EXACT SCIENCES CORP, 10-Q filed on 5/3/2016
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2016
May 2, 2016
Document and Entity Information
 
 
Entity Registrant Name
EXACT SCIENCES CORP 
 
Entity Central Index Key
0001124140 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2016 
 
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
 
97,791,900 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q1 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2016
Dec. 31, 2015
Current Assets:
 
 
Cash and cash equivalents
$ 52,151 
$ 41,135 
Marketable securities
210,441 
265,744 
Accounts receivable, net
5,621 
4,933 
Inventory, net
8,157 
6,677 
Prepaid expenses and other current assets
7,722 
7,375 
Total current assets
284,092 
325,864 
Property and Equipment, at cost:
 
 
Computer equipment and computer software
15,827 
14,025 
Laboratory equipment
13,496 
12,786 
Leasehold improvements
10,757 
7,118 
Buildings
4,792 
4,777 
Assets under construction
4,735 
8,038 
Furniture and fixtures
1,825 
1,265 
Property and Equipment, gross
51,432 
48,009 
Less-Accumulated depreciation
(16,386)
(13,913)
Net property and equipment
35,046 
34,096 
Other long-term assets
4,650 
4,070 
Total assets
323,788 
364,030 
Current Liabilities:
 
 
Accounts payable
2,841 
3,308 
Accrued liabilities
20,477 
22,253 
Debt and capital lease obligation, current portion
169 
166 
Other short-term liabilities
1,191 
996 
Total current liabilities
24,678 
26,723 
Long-term debt
4,750 
4,789 
Other long-term liabilities
4,893 
4,601 
Lease incentive obligation, less current portion
1,134 
1,061 
Total liabilities
35,455 
37,174 
Commitments and contingencies
   
   
Stockholders' Equity:
 
 
Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—no shares at March 31, 2016 and December 31, 2015
   
   
Common stock, $0.01 par value Authorized—200,000,000 shares issued and outstanding—97,737,710 and 96,674,786 shares at March 31, 2016 and December 31, 2015
978 
968 
Additional paid-in capital
913,455 
904,931 
Accumulated other comprehensive loss
(17)
(433)
Accumulated deficit
(626,083)
(578,610)
Total stockholders' equity
288,333 
326,856 
Total liabilities and stockholders’ equity
$ 323,788 
$ 364,030 
Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 31, 2016
Dec. 31, 2015
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
97,737,710 
96,674,786 
Common stock, outstanding shares
97,737,710 
96,674,786 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Revenue
 
 
Laboratory service revenue
$ 14,835 
$ 4,266 
Cost of sales
9,059 
4,212 
Gross margin
5,776 
54 
Operating expenses:
 
 
Research and development
10,126 
6,571 
General and administrative
17,824 
12,971 
Sales and marketing
25,711 
16,524 
Total operating expenses
53,661 
36,066 
Loss from operations
(47,885)
(36,012)
Other income (expense)
 
 
Investment income
466 
222 
Interest expense
(54)
(11)
Total other income
412 
211 
Net loss
$ (47,473)
$ (35,801)
Net loss per share-basic and diluted (in dollars per share)
$ (0.49)
$ (0.40)
Weighted average common shares outstanding-basic and diluted (in shares)
97,246 
88,662 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Consolidated Statements of Comprehensive Loss
 
 
Net loss
$ (47,473)
$ (35,801)
Other comprehensive loss, net of tax:
 
 
Unrealized gain on available-for-sale investments
473 
195 
Foreign currency translation loss
(57)
(10)
Comprehensive loss
$ (47,057)
$ (35,616)
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Cash flows from operating activities:
 
 
Net loss
$ (47,473)
$ (35,801)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization of fixed assets
2,473 
1,587 
Stock-based compensation
6,100 
3,620 
Amortization of other liabilities
(208)
(58)
Amortization of deferred financing costs
13 
 
Amortization of premium on short-term investments
214 
377 
Amortization of intangible assets
50 
 
Changes in assets and liabilities:
 
