EXACT SCIENCES CORP, 10-Q filed on 7/31/2015
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2015
Jul. 29, 2015
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, 2015 
 
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
 
96,087,664 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q2 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2015
Dec. 31, 2014
Current Assets:
 
 
Cash and cash equivalents
$ 33,765 
$ 58,131 
Marketable securities
177,053 
224,625 
Accounts receivable, net
2,151 
1,376 
Inventory, net
6,275 
4,017 
Prepaid expenses and other current assets
4,019 
3,528 
Total current assets
223,263 
291,677 
Property and Equipment, at cost:
 
 
Laboratory equipment
11,279 
10,381 
Assets under construction
7,664 
1,552 
Computer equipment and computer software
10,807 
7,577 
Leasehold improvements
6,446 
5,937 
Furniture and fixtures
933 
939 
Property and Equipment, gross
37,129 
26,386 
Less-Accumulated depreciation
(9,817)
(6,439)
Net property and equipment
27,312 
19,947 
Other long-term assets
2,442 
1,200 
Total assets
253,017 
312,824 
Current Liabilities:
 
 
Accounts payable
1,345 
2,647 
Accrued liabilities
16,306 
13,960 
Debt and capital lease obligation, current portion
345 
360 
Other short-term liabilities
734 
554 
Total current liabilities
18,730 
17,521 
Long-term debt
3,488 
1,000 
Long-term accrued interest
 
106 
Other long-term liabilities
4,620 
3,599 
Lease incentive obligation, less current portion
1,338 
1,614 
Total liabilities
28,176 
23,840 
Commitments and contingencies
   
   
Stockholders' Equity:
 
 
Preferred stock, $0.01 par value Authorized—5,000,000 shares Issued and outstanding—no shares at June 30, 2015 and December 31, 2014
   
   
Common stock, $0.01 par value Authorized—200,000,000 shares Issued and outstanding—89,061,044 and 88,626,042 shares at June 30, 2015 and December 31, 2014
891 
887 
Additional paid-in capital
719,635 
709,019 
Accumulated other comprehensive income (loss)
(11)
(115)
Accumulated deficit
(495,674)
(420,807)
Total stockholders' equity
224,841 
288,984 
Total liabilities and stockholders’ equity
$ 253,017 
$ 312,824 
Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2015
Dec. 31, 2014
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
200,000,000 
200,000,000 
Common stock, Issued shares
89,061,044 
88,626,042 
Common stock, outstanding shares
89,061,044 
88,626,042 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2015
Jun. 30, 2014
Net sales
 
 
 
 
Laboratory service revenue
$ 8,119 
 
$ 12,385 
 
License fees
 
 
 
294 
Total revenue
8,119 
 
12,385 
294 
Cost of sales
5,094 
 
9,306 
 
Gross margin
3,025 
 
3,079 
294 
Operating expenses:
 
 
 
 
Research and development
8,115 
7,174 
14,686 
14,604 
General and administrative
13,683 
6,230 
26,654 
10,816 
Sales and marketing
20,593 
6,166 
37,117 
10,622 
Total operating expenses
42,391 
19,570 
78,457 
36,042 
Loss from operations
(39,366)
(19,570)
(75,378)
(35,748)
Other income (expense)
 
 
 
 
Investment income
193 
146 
415 
232 
Interest income (expense)
107 
(13)
96 
(28)
Total other income
300 
133 
511 
204 
Net loss
$ (39,066)
$ (19,437)
$ (74,867)
$ (35,544)
Net loss per share-basic and diluted (in dollars per share)
$ (0.44)
$ (0.24)
$ (0.84)
$ (0.46)
Weighted average common shares outstanding-basic and diluted (in shares)
88,919 
82,048 
88,791 
76,548 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2015
Jun. 30, 2014
Consolidated Statements of Comprehensive Loss
 
 
 
 
Net loss
$ (39,066)
$ (19,437)
$ (74,867)
$ (35,544)
Other comprehensive loss, net of tax:
 
 
 
 
Unrealized (loss) gain on available-for-sale investments
(59)
(44)
136 
(36)
Foreign currency translation loss
(22)
 
(32)
 
Comprehensive loss
$ (39,147)
$ (19,481)
$ (74,763)
$ (35,580)
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Cash flows from operating activities:
 
 
Net loss
$ (74,867)
$ (35,544)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization of fixed assets
3,377 
1,344 
Stock-based compensation
8,168 
4,478 
Amortization of deferred license fees
 
