon exercise of outstanding warrants (1)

 

75 

 

155 

 

Shares issuable upon the release of restricted stock awards

 

1,546 

 

875 

 

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

 

24 

 

49 

 

 

 

7,866 

 

7,328 

 

 

 

(1)At June 30, 2014, represents warrants to purchase 75,000 shares of common stock issued under a consulting agreement.  At June 30, 2013, represents warrants to purchase 80,000 shares of common stock issued under a license agreement and warrants to purchase 75,000 shares of common stock issued under a consulting agreement.

STOCK-BASED COMPENSATION (Tables)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Option Plan Shares

 

 

 

 

 

 

 

 

 

Risk-free interest rates

 

(1)

 

0.94% 

 

1.96% 

 

0.94% - 1.15%

 

Expected term (in years)

 

(1)

 

 

 

 

Expected volatility

 

(1)

 

82.9% 

 

80.8% 

 

82.9% - 84.0%

 

Dividend yield

 

(1)

 

0% 

 

0% 

 

0% 

 

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

 

(1)

 

$

6.55 

 

$

9.86 

 

$

7.66 

 

 

 

 

 

 

 

 

 

 

 

ESPP Shares

 

 

 

 

 

 

 

 

 

Risk-free interest rates

 

0.10% - 0.41%

 

0.11% - 0.20%

 

0.10% - 0.41%

 

0.11% - 0.20%

 

Expected term (in years)

 

0.5 - 2

 

0.5 - 2

 

0.5 - 2

 

0.5 - 2

 

Expected volatility

 

42.5% - 49.5%

 

39.1% - 45.6%

 

42.5% - 49.5%

 

39.1% - 45.6%

 

Dividend yield

 

0% 

 

0% 

 

0% 

 

0% 

 

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

 

$

3.76 

 

$

2.80 

 

$

3.76 

 

$

2.80 

 

 

 

(1) The Company did not grant options under its 2010 Option Plan during the period indicated.

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

Options

 

Shares

 

Price

 

Term (Years)

 

Value (1)

 

(Aggregate intrinsic value in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, January 1, 2014

 

6,062,587

 

$

2.78

 

6.6

 

 

 

Granted

 

233,000

 

$

13.96

 

 

 

 

 

Exercised

 

(69,064

)

$

2.79

 

 

 

 

 

Forfeited

 

(5,125

)

$

7.80

 

 

 

 

 

Outstanding, June 30, 2014

 

6,221,398

 

$

3.19

 

5.5

 

$

86,097

 

 

 

 

 

 

 

 

 

 

 

Exercisable, June 30, 2014

 

5,374,375

 

$

2.06

 

5.1

 

$

80,441

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest, June 30, 2014

 

6,179,132

 

$

3.14

 

5.5

 

$

85,815

 

 

 

(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 $17.03 market price of the Company’s common stock at June 30, 2014.  The total intrinsic value of options exercised during the six months ended June 30, 2014 and 2013 was $0.7 million and $0.5 million, respectively.

 

 

 

 

 

Weighted

 

 

 

Restricted

 

Average Grant

 

 

 

Shares

 

Date Fair Value

 

Outstanding, January 1, 2014

 

1,150,694

 

$

11.24

 

Granted

 

576,794

 

$

13.81

 

Released

 

(166,756

)

$

8.99

 

Forfeited

 

(14,599

)

$

12.05

 

Outstanding, June 30, 2014

 

1,546,133

 

$

12.43

 

 

FAIR VALUE MEASUREMENTS (Tables)

The following table presents the Company’s fair value measurements as of June 30, 2014 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.  Amounts in the table are in thousands.

 

 

 

 

 

Fair Value Measurement at June 30, 2014 Using:

 

 

 

 

 

Quoted Prices in Active

 

Significant Other

 

Significant Unobservable

 

 

 

Fair Value at

 

Markets for Identical Assets

 

Observable Inputs

 

Inputs

 

Description

 

June 30, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

20,708 

 

$

20,708 

 

$

 

$

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

48,577 

 

 

48,577 

 

 

Corporate bonds

 

118,737 

 

 

118,737 

 

 

Certificates of deposit

 

3,551 

 

 

3,551 

 

 

Asset backed securities

 

43,224 

 

 

43,224 

 

 

Total

 

$

234,797 

 

$

20,708 

 

$

214,089 

 

$

 

 

The following table presents the Company’s fair value measurements as of December 31, 2013 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.  Amounts in the table are in thousands.

