EXACT SCIENCES CORP, 10-Q filed on 10/30/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2018
Oct. 29, 2018
Document and Entity Information    
Entity Registrant Name EXACT SCIENCES CORP  
Entity Central Index Key 0001124140  
Document Type 10-Q  
Document Period End Date Sep. 30, 2018  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Common Stock, Shares Outstanding   122,900,430
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
v3.10.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Current Assets:    
Cash and cash equivalents $ 161,705 $ 77,491
Marketable securities 1,023,512 347,224
Accounts receivable, net 41,916 26,419
Inventory, net 38,617 26,027
Prepaid expenses and other current assets 23,832 10,055
Total current assets 1,289,582 487,216
Long-term Assets:    
Property, plant and equipment, net 188,486 79,986
Intangibles, net 22,493 24,205
Other long-term assets, net 9,015 7,153
Total assets 1,509,576 598,560
Current Liabilities:    
Accounts payable 32,738 16,135
Accrued liabilities 68,938 49,126
Accrued interest 1,901  
Debt, current portion   182
Other short-term liabilities 3,158 2,681
Total current liabilities 106,735 68,124
Convertible notes, net 656,341  
Long-term debt, less current portion 17,080 4,269
Other long-term liabilities 12,691 5,749
Total liabilities 792,847 78,142
Commitments and contingencies
Stockholders' Equity:    
Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—no shares at September 30, 2018 and December 31, 2017
Common stock, $0.01 par value Authorized—200,000,000 shares issued and outstanding—122,889,854 and 120,497,426 shares at September 30, 2018 and December 31, 2017 1,229 1,205
Additional paid-in capital 1,698,695 1,380,577
Accumulated other comprehensive loss (1,406) (750)
Accumulated deficit (981,789) (860,614)
Total stockholders' equity 716,729 520,418
Total liabilities and stockholders’ equity $ 1,509,576 $ 598,560
v3.10.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Sep. 30, 2018
Dec. 31, 2017
Condensed 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 0 0
Preferred stock, outstanding shares 0 0
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 122,889,854 120,497,426
Common stock, outstanding shares 122,889,854 120,497,426
v3.10.0.1
Condensed Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Condensed Consolidated Statements of Operations        
Laboratory service revenue $ 118,291 $ 72,574 $ 311,481 $ 178,583
Cost of sales 30,020 20,729 79,822 55,701
Gross margin 88,271 51,845 231,659 122,882
Operating expenses:        
Research and development 17,631 11,725 47,278 29,464
General and administrative 46,729 30,763 121,861 75,442
Sales and marketing 64,836 37,768 172,675 113,297
Total operating expenses 129,196 80,256 341,814 218,203
Loss from operations (40,925) (28,411) (110,155) (95,321)
Other income (expense)        
Investment income 6,292 1,334 14,882 2,612
Interest expense (10,704) (51) (25,817) (155)
Total other income (expense) (4,412) 1,283 (10,935) 2,457
Net loss before tax (45,337) (27,128) (121,090) (92,864)
Income tax benefit (expense) (27) 231 (85) 231
Net loss $ (45,364) $ (26,897) $ (121,175) $ (92,633)
Net loss per share-basic and diluted (in dollars per share) $ (0.37) $ (0.23) $ (0.99) $ (0.81)
Weighted average common shares outstanding-basic and diluted (in shares) 122,671 119,215 121,946 114,246
v3.10.0.1
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Condensed Consolidated Statements of Comprehensive Loss        
Net loss $ (45,364) $ (26,897) $ (121,175) $ (92,633)
Other comprehensive loss, net of tax:        
Unrealized gain (loss) on available-for-sale investments 462 49 (668) 7
Foreign currency translation gain 10 16 12 97
Comprehensive loss $ (44,892) $ (26,832) $ (121,831) $ (92,529)
v3.10.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash flows from operating activities:    
Net loss $ (121,175) $ (92,633)