(294)
Amortization of other long-term liabilities
(241)
 
Forgiveness of long-term debt
(1,000)
 
Amortization of premium on short-term investments
702 
370 
Changes in assets and liabilities:
 
 
Prepaid expenses and other current assets
(291)
(1,788)
Accounts receivable
(775)
 
Inventory, net
(2,258)
 
Accounts payable
(1,302)
(404)
Accrued liabilities
3,181 
3,210 
Lease incentive obligation
(276)
(270)
Accrued interest
(106)
11 
Net cash used in operating activities
(65,688)
(28,887)
Cash flows from investing activities:
 
 
Purchases of marketable securities
(19,318)
(138,855)
Maturities of marketable securities
66,324 
44,768 
Purchases of property and equipment
(10,742)
(7,196)
Net cash provided by (used in) investing activities
36,264 
(101,283)
Cash flows from financing activities:
 
 
Proceeds from exercise of common stock options
859 
193 
Proceeds from sale of common stock, net of issuance costs
 
137,670 
Payments on capital lease obligations
(183)
(173)
Proceeds from mortgage payable
3,656 
 
Proceeds in connection with the Company's employee stock purchase plan
758 
337 
Net cash provided by financing activities
5,090 
138,027 
Effects of exchange rate on cash and cash equivalents
(32)
 
Net increase (decrease) in cash and cash equivalents
(24,366)
7,857 
Cash and cash equivalents, beginning of period
58,131 
12,851 
Cash and cash equivalents, end of period
33,765 
20,708 
Supplemental disclosure of non-cash investing and financing activities:
 
 
Unrealized gain (loss) on available-for-sale investments
136 
36 
Issuance of 21,826 and 32,666 shares of common stock to fund the Company’s 401(k) matching contribution for 2014 and 2013, respectively
$ 835 
$ 456 
Consolidated Statements of Cash Flows (Parenthetical)
6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Consolidated Statements of Cash Flows
 
 
Issuance of shares of common stock to fund the Company's 401(k) matching contribution
21,826 
32,669 
ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND BASIS OF PRESENTATION

(1) ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

Exact Sciences Corporation (together with its subsidiaries, “Exact”, “we”, “us” or the “Company”) was incorporated in February 1995. Exact is a molecular diagnostics company currently focused on the early detection and prevention of some of the deadliest forms of cancer. The Company has developed an accurate, non-invasive, patient-friendly screening test for the early detection of colorectal cancer and pre-cancer, and is currently working on the development of tests for lung cancer, pancreatic cancer and esophageal cancer.

 

 

Basis of Presentation

 

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

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 subsidiaries, Exact Sciences Laboratories, LLC, Exact Sciences Finance Corporation, Exact Sciences Europe LTD, and variable interest entities. All significant intercompany transactions and balances have been eliminated in consolidation.

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

Use of Estimates

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

 

Cash and Cash Equivalents

The Company considers cash on hand, demand deposits in bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. The Company had no restricted cash at June 30, 2015 and December 31, 2014.

 

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, 2015 and December 31, 2014, the Company’s investments were comprised of fixed income investments and all were deemed available-for-sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives.  The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations (including those with a contractual term greater than one year from the date of purchase) are classified as current. All of the Company’s investments are considered current. There were no realized losses for the six months ended June 30, 2015 and 2014.  Realized gains were $4.8 thousand and $7.6 thousand for the six months ended June 30, 2015 and 2014, respectively.

 

We periodically review our investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, our intent not to sell the security, and whether it is more likely than not that we will have to sell the security before recovery of its cost basis. For the six months ended June 30, 2015, no investments were identified with other-than-temporary declines in value.

 

Available-for-sale securities at June 30, 2015 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

120,096

 

$

28

 

$

(22)

 

$

120,102

 

U.S. government agency securities

 

 

4,249

 

 

 —

 

 

(1)

 

 

4,248

 

Asset backed securities

 

 

48,687

 

 

26

 

 

(10)

 

 

48,703

 

Commercial paper

 

 

4,000

 

 

 —

 

 

 

 

4,000

 

Total available-for-sale securities

 

$

177,032

 

$

54

 

$

(33)

 

$

177,053

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

141,239

 

$

21

 

$

(136)

 

$

141,124

 

U.S. government agency securities

 

 

18,687

 

 

8

 

 

(7)

 

 

18,688

 

Certificates of deposit

 

 

60,821

 

 

17

 

 

(18)

 

 

60,820

 

Commercial paper

 

 

3,993

 