 
Accounts receivable, net
(688)
(205)
Inventory, net
(1,480)
(1,406)
Prepaid expenses and other current assets
(347)
(364)
Accounts payable
(467)
(646)
Accrued liabilities
(664)
(2,309)
Lease incentive obligation
130 
(138)
Accrued interest
 
Net cash used in operating activities
(42,347)
(35,337)
Cash flows from investing activities:
 
 
Purchases of marketable securities
(6,118)
(11,145)
Maturities of marketable securities
61,680 
31,116 
Purchases of property and equipment
(2,389)
(2,371)
Net cash used in investing activities
53,173 
17,600 
Cash flows from financing activities:
 
 
Proceeds from exercise of common stock options
288 
386 
Payments on capital lease obligations
 
(91)
Payments on mortgage payable
(41)
 
Net cash provided by financing activities
247 
295 
Effects of exchange rate on cash and cash equivalents
(57)
(10)
Net increase (decrease) in cash and cash equivalents
11,016 
(17,452)
Cash and cash equivalents, beginning of period
41,135 
58,131 
Cash and cash equivalents, end of period
52,151 
40,679 
Supplemental disclosure of non-cash investing and financing activities:
 
 
Property and equipment acquired but not paid
1,034 
836 
Unrealized gain on available-for-sale investments
473 
195 
Issuance of 340,950 and 21,826 shares of common stock to fund the Company’s 401(k) matching contribution for 2015 and 2014, respectively
2,146 
835 
Interest paid
$ 53 
$ 4 
Consolidated Statements of Cash Flows (Parenthetical)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Consolidated Statements of Cash Flows
 
 
Issuance of shares of common stock to fund the Company's 401(k) matching contribution
340,950 
21,826 
ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND BASIS OF PRESENTATION

(1) ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

Exact Sciences Corporation (“Exact” or the “Company”) was incorporated in February 1995. Exact is a molecular diagnostics company currently focused on the early detection and prevention of some of the deadliest forms of cancer. The Company has developed an accurate, non-invasive, patient-friendly screening test called Cologuard for the early detection of colorectal cancer and pre-cancer, and is currently working on the development of tests for 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, Beijing Exact Sciences Medical Technology Company Limited, and variable interest entities are unaudited and have been prepared on a basis substantially consistent with the Company’s audited financial statements and notes as of and for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K (the “2015 Form 10-K”). These condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the results of operations have been included. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. The statements should be read in conjunction with the audited financial statements and related notes included in the 2015 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, Beijing Exact Sciences Medical Technology Company Limited, and variable interest entities. All significant intercompany transactions and balances have been eliminated in consolidation.

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

Use of Estimates

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

 

Cash and Cash Equivalents

The Company considers cash on hand, demand deposits in bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. no

 

Marketable Securities

 

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

 

At March 31, 2016 and December 31, 2015, 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 three months ended March 31, 2016 and 2015. Realized gains were $3.3 thousand and $3.0 thousand for the three months ended March 31, 2016 and 2015, 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 three months ended March 31, 2016, no investments were identified with other-than-temporary declines in value.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

132,854

 

$

93

 

$

(41)

 

$

132,906

 

Asset backed securities

 

 

62,380

 

 

12

 

 

(44)

 

 

62,348

 

U.S. government agency securities

 

 

7,057

 

 

8

 

 

 —

 

 

7,065

 

Certificates of deposit

 

 

5,500

 

 

2

 

 

 —

 

 

5,502

 

Commercial paper

 

 

2,621

 

 

 —

 

 

(1)

 

 

2,620

 

Total available-for-sale securities

 

$

210,412

 

$

115

 

$

(86)

 

$

210,441

 

 

Available-for-sale securities at December 31, 2015 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

179,471

 

$

2

 

$

(262)

 

$

179,211

 

Asset backed securities

 

 

77,661

 

 

 —

 

 

(166)

 

 

77,495

 

U.S. government agency securities

 

 

7,057

 

 

 —

 

 

(18)

 

 

7,039

 

Certificates of deposit

 

 

1,999

 

 

 —

 

 

