EXACT SCIENCES CORP, 10-K filed on 2/27/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Feb. 26, 2015
Jun. 30, 2014
Document and Entity Information
 
 
 
Entity Registrant Name
EXACT SCIENCES CORP 
 
 
Entity Central Index Key
0001124140 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 1,398,396,140 
Entity Common Stock, Shares Outstanding
 
88,671,335 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Current Assets:
 
 
Cash and cash equivalents
$ 58,131 
$ 12,851 
Marketable securities
224,625 
120,408 
Accounts receivable
1,376 
 
Inventory, net
4,017 
 
Prepaid expenses and other current assets
3,528 
2,199 
Total current assets
291,677 
135,458 
Property and Equipment, at cost:
 
 
Laboratory equipment
10,381 
5,087 
Assets under construction
1,552 
2,592 
Computer equipment and computer software
7,577 
1,217 
Leasehold improvements
5,937 
5,043 
Furniture and fixtures
939 
268 
Property and Equipment, gross
26,386 
14,207 
Less-Accumulated depreciation
(6,439)
(3,038)
Net property and equipment
19,947 
11,169 
Total assets
311,624 
146,627 
Current Liabilities:
 
 
Accounts payable
2,647 
873 
Accrued expenses
13,960 
5,694 
Capital lease obligation, current portion
360 
351 
Lease incentive obligation, current portion
554 
540 
Deferred license fees, current portion
 
294 
Total current liabilities
17,521 
7,752 
Long-term debt
1,000 
1,000 
Long-term accrued interest
106 
84 
Other long-term liabilities
2,399 
 
Capital lease obligation, less current portion
 
360 
Lease incentive obligation, less current portion
1,614 
2,115 
Total liabilities
22,640 
11,311 
Commitments and contingencies
   
   
Stockholders' Equity:
 
 
Preferred stock, $0.01 par value Authorized—5,000,000 shares Issued and outstanding—no shares at December 31, 2014 and December 31, 2013
   
   
Common stock, $0.01 par value Authorized—200,000,000 shares Issued and outstanding—88,626,042 and 71,071,838 shares at December 31, 2014 and December 31, 2013
887 
711 
Additional paid-in capital
709,019 
455,239 
Accumulated other comprehensive income
(115)
125 
Accumulated deficit
(420,807)
(320,759)
Total stockholders' equity
288,984 
135,316 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 311,624 
$ 146,627 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 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
200,000,000 
200,000,000 
Common stock, Issued shares
88,626,042 
71,071,838 
Common stock, outstanding shares
88,626,042 
71,071,838 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Net sales
 
 
 
Laboratory service revenue
$ 1,504 
 
 
License fees
294 
4,144 
4,144 
Total revenue
1,798 
4,144 
4,144 
Cost of sales
4,325 
 
 
Gross margin
(2,527)
4,144 
4,144 
Operating expenses:
 
 
 
Research and development
28,669 
27,678 
42,131 
General and administrative
30,435 
13,649 
9,900 
Sales and marketing
38,908 
9,578 
4,755 
Total operating expenses
98,012 
50,905 
56,786 
Loss from operations
(100,539)
(46,761)
(52,642)
Other income (expense)
 
 
 
Investment income
542 
316 
262 
Interest expense
(51)
(69)
(41)
Total other income (expense)
491 
247 
221 
Net loss
$ (100,048)
$ (46,514)
$ (52,421)
Net loss per share-basic and diluted (in dollars per share)
$ (1.25)
$ (0.69)
$ (0.88)
Weighted average common shares outstanding-basic and diluted (in shares)
80,232 
67,493 
59,481 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Consolidated Statements of Comprehensive Loss
 
 
 
Net loss
$ (100,048)
$ (46,514)
$ (52,421)
Other comprehensive loss, net of tax:
 
 
 
Unrealized gain (loss) on available-for-sale investments
(240)
47 
92 
Comprehensive loss
$ (100,288)
$ (46,467)
$ (52,329)
Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Common Stock [Member]
Additional Paid In Capital [Member]
Accumulated Other Comprehensive Income [Member]
Retained Earnings [Member]
Total
Balance at Dec. 31, 2011
$ 566 
$ 304,767 
$ (14)
$ (221,824)
$ 83,495 
Balance (in shares) at Dec. 31, 2011
56,624,763 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
Issuance of common stock related to the Mayo Transaction (Note 4)
999 
 
 
1,000 
Issuance of common stock related to the Mayo Transaction (Note 4) (in shares)
97,466 
 
 
 
 
Issuance of common stock, net of issuance costs of $11.0, $4.8 and $3.9 million for 2014, 2013 and 2012, respectively
63 
57,692 
 
 
57,755 
Issuance of common stock, net of issuance costs (in shares)
6,325,000 
 
 
 
 
Exercise of common stock options and warrants
2,381 
 
 
2,388 
Exercise of common stock options and warrants (in shares)
691,471 
 
 
 
 
Issuance of common stock to fund the Company's 2014, 2013 and 2012 401(k) match
 
274 
 
 
274 
Issuance of common stock to fund the Company's 2013, 2012 and 2011 401(k) match (in shares)
32,872 
 
 
 
 
Compensation expense related to issuance of stock options and restricted stock awards
5,492 
 
 
5,493 
Compensation expense related to issuance of stock options and restricted stock awards (in shares)
74,617 
 
 
 