 

 

 

 

 

3,993

 

Total available-for-sale securities

 

$

224,740

 

$

46

 

$

(161)

 

$

224,625

 

 

Changes in Accumulated Other Comprehensive Income (Loss)

The amounts recognized in accumulated other comprehensive income (loss) (AOCI) for the six months ended June 30, 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

 

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2014

 

$

 —

 

$

(115)

 

$

(115)

 

Other comprehensive (loss) income before reclassifications

 

 

(32)

 

 

142

 

 

110

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

(6)

 

 

(6)

 

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

 

 

(32)

 

 

136

 

 

104

 

Balance at June 30, 2015

 

$

(32)

 

$

21

 

$

(11)

 

 

The amounts recognized in AOCI for the six months ended June 30, 2014 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

 

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2013

 

$

 —

 

$

125

 

$

125

 

Other comprehensive (loss) income before reclassifications

 

 

 —

 

 

(24)

 

 

(24)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

(12)

 

 

(12)

 

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

 

 

 —

 

 

(36)

 

 

(36)

 

Balance at June 30, 2014

 

$

 —

 

$

89

 

$

89

 

 

Amounts reclassified from accumulated other comprehensive income (loss) for the six months ended June 30, 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Six Months Ended June 30,

Details about AOCI  Components

 

Statement of Operations

 

2015

 

2014

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

(6)

 

$

(12)

 

Total reclassifications

 

 

 

$

(6)

 

$

(12)

 

 

Property and Equipment

 

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

 

 

 

 

 

 

 

 

Estimated

 

Asset Classification

    

Useful Life

 

Laboratory equipment

 

3 -  5 years

 

Computer equipment and computer software

 

3 years

 

Leasehold improvements

 

Lesser of the remaining lease term or useful life

 

Furniture and fixtures

 

3 years

 

 

At June 30, 2015, the Company had $7.7 million of assets under construction which consisted of $4.8 million related to a new building purchase, $1.5 million of capitalized costs related to software projects, $0.8 million of costs related to machinery and equipment, and $0.6 million of costs related to leasehold improvement and building projects. Depreciation will begin on these assets once they are placed into service. The Company expects to incur $2.4 million in costs to complete the building improvements of which $1.4 million will be financed.  The Company expects to incur minimal costs to complete the leasehold improvements, machinery and equipment, and the software projects, and these projects are expected to be completed in 2015.

 

 

Software Capitalization Policy

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

 

Net Loss Per Share

 

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

 

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

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

    

2015

    

2014

    

Shares issuable upon exercise of stock options

 

5,144

 

6,221

 

Shares issuable upon exercise of outstanding warrants(1)

 

 —

 

75

 

Shares issuable upon the release of restricted stock awards

 

2,277

 

1,546

 

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

 

 —

 

24

 

 

 

7,421

 

7,866

 

 


(1)

At June 30, 2014, represents warrants to purchase 75,000 shares of common stock issued under a consulting agreement.

 

Revenue Recognition

 

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

 

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

 

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

 

The Company recognized approximately $8.1 million and $12.4 million in laboratory service revenue for the three and six months ended June 30, 2015.

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

 

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

 

The Company did not recognize revenue in connection with the amortization of the up-front payments from Genzyme during the three and six months ended June 30, 2015. The Company recognized approximately $0.3 million in license fee revenue in connection with the amortization of the up-front payments from Genzyme during the six months ended June 30, 2014. There was no license fee revenue recognized during the three months ended June 30, 2014.

Inventory

 

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

 

Direct and indirect manufacturing costs incurred during process validation and for other research and development activities, which are not permitted to be sold, have been expensed to research and development.  Raw material inventory that was purchased in prior periods, and expensed to research and development, may still be on hand and used toward the production of commercial Cologuard, provided it has an appropriate remaining shelf life.  This inventory is expected to provide a gross margin benefit to the Company in future periods of $0.3 million if the entirety of those balances are allocated to inventory produced for resale and not allocated to research and development activities.

 

Inventory consist of the following (amount in thousands):

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2015

    

2014

 

Raw Materials

 

$

1,072

 

$

1,019

 

Semi-finished and finished goods

 

 

5,203

 

 

2,998

 

Total inventory

 

$

6,275

 

$

4,017

 

 

Foreign Currency Translation

 

For the Company’s international subsidiary, formed in 2014, the local currency is the functional currency. Assets and liabilities of this subsidiary are translated into United States dollars at the period-end exchange rate or historical rates as appropriate. Consolidated statements of earnings amounts are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheet as a component of accumulated other comprehensive income in total Exact Sciences Corporation’s shareholders’ equity. Transaction gains and losses are included in the consolidated statement of operations in 2015.