 

 

 

 

 

Fair Value Measurement at December 31, 2013 Using:

 

 

 

 

 

Quoted Prices in Active

 

Significant Other

 

Significant Unobservable

 

 

 

Fair Value at

 

Markets for Identical Assets

 

Observable Inputs

 

Inputs

 

Description

 

December 31, 2013

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

12,851 

 

$

12,851 

 

$

 

$

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

Corporate bonds

 

54,554 

 

 

54,554 

 

 

U.S. government agency securities

 

34,338 

 

 

34,338 

 

 

Certificates of deposit

 

6,561 

 

 

6,561 

 

 

Commercial paper

 

1,499 

 

 

1,499 

 

 

Asset backed securities

 

23,456 

 

 

 

23,456 

 

 

 

Total

 

$

133,259 

 

$

12,851 

 

$

120,408 

 

$

 

 

The following summarizes contractual underlying maturities of the Company’s available-for-sale investments in debt securities at June 30, 2014 (in thousands):

 

 

 

Due in one year or less

 

Due after one year through two years

 

Description

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

Marketable Securities

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

$

32,906 

 

$

32,932 

 

$

15,644 

 

$

15,645 

 

Corporate bonds

 

29,096 

 

29,134 

 

89,600 

 

89,603 

 

Certificates of deposit

 

3,550 

 

3,551 

 

 

 

Asset backed securities

 

33,932 

 

33,947 

 

9,272 

 

9,277 

 

Total

 

$

99,484 

 

$

99,564 

 

$

114,516 

 

$

114,525 

 

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2014
item
Jun. 30, 2014
Jun. 30, 2013
Dec. 31, 2013
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 
 
 
Restricted cash
$ 0 
$ 0 
 
$ 0 
Number of objectives of the entity's investment strategy
 
 
 
Realized gains
 
7,600 
2,800 
 
Minimum contractual term of certain current investments which can be liquidated
1 year 
 
 
 
Available-for-sale securities
 
 
 
 
Amortized Cost
214,000,000 
214,000,000 
 
120,283,000 
Gains in Accumulated Other Comprehensive Income
89,000 
89,000 
 
125,000 
Estimated Fair Value
214,089,000 
214,089,000 
 
120,408,000 
Corporate Bond Securities [Member]
 
 
 
 
Available-for-sale securities
 
 
 
 
Amortized Cost
118,696,000 
118,696,000 
 
54,487,000 
Gains in Accumulated Other Comprehensive Income
41,000 
41,000 
 
67,000 
Estimated Fair Value
118,737,000 
118,737,000 
 
54,554,000 
U S Government Agencies Debt Securities [Member]
 
 
 
 
Available-for-sale securities
 
 
 
 
Amortized Cost
48,550,000 
48,550,000 
 
34,291,000 
Gains in Accumulated Other Comprehensive Income
27,000 
27,000 
 
47,000 
Estimated Fair Value
48,577,000 
48,577,000 
 
34,338,000 
Certificates Of Deposit [Member]
 
 
 
 
Available-for-sale securities
 
 
 
 
Amortized Cost
3,550,000 
3,550,000 
 
6,558,000 
Gains in Accumulated Other Comprehensive Income
1,000 
1,000 
 
3,000 
Estimated Fair Value
3,551,000 
3,551,000 
 
6,561,000 
Commercial Paper Not Included With Cash And Cash Equivalents [Member]
 
 
 
 
Available-for-sale securities
 
 
 
 
Amortized Cost
 
 
 
1,499,000 
Estimated Fair Value
 
 
 
1,499,000 
Asset Backed Securities [Member]
 
 
 
 
Available-for-sale securities
 
 
 
 
Amortized Cost
43,204,000 
43,204,000 
 
23,448,000 
Gains in Accumulated Other Comprehensive Income
20,000 
20,000 
 
8,000 
Estimated Fair Value
$ 43,224,000 
$ 43,224,000 
 
$ 23,456,000 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Accumulated Other Comprehensive Income (Loss) [Line Items]
 
 
 
 
Accumulated Other Comprehensive Income (Loss), Net of Tax, Beginning Balance
$ 133 
$ 71 
$ 125 
$ 78 
Other Comprehensive Income (Loss), before Reclassifications, Net of Tax
(39)
(52)
(24)
(48)
Reclassification from Accumulated Other Comprehensive Income, Current Period, Net of Tax
(5)
(2)
(12)
(13)
Other Comprehensive Income (Loss), Net of Tax, Portion Attributable to Parent
(44)
(54)
(36)
(61)
Accumulated Other Comprehensive Income (Loss), Net of Tax, Ending Balance
$ 89 
$ 17 
$ 89 
$ 17 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 3) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
 
 
 
 
Investment income
$ 146 
$ 55 
$ 232 
$ 117 
Reclassification Out Of Accumulated Other Comprehensive Income [Member]
 
 
 
 
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
 
 
 
 
Investment income
(5)
(2)
(12)
(13)
Accumulated Net Unrealized Investment Gain Loss [Member] |
Reclassification Out Of Accumulated Other Comprehensive Income [Member]
 
 
 
 
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
 
 
 