 —

 

 

1,999

 

Total available-for-sale securities

 

$

266,188

 

$

2

 

$

(446)

 

$

265,744

 

 

Changes in Accumulated Other Comprehensive Income (Loss)

The amounts recognized in accumulated other comprehensive income (loss) (“AOCI”) for the three months ended March 31, 2016 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

 

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2015

 

$

11

 

$

(444)

 

$

(433)

 

Other comprehensive (loss) income before reclassifications

 

 

(57)

 

 

456

 

 

399

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

17

 

 

17

 

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

 

 

(57)

 

 

473

 

 

416

 

Balance at March 31, 2016

 

$

(46)

 

$

29

 

$

(17)

 

 

The amounts recognized in AOCI for the three months ended March 31, 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

 

 

(10)

 

 

192

 

 

182

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

3

 

 

3

 

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

 

 

(10)

 

 

195

 

 

185

 

Balance at March 31, 2015

 

$

(10)

 

$

80

 

$

70

 

 

Amounts reclassified from AOCI for the three months ended March 31, 2016 and 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Three Months Ended March 31,

 

Details about AOCI  Components

 

Statement of Operations

 

2016

 

2015

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

17

 

$

3

 

Total reclassifications

 

 

 

$

17

 

$

3

 

 

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

 

Buildings

 

30 years

 

 

At March 31, 2016, the Company had $4.7 million of assets under construction which consisted of $1.8 million related to leasehold improvements, $1.5 million related to software projects and $1.4 million related to machinery and equipment. Depreciation will begin on these assets once they are placed into service. The Company expects to incur an additional $1.2 million to complete the leasehold improvements, $0.2 million to complete the machinery and equipment, and minimal costs to complete the software projects. These projects are expected to be completed in 2016. There were no impairment losses for the periods ended March 31, 2016 and December 31, 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 incurred during the application development stage that meet the criteria for capitalization are capitalized and amortized, when the software is ready for its intended use, using the straight-line basis over the estimated useful life of the software.

 

Patent Costs and Intangible Assets

 

Patent costs, which have historically consisted of related legal fees, are capitalized as incurred, only if the Company determines that there is some probably future economic benefit derived from the transaction. The capitalized patents are amortized beginning when patents are approved over an estimated useful life. 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 three months ended March 31, 2016 should be expensed and not capitalized as the future economic benefit derived from the transactions cannot be determined.

 

Under a technology license and royalty agreement entered into with MDx Health, the Company is required to pay MDx Health milestone-based royalties on sales of products or services covered by the licensed intellectual property. Once the achievement of a milestone has occurred or is considered probable, an intangible asset and corresponding liability is reported in other long-term assets and accrued expenses, respectively. The intangible asset is amortized over the estimated ten-year useful life of the licensed intellectual property, and such amortization is reported in cost of sales. As of March 31, 2016, an intangible asset of $1.7 million and a liability of $2.0 million are reported in other long-term assets and accrued expenses, respectively. As of December 31, 2015, an intangible asset of $1.8 million and a liability of $2.0 million were reported in other long-term assets and accrued expenses, respectively. Amortization expense for the three months ended March 31, 2016 was $50.0 thousand. There was no amortization expense recorded for the three months ended March 31, 2015.

 

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 (amounts are in thousands):

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

    

2016

    

2015

    

Shares issuable upon exercise of stock options

 

5,475

 

5,222

 

Shares issuable upon the release of restricted stock awards

 

6,202

 

2,305

 

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

 

 —

 

24

 

 

 

11,677

 

7,551

 

 

Revenue Recognition

 

Laboratory Service Revenue. The Company’s revenues are generated by performing diagnostic services using its Cologuard test, and the service is completed upon delivery of a test result to an ordering physician. The Company recognizes revenue in accordance with the provisions of ASC 954-605, Health Care Entities – Revenue Recognition. The Company recognizes revenue related to billings for Medicare and other payors on an accrual basis, net of contractual and other adjustments, when amounts that will ultimately be realized can be estimated. Contractual and other adjustments represent the difference between the list price (the billing rate) and the estimated reimbursement rate for each payor. Upon ultimate collection, the amount received from Medicare and other payors where reimbursement was estimated is compared to previous collection estimates and, if necessary, the contractual allowance is adjusted.