 

Reclassifications

 

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

MAYO LICENSE AGREEMENT
MAYO LICENSE AGREEMENT

(3) MAYO LICENSE AGREEMENT

 

Overview

 

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

 

Warrants

 

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

 

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

 

MAYO exercised the warrant to purchase 250,000 shares through partial exercises, the last of which occurred in June 2014. In June 2014, MAYO exercised the remaining shares of this warrant by utilizing the cashless exercise provision contained in the warrant. As a result of this exercise for a gross amount of 80,000 shares, in lieu of paying a cash exercise price, MAYO forfeited its right with respect to 10,587 shares leaving it with a net amount of 69,413 shares. Following this exercise, all of MAYO’s warrants to purchase the Company’s common stock were fully exercised.

 

Royalty Payments

 

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

 

Other Payments

 

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

 

In addition, the Company pays MAYO for research and development efforts.  During the three and six months ended June 30, 2015, the Company made payments of $0.4 million and $1.6 million, respectively. At June 30, 2015 the Company recorded an estimated liability in the amount of $0.7 million for MAYO’s research and development efforts.  During the three and six months ended June 30, 2014, the Company made research and development payments to MAYO 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.

 

May 2012 Amendment

 

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

 

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

 

February 2015 Amendment

 

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

Pursuant to the Restated MAYO Agreement, the Company agreed to pay MAYO an additional $5.0 million, payable in five annual $1.0 million installments, the first of which was due February 10, 2015. The first $1.0 million payment was made to MAYO in February 2015 and was capitalized to pre-paid assets and will be amortized to research and development expenses straight-line over the initial 12 month research period.  Additionally, the Company will make milestone payments once certain sales levels are reached on licensed products. It is uncertain as to when or if these milestones will be met; therefore, the milestone payments have not been recorded as a liability. The Company evaluates the status of the milestone payments at each reporting date to determine if a liability should be recorded for the milestone payment.

MD ANDERSON LICENSE AGREEMENT
MD ANDERSON LICENSE AGREEMENT

 

(4) MD ANDERSON LICENSE AGREEMENT

 

Overview

 

On April 10, 2015, the Company entered into a Joint Development and License Agreement (“MD Anderson Agreement”) with the University of Texas M.D. Anderson Cancer Center (“MD Anderson”) to jointly develop, clinically validate and obtain FDA approval and CMS coverage and reimbursement for in-vitro diagnostic and screening tools for the early detection of lung cancer (the “IVD Assays”). Under the MD Anderson Agreement, MD Anderson granted the Company an exclusive license which provides the Company with the intellectual property rights for the purpose of developing, manufacturing and marketing IVD Assays. In addition to granting the Company a license to the covered MD Anderson intellectual property, MD Anderson agreed to make personnel available to provide the Company product development and research and development assistance. Pursuant to the MD Anderson Agreement, the Company is obligated to reimburse IVD Assay development expenses incurred by the staff at MD Anderson, up to a maximum of $1.0 million per year for the first two years of the MD Anderson Agreement. At June 30, 2015 the Company recorded an estimated liability in the amount of $0.3 million for IVD Assay development efforts. As of June 30, 2015 the Company has not made payments for IVD Assay development costs. Beginning on April 30, 2015 and continuing through December 31, 2016, the Company is required to pay a quarterly fee of $0.3 million for the use of samples already collected prior to the effective date of the agreement which will be utilized in the continued research and development of IVD Assays. As of June 30, 2015 the Company recorded an estimated liability in the amount of $0.5 million for the use of samples provided by MD Anderson. Further, the Company has agreed to pay MD Anderson a low single digit royalty on the Company’s net sales of products using the licensed MD Anderson intellectual property. As of June 30, 2015 there have been no commercial sales of such product.    

 

STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION

(5) STOCK-BASED COMPENSATION

 

Stock-Based Compensation Plans

 

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

 

Stock-Based Compensation Expense

 

The Company recorded $4.6 million and $8.2 million in stock-based compensation expense during the three and six months ended June 30, 2015 in connection with the amortization of restricted stock and restricted stock unit awards, stock purchase rights granted under the Company’s employee stock purchase plan and stock options granted to employees, non-employee consultants and non-employee directors.   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 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 – Expected term is based on the Company’s historical life data and is determined using the average of the vesting period and the contractual life of the stock options granted.