Adjustments to reconcile net loss to net cash used in operating activities:    
Depreciation and amortization of property and equipment 14,349 10,507
Loss on disposal of property and equipment 853 301
Deferred tax benefit   (231)
Stock-based compensation 44,554 23,002
Amortization of debt discount 18,559  
Amortization of debt issuance costs 1,597  
Amortization of other liabilities (1,809) (1,199)
Amortization of deferred financing costs 86 40
Amortization of premium on short-term investments (2,581) 56
Amortization of intangible assets 1,847 645
Changes in assets and liabilities, net effects of acquisition:    
Accrued interest 1,901  
Accounts receivable, net (15,497) (15,663)
Inventory, net (12,590) (11,231)
Prepaid expenses and other current assets (13,777) (1,391)
Accounts payable 16,603 8,022
Accrued liabilities (1,600) 9,306
Other short-term liabilities 87 (29)
Lease incentive obligation 504 (462)
Net cash used in operating activities (68,089) (70,960)
Cash flows from investing activities:    
Purchases of marketable securities (1,081,662) (345,039)
Maturities of marketable securities 407,287 195,485
Purchases of property and equipment (97,987) (24,442)
Business acquisition, net of cash acquired   (2,996)
Purchases of intangible assets   (8,442)
Internally developed software (135) (25)
Net cash used in investing activities (772,497) (185,459)
Cash flows from financing activities:    
Proceeds from issuance of convertible notes, net 896,431  
Proceeds from financing obligation 6,750  
Proceeds from exercise of common stock options 6,376 3,350
Proceeds from sale of common stock, net of issuance costs   253,389
Proceeds in connection with the Company's employee stock purchase plan 2,663 1,629
Payments of deferred financing costs (25)  
Proceeds from construction loan 17,271  
Payments on mortgage payable (4,678) (130)
Net cash provided by financing activities 924,788 258,238
Effects of exchange rate changes on cash and cash equivalents 12 97
Net increase in cash and cash equivalents 84,214 1,916
Cash and cash equivalents, beginning of period 77,491 48,921
Cash and cash equivalents, end of period 161,705 50,837
Supplemental disclosure of non-cash investing and financing activities:    
Property and equipment acquired but not paid 25,714 3,930
Unrealized gain (loss) on available-for-sale investments (668) 7
Issuance of 86,882 and 158,717 shares of common stock to fund the Company’s 401(k) matching contribution for 2017 and 2016, respectively 4,303 3,008
Interest paid $ 4,638 $ 151
v3.10.0.1
Condensed Consolidated Statements of Cash Flows (Parenthetical) - shares
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Condensed Consolidated Statements of Cash Flows    
Issuance of shares of common stock to fund the Company's 401(k) matching contribution 86,882 158,717
v3.10.0.1
ORGANIZATION AND BASIS OF PRESENTATION
9 Months Ended
Sep. 30, 2018
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 other types of cancer, with the goal of becoming a leader in cancer diagnostics.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements, which include the accounts of Exact Sciences Corporation and those of its wholly owned subsidiaries and variable interest entities, are unaudited and have been prepared on a basis substantially consistent with the Company’s audited financial statements and notes as of and for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K (the “2017 Form 10-K”). These condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the results of operations have been included. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. The statements should be read in conjunction with the audited financial statements and related notes included in the 2017 Form 10-K.  Management has evaluated subsequent events for disclosure or recognition in the accompanying financial statements up to the filing of this report.