 

The estimates of amounts that will ultimately be realized require significant judgment by management. Some patients have out-of-pocket costs for amounts not covered by their insurance carrier, and the Company may bill the patient directly for these amounts in the form of co-payments and co-insurance in accordance with their insurance carrier and health plans. Some payors may not cover Cologuard as ordered by the prescribing physician under their reimbursement policies. The Company pursues reimbursement from such patients on a case-by-case basis. In the absence of contracted reimbursement coverage or the ability to estimate the amount that will ultimately be realized for the Company’s services, revenue is recognized upon cash receipt.

 

The Company uses judgment in determining if it is able to make an estimate of what will ultimately be realized. The Company also uses judgment in estimating the amounts it expects to collect by payor. The Company’s judgments will continue to evolve in the future as it continues to gain payment experience with payors and patients.

 

The Company recognized approximately $14.8 million and $4.3 million in laboratory service revenue for the three months ended March 31, 2016 and 2015, 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 net realizable value, and records a charge to cost of sales for such inventory, as appropriate. In addition, the Company's products are subject to strict quality control and monitoring which the Company performs throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or become obsolete due to expiration, the Company records a charge to cost of sales to write down such unmarketable inventory to its estimated net realizable value.

 

Direct and indirect manufacturing costs incurred during process validation and for other research and development activities, which are not permitted to be sold, have been expensed to research and development. 

 

Inventory consists of the following (amount in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

March 31,

 

 

    

2016

    

2015

 

Raw materials

 

$

2,066

 

$

2,305

 

Semi-finished and finished goods

 

 

6,091

 

 

3,118

 

Total inventory

 

$

8,157

 

$

5,423

 

 

Foreign Currency Translation

 

For the Company’s international subsidiaries, the local currency is the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at the period-end exchange rate or historical rates as appropriate. Consolidated statements of operations amounts are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the condensed consolidated balance sheet as a component of accumulated other comprehensive income in total Exact Sciences Corporation’s stockholders’ equity. Transaction gains and losses are included in the condensed consolidated statement of operations in 2016.

 

Reclassifications

 

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

MAYO LICENSE AGREEMENT
MAYO LICENSE AGREEMENT

(3) MAYO LICENSE AGREEMENT

 

Overview

 

As more fully described in the 2015 Form 10-K, in June 2009 the Company entered into a patent license agreement (the “MAYO Agreement”) with MAYO Foundation for Medical Education and Research (“MAYO”). The Company’s license agreement with MAYO was amended and restated in February 2015 and further amended in January 2016. Under the license agreement, MAYO granted the Company an exclusive, worldwide license to certain MAYO patents and patent applications, as well as a non-exclusive, worldwide license with regard to certain MAYO know-how. As expanded by the January 2016 amendment to the license agreement, the scope of the license includes any screening, surveillance or diagnostic tests or tools for use in connection with any type of cancers, pre-cancers, diseases or conditions.

 

Pursuant to the Company’s agreement with MAYO, the Company is required to pay MAYO a low single digit royalty on the Company’s net sales of products using the licensed MAYO intellectual property, with minimum annual royalty fees of $25.0 thousand each year through 2033, the year the last patent expires. The January 2016 amendment to the MAYO license agreement established various low single digit royalty rates on net sales of current and future products and clarified how net sales will be calculated.  As part of the amendment, the royalty rate on the Company’s net sales of Cologuard increased and, if in the future, improvements are made to the Cologuard product, the royalty rate may further increase. However, the amendment provides that the Cologuard royalty will remain a low single digit percentage of net sales.

 

The Company is also required to issue MAYO shares of the Company’s common stock with a value of $200.0 thousand upon commercial launch of our second and third products that use the licensed MAYO intellectual property, as well as to pay MAYO, for each of the Company’s products that use licensed MAYO intellectual property, $200.0 thousand cash upon such product reaching $5 million in cumulative net sales, $750.0 thousand cash upon such product reaching $20 million in cumulative net sales, and $2 million cash upon such product reaching $50 million in cumulative net sales.

 

As part of the February 2015 amendment and restatement of the license agreement, the Company agreed to pay MAYO an additional $5 million, payable in five annual installments, through 2019. The Company paid MAYO the annual installment of $1 million in the first quarter of 2015 and 2016.

 

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 $1.0 million and has made payments of $1.0 million for the three months ended March 31, 2016. The Company has recorded an estimated liability in the amount of $1.2 million for research and development efforts as of March 31, 2016. The Company incurred charges of $0.5 million and made payments of $1.2 million for the three months ended March 31, 2015.

 

STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION

(4) 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 Award Plan, the 2016 Inducement Award Plan and the 2000 Stock Option and Incentive Plan (collectively, the “Stock Plans”).

 

Stock-Based Compensation Expense

 

The Company recorded $6.1 million and $3.6 million in stock-based compensation expense during the three months ended March 31, 2016 and 2015, respectively, in connection with the amortization of restricted stock and restricted stock unit awards, stock purchase rights granted under the Company’s employee stock purchase plan and stock options granted to employees, non-employee consultants and non-employee directors.  

 

Determining Fair Value

 

Valuation and Recognition – The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of each market measure-based award is estimated on the date of grant using a Monte Carlo simulation pricing model. The fair value of service-based awards for each restricted stock unit award is determined on the date of grant using the closing stock price on that day. The estimated fair value of these awards is recognized to expense using the straight-line method over the vesting period. The Black-Scholes and Monte Carlo pricing models utilize the following assumptions:

 

Expected Term – Expected life of an option award is the average length of time over which the Company expects employees will exercise their options, which is based on historical experience with similar grants. Expected life of a market measure-based award is based on the applicable performance period.

 

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

 

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

 

Forfeitures - 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 three months ended March 31, 2016 and 2015 was 3.48% and 4.99%, respectively.

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2016

    

2015

    

Option Plan Shares

 

 

 

 

 

Risk-free interest rates

 

1.48%  - 1.69%

 

1.5%  - 1.92%

 

Expected term (in years)

 

6.25  - 6.74

 

6.25 - 6.6

 

Expected volatility

 

58.9%  - 59.4%

 

67.1%  - 73.2%

 

Dividend yield

 

 0%

 

0%

 

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

 

$3.17

 

$ 15.81

 

Market Measure-Based Shares

 

   

 

 

 

Risk-free interest rates

 

0.91%

 

(1)

 

Expected term (in years)

 

 2.84

 

(1)

 

Expected volatility

 

 68.3%

 

(1)

 

Dividend yield

 

 0%

 

(1)

 

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

 

 $2.32

 

(1)

 

ESPP Shares

 

   

 

 

 

Risk-free interest rates

 

(2)

 

(2)

 

Expected term (in years)

 

(2)

 

(2)

 

Expected volatility

 

(2)

 

(2)

 

Dividend yield

 

(2)

 

(2)

 

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

 

(2)

 

(2)

 

 


(1)

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

(2)

The Company did not issue stock purchase rights under its 2010 Employee Stock Purchase Plan during the respective period.

 

Stock Option and Restricted Stock Activity

 

A summary of stock option activity under the Stock Plans during the three months ended March 31, 2016 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, 2015

 

4,936,594

 

$

4.80

 

4.5

 

 

 

 

Granted

 

883,889

 

 

5.48

 

 

 

 

 

 

Exercised

 

(332,924)

 

 

0.87

 

 

 

 

 

 

Forfeited

 

(12,150)

 

 

16.52

 

 

 

 

 

 

Outstanding, March 31, 2016

 

5,475,409

 

$

5.10

 

5.1

 

$

18,052

 

Exercisable, March 31, 2016

 

4,175,037

 

$

3.66

 

3.9

 

$

16,974

 

Vested and expected to vest, March 31, 2016

 

5,309,942

 

$

5.05

 

5.1

 

$

17,964

 

 


(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 $6.74 market price of the Company’s common stock at March 31, 2016.  The total intrinsic value of options exercised during the three months ended March 31, 2016 and 2015 was $2.1 million and $0.4 million, respectively.

As of March 31, 2016, there was $52.6 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all Stock Plans.  Total unrecognized compensation cost will be adjusted for future forfeitures.  The Company expects to recognize that cost over a weighted average period of 3.0 years.

 

A summary of restricted stock and restricted stock unit activity under the Stock Plans during the three months ended March 31, 2016 is as follows:

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

Restricted

 

Average Grant

 

 

 

Shares

 

Date Fair Value

 

Outstanding, January 1, 2016

 

3,444,694

 

$

14.19

 

Granted

 

3,244,764

 

 

4.37

 

Released

 

(422,379)

 

 

16.73

 

Forfeited

 

(64,840)

 

 

20.18

 

Outstanding, March 31, 2016

 

6,202,239

 

$

8.61

 

 

FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS

(5) FAIR VALUE MEASUREMENTS

 

The Financial Accounting Standards Board 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 $4.8 million as of March 31, 2016 and December 31, 2015, 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 March 31, 2016 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 March 31, 2016 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

Description

 

March 31, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

38,151

 

$

38,151

 

$

 —

 

$

 —

 

Certificates of deposit

 

 

14,000

 

 

 —

 

 

14,000

 

 

 —

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

132,906

 

 

 —

 

 

132,906

 

 

 —

 

Asset backed securities

 

 

62,348

 

 

 —

 

 

62,348

 

 

 —

 

U.S. government agency securities

 

 

7,065

 

 

 —

 

 

7,065

 

 

 —

 

Certificates of deposit

 

 

5,502

 

 

 —

 

 

5,502

 

 

 —

 

Commercial paper

 

 

2,620

 

 

 —

 

 

2,620

 

 

 —

 

Total

 

$

262,592

 

$

38,151

 

$

224,441

 

$

 —

 

 

The following table presents the Company’s fair value measurements as of December 31, 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 December 31, 2015 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

Description

 

December 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

37,435

 

$

37,435

 

$

 —

 

$

 —

 

Commercial Paper

 

 

3,700

 

 

 —

 

 

3,700

 

 

 —

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

179,211

 

 

 —

 

 

179,211

 

 

 —

 

Asset backed securities

 

 

77,495

 

 

 —

 

 

77,495

 

 

 —

 

U.S. government agency securities

 

 

7,039

 

 

 —

 

 

7,039

 

 

 —

 

Certificates of deposit

 

 

1,999

 

 

 —

 

 

1,999

 

 

 —

 

Total

 

$

306,879

 

$

37,435

 

$

269,444

 

$

 —

 

 

The following table summarizes gross unrealized losses and fair values of our investments in an unrealized loss position as of March 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset backed securities

 

$

43,177

 

$

(44)

 

$

 —

 

$

 —

 

$

43,177

 

$

(44)

 

Corporate bonds

 

 

41,402

 

 

(41)

 

 

 —

 

 

 —

 

 

41,402

 

 

(41)

 

Commercial Paper

 

 

2,620

 

 

(1)

 

 

 —

 

 

 —

 

 

2,620

 

 

(1)

 

U.S. government agency securities

 

 

2,499

 

 

 —

 

 

 —

 

 

 —

 

 

2,499

 

 

 —

 

Total

 

$

89,698

 

$

(86)

 

$

 —

 

$

 —

 

$

89,698

 

$

(86)

 

 

The following summarizes contractual underlying maturities of the Company’s available-for-sale investments in debt securities at March 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due one year or less

 

Due after one year through four years

Description

    

 

Cost

    

 

Fair Value

 

 

Cost

    

 

Fair Value

Marketable Securities

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

98,989

 

$

99,012

 

$

33,865

 

$

33,894

Certificates of deposit

 

 

5,500

 

 

5,502

 

 

 —

 

 