 
Purchase of employee stock purchase plan shares
366 
 
 
367 
Purchase of employee stock purchase plan shares (in shares)
63,611 
 
 
 
 
Expense related to warrants (Note 4)
 
152 
 
 
152 
Net loss
 
 
 
(52,421)
(52,421)
Accumulated other comprehensive (loss) income
 
 
92 
 
92 
Balance at Dec. 31, 2012
639 
372,123 
78 
(274,245)
98,595 
Balance (in shares) at Dec. 31, 2012
63,909,800 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
Issuance of common stock, net of issuance costs of $11.0, $4.8 and $3.9 million for 2014, 2013 and 2012, respectively
63 
73,232 
 
 
73,296 
Issuance of common stock, net of issuance costs (in shares)
6,325,000 
 
 
 
 
Exercise of common stock options and warrants
1,337 
 
 
1,341 
Exercise of common stock options and warrants (in shares)
418,146 
 
 
 
 
Issuance of common stock to fund the Company's 2014, 2013 and 2012 401(k) match
354 
 
 
354 
Issuance of common stock to fund the Company's 2013, 2012 and 2011 401(k) match (in shares)
30,538 
 
 
 
 
Compensation expense related to issuance of stock options and restricted stock awards
7,741 
 
 
7,744 
Compensation expense related to issuance of stock options and restricted stock awards (in shares)
328,422 
 
 
 
 
Purchase of employee stock purchase plan shares
452 
 
 
453 
Purchase of employee stock purchase plan shares (in shares)
59,932 
 
 
 
 
Net loss
 
 
 
(46,514)
(46,514)
Accumulated other comprehensive (loss) income
 
 
47 
 
47 
Balance at Dec. 31, 2013
711 
455,239 
125 
(320,759)
135,316 
Balance (in shares) at Dec. 31, 2013
71,071,838 
 
 
 
71,071,838 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
Issuance of common stock, net of issuance costs of $11.0, $4.8 and $3.9 million for 2014, 2013 and 2012, respectively
155 
238,425 
 
 
238,580 
Issuance of common stock, net of issuance costs (in shares)
15,500,000 
 
 
 
 
Exercise of common stock options and warrants
15 
2,625 
 
 
2,640 
Exercise of common stock options and warrants (in shares)
1,522,753 
 
 
 
 
Issuance of common stock to fund the Company's 2014, 2013 and 2012 401(k) match
455 
 
 
456 
Issuance of common stock to fund the Company's 2013, 2012 and 2011 401(k) match (in shares)
32,666 
 
 
 
 
Compensation expense related to issuance of stock options and restricted stock awards
11,516 
 
 
11,520 
Compensation expense related to issuance of stock options and restricted stock awards (in shares)
410,619 
 
 
 
 
Purchase of employee stock purchase plan shares
759 
 
 
760 
Purchase of employee stock purchase plan shares (in shares)
88,166 
 
 
 
 
Net loss
 
 
 
(100,048)
(100,048)
Accumulated other comprehensive (loss) income
 
 
(240)
 
(240)
Balance at Dec. 31, 2014
$ 887 
$ 709,019 
$ (115)
$ (420,807)
$ 288,984 
Balance (in shares) at Dec. 31, 2014
88,626,042 
 
 
 
88,626,042 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities:
 
 
 
Net loss
$ (100,048)
$ (46,514)
$ (52,421)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization of fixed assets
3,710 
1,418 
985 
Loss on disposal of property and equipment
49 
100 
 
Stock-based compensation
11,520 
7,744 
5,493 
Amortization of deferred license fees
(294)
(4,144)
(4,144)
Warrant licensing expense
 
 
152 
Restricted stock licensing expense
 
 
1,000 
Amortization of premium on short-term investments
842 
636 
532 
Changes in assets and liabilities:
 
 
 
Prepaid expenses and other current assets
(1,329)
(1,606)
441 
Accounts receivable
(1,376)
 
 
Inventory, net
(4,017)
 
 
Accounts payable
1,886 
(2,891)
2,887 
Accrued expenses
8,610 
2,833 
532 
Lease incentive obligation
(487)
2,655 
 
Accrued interest
22 
21 
21 
Net cash used in operating activities
(80,912)
(39,748)
(44,522)
Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(209,471)
(98,510)
(96,047)
Maturities of marketable securities
104,172 
72,289 
58,411 
Purchases of property and equipment
(12,537)
(9,282)
(681)
Net cash used in investing activities
(117,836)
(35,503)
(38,317)
Cash flows from financing activities:
 
 
 
Proceeds from sale of common stock, net of issuance costs
238,580 
73,296 
57,755 
Proceeds from exercise of common stock options
2,640 
1,341 
2,388 
Proceeds in connection with the Company's employee stock purchase plan
760 
453 
367 
Proceeds from New Market Tax Credit financing agreements
2,399 
 
 
Payments on capital lease obligations
(351)
(333)
(107)
Net cash provided by financing activities
244,028 
74,757 
60,403 
Net increase (decrease) in cash and cash equivalents
45,280 
(494)
(22,436)
Cash and cash equivalents, beginning of period
12,851 
13,345 
35,781 
Cash and cash equivalents, end of period
58,131 
12,851 
13,345 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Unrealized gain (loss) on available-for-sale investments
(240)
47 
92 
Issuance of 32,666, 30,538, and 32,872 shares of common stock to fund the Company’s 401(k) matching contribution for 2013, 2012, and 2011, respectively
456 
354 
274 
Laboratory equipment acquired with a capital lease
 
 
$ 1,151 
Consolidated Statements of Cash Flows (Parenthetical)
12 Months Ended
Dec. 31, 2014
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
32,666 
30,538 
32,872 
ORGANIZATION
ORGANIZATION

(1) ORGANIZATION

Exact Sciences Corporation (Exact or the Company) was incorporated in February 1995. Exact is a molecular diagnostics company currently focused on the early detection and prevention of colorectal cancer. The Companys 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 precancer and cancer.