 
Investment income
$ (5)
$ (2)
$ (12)
$ (13)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 4) (USD $)
3 Months Ended 9 Months Ended 3 Months Ended
Jun. 30, 2014
item
Dec. 31, 2013
Jun. 30, 2014
Equipment [Member]
Jun. 30, 2014
Equipment [Member]
Minimum [Member]
Jun. 30, 2014
Equipment [Member]
Maximum [Member]
Sep. 30, 2013
Office Equipment [Member]
Jun. 30, 2014
Furniture And Fixtures [Member]
Jun. 30, 2014
Software Development [Member]
Property and equipment
 
 
 
 
 
 
 
 
Estimated Useful Life
 
 
 
3 years 
5 years 
3 years 
3 years 
 
Assets under construction
$ 6,694,000 
$ 2,592,000 
$ 2,300,000 
 
 
 
 
$ 4,400,000 
Expected cost to complete construction of project
 
 
$ 1,000,000 
 
 
 
 
$ 2,200,000 
Software Capitalization Policy
 
 
 
 
 
 
 
 
Software development stages
 
 
 
 
 
 
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 5)
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Common shares not included in the computation of diluted net loss per share
 
 
 
Potentially issuable common shares not included in the computation of diluted net loss per share because they would have an anti-dilutive effect
 
7,328,000 
7,866,000 
Additional disclosure
 
 
 
Number of shares of common stock that can be purchased through issuance of warrants under a license agreement
 
80,000 
 
Number of shares of common stock that can be purchased through issuance of warrants under a consulting agreement
75,000 
75,000 
 
Employee And Non Employees Stock Option [Member]
 
 
 
Common shares not included in the computation of diluted net loss per share
 
 
 
Potentially issuable common shares not included in the computation of diluted net loss per share because they would have an anti-dilutive effect
 
6,249,000 
6,221,000 
Warrant [Member]
 
 
 
Common shares not included in the computation of diluted net loss per share
 
 
 
Potentially issuable common shares not included in the computation of diluted net loss per share because they would have an anti-dilutive effect
 
155,000 
75,000 
Restricted Stock [Member]
 
 
 
Common shares not included in the computation of diluted net loss per share
 
 
 
Potentially issuable common shares not included in the computation of diluted net loss per share because they would have an anti-dilutive effect
 
875,000 
1,546,000 
Restricted Stock Related To Licensing Agreement [Member]
 
 
 
Common shares not included in the computation of diluted net loss per share
 
 
 
Potentially issuable common shares not included in the computation of diluted net loss per share because they would have an anti-dilutive effect
 
49,000 
24,000 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 6) (USD $)
3 Months Ended 6 Months Ended 0 Months Ended 3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Apr. 2, 2014
Dec. 31, 2013
Jan. 27, 2009
Collaboration License And Purchase Agreement [Member]
Genzyme Corporation [Member]
Jun. 30, 2013
Collaboration License And Purchase Agreement [Member]
Genzyme Corporation [Member]
Sep. 30, 2010
Collaboration License And Purchase Agreement [Member]
Genzyme Corporation [Member]
Mar. 31, 2010
Collaboration License And Purchase Agreement [Member]
Genzyme Corporation [Member]
Jun. 30, 2014
Collaboration License And Purchase Agreement [Member]
Genzyme Corporation [Member]
Jun. 30, 2013
Collaboration License And Purchase Agreement [Member]
Genzyme Corporation [Member]
License fees
 
 
 
 
 
 
 
 
 
 
 
Amount received
 
 
 
 
 
$ 16,650,000 
 
$ 900,000 
$ 1,000,000 
 
 
Amount of Deferred Revenue
 
 
 
 
 
16,650,000 
 
 
 
 
 
Total agreed consideration amount
 
 
 
 
 
18,500,000 
 
 
 
 
 
Amount subject to holdback
 
 
 
 
 
1,850,000 
 
 
 
 
 
Initial collaboration period
 
 
 
 
 
5 years 
 
 
 
 
 
Sale of common stock (in shares)
 
82,920,004 
 
 
82,920,004 
3,000,000 
 
 
 
 
 
Price at which share of common stock are sold (in dollars per share)
 
 
 
 
 
$ 2.00 
 
 
 
 
 
Premium above closing price of common stock at which shares are sold (in dollars per share)
 
 
 
 
 
$ 0.51 
 
 
 
 
 
Closing price of common stock (in dollars per share)
 
$ 17.03 
 
$ 12.75 
 
$ 1.49 
 
 
 
 
 
Aggregate premium received over the closing price of common stock
 
 
 
 
 
1,530,000 
 
 
 
 
 
Amount of premium being amortized
 
 
 
 
 
1,530,000 
 
 
 
 
 
License fee revenue
$ 1,036,000 
$ 294,000 
$ 2,072,000 
 
 
 
$ 1,000,000 
 
 
$ 300,000 
$ 2,100,000 
MAYO LICENSE AGREEMENT (Details) (USD $)
0 Months Ended 1 Months Ended