 —

Commercial Paper

 

 

2,621

 

 

2,620

 

 

 —

 

 

 —

U.S. government agency securities

 

 

2,500

 

 

2,500

 

 

4,557

 

 

4,565

Asset backed securities

 

 

1

 

 

1

 

 

62,379

 

 

62,347

Total

 

$

109,611

 

$

109,635

 

$

100,801

 

$

100,806

 

NEW MARKET TAX CREDIT
NEW MARKET TAX CREDIT

(6) NEW MARKET TAX CREDIT

As more fully described in the 2015 Form 10-K, 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. The $2.4 million was 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 the Company’s on-going compliance with the conditions of the NMTC program. The Company has recorded $0.1 million as a decrease of expenses for the three months ended March 31, 2016. At March 31, 2016, the remaining balance of $1.9 million is included in Other Long-Term Liabilities. 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.

LONG-TERM DEBT
LONG-TERM DEBT

(7) LONG-TERM DEBT

Building Purchase Mortgage

During June 2015, the Company entered into a $5.1 million credit agreement with an unrelated third-party financial institution to finance the purchase of a facility located in Madison, WI. The credit agreement is collateralized by the acquired building.

 

Borrowings under the credit agreement bear interest at 4.15%. The Company made interest-only payments on the outstanding principal balance for the period between July 12, 2015 and September 12, 2015. 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.

 

Additionally, the Company has recorded $73.0 thousand in mortgage issuance costs, which are recorded as a direct deduction from the mortgage liability. The issuance costs are being amortized through June 12, 2019. For the three months ended March 31, 2016, the Company has recorded $4.5 thousand in amortization of mortgage issuance costs.

 

WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS
WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS

(8) 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 ta.x 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 the 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 an 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 March 31, 2016 the Company has earned $2.9 million of tax credits and has received payment of $0.2 million from the WEDC as of March 31, 2016. The unpaid portion is $2.7 million, of which $0.9 million is reported in prepaid expenses and other current assets and $1.8 million is reported in other long-term assets, reflecting when collection of the refundable tax credits is expected to occur. As of March 31, 2016, the Company also has recorded a $0.6 million liability in other short-term liabilities and a $1.9 million liability in other long-term liabilities, reflecting when the expected benefit of the tax credit amortization will reduce future operating expenses.

 

During the three months ended March 31, 2016, the Company amortized $121.5 thousand of the tax credits earned as a reduction of operating expenses. 

 

RECENT ACCOUNTING PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS

(9) RECENT ACCOUNTING PRONOUNCEMENTS

In February 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-02, “Amendments to the Consolidation Analysis (Topic 810).” The amendments in this update affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation method. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act or 1940. The amendments in this update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted this guidance during the three months ended March 31, 2016. The impact of adoption did not have a material impact on the Company’s financial statements.

 

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. This guidance simplifies presentation of debt issuance costs but does not address presentation or subsequent measurement of debt issue costs related to line of credit arrangements. In August 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-15 “Interest-Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which indicates the SEC staff would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Accounting Standards Update No. 2015-03 will be effective for the first interim period within annual reporting periods beginning after December 15, 2015. The Company adopted this guidance during the three months ended March 31, 2016. The impact of adoption did not have a material impact on the Company’s financial statements.

 

In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which provides guidance that requires management to evaluate each cloud computing arrangement in order to determine whether it includes a software license that must be accounting for separately from hosted services. The new guidance clarifies that if a cloud computing arrangement includes a software license, the Company should account for the software license consistent with our accounting for other software licenses. If the arrangement does not include a software license, the Company should account for the arrangement as a service contract. The Company adopted this guidance during the three months ended March 31, 2016. The impact of adoption did not have a material impact on the Company’s financial statements.

 

In August 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date” (“Update 2015-14”) to defer for one year the effective date of the new revenue standard and allow early adoption as of the original effective date which is for annual reports beginning after December 15, 2016. The Company is currently evaluating the impact of this amendment on the Company’s financial position and results of operations.