 

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

 

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

 

Forfeitures - The Company records stock-based compensation expense only for those awards that are expected to vest.  A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.  The Company’s forfeiture rate used in the six months ended June 30, 2015 and 2014 was 4.99%.  

 

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,

 

 

    

2015

    

2014

    

2015

    

2014

    

Option Plan Shares

 

 

 

 

 

 

 

 

 

Risk-free interest rates

 

(1)

 

(1)

 

1.5%  -  1.92%

 

 1.96%

 

Expected term (in years)

 

(1)

 

(1)

 

 6.25 

 

 6.25

 

Expected volatility

 

(1)

 

(1)

 

67.1%  -  73.2%

 

80.8%

 

Dividend yield

 

(1)

 

(1)

 

0 %

 

0%

 

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

 

(1)

 

(1)

 

$  15.81 

 

$  9.86

 

ESPP Shares

 

   

 

 

 

   

 

 

 

Risk-free interest rates

 

0.25%  -  0.6%

 

0.1%  - 0.41%

 

0.25%  -  0.6%

 

0.1%  - 0.41%

 

Expected term (in years)

 

0.5  -  2

 

0.5  - 2

 

0.5  -  2

 

0.5  - 2

 

Expected volatility

 

51.2%  -  57.4%

 

42.5%  - 49.5%

 

51.2%  -  57.4%

 

42.5%  - 49.5%

 

Dividend yield

 

0 %

 

0%

 

0 %

 

0%

 

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

 

$ 7.48

 

$ 3.76

 

$ 7.48

 

$ 3.76

 

 


(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, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

Options

 

Shares

 

Price

 

Term (Years)

 

Value(1)

 

(Aggregate intrinsic value in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2014

 

4,934,317

 

$

3.63

 

5.2

 

 

 

 

Granted

 

340,978

 

 

23.51

 

 

 

 

 

 

Exercised

 

(96,573)

 

 

8.08

 

 

 

 

 

 

Forfeited

 

(35,025)

 

 

16.55

 

 

 

 

 

 

Outstanding, June 30, 2015

 

5,143,697

 

$

4.77

 

5.0

 

$

128,421

 

Exercisable, June 30, 2015

 

4,367,935

 

$

2.61

 

4.3

 

$

118,496

 

Vested and expected to vest, June 30, 2015

 

5,104,986

 

$

4.68

 

5.2

 

$

127,926

 

 


(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 $29.74 market price of the Company’s common stock at June 30, 2015.  The total intrinsic value of options exercised during the six months ended June 30, 2015 and 2014 was $1.8 million and $0.7 million, respectively.

 

As of June 30, 2015, there was $38.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all Stock Plans.  Total unrecognized compensation cost will be adjusted for future changes in forfeitures.  The Company expects to recognize that cost over a weighted average period of 3.1 years.

 

A summary of restricted stock activity under the Stock Plans during the six months ended June 30, 2015 is as follows:

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

Restricted

 

Average Grant

 

 

 

Shares

 

Date Fair Value

 

Outstanding, January 1, 2015

 

1,541,114

 

$

13.86

 

Granted

 

1,104,074

 

 

23.62

 

Released

 

(262,656)

 

 

11.84

 

Forfeited

 

(105,825)

 

 

14.79

 

Outstanding, June 30, 2015

 

2,276,707

 

$

18.78

 

 

FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS

(6) 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 $3.5 million and $1.0 million as of June 30, 2015 and December 31, 2014, respectively, 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, 2015 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.  Amounts in the table are in thousands.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at June 30, 2015 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

Description

 

June 30, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

33,765

 

$

33,765

 

$

 —

 

$

 —

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

120,101

 

 

 —

 

 

120,101

 

 

 —

 

U.S. government agency securities

 

 

4,249

 

 

 —

 

 

4,249

 

 

 —

 

Asset backed securities

 

 

48,703

 

 

 —

 

 

48,703

 

 

 —

 

Commercial paper

 

 

4,000

 

 

 —

 

 

4,000

 

 

 —

 

Total

 

$

210,818

 

$

33,765

 

$

177,053

 

$

 —

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at December 31, 2014 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

Description

 

December 31, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

53,569

 

$

53,569

 

$

 —

 

$

 —

 

Corporate bonds

 

 

4,562

 

 

 —

 

 

4,562

 

 

 —

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

141,124

 

 

 —

 

 

141,124

 

 

 —

 

U.S. government agency securities

 