v3.10.0.1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
9 Months Ended
Sep. 30, 2018
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries and variable interest entities. All significant intercompany transactions and balances have been eliminated in consolidation.

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

Use of Estimates

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

 

Cash and Cash Equivalents

The Company considers cash on hand, demand deposits in bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents.

 

Marketable Securities

 

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

 

At September 30, 2018 and December 31, 2017, the Company’s investments were comprised of fixed income investments, and all were deemed available-for-sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives.  The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Investments in which the Company has the ability and intent, if necessary, to liquidate, in order to support its current operations (including those with a contractual term greater than one year from the date of purchase), are classified as current. All of the Company’s investments are considered current. There were no realized losses for the nine months ended September 30, 2018 and 2017. Realized gains were $0.2 million and $17,000 for the nine months ended September 30, 2018 and 2017, respectively.

 

The Company periodically reviews its investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, the Company’s intent not to sell the security, and whether it is more likely than not that the Company will have to sell the security before recovery of its cost basis. For the nine months ended September 30, 2018, no investments were identified with other-than-temporary declines in value.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income (Loss)

 

Income (Loss)

 

Value

 

Corporate bonds

 

$

415,828

 

 

104

 

 

(473)

 

$

415,459

 

Asset backed securities

 

 

288,286

 

 

 3

 

 

(547)

 

 

287,742

 

U.S. government agency securities

 

 

265,563

 

 

 —

 

 

(432)

 

 

265,131

 

Commercial paper

 

 

12,081

 

 

 —

 

 

(5)

 

 

12,076

 

Certificates of deposit

 

 

43,111

 

 

15

 

 

(22)

 

 

43,104

 

Total available-for-sale securities

 

$

1,024,869

 

$

122

 

$

(1,479)

 

$

1,023,512

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income (Loss)

 

Income (Loss)

 

Value

 

Corporate bonds

 

$

181,639

 

$

10

 

$

(344)

 

$

181,305

 

Asset backed securities

 

 

94,700

 

 

 —

 

 

(185)

 

 

94,515

 

U.S. government agency securities

 

 

54,974

 

 

 —

 

 

(162)

 

 

54,812

 

Commercial paper

 

 

9,953

 

 

 —

 

 

(7)

 

 

9,946

 

Certificates of deposit

 

 

6,647

 

 

 1

 

 

(2)

 

 

6,646

 

Total available-for-sale securities

 

$

347,913

 

$

11

 

$

(700)

 

$

347,224

 

 

Changes in Accumulated Other Comprehensive Income (Loss)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

(In thousands)

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2017

 

$

(61)

 

$

(689)

 

$

(750)

 

Other comprehensive income (loss) before reclassifications

 

 

12

 

 

(883)

 

 

(871)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

215

 

 

215

 

Net current period change in accumulated other comprehensive loss

 

 

12

 

 

(668)

 

 

(656)

 

Balance at September 30, 2018

 

$

(49)

 

$

(1,357)

 

$

(1,406)

 

 

The amounts recognized in AOCI for the nine months ended September 30, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

(In thousands)

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at December 31, 2016

 

$

(204)

 

$

(214)

 

$

(418)

 

Other comprehensive loss before reclassifications

 

 

97

 

 

(3)

 

 

94

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

10

 

 

10

 

Net current period change in accumulated other comprehensive loss

 

 

97

 

 

 7

 

 

104

 

Balance at September 30, 2017

 

$

(107)

 

$

(207)

 

$

(314)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Nine Months Ended September 30,

 

Details about AOCI Components (In thousands)

 

Statement of Operations

 

2018

 

2017

 

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

215

 

$

10

 

Total reclassifications

 

 

 

$

215

 

$

10

 

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost and depreciated using the straight-line method over the assets’ estimated useful lives. Maintenance and repairs are expensed when incurred; additions and improvements are capitalized. Property and equipment consisted of the following as of September 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

September 30,

 

December 31,

 

(In thousands)

 

Useful Life

 

2018

 

2017

    

Property, plant and equipment

 

 

 

 

 

 

 

 

 

 

Land

 

 

(1)

 

$

4,466

 

$

4,466

 

Leasehold and building improvements

 

 

(2)

 

 

35,264

 

 

17,629

 

Land improvements

 

 

15 years

 

 

1,530

 

 

1,419

 

Buildings

 

 

30 - 40 years

 

 

9,886

 

 

7,928

 

Computer equipment and computer software

 

 

3 years

 

 

35,355

 

 

30,148

 

Laboratory equipment

 

 

3 - 5 years

 

 

34,720

 

 

23,296

 

Furniture and fixtures

 

 

3 years

 

 

7,608

 

 

4,531

 

Assets under construction

 

 

(3)

 

 

110,928

 

 

28,655

 

Property, plant and equipment, at cost

 

 

 

 

 

239,757

 

 

118,072

 

Accumulated depreciation

 

 

 

 

 

(51,271)

 

 

(38,086)

 

Property, plant and equipment, net

 

 

 

 

$

188,486

 

$

79,986

 


(1)

Not depreciated.