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. See Note 12 for the discussion of financing arrangements involving certain entities that are variable interest entities that are included in our consolidated financial statements.  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 accounting principles generally accepted in the United States 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 December 31, 2014 and 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 income. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity computed under the straight‑line method. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other‑than‑temporary on available‑for‑sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available‑for‑sale are included in investment income.

At December 31, 2014 and December 31, 2013 the Companys investments were comprised of fixed income investments and all were deemed available‑for‑sale. The objectives of the Companys 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 Companys 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 Companys investments are considered current. Realized gains were $11,000, $9,639, and $6,231, net of insignificant realized losses, for the years ended December 31, 2014, 2013, and 2012, respectively. Unrealized losses on investments recorded in other comprehensive income were $159,908 and $7,190 for the years ended December 31, 2014 and 2013, respectively. Unrealized gains on investments recorded in other comprehensive income were $45,808 and $132,663 for the years ended December 31, 2014 and 2013, respectively.

Available‑for‑sale securities at December 31, 2014 consist 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 

 

 

 

 

(7)

 

 

18,688 

 

Asset backed securities

 

 

60,821 

 

 

17 

 

 

(18)

 

 

60,820 

 

Commercial paper

 

 

3,993 

 

 

 —

 

 

 —

 

 

3,993 

 

Total available-for-sale securities

 

$

224,740 

 

$

46 

 

$

(161)

 

$

224,625 

 

 

 

Available‑for‑sale securities at December 31, 2013 consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

77,935 

 

$

82 

 

$

(7)

 

$

78,010 

 

U.S. government agency securities

 

 

34,291 

 

 

46 

 

 

 —

 

 

34,337 

 

Certificates of deposit

 

 

6,558 

 

 

 

 

 —

 

 

6,562 

 

Commercial paper

 

 

1,499 

 

 

 —

 

 

 —

 

 

1,499 

 

Total available-for-sale securities

 

$

120,283 

 

$

132 

 

$

(7)

 

$

120,408 

 

 

Changes in Accumulated Other Comprehensive Income (Loss)

The amount recognized in accumulated other comprehensive income (loss) (AOCI) for the years ended December 31, 2014 and 2013 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

2014

 

2013

 

2012

Beginning balance

 

$

125 

 

$

78 

 

$

(14)

Other comprehensive (loss) income before reclassifications

 

 

(200)

 

 

90 

 

 

84 

Amounts reclassified from accumulated other comprehensive loss

 

 

(40)

 

 

(43)

 

 

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

 

 

(240)

 

 

47 

 

 

92 

Ending balance

 

$

(115)

 

$

125 

 

$

78 

 

Amounts reclassified from accumulated other comprehensive income (loss) for the years ended December 31, 2014 and 2013 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Year Ended December 31,

Details about AOCI  Components

 

Statement of Operations

 

2014

 

2013

 

2012

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

(40)

 

$

(43)

 

$

Total reclassifications

 

 

 

$

(40)

 

$

(43)

 

$

 

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, computer equipment and computer software

 

3 years

 

Leasehold improvements

 

Lesser of the remaining lease term or useful life

 

Furniture and fixtures

 

3 years

 

 

Depreciation expense for the years ended December 31, 2014, 2013, and 2012 was $3.7 million, $1.4 million, and $1.0 million, respectively.

At December 31, 2014, the Company had $1.6 million of assets under construction which consisted of $1.2 million of capitalized costs related to software and computer hardware projects and $0.4 million of costs related to leasehold improvement projects. Depreciation will begin on these assets once they are placed into service. We expect that it will cost $0.2 million to complete the leasehold improvement projects and $0.1 million to complete 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.

Patent Costs

Patent costs, which have historically consisted of related legal fees, are capitalized as incurred, only if the Company determines that there is some probable future economic benefit derived from the transaction. The capitalized patents are amortized beginning when patents are approved over an estimated useful life of five years. Capitalized patent costs are expensed upon disapproval, upon a decision by the Company to no longer pursue the patent or when the related intellectual property is either sold or deemed to be no longer of value to the Company. The Company determined that all patent costs incurred during the year ended December 31, 2014, 2013 and 2012 should be expensed and not capitalized as the future economic benefit derived from the transactions cannot be determined.

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 is the same because all outstanding common stock equivalents have been excluded, as they are anti‑dilutive as a result of the Companys losses.

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

 

 

 

 

 

 

 

 

 

 

 

    

2014

    

2013

    

2012

 

Shares issuable upon exercise of stock options

 

4,934 

 

6,063 

 

6,182 

 

Shares issuable upon exercise of outstanding warrants(1)

 

 —

 

155 

 

325 

 

Shares issuable upon the release of restricted stock awards

 

1,541 

 

1,151 

 

814 

 

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

 

24 

 

49 

 

73 

 

 

 

6,499 

 

7,418 

 

7,394 

 

 


(1)

At December 31, 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. At December 31, 2012, represents warrants to purchase 250,000 shares of common stock issued under a licensing agreement and warrants to purchase 75,000 shares of common stock issued under a consulting agreement.