 

18,688

 

 

 —

 

 

18,688

 

 

 —

 

Asset backed securities

 

 

60,820

 

 

 —

 

 

60,820

 

 

 —

 

Commercial paper

 

 

3,993

 

 

 —

 

 

3,993

 

 

 —

 

Total

 

$

282,756

 

$

53,569

 

$

229,187

 

$

 —

 

 

The following table summarizes gross unrealized losses and fair values of our investments in an unrealized loss position as of June 30, 2015, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

Less than 12 months

 

12 months or greater

 

Total

 

(In thousands)

    

 

Fair Value

    

 

Gross Unrealized Loss

    

 

Fair Value

    

 

Gross Unrealized Loss

    

 

Fair Value

    

 

Gross Unrealized Loss

 

Marketable Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

65,965

 

$

(21)

 

$

 —

 

$

 —

 

$

65,965

 

$

(21)

 

U.S. government agency securities

 

 

2,498

 

 

(1)

 

 

 —

 

 

 —

 

 

2,498

 

 

(1)

 

Asset backed securities

 

 

21,863

 

 

(10)

 

 

1,432

 

 

(1)

 

 

23,295

 

 

(11)

 

Total

 

$

90,326

 

$

(32)

 

$

1,432

 

$

(1)

 

$

91,758

 

$

(33)

 

 

The following summarizes contractual underlying maturities of the Company’s available-for-sale investments in debt securities at June 30, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due one year or less

 

Due after one year through two years

Description

    

 

Cost

    

 

Fair Value

 

 

Cost

    

 

Fair Value

Marketable Securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

$

4,249

 

$

4,249

 

$

 —

 

$

 —

Corporate bonds

 

 

112,370

 

 

112,367

 

 

7,725

 

 

7,734

Commercial paper

 

 

4,000

 

 

4,000

 

 

 —

 

 

 —

Asset backed securities

 

 

 —

 

 

 —

 

 

48,687

 

 

48,703

Total

 

$

120,619

 

$

120,616

 

$

56,412

 

$

56,437

 

NEW MARKET TAX CREDIT
NEW MARKET TAX CREDIT

(7) NEW MARKET TAX CREDIT

During the fourth quarter of 2014, the Company received approximately $2.4 million in net proceeds from financing agreements related to working capital and capital improvements at one of its Madison, Wisconsin facilities.  This financing arrangement was structured with an unrelated third party financial institution (the “Investor”), an investment fund, and its majority owned community development entity in connection with the Company’s participation in transactions qualified under the federal New Markets Tax Credit (NMTC) program, pursuant to Section 45D of the Internal Revenue Code of 1986, as amended. Through its participation in this program, the Company has secured low interest financing and the potential for future debt forgiveness related to the Madison, Wisconsin facility.  Upon closing of this transaction, the Company provided an aggregate of approximately $5.1 million to the Investor, in the form of a loan receivable, with a term of seven years, bearing an interest rate of 2.74% per annum. This $5.1 million in proceeds plus capital from the Investor was used to make an aggregate $7.5 million loan to a subsidiary of the Company. This financing arrangement is not secured by any assets of the Company. On December 1, 2021, the Company would receive a repayment of its approximately $5.1 million loan. The $5.1 million is eliminated in the consolidation of the financial statements. This transaction also includes a put/call feature that becomes enforceable at the end of the seven-year compliance period. The Investor may exercise its put option or the Company can exercise the call, both of which will serve to trigger forgiveness of the net debt. The value attributable to the put/call is nominal. The $2.4 million is recorded in Other Long-Term Liabilities on the consolidated balance sheets. The benefit of this net $2.4 million contribution will be recognized as a decrease in expenses, included in cost of sales, as the Company amortizes the contribution liability over the seven-year compliance period as it is being earned through our on-going compliance with the conditions of the NMTC program. The Company has recorded $0.1 million and $0.2 million as a decrease of expenses for the three and six months ended June 30, 2015. At June 30, 2015, the remaining balance is $2.2 million. The Company incurred approximately $0.2 million of debt issuance costs related to the above transactions, which are being amortized over the life of the agreements.

The Investor is subject to 100% recapture of the NMTC it receives for a period of seven years as provided in the Internal Revenue Code and applicable U.S. Treasury regulations.  The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement.  Noncompliance with applicable requirements could result in the Investor’s projected tax benefits not being realized and, therefore, require the Company to indemnify the Investor for any loss or recapture of NMTC related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations.  The Company does not anticipate any credit recapture will be required in connection with this financing arrangement. 