(2)

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

(3)

Not depreciated until placed into service.

 

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

 

Software Capitalization Policy

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

 

Intangible Assets

 

Intangible Assets

 

Intangible assets consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

(In thousands)

    

2018

    

2017

 

Finite-lived intangible assets

 

 

 

 

 

 

 

Finite-lived intangible assets

 

$

23,856

 

$

23,731

 

Less: Accumulated amortization

 

 

(3,342)

 

 

(1,505)

 

Finite-lived intangible assets, net

 

 

20,514

 

 

22,226

 

Indefinite-lived intangible assets

 

 

 

 

 

 

 

Goodwill

 

 

1,979

 

 

1,979

 

Net carrying value

 

$

22,493

 

$

24,205

 

 

Finite-Lived Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Net Balance at

 

Average

 

 

 

September 30,

 

Remaining

 

(In thousands)

    

2018

    

Life (Years)

 

Licensed intellectual property and patents

 

$

19,544

 

 

9.8

 

Developed technology

 

 

970

 

 

6.2

 

Total

 

$

20,514

 

 

 

 

 

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

 

 

 

 

 

 

(In thousands)

    

 

    

 

2018

 

$

618

 

2019

 

 

2,472

 

2020

 

 

2,467

 

2021

 

 

2,391

 

2022

 

 

2,370

 

Thereafter

 

 

10,196

 

 

 

$

20,514

 

 

The Company reviews long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no impairment losses for periods ended September 30, 2018 and December 31, 2017.

 

Patent costs, which have historically consisted of related legal fees, are capitalized as incurred, only if the Company determines that there is some probable future economic benefit to be derived from the transaction. A capitalized patent is amortized over its estimated useful life, beginning when such patent is approved. Capitalized patent costs are expensed upon disapproval, upon a decision by the Company to no longer pursue the patent or when the related intellectual property is either sold or deemed to be no longer of value to the Company. Other than the transactions discussed below, the Company determined that all patent costs incurred during the nine months ended September 30, 2018 and 2017 should be expensed and not capitalized as the future economic benefit to be derived from the transactions cannot be determined.

 

Under a technology license and royalty agreement entered into with MDxHealth (“MDx”), dated July 26, 2010 (as subsequently amended, the “MDx License Agreement”), the Company was required to pay MDx milestone-based royalties on sales of products or services covered by the licensed intellectual property. Once the achievement of a milestone occurred or was considered probable, an intangible asset and corresponding liability was reported in other long-term assets and accrued liabilities, respectively. The liability was relieved once the milestone was achieved and payment made. The intangible asset is being amortized over the estimated ten-year useful life of the licensed intellectual property through 2024, and such amortization is reported in cost of sales. Payment for all remaining milestones under the MDx License Agreement was made as part of the Royalty Buy-Out agreement outlined below.

 

Effective April 25, 2017, the Company and MDx entered into a Royalty Buy-Out Agreement (“Royalty Buy-Out Agreement”), which terminated the MDx License Agreement.  Pursuant to the Royalty Buy-Out Agreement, the Company paid MDx a one-time fee of $8.0 million in exchange for an assignment of certain patents covered by the MDx License Agreement and the elimination of all ongoing royalties and other payments by the Company to MDx under the MDx License Agreement.  Also included in the Royalty Buy-Out Agreement is a mutual release of liabilities, which includes all amounts previously accrued under the MDx License Agreement.  Concurrently with entering into the Royalty Buy-Out Agreement, the Company entered into a Patent Purchase Agreement (“Patent Purchase Agreement”) with MDx under which it paid MDx an additional $7.0 million in exchange for the assignment of certain other patent rights that were not covered by the MDx License Agreement. The total $15.0 million paid by the Company pursuant to the Royalty Buy-Out Agreement and Patent Purchase Agreement, net of liabilities relieved of $6.6 million, was recorded as an intangible asset and is being amortized over the estimated useful life of the licensed intellectual property through 2024, and such amortization is reported in cost of sales. The $6.6 million of liabilities relieved were related to historical milestones and accrued royalties under the MDx License Agreement.