 

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02, “Leases (Topic 842),” which requires recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.   The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of this update on its financial position and results of operations.

 

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“Update 2016-08”), which intends to improve the operability and understandability of the implementation guidance on principal versus agent considerations.  An entity that is a principal recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified goods or service transferred. An entity that is an agent recognizes revenue in the amount of any fee of commission to which it expects to be entitled in exchange for arranging for the specified goods or services to be provide by the other party.  The effective date and transition requirements for the amendments in Update 2016-08 are the same as the effective date and transition requirements of Update 2015-14. The Company is currently evaluating the impact of Update 2016-08 on its financial position and results of operations.

 

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-09, “Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” as part of its Simplification initiative.  The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statements of cash flows.  The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  The Company is currently evaluating the impact of this update on its financial position and results of operations.

 

In April 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“Update 2016-10”), amending the new revenue recognition standard that was issued jointly with the International Accounting Standards Board in May 2014. The amendments do not change the core principles of the standard, but clarify the accounting for identifying performance obligations, as well as licensing implementation guidance. The effective date for the amendments in Update 2016-10 are the same as the effective date of Update 2015-14. The Company is currently evaluating the impact of Update 2016-10 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, Beijing Exact Sciences Medical Technology Company Limited, and variable interest entities. All significant intercompany transactions and balances have been eliminated in consolidation.

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

Use of Estimates

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

Cash and Cash Equivalents

The Company considers cash on hand, demand deposits in bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. no

Marketable Securities

 

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

 

At March 31, 2016 and December 31, 2015, 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 three months ended March 31, 2016 and 2015. Realized gains were $3.3 thousand and $3.0 thousand for the three months ended March 31, 2016 and 2015, 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 three months ended March 31, 2016, no investments were identified with other-than-temporary declines in value.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

132,854

 

$

93

 

$

(41)

 

$

132,906

 

Asset backed securities

 

 

62,380

 

 

12

 

 

(44)

 

 

62,348

 

U.S. government agency securities

 

 

7,057

 

 

8

 

 

 —

 

 

7,065

 

Certificates of deposit

 

 

5,500

 

 

2

 

 

 —

 

 

5,502

 

Commercial paper

 

 

2,621

 

 

 —

 

 

(1)

 

 

2,620

 

Total available-for-sale securities

 

$

210,412

 

$

115

 

$

(86)

 

$

210,441

 

 

Available-for-sale securities at December 31, 2015 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

179,471

 

$

2

 

$

(262)

 

$

179,211

 

Asset backed securities

 

 

77,661

 

 

 —

 

 

(166)

 

 

77,495

 

U.S. government agency securities

 

 

7,057

 

 

 —

 

 

(18)

 

 

7,039

 

Certificates of deposit

 

 

1,999

 

 

 —

 

 

 —

 

 

1,999

 

Total available-for-sale securities

 

$

266,188

 

$

2

 

$

(446)

 

$

265,744

 

 

Changes in Accumulated Other Comprehensive Income (Loss)

The amounts recognized in accumulated other comprehensive income (loss) (“AOCI”) for the three months ended March 31, 2016 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

 

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2015

 

$

11

 

$

(444)

 

$

(433)

 

Other comprehensive (loss) income before reclassifications

 

 

(57)

 

 

456

 

 

399

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

17

 

 

17

 

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

 

 

(57)

 

 

473

 

 

416

 

Balance at March 31, 2016

 

$

(46)

 

$

29

 

$

(17)

 

 

The amounts recognized in AOCI for the three months ended March 31, 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

 

 

(10)

 

 

192

 

 

182

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

3

 

 

3

 

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

 

 

(10)

 

 

195

 

 

185

 

Balance at March 31, 2015

 

$

(10)

 

$

80

 

$

70

 

 

Amounts reclassified from AOCI for the three months ended March 31, 2016 and 2015 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Three Months Ended March 31,

 

Details about AOCI  Components

 

Statement of Operations

 

2016

 

2015

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

17

 

$

3

 

Total reclassifications

 

 

 

$

17

 

$

3

 

 

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

 

Buildings