 

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

 

·

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

·

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

·

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

·

The Company is obligated to absorb losses of the VIEs.

 

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

 

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

LONG-TERM DEBT
LONG-TERM DEBT

(8)  LONG-TERM DEBT

Building Purchase Mortgage

During June 2015, the Company entered into a debt agreement with an unrelated third party financial institution to finance the purchase of the facility and contemplated improvements located at 501 Charmany Drive in Madison, WI for $5.1 million. Of the $5.1 million in funds available pursuant to the credit agreement, $3.7 million was directly applied towards the purchase price of the building in June 2015 and the remaining $1.4 million is a construction loan available to finance future improvements. The debt agreement is secured by the acquired building.

 

Borrowings under the debt agreement bear interest at 4.15% per annum which is calculated on the outstanding principal balance. The Company is required to make interest only payments on the outstanding principal balance from July 12, 2015 through September 12, 2015 which is the period the Company anticipates completing all building related improvements.  Beginning on October 12, 2015 and continuing through the maturity date, May 12, 2019, the Company is required to make monthly principal and interest payments of $31.2 thousand. The final principal and interest payment due on June 12, 2019 is $4.4 million.

 

As of June 30, 2015 no draws have been made on the $1.4 million portion of the debt agreement related to construction of future improvements. There is an outstanding principal balance of $3.7 million, and the current portion is $0.2 million. Additionally, the Company has recorded $26.1 thousand in deferred financing costs which are being amortized through June 12, 2019.

 

Wisconsin Department of Commerce Loan

 

During November 2009, the Company entered into a loan agreement with the Wisconsin Department of Commerce pursuant to which the Wisconsin Department of Commerce agreed to lend up to $1.0 million to the Company subject to the Company’s satisfaction of certain conditions. The Company received the $1.0 million in December 2009. The terms of the loan are such that portions of the loan become forgivable if the Company meets certain job creation requirements at a specified wage rate. After the Company creates 100 full time positions, the principal shall be reduced at the rate of $5,405 for each new position created thereafter during the measurement period. The loan’s terms also contain a milestone that if the Company has created 185 new full‑time positions as of June 30, 2015, the full amount of principal shall be forgiven. The loan bears an interest rate of 2%, which is subject to an increase to 4% if the Company does not meet certain job creation requirements. Both principal and interest payments under the loan agreement are deferred for five years.

As of June 30, 2015, and during the term of the loan agreement, the Company has created 185 new, full-time Wisconsin-based jobs at the specified wage rate. The $1.0 million benefit associated with the expected loan forgiveness has been recorded as an offset to the operating expenses during the period ended June 30, 2015.

WISCONSIN ECONOMIC DEVELOPMENT TAX CREDIT
WISCONSIN ECONOMIC DEVELOPMENT TAX CREDIT

(9)  WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS

During the first quarter of 2015, the Company entered into an agreement with the Wisconsin Economic Development Corporation (“WEDC”) to earn $9.0 million in refundable tax credits if the Company expends $26.3 million in capital investments and establishes and maintains 758 full-time positions in the state of Wisconsin over a seven year period.  The tax credits earned should first be applied against the tax liability otherwise due and if there is no such liability present, the claim for tax credits will be reimbursed in cash to the Company.  The maximum amount of the refundable tax credit to be earned for each year is fixed, and the Company earns the credits by meeting certain capital investment and job creation thresholds over the seven year period. Should the Company earn and receive the job creation tax credits but not maintain those full-time positions through the end of the agreement, the Company may be required to pay those credits back to WEDC. 

 

The Company will record the earned tax credits as job creation and capital investments occur. The amount of tax credits earned will be recorded as a liability and amortized as a reduction of operating expenses over the expected period of benefit. The tax credits earned from capital investment will be recognized as on offset to depreciation expense over the expected life of the acquired capital assets. The tax credits earned related to job creation will be recognized as an offset to operational expenses over the life of the agreement as the Company is required to maintain the minimum level of full-time positions through the seven year period.

 

As of June 30, 2015 the Company has earned $1.4 million of tax credits.  $0.2 million is a current asset and $1.2 million is a long term asset, reflecting when collection of the refundable tax credits is expected to occur. 

 

During the three and six month periods ending June 30, 2015, the Company has amortized $40.5 thousand of the credits earned as a reduction of operating expenses.  At June 30, 2015, the Company also has a $0.2 million current liability and a $1.2 million long term liability, reflecting when the expected benefit of the tax credit amortization will reduce future operating expenses.

 

SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

(10)  SUBSEQUENT EVENTS

On July 24, 2015 the Company completed an underwritten public offering of 7.0 million shares of common stock at a price of $25.50 per share to the public. The Company received approximately $174.0 million of net proceeds from the offering, after deducting $4.5 million for the underwriting discounts and commissions and other stock issuance costs paid by the Company.

RECENT ACCOUNTING PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS

(11) RECENT ACCOUNTING PRONOUNCEMENTS

In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The standard is effective for the Company’s financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

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, 2017. The Company would be permitted to early adopt ASU 2014-09 for the fiscal year beginning after December 15, 2016, and interim periods therein. The Company is currently evaluating the impact of this amendment on its 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 subsidiaries, Exact Sciences Laboratories, LLC, Exact Sciences Finance Corporation, Exact Sciences Europe LTD, and variable interest entities. All significant intercompany transactions and balances have been eliminated in consolidation.

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

Use of Estimates

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

Cash and Cash Equivalents

The Company considers cash on hand, demand deposits in bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. The Company had no restricted cash at June 30, 2015 and December 31, 2014.

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, 2015 and December 31, 2014, the Company’s investments were comprised of fixed income investments and all were deemed available-for-sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives.  The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations (including those with a contractual term greater than one year from the date of purchase) are classified as current. All of the Company’s investments are considered current. There were no realized losses for the six months ended June 30, 2015 and 2014.  Realized gains were $4.8 thousand and $7.6 thousand for the six months ended June 30, 2015 and 2014, respectively.

 

We periodically review our investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, our intent not to sell the security, and whether it is more likely than not that we will have to sell the security before recovery of its cost basis. For the six months ended June 30, 2015, no investments were identified with other-than-temporary declines in value.

 

Available-for-sale securities at June 30, 2015 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

120,096

 

$

28

 

$

(22)

 

$

120,102

 

U.S. government agency securities

 

 

4,249

 

 

 —

 

 

(1)

 

 

4,248

 

Asset backed securities

 

 

48,687

 

 

26

 

 

(10)

 

 

48,703

 

Commercial paper

 

 

4,000

 

 

 —

 

 

 

 

4,000

 

Total available-for-sale securities

 

$

177,032

 

$

54

 

$

(33)

 

$

177,053

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

141,239

 

$

21

 

$

(136)

 

$

141,124

 

U.S. government agency securities

 

 

18,687

 

 

8

 

 

(7)

 

 

18,688

 

Certificates of deposit

 

 

60,821

 

 

17

 

 

(18)

 

 

60,820

 

Commercial paper

 

 

3,993

 

 

 

 

 

 

3,993

 

Total available-for-sale securities

 

$

224,740

 

$

46

 

$

(161)

 

$

224,625

 

 

Changes in Accumulated Other Comprehensive Income (Loss)

The amounts recognized in accumulated other comprehensive income (loss) (AOCI) for the six months ended June 30, 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

 

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2014

 

$

 —

 

$

(115)

 

$

(115)

 

Other comprehensive (loss) income before reclassifications

 

 

(32)

 

 

142

 

 

110

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

(6)

 

 

(6)

 

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

 

 

(32)

 

 

136

 

 

104

 

Balance at June 30, 2015

 

$

(32)

 

$

21

 

$

(11)

 

 

The amounts recognized in AOCI for the six months ended June 30, 2014 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

 

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2013

 

$

 —

 

$

125

 

$

125

 

Other comprehensive (loss) income before reclassifications

 

 

 —

 

 

(24)

 

 

(24)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

(12)

 

 

(12)

 

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

 

 

 —

 

 

(36)

 

 

(36)

 

Balance at June 30, 2014

 

$

 —

 

$

89

 

$

89

 

 

Amounts reclassified from accumulated other comprehensive income (loss) for the six months ended June 30, 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Six Months Ended June 30,

Details about AOCI  Components

 

Statement of Operations

 

2015

 

2014

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

(6)

 

$

(12)

 

Total reclassifications

 

 

 

$

(6)

 

$

(12)

 

 

Property and Equipment

 

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

 

 

 

 

 

 

 

 

Estimated

 

Asset Classification

    

Useful Life

 

Laboratory equipment

 

3 -  5 years

 

Computer equipment and computer software

 

3 years

 

Leasehold improvements

 

Lesser of the remaining lease term or useful life

 

Furniture and fixtures

 

3 years