 

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

 

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

 

The Company accounted for the transaction as an asset acquisition under GAAP. The asset is comprised of a portfolio of biomarkers and related technology and know-how, which is a group of complementary assets concentrated in a single identifiable asset.  The transaction costs directly related to the asset acquisition were added to the asset in accordance with GAAP.  As such, the collective asset value from the acquisition resulted in an intangible asset of $12.2 million.  The intellectual property asset, which includes related transaction costs, is being amortized on a straight-line basis over the period the Company expects to be benefited, which is in line with the legal life of the patents acquired.  The Company capitalized these costs as there is a reasonable expectation that the assets acquired will be used in an alternative manner in the future, that is not contingent on future development subsequent to acquisition, and the Company anticipates there to be economic benefit from these alternative uses.  For the three and nine months ended September 30, 2018, the Company recorded amortization expense of $0.2 million and $0.7 million, respectively. At September 30, 2018 and December 31, 2017, the net balance of $11.5 million and $12.2 million, respectively, is reported in net intangible assets in the Company’s condensed consolidated balance sheets.

 

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

 

Goodwill

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

 

Investment in Privately-Held Company 

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

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

On October 2, 2018, the Company completed an acquisition of all of Biomatrica’s outstanding equity interests for an aggregate purchase price of $20.0 million net of cash received,  debt repaid and certain other adjustments. The transaction is subject to a post-closing working capital adjustment, which the Company will fund with cash on hand (to the extent any additional amounts are payable by the Company) (the “2018 Biomatrica Acquisition”). Contingent consideration for an additional $20.0 million could be earned based upon certain revenue milestones being met. The purchase price was also reduced by the value attributable to the 2017 Biomatrica Investment discussed above. The purchase price for the 2018 Biomatrica Acquisition will be preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition and is subject to change as the Company completes its analysis of their fair values during the measurement period, not to exceed one year as permitted under GAAP. Due to the transaction closing subsequent to September 30, 2018, the Company will complete the preliminary purchase price allocation and include the applicable disclosures in its 2018 Annual Report on Form 10-K.

 

Net Loss Per Share

 

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

 

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

 

 

 

 

 

 

 

 

 

September 30,

 

(In thousands)

    

2018

    

2017

    

Shares issuable upon exercise of stock options

 

2,856

 

4,042

 

Shares issuable upon the release of restricted stock awards

 

6,280

 

6,164

 

Shares issuable upon conversion of convertible notes

 

12,044

 

 —

 

 

 

21,180

 

10,206

 

 

Revenue Recognition

 

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

 

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

 

Contracts

 

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

 

·

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

·

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

·

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

·

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

·

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

 

Performance obligations

 

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

 

Transaction price

 

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

 

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

 

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

 

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

 

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

 

When the Company does not have significant historical experience or that experience has limited predictive value, the constraint over estimates of variable consideration may result in no revenue being recognized upon delivery of a patient’s Cologuard test result to the ordering physician, with recognition, generally occurring at the date of cash receipt. Since the first quarter of 2017, the Company has determined that its historical experience has sufficient predictive value, such that there are no longer any contracts for which no revenue is recognized upon delivery of a Cologuard test result to an ordering physician. Of the revenue recognized in the twelve months ended December 31, 2017, approximately $4.3 million relates to the one-time impact of certain payers meeting the Company’s revenue recognition criteria for accrual-basis revenue recognition beginning with the period ended March 31, 2017. Approximately $1.0 million of this one-time impact relates to tests completed in the prior year and for which the Company’s accrual revenue recognition criteria were not met until 2017. 