 

Accounting for Stock‑Based Compensation

The Company requires all share‑based payments to employees, including grants of employee stock options, restricted stock, restricted stock units and shares purchased under an ESPP (if certain parameters are not met), to be recognized in the financial statements based on their fair values.

Revenue Recognition

Laboratory service revenue.    The Company’s revenues are primarily generated 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 or determinable, and collectability is reasonably assured. The Company assesses whether the fee is fixed or determinable and if the collectability is reasonable 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 significant 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. As such, the Company takes assignment of benefits and risk of collection with the third-party payor. Patients may have out-of-pocket costs for amounts not covered by their insurance reimbursement policies. Consequently, 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 test paid against the number of tests billed, and consider the payor’s outstanding balance for unpaid test 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. Cologuard became available upon FDA approval on August 11, 2014. The national coverage decision for Cologuard was released by CMS on October 9, 2014.

The Company recognized approximately $1.5 million in laboratory service revenue for the year ended December 31, 2014.

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 Note 3 below, in connection with the Companys 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 Companys 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 is amortizing that up‑front payment on a straight line basis into revenue over the initial five‑year collaboration period ending in January 2014. The Company received the first holdback amount of $962,000, which included accrued interest, due from Genzyme during the first quarter of 2010. The Company received the second holdback amount of $934,250 which included accrued interest due, from Genzyme during the third quarter of 2010. The amounts were deferred and were amortized on a straight‑line basis into revenue over the remaining term of the collaboration at the time of receipt.

In addition, Genzyme purchased 3,000,000 shares of common stock purchased from the Company on January 27, 2009 for $2.00 per share, representing a premium of $0.51 per share above the closing price of the Companys common stock on that date of $1.49 per share. The aggregate premium paid by Genzyme over the closing price of the Companys 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 ending in January 2014.

The Company recognized approximately $0.3 million in license fee revenue for the year ended December 31, 2014 and $4.1 million in license fee revenue in connection with the amortization of the up‑front payments from Genzyme during the years ended December 31, 2013, and 2012, respectively.

Inventory

Inventory is stated at the lower of cost or market value (net realizable value). The Company determines the cost of inventory using the first-in, first out method (FIFO). The Company estimates the recoverability of inventory by reference to internal estimates of future demands and product life cycles, including expiration. The Company periodically analyzes its inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated 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 production 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 $0.7 million if the entirety of those balances were allocated to inventory produced for resale and not allocated to research and development activities.

The Company has invested in its manufacturing operations to support future demand for Cologuard. Because of this investment in the future, the Company is not currently operating at normal capacity. Charges related to excess capacity are included as current period charges to cost of sales, and are not capitalized into inventory. Total excess capacity charged to cost of sales during the year ended December 31, 2014 was $1.6 million.

Inventory consists of the following (amount in thousands):

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2014

    

2013

 

Raw Materials

 

$

1,019 

 

$

 —

 

Semi-finished and finished goods

 

 

2,998 

 

 

 —

 

Total inventory

 

$

4,017 

 

$

 —

 

 

Advertising Costs

The Company expenses the costs of media advertising at the time the advertising takes place. The Company expensed approximately $5.3 million, $0.1 million and $0.1 million of media advertising during the years ended December 31, 2014, 2013, and 2012, respectively.

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 Companys 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 Companys 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 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 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

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

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

 

 

78,010 

 

 

 —

 

 

78,010 

 

 

 —

 

U.S. government agency securities

 

 

34,338 

 

 

 —

 

 

34,338 

 

 

 —

 

Certificates of deposit

 

 

6,561 

 

 

 —

 

 

6,561 

 

 

 —

 

Commercial paper

 

 

1,499 

 

 

 —

 

 

1,499 

 

 

 —

 

Total

 

$

133,259 

 

$

12,851 

 

$

120,408 

 

$

 —

 

 

The Company monitors investments for other-than-temporary impairment.  It was determined that unrealized gains and losses at December 31, 2014 and 2013, are temporary in nature, because the change in market value for those securities has resulted from fluctuating interest rates, rather than a deterioration of the credit worthiness of the issuers. So long as the Company holds these securities to maturity, it is unlikely to experience gains or losses. In the event that the Company disposes of these securities before maturity, it is expected that realized gains or losses, if any, will be immaterial.

The following table summarizes the gross unrealized losses and fair values of investments in an unrealized loss position as of December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

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

    

$

113,960 

    

$

(136)

    

$

 —

    

$

 —

    

$

113,960 

    

$

(136)

    Asset backed securities

    

 

33,073 

    

 

(18)

    

 

 —

    

 

 —

    

 

33,073 

    

 

(18)

    U.S. government agency securities

    

 

5,641 

    

 

(7)

    

 

 —

    

 

 —

    

 

5,641 

    

 

(7)

Total

    

$

152,674 

    

$

(161)

    

$

 —

    

$

 —

    

$

152,674 

    

$

(161)

 

The following table summarizes the gross unrealized losses and fair value of investments in an unrealized loss position as of December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

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

    

$

7,379 

    

$

(6)

    

$

 —

    

$

 —

    

$

7,379 

 

$

(6)

    Asset backed securities

    

 

5,062 

    

 

(1)

    

 

 —

    

 

 —

    

 

5,062 

 

 

(1)

    Commercial paper

    

 

1,499 

    

 

 —

    

 

 —

    

 

 —

    

 

1,499 

 

 

 —

Total

    

$

13,940 

    

$

(7)

    

$

 —

    

$

 —

    

$

13,940 

 

$

(7)

 

 

The following table summarizes contractual underlying maturities of the Companys available‑for‑sale investments at December 31, 2014 (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

 

$

14,788 

 

$

14,796 

 

$

3,899 

 

$

3,892 

    Corporate bonds

 

 

81,461 

 

 

81,423 

 

 

59,777 

 

 

59,701 

    Commercial paper

 

 

3,993 

 

 

3,993 

 

 

 —

 

 

 —

    Asset backed securities

 

 

 —

 

 

 —

 

 

60,821 

 

 

60,820 

Total

 

$

100,242 

 

$

100,212 

 

$

124,497 

 

$

124,413 

 

 

Concentration of Credit Risk

In accordance with GAAP, the Company is required to disclose any significant off‑balance‑sheet risk and credit risk concentration. The Company has no significant off‑balance‑sheet risk, such as foreign exchange contracts or other hedging arrangements. Financial instruments that subject the Company to credit risk consist of cash, cash equivalents and marketable securities. As of December 31, 2014, the Company had cash and cash equivalents deposited in financial institutions in which the balances exceed the federal government agency insured limit of $250,000 by approximately $57.1 million. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk. 

Subsequent Events

The Company evaluates events that occur through the filing date and discloses those events or transactions that provide additional evidence with respect to conditions that existed at the date of the balance sheet. In addition, the financial statements are adjusted for any changes in estimates resulting from the use of such evidence.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The update also creates a new Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers, which provides guidance for the incremental costs of obtaining a contract with a customer and those costs incurred in fulfilling a contract with a customer that are not in the scope of another topic. The new revenue standard requires that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entities expect to be entitled in exchange for those goods or services. To achieve that core principle, the standard requires a five step process of identifying the contracts with customers, identifying the performance obligations in the contracts, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, the performance obligations are satisfied. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. We are evaluating the impact that the adoption of this standard will have on our consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern . The amendment is effective for the annual period beginning after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. The amendment requires an entity’s management to evaluate for each annual and interim reporting period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. If substantial doubt is raised, further analysis and disclosures are required, including management’s plans to mitigate the adverse conditions or events.

 

In July 2013, the FASB issued ASU 2013-11 regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This standard requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss ("NOL") or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This ASU requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. This guidance is effective for fiscal years beginning after December 15, 2013, with early adoption permitted. The Company adopted this guidance during the first quarter of 2014, and it did not have a material impact on the consolidated financial statements as we have a full valuation allowance against the deferred tax asset. Refer to footnote 13 for further description.

Reclassifications

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

GENZYME STRATEGIC TRANSACTION
GENZYME STRATEGIC TRANSACTION

(3) GENZYME STRATEGIC TRANSACTION

 

Transaction summary

 

On January 27, 2009, the Company entered into a Collaboration, License and Purchase Agreement (the CLP Agreement) with Genzyme Corporation (Genzyme). Pursuant to the CLP Agreement, the Company (i) assigned to Genzyme all of its intellectual property applicable to the fields of prenatal and reproductive health (the Transferred Intellectual Property), (ii) granted Genzyme an irrevocable, perpetual, exclusive, worldwide, fully‑paid, royalty‑free license to use and sublicense all of the Companys remaining intellectual property (the Retained Intellectual Property) in the fields of prenatal and reproductive health (the Genzyme Core Field), and (iii) granted Genzyme an irrevocable, perpetual, non‑exclusive, worldwide, fully‑paid, royalty‑free license to use and sublicense the Retained Intellectual Property in all fields other than the Genzyme Core Field and other than colorectal cancer detection and stool‑based disease detection (the Company Field). Following the transaction, the Company retained rights in its intellectual property to pursue only the fields of colorectal cancer detection and stool‑based detection of any disease or condition

 

Pursuant to the Genzyme Strategic Transaction, Genzyme agreed to pay an aggregate of $18.5 million to the Company, of which $16.65 million was paid at closing and $1.85 million (the Holdback Amount) was subject to a holdback by Genzyme to satisfy certain potential indemnification obligations of the Company. Genzyme also agreed to pay a double‑digit royalty to the Company on income received by Genzyme as a result of any licenses or sublicenses to third parties of the Transferred Intellectual Property or the Retained Intellectual Property in any field other than the Genzyme Core Field or the Company Field.

 

The Companys on‑going performance obligations to Genzyme under the CLP, including the obligation to deliver 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 is amortizing that up‑front payment on a straight line basis into the License Fee Revenue line item in its statements of operations over the initial five year collaboration period. The Company received the first holdback amount of $962,000, which included accrued interest, due from Genzyme during the first quarter of 2010. The Company received the second holdback amount of $934,250 which included accrued interest due, from Genzyme during the third quarter of 2010. The amounts were deferred and were amortized on a straight‑line basis into revenue over the remaining term of the collaboration through January 2014.

 

In addition, the Company entered into a Common Stock Subscription Agreement with Genzyme on January 27, 2009, which provided for the private issuance and sale to Genzyme of 3,000,000 shares (the Shares) of the Companys common stock, $0.01 par value per share, at a per share price of $2.00, for an aggregate purchase price of $6.0 million. The price paid by Genzyme for the Shares represented a premium of $0.51 per share above the closing price of the Companys common stock on that date of $1.49 per share. The aggregate premium paid by Genzyme over the closing price of the Companys common stock on the date of the transaction of $1.53 million is included as a part of the total consideration for the CLP. Accordingly, the Company deferred the aggregate $1.53 million premium and amortized that amount on a straight line basis into the License fees line item in the Companys statements of operations over the initial five‑year collaboration period.

 

The Company recognized approximately $0.3 million in license fee revenue in connection with the amortization of the up-front payments and holdback amounts from Genzyme during the year ended December 31, 2014. The Company recognized approximately $4.1 million in license fee revenue in connection with the amortization of the up‑front payments and holdback amounts from Genzyme during each of the years ended December 31, 2013 and 2012.

 

MAYO LICENSE AGREEMENT
MAYO LICENSE AGREEMENT

(4) 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 expense 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 using 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 became exercisable over a four year period.

 

The warrant covering 1,000,000 shares was fully exercised as of September 2011.

 

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. Minimum royalty payments were $10,000 in 2012, $25,000  in each of 2013 and 2014 and will be $25,000 per year thereafter through 2033, the year the last patent expires.

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, 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 its FDA 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 is paying MAYO for research and development efforts. As part of the Company’s research collaboration with MAYO, the Company has incurred charges of $2.3 million and has made payments of $0.7 million for the year ended December 31, 2014. The Company has recorded an estimated liability in the amount of $1.4 million for research and development efforts as of December 31, 2014. The Company incurred $1.7 million and made payments of $1.0 million for the year ended December 31, 2013. The Company recorded an estimated liability in the amount of $0.7 million for research and development efforts at December 31, 2013. The Company incurred charges of $1.2 million and made payments of $1.1 million for the year ended December 31, 2012.

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 they would proceed with the tests for other gastrointestinal diseases unless the significant risks related to the colorectal cancer screening test receiving FDA approval were mitigated. Because of the significant uncertainty of receiving FDA approval for the colorectal cancer diagnostic, 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 the second and third 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.

ISSUANCES OF EQUITY
ISSUANCES OF EQUITY

(5) ISSUANCES OF EQUITY

Underwritten Public Offerings

On August 13, 2012, the Company completed an underwritten public offering of 6.3 million shares of common stock at a price of $9.75 per share to the public. The Company received approximately $57.8 million of net proceeds from the offering, after deducting $3.9 million for the underwriting discount and other stock issuance costs paid by the Company.

On June 21, 2013, the Company completed an underwritten public offering of 6.3 million shares of common stock at a price of $12.35 per share to the public. The Company received approximately $73.3 million of net proceeds from the offering, after deducting $4.8 million for the underwriting discount and other stock issuance costs paid by the Company.

On April 2, 2014, the Company completed an underwritten public offering of 11.5 million 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.

On December 16, 2014, the Company completed an underwritten public offering of 4.0 million shares of common stock at a price of $25.75 per share to the public. The Company received approximately $100.9 million of net proceeds from the offering, after deducting $2.1 million for the underwriting discount and other stock issuance costs paid by the Company.

Rights Agreement

In February 2011, the Company adopted a rights agreement and subsequently distributed to the Companys 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 the Companys outstanding common stock or the commencement or announcement of an intention to make a tender offer or exchange offer for 15% or more of the Companys outstanding common stock. If any person or group acquires 15% or more of the Companys common stock, the Companys stockholders, other than the acquiror, will have the right to purchase additional shares of the Companys 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 acquirors ownership position in the Companys shares, thereby making a takeover prohibitively expensive and encouraging such acquiror to negotiate with the Companys 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.

STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION

(6) 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, the “Stock Plans”).

2000 Stock Option and Incentive Plan  The Company adopted the 2000 Option and Incentive Plan (the “2000 Option Plan”) on October 17, 2000. The 2000 Option Plan expired October 17, 2010 and after such date no further awards could be granted under the plan. Under the terms of the 2000 Option Plan, the Company was authorized to grant incentive stock options, as defined under the Internal Revenue Code, non‑ qualified options, restricted stock awards and other stock awards to employees, officers, directors, consultants and advisors. Options granted under the 2000 Option Plan expire ten years from the date of grant. Grants made from the 2000 Option Plan generally vest over a period of three to four years.

The 2000 Option Plan was administered by the compensation committee of the Company’s board of directors, which selected the individuals to whom equity‑based awards would be granted and determined the option exercise price and other terms of each award, subject to the provisions of the 2000 Option Plan. The 2000 Option Plan provides that upon an acquisition of the Company, all options to purchase common stock will accelerate by a period of one year. In addition, upon the termination of an employee without cause or for good reason prior to the first anniversary of the completion of the acquisition, all options then outstanding under the 2000 Option Plan held by that employee will immediately become exercisable. At December 31, 2014, options to purchase 3,358,800 shares were outstanding under the 2000 Option Plan. There were no shares of restricted stock outstanding under the 2000 Option Plan.

2010 Omnibus Long‑Term Incentive Plan  The Company adopted the 2010 Omnibus Long‑Term Incentive Plan (the “2010 Stock Plan”) on July 16, 2010. The 2010 Stock Plan will expire on July 16, 2020 and after such date no further awards may be granted under the plan. Under the terms of the 2010 Stock Plan, the Company is authorized to grant incentive stock options, as defined under the Internal Revenue Code, non‑ qualified options, restricted stock awards and other stock awards to employees, officers, directors, consultants and advisors. Options granted under the 2010 Stock Plan expire ten years from the date of grant. Grants made from the 2010 Stock Plan generally vest over a period of three to four years.

The 2010 Stock Plan is administered by the compensation committee of the Company’s board of directors, which selects the individuals to whom equity‑based awards will be granted and determines the option exercise price and other terms of each award, subject to the provisions of the 2010 Stock Plan. The 2010 Stock Plan provides that upon an acquisition of the Company, all equity will accelerate by a period of one year. In addition, upon the termination of an employee without cause or for good reason prior to the first anniversary of the completion of the acquisition, all equity awards then outstanding under the 2010 Stock Plan held by that employee will immediately vest. At December 31, 2014, options to purchase 1,575,517 shares were outstanding under the 2010 Stock Plan and 1,541,114 shares of restricted stock and restricted stock units were outstanding. At December 31, 2014, there were 1,638,187 shares available for future grant under the 2010 Stock Plan.

2010 Employee Stock Purchase Plan  The 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) was adopted by the Company on July 16, 2010. The 2010 Purchase Plan provides participating employees the right to purchase common stock at a discount through a series of offering periods. The 2010 Purchase Plan will expire on October 31, 2020. On July 24, 2014 the stockholders of Exact Sciences Corporation approved an amendment to the 2010 Employee Stock Purchase Plan to increase the number of shares available for purchase thereunder by 500,000 shares. At December 31, 2014, there were 540,177 shares of common stock available for purchase by participating employees under the 2010 Purchase Plan.

The compensation committee of the Company’s board of directors administers the 2010 Purchase Plan. Generally, all employees whose customary employment is more than 20 hours per week and more than five months in any calendar year are eligible to participate in the 2010 Purchase Plan. Participating employees authorize an amount, between 1% and 15% of the employee’s compensation, to be deducted from the employee’s pay during the offering period. On the last day of the offering period, the employee is deemed to have exercised the employee’s option to purchase shares of Company common stock, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the 2010 Purchase Plan, the option exercise price is an amount equal to 85% of the fair market value, as defined under the 2010 Purchase Plan and no employee can purchase more than $25,000 of Company common stock under the 2010 Purchase Plan in any calendar year. Rights granted under the 2010 Purchase Plan terminate upon an employee’s voluntary withdrawal from the 2010 Purchase Plan at any time or upon termination of employment. At December 31, 2014, there were 259,823 cumulative shares issued under the 2010 Purchase Plan, and 88,166 shares were issued in the year ended December 31, 2014, as follows:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted Average

 

Offering period ended

 

Number of Shares

 

price per Share

 

April 30, 2014

 

40,846 

 

$

8.25 

 

October 31, 2014

 

47,320 

 

$

8.95 

 

 

Stock‑Based Compensation Expense

The Company recorded approximately $11.5 million in stock‑based compensation expense during the year ended December 31, 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 $7.7 million in stock‑based compensation expense during the year ended December 31, 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 and non‑employee directors. The Company recorded approximately $5.5 million in stock‑based compensation expense during the year ended December 31, 2012 in connection with the amortization of awards of common stock, restricted common stock and stock options granted to employees, non‑employee directors and non‑employee consultants. Non‑cash stock‑based compensation expense by department for the years ended December 31, 2014, 2013, and 2012 are as follows, and amounts included in the table are in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2014

    

2013

    

2012

 

Cost of sales

 

$

279 

 

$

 —

 

$

 —

 

Research and development

 

 

4,135 

 

 

2,817 

 

 

2,396 

 

General and administrative

 

 

5,589 

 

 

3,054 

 

 

2,579 

 

Sales and marketing

 

 

1,517 

 

 

1,873 

 

 

518 

 

    Total stock-based compensation

 

$

11,520 

 

$

7,744 

 

$

5,493 

 

 

In connection with the June 7, 2013 resignation of the Company’s former Chief Commercial Officer, the Company modified the vesting of 100,000 shares of her previously unvested restricted stock units of which 41,250 of the restricted stock units vested upon the execution of the separation agreement, 10,000 will vest in March 2014, and the remaining 48,750 will vest in twentyfour equal monthly installments beginning in April 2014, subject to her continuing compliance with the terms of the separation agreement. She forfeited all other unvested restricted stock units and stock option awards. It was determined that the continuing compliance and service to be provided to the Company under the separation agreement was not substantive and, as a result, the Company recorded the full value of the modified restricted stock units as additional stock‑based compensation expense in the second quarter of 2013.

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 used in the twelve months ended December 31, 2014, 2013 and 2012 was 4.99%,  2.76%, and 1.38%, respectively. 

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. 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 following table:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2014

    

2013

    

2012

 

Option Plan Shares

 

 

 

 

 

 

 

Risk-free interest rates

 

1.96%  -  2.01%

 

0.94%  -  1.73%

 

0.81%  -  1.00%

 

Expected term (in years)

 

6

 

6

 

6

 

Expected volatility

 

77.6%  -  80.8%

 

82.9%  -  84.0%

 

85%  -  92%

 

Dividend yield

 

0 %

 

0 %

 

0 %

 

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

 

$ 10.05

 

$ 8.12

 

$ 6.90

 

ESPP Shares

 

 

 

 

 

 

 

Risk-free interest rates

 

0.1%  -  0.5%

 

0.1%  -  0.33%

 

0.18%  -  0.30%

 

Expected term (in years)

 

0.5  -  2

 

0.5  -  2

 

0.5  -  2

 

Expected volatility

 

42.5%  -  62.7%

 

39.1%  -  45.6%

 

34.0%  -  54.9%

 

Dividend yield

 

0 %

 

0 %

 

0 %

 

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

 

$ 6.3

 

$ 3.13

 

$ 2.84

 

 

 

Stock Option, Restricted Stock, and Restricted Stock Unit Activity

A summary of stock option activity under the Stock Plans during the years ended 2014, 2013 and 2012 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, 2012

 

6,453,584 

 

$

2.27 

 

 

 

 

 

 

Granted

 

499,198 

 

 

9.18 

 

 

 

 

 

 

Exercised

 

(691,471)

 

 

3.45 

 

 

 

 

 

 

Forfeited

 

(79,375)

 

 

7.6 

 

 

 

 

 

 

Outstanding, December 31, 2012

 

6,181,936 

 

$

2.62 

 

 

 

 

 

 

Granted

 

290,570 

 

 

11.36 

 

 

 

 

 

 

Exercised

 

(274,919)

 

 

5.17 

 

 

 

 

 

 

Forfeited

 

(135,000)

 

 

10.08 

 

 

 

 

 

 

Outstanding, December 31, 2013

 

6,062,587 

 

$

2.78 

 

6.6 

 

 

 

 

Granted

 

266,477 

 

 

14.28 

 

 

 

 

 

 

Exercised

 

(1,378,372)

 

 

1.91 

 

 

 

 

 

 

Forfeited

 

(16,375)

 

 

6.37 

 

 

 

 

 

 

Outstanding, December 31, 2014

 

4,934,317 

 

$

3.63 

 

5.2 

 

$

117,503 

 

Exercisable, December 31, 2014

 

4,186,502 

 

$

2.27 

 

4.7 

 

$

105,384 

 

Vested and expected to vest, December 31, 2014

 

4,897,001 

 

$

3.57 

 

5.2 

 

$

116,898 

 

 


(1)

The aggregate intrinsic value of options outstanding at December 31, 2014 is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s common stock for the 4,934,317 options that had exercise prices that were lower than the $27.44 market price of our common stock at December 31, 2014. The aggregate intrinsic value of options exercisable at December 31, 2014 is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s common stock for the 4,186,502 options that had exercise prices that were lower than the $27.44 market price of our common stock at December 31, 2014. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $29.2 million, $1.9 million, $4.5 million, respectively, determined as of the date of exercise.

 

Warrants to purchase 75,000 shares of common stock were issued in connection with a consulting agreement in 2009 to provide specific assistance to the Company in attaining FDA approval of Cologuard. The 75,000 warrants vested in the third quarter of 2014 upon successful approval for Cologuard. The Company recorded $1.3 million, the fair value of the warrant on the vesting date as stock-based compensation expense during the third quarter of 2014 in connection with the vesting of this warrant.

A summary of restricted stock and restricted stock unit activity under the Stock Plans during the years ended December 31, 2014, 2013 and 2012 is as follows:

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

Restricted

 

Average Grant

 

 

 

Shares

 

Date Fair Value

 

Outstanding, January 1, 2012

 

401,490 

 

$

6.24 

 

Granted

 

602,268 

 

 

9.47 

 

Released

 

(185,116)

 

 

5.67 

 

Forfeited

 

(4,687)

 

 

7.69 

 

Outstanding, December 31, 2012

 

813,955 

 

$

8.51 

 

Granted

 

1,147,553 

 

 

11.76 

 

Released

 

(344,611)

 

 

8.56 

 

Forfeited

 

(466,203)

 

 

9.73 

 

Outstanding, December 31, 2013

 

1,150,694 

 

$

11.23 

 

Granted

 

926,171 

 

 

15.61 

 

Released

 

(491,370)

 

 

11.17 

 

Forfeited

 

(44,381)

 

 

12.44 

 

Outstanding, December 31, 2014

 

1,541,114 

 

$

13.86 

 

 

As of December 31, 2014, there was approximately $19.5 million of total unrecognized compensation cost related to non‑vested share‑based compensation arrangements granted under all equity compensation 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 2.8 years.

The Company received approximately $2.6 million, $1.3 million and $2.4 million from stock option exercises during the years ended December 31, 2014, 2013 and 2012, respectively. During the years ended December 31, 2014, 2013 and 2012, 88,166,  59,932 and 63,611 shares of common stock, respectively, were issued under the Company’s 2010 Purchase Plan resulting in proceeds to the company of $0.8 million, $0.5 million and $0.4 million, respectively.

The following table summarizes information relating to currently outstanding and exercisable stock options as of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

Exercisable

 

 

    

 

    

Weighted

    

 

 

    

 

    

 

 

 

 

 

 

 

Average

 

Weighted