 

Allocate transaction price

 

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

 

Point in time recognition

 

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

 

Disaggregation of Revenue

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

(In thousands)

    

2018

    

2017

 

Medicare Parts B & C

 

$

65,870

 

$

47,041

 

Commercial

 

 

48,624

 

 

22,838

 

Other

 

 

3,797

 

 

2,695

 

Total

 

$

118,291

 

$

72,574

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

(In thousands)

    

2018

    

2017

    

Medicare Parts B & C

 

$

178,052

 

$

119,746

 

Commercial

 

 

123,045

 

 

52,686

 

Other

 

 

10,384

 

 

6,151

 

Total

 

$

311,481

 

$

178,583

 

 

Contract Balances

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable and deferred revenue on the condensed consolidated balance sheets. Generally, billing occurs subsequent to delivery of a patient’s test result to the ordering physician, resulting in an account receivable. However, the Company sometimes receives advance payment from a patient, particularly a self-pay patient, before a Cologuard test result is completed, resulting in deferred revenue. The deferred revenue balance is relieved upon delivery of the applicable patient’s test result to the ordering physician. Changes in accounts receivable and deferred revenue were not materially impacted by any other factors.

 

Deferred revenue balances are reported in other short-term liabilities in the Company’s condensed consolidated balance sheets and were $0.5 million and $0.2 million as of September 30, 2018 and December 31, 2017, respectively.

 

Revenue recognized for the three months ended September 30, 2018 and 2017, which was included in the deferred revenue balance at the beginning of each period was $0.1 million and $38,000, respectively. Revenue recognized for the nine months ended September 30, 2018 and 2017, which was included in the deferred revenue balance at the beginning of each period was $0.1 million and $44,000, respectively.

 

Practical expedients

 

The Company does not adjust the transaction price for the effects of a significant financing component, as at contract inception, the Company expects the collection cycle to be one year or less.

 

The Company expenses sales commissions when incurred because the amortization period would have been one year or less.  These costs are recorded within sales and marketing expenses in the Company’s condensed consolidated statements of operations.  

 

The Company incurs certain other costs that are incurred regardless of whether a contract is obtained. Such costs are primarily related to legal services and patient communications (e.g. compliance reminder letters).  These costs are expensed as incurred and recorded within general and administrative expenses in the Company’s condensed consolidated statements of operations. 

 

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 materials used in performing Cologuard tests 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 in the Company’s condensed consolidated statements of operations. 

 

Inventory consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

(In thousands)

    

2018

    

2017

 

Raw materials

 

$

12,214

 

$

10,344

 

Semi-finished and finished goods

 

 

26,403

 

 

15,683

 

Total inventory

 

$

38,617

 

$

26,027

 

 

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. Condensed consolidated statements of operations are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the Company’s condensed consolidated balance sheet as a component of accumulated other comprehensive loss in total Exact Sciences Corporation’s stockholders’ equity. Transaction gains and losses are included in the Company’s condensed consolidated statement of operations.

 

Reclassifications

 

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

v3.10.0.1
MAYO LICENSE AGREEMENT
9 Months Ended
Sep. 30, 2018
MAYO LICENSE AGREEMENT  
MAYO LICENSE AGREEMENT

(3) MAYO LICENSE AGREEMENT

 

Overview

 

As more fully described in the 2017 Form 10-K, in June 2009 the Company entered into a patent license 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 and October 2017. 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 license 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 $25,000 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.  The October 2017 amendment further modified royalty rates.  As part of these amendments, 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, but would remain a low-single-digit percentage of net sales.

 

In addition to royalties, the Company is required to pay MAYO cash of $0.2 million, $0.8 million and $2.0 million upon each product using the licensed MAYO intellectual property reaching $5.0 million, $20.0 million and $50.0 million in cumulative net sales, respectively.

 

As part of the February 2015 amendment and restatement of the license agreement, the Company agreed to pay MAYO an additional $5.0 million, payable in five annual installments, through 2019. The Company paid MAYO the annual installment of $1.0 million in the first quarter of each of 2015, 2016 and 2018. The Company paid MAYO the 2017 installment in December 2016. The Company records the $1.0 million installments to prepaid expenses and other current assets and amortizes each installment over a twelve-month period commencing on February 1 of each year. For the three and nine months ended September 30, 2018 and 2017 the Company has recorded $0.3 million and $0.7 million in amortization of the installments, respectively.

 

In addition, the Company is paying MAYO for research and development efforts. As part of the Company’s research collaboration with MAYO, the Company incurred charges of $0.7 million and $3.4 million for the three and nine months ended September 30, 2018. The Company made payments of $0.9 million and $3.5 million for the three and nine months ended September 30, 2018. The Company recorded an estimated liability of $1.7 million for research and development efforts as of September 30, 2018. The Company incurred charges of $1.1 million and $3.2 million for the three and nine months ended September 30, 2017. The Company made payments of $0.3 million and $2.2 million for the three and nine months ended September 30, 2017. The Company recorded an estimated liability of $1.9 million for research and development efforts as of September 30, 2017.

 

v3.10.0.1
PFIZER PROMOTION AGREEMENT
9 Months Ended
Sep. 30, 2018
PFIZER PROMOTION AGREEMENT  
COLLABORATION AGREEMENT

(4) PFIZER PROMOTION AGREEMENT

 

In August 2018, the Company entered into a Promotion Agreement (“Promotion Agreement”) with Pfizer Inc. (“Pfizer”). Under the terms of the Promotion Agreement, Pfizer will promote Cologuard and provide certain other sales and marketing services. The Company and Pfizer committed in the Promotion Agreement to invest specified amounts in the advertising and promotion of Cologuard. The Company will be obligated to pay Pfizer a promotion fee based on incremental gross profits over specified baselines and pay Pfizer royalties for Cologuard related revenues for a specified period after the expiration or termination of the Promotion Agreement. The initial term of Promotion Agreement runs through December 31, 2021. As of September 30, 2018, no work has been performed under the Promotion Agreement and as such there is no impact on the Company’s condensed consolidated financial statements.

 

v3.10.0.1
STOCK-BASED COMPENSATION
9 Months Ended
Sep. 30, 2018
STOCK-BASED COMPENSATION  
STOCK-BASED COMPENSATION

(5) STOCK-BASED COMPENSATION

 

Stock-Based Compensation Plans

 

The Company maintains the 2010 Omnibus Long-Term Incentive Plan (As Amended and Restated Effective July 27, 2017), 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 records stock-based compensation expense in connection with the amortization of restricted stock awards, restricted stock units (“RSUs”), 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 $16.5 million and $44.6 million in stock-based compensation expense during the three and nine months ended September 30, 2018. The Company recorded $10.8 million and $23.0 million in stock-based compensation expense during the three and nine months ended September 30, 2017.

 

In connection with the April 25, 2018 transition of the Company’s former Chief Operating Officer, the Company accelerated the vesting of 69,950 shares under his previously unvested stock options and 54,350 shares under his previously unvested restricted stock units whereby such unvested stock options and unvested restricted stock units vest on December 31, 2018. It was determined that the continuing service to be provided by the Company’s former Chief Operating Officer to the Company through December 31, 2018 is substantive and, as a result, the Company will recognize the additional non-cash stock-based compensation expense for the modified awards evenly over the transition term of April 25, 2018 through December 31, 2018. During the three and nine months ended September 30, 2018, the Company recorded $1.4 million and $2.5 million, respectively, of non-cash stock-based compensation expense for the modified awards.

 

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 – Beginning in 2017, the Company adopted Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“Update 2016-09”). With the adoption of Update 2016-09, forfeiture estimates are no longer required, and the effects of actual forfeitures are recorded at the time they occur. The impact on the Company’s condensed consolidated balance sheet as of March 31, 2017 was a cumulative-effect adjustment of $0.4 million, increasing opening accumulated deficit and additional paid-in capital.

 

The fair value of each option is based on the assumptions in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

    

2018

    

2017

    

Option Plan Shares

 

 

 

 

 

 

 

 

 

Risk-free interest rates

 

(1)

 

2.06%

 

2.73% - 2.79%

 

2.06% - 2.13%

 

Expected term (in years)

 

(1)

 

6.56

 

5.45 -6.43

 

6.56 - 6.59

 

Expected volatility

 

(1)

 

62.5%

 

61.82% - 66.17%

 

62.5% - 62.9%

 

Dividend yield

 

(1)

 

0%

 

0%

 

0%

 

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

 

(1)

 

$ 27.03

 

$ 24.55

 

$ 25.18

 

ESPP Shares

 

 

 

 

 

   

 

 

 

Risk-free interest rates

 

(2)

 

(2)

 

2.05% - 2.5%

 

0.98% - 1.28%

 

Expected term (in years)

 

(2)

 

(2)

 

0.5 - 2

 

0.5 - 2

 

Expected volatility

 

(2)

 

(2)

 

51.75% - 65.39%

 

66.4% - 85.5%

 

Dividend yield

 

(2)

 

(2)

 

0 %

 

0%

 

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

 

(2)

 

(2)

 

$ 18.68

 

$ 13.05

 

 


(1)

The Company did not grant options under its 2010 Stock Plan during the period indicated.

(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 nine months ended September 30, 2018 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, 2018

 

3,360,461

 

$

11.89

 

6.4

 

 

 

 

Granted

 

343,566

 

 

44.37

 

 

 

 

 

 

Exercised

 

(848,061)

 

 

7.52

 

 

 

 

 

 

Forfeited

 

 —

 

 

 —

 

 

 

 

 

 

Outstanding, September 30, 2018

 

2,855,966

 

$

17.10

 

6.7

 

$

176,558

 

Exercisable, September 30, 2018

 

1,329,452

 

$

10.52

 

4.8

 

$

90,931

 

 


(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 $78.92 market price of the Company’s common stock at September 28, 2018.  The total intrinsic value of options exercised during the nine months ended September 30, 2018 and 2017 was $40.1 million and $11.2 million, respectively.

 

As of September 30, 2018, there was $127.8 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 2.9 years.

 

A summary of restricted stock and restricted stock unit activity under the Stock Plans during the nine months ended September 30, 2018 is as follows:

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

Restricted

 

Average Grant

 

 

 

Shares and RSUs

 

Date Fair Value

 

Outstanding, January 1, 2018

 

6,148,778

 

$

15.76

 

Granted

 

1,504,700

 

 

48.55

 

Released

 

(1,209,608)

 

 

20.84

 

Forfeited

 

(164,161)

 

 

32.78

 

Outstanding, September 30, 2018

 

6,279,709

 

$

22.14

 

 

v3.10.0.1
FAIR VALUE MEASUREMENTS
9 Months Ended
Sep. 30, 2018
FAIR VALUE MEASUREMENTS  
FAIR VALUE MEASUREMENTS

(6) 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 represents a Level 2 measurement.  When determining the estimated fair value of the Company’s long-term debt, the Company used market-based risk measurements, such as credit risk. See Note 8 and Note 10 for further detail on the Company’s long-term debt.

 

The following table presents the Company’s fair value measurements as of September 30, 2018 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at September 30, 2018 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

September 30, 2018

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

92,318

 

$

92,318

 

$

 —

 

$

 —

 

U.S. government agency securities

 

 

63,694

 

 

 —

 

 

63,694

 

 

 —

 

Commercial paper

 

 

5,693

 

 

 —

 

 

5,693

 

 

 —

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

415,459

 

 

 —

 

 

415,459

 

 

 —

 

Asset backed securities

 

 

287,742

 

 

 —

 

 

287,742

 

 

 —

 

U.S. government agency securities

 

 

265,131

 

 

 —

 

 

265,131

 

 

 —

 

Certificates of deposit

 

 

43,104

 

 

 —

 

 

43,104

 

 

 —

 

Commercial paper

 

 

12,076

 

 

 —

 

 

12,076

 

 

 —

 

Total

 

$

1,185,217

 

$

92,318

 

$

1,092,899

 

$

 —

 

 

The following table presents the Company’s fair value measurements as of December 31, 2017 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at December 31, 2017 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant