EXACT SCIENCES CORP, 10-K filed on 2/22/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Feb. 20, 2018
Jun. 30, 2017
Document and Entity Information
 
 
 
Entity Registrant Name
EXACT SCIENCES CORP 
 
 
Entity Central Index Key
0001124140 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 4,122,231,808 
Entity Common Stock, Shares Outstanding
 
120,941,528 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current Assets:
 
 
Cash and cash equivalents
$ 77,491 
$ 48,921 
Marketable securities
347,224 
262,179 
Accounts receivable, net
26,419 
8,526 
Inventory, net
26,027 
6,833 
Prepaid expenses and other current assets
10,055 
7,114 
Total current assets
487,216 
333,573 
Property and Equipment, at cost:
 
 
Computer equipment and computer software
30,148 
20,767 
Laboratory equipment
23,296 
14,749 
Leasehold and building improvements
17,629 
13,549 
Assets under construction
28,655 
6,711 
Land
4,466 
 
Land improvements
1,419 
 
Buildings
7,928 
4,792 
Furniture and fixtures
4,531 
2,515 
Property and Equipment, gross
118,072 
63,083 
Less-Accumulated depreciation
(38,086)
(24,941)
Net property and equipment
79,986 
38,142 
Intangible asset, net
22,160 
1,550 
Other long-term assets, net
9,198 
3,775 
Total assets
598,560 
377,040 
Current Liabilities:
 
 
Accounts payable
16,135 
710 
Accrued liabilities
49,126 
28,106 
Debt, current portion
182 
174 
Other short-term liabilities
2,681 
1,702 
Total current liabilities
68,124 
30,692 
Long-term debt
4,269 
4,633 
Other long-term liabilities
5,633 
5,734 
Lease incentive obligation, less current portion
116 
686 
Total liabilities
78,142 
41,745 
Commitments and contingencies
   
   
Stockholders' Equity:
 
 
Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—no shares at December 31, 2017 and December 31, 2016
   
   
Common stock, $0.01 par value Authorized—200,000,000 shares issued and outstanding—120,497,426 and 110,236,127 shares at December 31, 2017 and December 31, 2016
1,205 
1,102 
Additional paid-in capital
1,380,577 
1,080,432 
Accumulated other comprehensive loss
(750)
(418)
Accumulated deficit
(860,614)
(745,821)
Total stockholders' equity
520,418 
335,295 
Total liabilities and stockholders’ equity
$ 598,560 
$ 377,040 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
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
120,497,426 
110,236,127 
Common stock, outstanding shares
120,497,426 
110,236,127 
Accounts receivable, reserves
$ 0 
$ 0 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Revenue
 
 
 
Laboratory service revenue
$ 265,989 
$ 99,376 
$ 39,437 
Cost of sales
79,196 
45,195 
24,501 
Gross margin
186,793 
54,181 
14,936 
Operating expenses:
 
 
 
Research and development
42,139 
33,473 
33,914 
General and administrative
109,040 
76,898 
57,950 
Sales and marketing
153,924 
112,826 
82,140 
Total operating expenses
305,103 
223,197 
174,004 
Loss from operations
(118,310)
(169,016)
(159,068)
Other income (expense)
 
 
 
Investment income
3,932 
2,018 
1,271 
Interest expense
(206)
(213)
(6)
Total other income
3,726 
1,805 
1,265 
Net loss before tax
(114,584)
(167,211)
(157,803)
Income tax benefit
187 
 
 
Net loss
$ (114,397)
$ (167,211)
$ (157,803)
Net loss per share-basic and diluted (in dollars per share)
$ (0.99)
$ (1.63)
$ (1.71)
Weighted average common shares outstanding-basic and diluted (in shares)
115,684 
102,335 
92,135 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Consolidated Statements of Comprehensive Loss
 
 
 
Net loss
$ (114,397)
$ (167,211)
$ (157,803)
Other comprehensive loss, net of tax:
 
 
 
Unrealized gain (loss) on available-for-sale investments
(475)
230 
(329)
Foreign currency translation gain (loss)
143 
(215)
11 
Comprehensive loss
$ (114,729)
$ (167,196)
$ (158,121)
Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Common Stock
Additional Paid In Capital
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Total
Balance at Dec. 31, 2014
$ 886 
$ 709,020 
$ (115)
$ (420,807)
$ 288,984 
Balance (in shares) at Dec. 31, 2014
88,626,042 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
Issuance of common stock, net of issuance costs of $7.4, $7.3, and $4.43 million for 2017, 2016, and 2015, respectively
70 
174,070 
 
 
174,140 
Issuance of common stock, net of issuance costs (in shares)
7,000,000 
 
 
 
 
Exercise of common stock options and warrants
1,245 
 
 
1,248 
Exercise of common stock options and warrants (in shares)
281,315 
 
 
 
 
Issuance of common stock to fund the Company's 401(k) match
 
836 
 
 
836 
Issuance of common stock to fund the Company's 401(k) match (in shares)
21,826 
 
 
 
 
Compensation expense related to issuance of stock options and restricted stock awards
18,044 
 
 
18,050 
Compensation expense related to issuance of stock options and restricted stock awards (in shares)
568,818 
 
 
 
 
Purchase of employee stock purchase plan shares
1,717 
 
 
1,719 
Purchase of employee stock purchase plan shares (in shares)
176,785 
 
 
 
 
Net loss
 
 
 
(157,803)
(157,803)
Accumulated other comprehensive income
 
 
(318)
 
(318)
Balance at Dec. 31, 2015
967 
904,932 
(433)
(578,610)
326,856 
Balance (in shares) at Dec. 31, 2015
96,674,786 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
Issuance of common stock, net of issuance costs of $7.4, $7.3, and $4.43 million for 2017, 2016, and 2015, respectively
98 
144,144 
 
 
144,242 
Issuance of common stock, net of issuance costs (in shares)
9,775,000 
 
 
 
 
Exercise of common stock options and warrants
23 
3,388 
 
 
3,411 
Exercise of common stock options and warrants (in shares)
2,254,384 
 
 
 
 
Issuance of common stock to fund the Company's 401(k) match
2,148 
 
 
2,151 
Issuance of common stock to fund the Company's 401(k) match (in shares)
341,507 
 
 
 
 
Compensation expense related to issuance of stock options and restricted stock awards
23,724 
 
 
23,732 
Compensation expense related to issuance of stock options and restricted stock awards (in shares)
833,627 
 
 
 
 
Purchase of employee stock purchase plan shares
2,096 
 
 
2,099 
Purchase of employee stock purchase plan shares (in shares)
356,823 
 
 
 
 
Net loss
 
 
 
(167,211)
(167,211)
Accumulated other comprehensive income
 
 
15 
 
15 
Balance at Dec. 31, 2016
1,102 
1,080,432 
(418)
(745,821)
335,295 
Balance (in shares) at Dec. 31, 2016
110,236,127 
 
 
 
110,236,127 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
Cumulative-effect adjustment - ASU 2016-09 adoption (ASU 2016-09)
 
396 
 
(396)
 
Issuance of common stock, net of issuance costs of $7.4, $7.3, and $4.43 million for 2017, 2016, and 2015, respectively
74 
253,314 
 
 
253,388 
Issuance of common stock, net of issuance costs (in shares)
7,450,000 
 
 
 
 
Exercise of common stock options and warrants
11 
5,092 
 
 
5,103 
Exercise of common stock options and warrants (in shares)
1,067,047 
 
 
 
 
Issuance of common stock to fund the Company's 401(k) match
3,006 
 
 
3,008 
Issuance of common stock to fund the Company's 401(k) match (in shares)
158,717 
 
 
 
 
Compensation expense related to issuance of stock options and restricted stock awards
12 
35,500 
 
 
35,512 
Compensation expense related to issuance of stock options and restricted stock awards (in shares)
1,162,112 
 
 
 
 
Purchase of employee stock purchase plan shares
2,837 
 
 
2,841 
Purchase of employee stock purchase plan shares (in shares)
423,423 
 
 
 
 
Net loss
 
 
 
(114,397)
(114,397)
Accumulated other comprehensive income
 
 
(332)
 
(332)
Balance at Dec. 31, 2017
$ 1,205 
$ 1,380,577 
$ (750)
$ (860,614)
$ 520,418 
Balance (in shares) at Dec. 31, 2017
120,497,426 
 
 
 
120,497,426 
Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Consolidated Statements of Stockholders' Equity
 
 
 
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
 
Issuance of common stock, issuance costs
$ 7.40 
$ 7.30 
$ 4.43 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities:
 
 
 
Net loss
$ (114,397)
$ (167,211)
$ (157,803)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization of fixed assets
14,500 
11,309 
7,600 
Loss on disposal of property and equipment
954 
151 
40 
Deferred tax benefit
(115)
 
 
Stock-based compensation
35,512 
23,732 
18,050 
Amortization of other liabilities
(1,674)
(1,013)
(573)
Amortization of deferred financing costs
54 
52 
44 
Forgiveness of long-term debt
 
 
(1,000)
Amortization of premium on short-term investments
65 
463 
1,323 
Amortization of intangible assets
1,055 
200 
150 
Proceeds from refundable tax credits
 
800 
 
Changes in assets and liabilities, net effects of acquisition:
 
 
 
Accounts receivable, net
(17,529)
(3,593)
(3,557)
Inventory, net
(19,194)
(156)
(2,660)
Prepaid expenses and other current assets
(995)
761 
(3,057)
Accounts payable
15,383 
(2,598)
661 
Accrued liabilities
15,154 
7,349 
7,424 
Other short-term liabilities
119 
 
 
Lease incentive obligation
(616)
(312)
(553)
Accrued Interest
 
 
(106)
Net cash used in operating activities
(71,724)
(130,066)
(134,017)
Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(357,051)
(189,989)
(205,054)
Maturities of marketable securities
271,466 
193,321 
162,283 
Purchases of property and equipment
(48,480)
(14,851)
(20,084)
Business acquisition, net of cash acquired
(2,980)
 
 
Investment in privately-held company
(3,000)
 
 
Internally developed software
(70)
 
 
Purchased intangible assets
(20,690)
 
(1,900)
Net cash used in investing activities
(160,805)
(11,519)
(64,755)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of common stock options
5,103 
3,411 
1,248 
Proceeds from sale of common stock, net of issuance costs
253,388 
144,242 
174,140 
Payments on capital lease obligations
 
 
(360)
Proceeds from Mortgage Payable
 
 
5,062 
Payments on mortgage payable
(174)
(166)
(44)
Payments on deferred financing costs
(202)
 
 
Proceeds in connection with the Company's employee stock purchase plan
2,841 
2,099 
1,719 
Net cash provided by financing activities
260,956 
149,586 
181,765 
Effects of exchange rate changes on cash and cash equivalents
143 
(215)
11 
Net increase (decrease) in cash and cash equivalents
28,570 
7,786 
(16,996)
Cash and cash equivalents, beginning of period
48,921 
41,135 
58,131 
Cash and cash equivalents, end of period
77,491 
48,921 
41,135 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Property and equipment acquired but not paid
8,818 
655 
1,705 
Unrealized gain (loss) on available-for-sale investments
(475)
230 
(329)
Issuance of 158,717 and 341,507 and 21,826 shares of common stock to fund the Company's 401(k) matching contribution for 2016, 2015 and 2014, respectively
3,008 
2,151 
836 
Interest paid
$ 201 
$ 209 
$ 95 
Consolidated Statements of Cash Flows (Parenthetical)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Consolidated Statements of Cash Flows
 
 
 
Issuance of shares of common stock to fund the Company's 401(k) matching contribution
158,717 
341,507 
21,826 
ORGANIZATION
ORGANIZATION

(1) ORGANIZATION

Exact Sciences Corporation (together with its subsidiaries, “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 additional tests for other types of cancer, with the goal of becoming a leader in cancer diagnostics. 

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, CG Growth, LLC, Exact Sciences Development Company, LLC, Sampleminded, Inc., Exact Sciences Europe LTD, Beijing Exact Sciences Medical Technology Company Limited, and variable interest entities. See Note 10 for the discussion of financing arrangements involving certain entities that are variable interest entities that are included in the Company’s consolidated financial statements.  All significant intercompany transactions and balances have been eliminated in consolidation. The Company does have a minority equity interest in a company accounted for as a cost method investment. The operating results of this company are not included in the Company’s results of operations.

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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 a bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. The Company had no restricted cash at December 31, 2017 and 2016.

Marketable Securities

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

At December 31, 2017 and December 31, 2016 the Company’s marketable securities were comprised of fixed income investments, and all were deemed available‑for‑sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives. The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations (including those with a contractual term greater than one year from the date of purchase) are classified as current. All of the Company’s investments are considered current. Realized gains were $23,000,  $24,000, and $14,000, net of insignificant realized losses, for the years ended December 31, 2017, 2016, and 2015, respectively and are included in investment income.

The Company periodically reviews 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 year ended December 31, 2017, no investments were identified with other-than-temporary declines in value.

Available‑for‑sale securities at December 31, 2017 consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

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

 

 

Available‑for‑sale securities at December 31, 2016 consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

137,013

 

$

17

 

$

(93)

 

$

136,937

 

Asset backed securities

 

 

55,667

 

 

 3

 

 

(30)

 

 

55,640

 

U.S. government agency securities

 

 

49,591

 

 

 3

 

 

(120)

 

 

49,474

 

Commercial paper

 

 

19,069

 

 

 8

 

 

(1)

 

 

19,076

 

Certificates of deposit

 

 

1,053

 

 

 —

 

 

(1)

 

 

1,052

 

Total available-for-sale securities

 

$

262,393

 

$

31

 

$

(245)

 

$

262,179

 

 

Changes in Accumulated Other Comprehensive Income (Loss)

The amount recognized in accumulated other comprehensive income (loss) (“AOCI”) for the years ended December 31, 2017, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

(In thousands)

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at January 1, 2015

 

$

 —

 

$

(115)

 

$

(115)

 

Other comprehensive (loss) income before reclassifications

 

 

11

 

 

(361)

 

 

(350)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

32

 

 

32

 

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

 

 

11

 

 

(329)

 

 

(318)

 

Balance at December 31, 2015

 

$

11

 

$

(444)

 

$

(433)

 

Other comprehensive (loss) income before reclassifications

 

 

(215)

 

 

117

 

 

(98)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

113

 

 

113

 

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

 

 

(215)

 

 

230

 

 

15

 

Balance at December 31, 2016

 

$

(204)

 

$

(214)

 

$

(418)

 

Other comprehensive (loss) income before reclassifications

 

 

143

 

 

(530)

 

 

(387)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

55

 

 

55

 

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

 

 

143

 

 

(475)

 

 

(332)

 

Balance at December 31, 2017

 

$

(61)

 

$

(689)

 

$

(750)

 

 

Amounts reclassified from accumulated other comprehensive loss for the years ended December 31, 2017, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Year Ended December 31,

Details about AOCI Components (In thousands)

 

Statement of Operations

 

2017

 

2016

 

2015

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

55

 

$

113

 

$

32

Total reclassifications

 

 

 

$

55

 

$

113

 

$

32

 

Allowance for Doubtful Accounts

 

The Company estimates an allowance for doubtful accounts against accounts receivable based on estimates of expected collections consistent with historical cash collection experience. The allowance for doubtful accounts is evaluated on a regular basis and adjusted when trends, significant events or other substantive evidence indicate that expected collections will be less than applicable accrual rates.  At December 31, 2017 and 2016 there was no allowance for doubtful accounts recorded. For the years ended December 31, 2017, 2016 and 2015, there was no bad debt expense written off against the allowance and charged to operating expense.

 

Inventory

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

Inventory consists of the following:

 

 

 

 

 

 

 

 

 

 

December 31,

 

December 31,

 

(In thousands)

    

2017

    

2016

 

Raw materials

 

$

10,344

 

$

2,408

 

Semi-finished and finished goods

 

 

15,683

 

 

4,425

 

Total inventory

 

$

26,027

 

$

6,833

 

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight‑line method over the assets’ estimated useful lives. Land is stated at cost and does not depreciate. Maintenance and repairs are expensed when incurred; additions and improvements are capitalized. The estimated useful lives of property and equipment are as follows:

 

 

 

 

 

 

 

Estimated

 

Asset Classification

    

Useful Life

 

Laboratory equipment

 

3 - 5 years

 

Computer equipment and computer software

 

3 years

 

Leasehold and building improvements

 

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

 

Furniture and fixtures

 

3 years

 

Land improvements

 

15 years

 

Buildings

 

30 years

 

 

Depreciation expense for the years ended December 31, 2017, 2016, and 2015 was $14.5 million, $11.3 million, and $7.6 million, respectively.

At December 31, 2017, the Company had $28.7 million of assets under construction which consisted of $13.8 million related to building and leasehold improvements, $2.6 million of capitalized costs related to software projects and $12.3 million of costs related to laboratory equipment. Depreciation will begin on these assets once they are placed into service. The Company expects to incur an additional $102.4 million to complete the building projects, $15.8 million to complete the laboratory equipment, and minimal cots to complete the computer equipment and computer software projects. These projects are expected to be completed in 2018 and 2019. 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 years ended December 31, 2017, 2016 or 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, Intangible Assets and Goodwill

Intangible Assets

Intangible assets consisted of the following:

 

 

 

 

 

 

 

 

 

 

December 31,

 

December 31,

 

(In thousands)

    

2017

    

2016

 

Intangible assets:

 

 

 

 

 

 

 

Finite-lived intangible assets

 

$

23,660

 

$

2,000

 

Less: Accumulated amortization

 

 

(1,500)

 

 

(450)

 

Net carrying value

 

$

22,160

 

$

1,550

 

 

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 December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Net Balance at

 

Average

 

 

 

December 31,

 

Remaining

 

(In thousands)

    

2017

    

Life (Years)

 

Licensed intellectual property and patents

 

$

21,241

 

 

 10.5

 

Developed technology

 

 

919

 

 

 7.6

 

Total

 

$

22,160

 

 

 

 

 

As of December 31, 2017, the estimated future amortization expense associated with the Company’s finite-lived intangible assets for each of the five succeeding fiscal years is as follows:

 

 

 

 

 

(In thousands)

    

 

    

 

2018

 

$

2,407

 

2019

 

 

2,407

 

2020

 

 

2,407

 

2021

 

 

2,372

 

2022

 

 

2,369

 

Thereafter

 

 

10,198

 

 

 

$

22,160

 

 

The Company reviews long-lived assets and certain identifiable intangibles 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 the periods ended December 31, 2017, 2016, and 2015.

Patent costs, which have historically consisted of related legal fees, are capitalized as incurred, only if the Company determines that there is some probable future economic benefit derived from the transaction. 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 year ended December 31, 2017, 2016 and 2015 should be expensed and not capitalized as the future economic benefit derived from the transactions cannot be determined.

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.

Under a technology license and royalty agreement entered into with MDx Health (“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 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 remaining 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 License Agreement. 

As of December 31, 2017, an intangible asset of $9.0 million 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. As of December 31, 2016, an intangible asset of $1.6 million and a liability of $1.3 million related to historical milestone payments made under the MDx License Agreement, were reported in intangible assets and accrued liabilities, respectively.  Amortization expense for the years ended December 31, 2017, 2016, and 2015 was $1.0 million, $0.2 million, and $0.2 million, 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 portfolio of Armune assets the Company acquired is expected to complement its product pipeline. 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, 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 year-ending December 31, 2017, the Company recorded amortization expense of $40,000. At December 31, 2017 the net balance of $12.2 million is reported in net intangible assets in the Company’s consolidated balance sheet.

 

As a result of the Sampleminded 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 year-ended December 31, 2017, the Company recorded amortization expense of $52,000 and the net balance of $0.9 million is reported in intangible assets in our consolidated balance sheet.

Goodwill

As more fully described in Note 12, during the third quarter of 2017, the Company recognized goodwill of $2.0 million from the acquisition of Sampleminded, Inc., which was completed during the period. Goodwill is recorded as part of other long-term assets on the consolidated balance sheet. The Company will evaluate goodwill impairment on an annual basis or more frequently should an event or change in circumstance occur that indicates that the carrying amount is in excess of the fair value. There were no impairment losses for the years ended December 31, 2017, 2016, and 2015.

Investment in Privately-Held Company

On November 30, 2017, the Company made a 10 percent, investment in a supplier. The investment does not constitute a variable interest entity as the Company does not have control over the supplier’s business.  Additionally, as the ownership percentage is below 20 percent, the equity method is not being used to account for the investment. The supplier is privately-held and there are no quoted prices or observable pricing inputs available, therefore the Company has accounted for this investment under the cost-method. The investment will be evaluated annually for impairment and there was no impairment recorded during the year ended December 31, 2017. The total cash paid related to the investment was $3.0 million, which agrees to the carrying value as of December 31, 2017 and is included in the other long-term assets on our consolidated balance sheets.

Net Loss Per Share

Basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period. Basic and diluted net loss per share is the same because all outstanding common stock equivalents have been excluded, as they are anti‑dilutive as a result of the 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:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

(In thousands)

    

2017

    

2016

    

2015

 

Shares issuable upon exercise of stock options

 

3,360

 

3,505

 

4,937

 

Shares issuable upon the release of restricted stock awards

 

6,149

 

5,601

 

3,445

 

 

 

9,509

 

9,106

 

8,382

 

 

 

Accounting for Stock‑Based Compensation

 

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

Revenue Recognition

Laboratory service revenue. The Company’s laboratory service revenue is generated by performing screening 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 on an accrual basis, net of contractual and other adjustments, when amounts that will ultimately be collected can be reasonably estimated. Contractual and other adjustments represent the difference between the list price (the billing rate) and the estimated reimbursement rate from payers and patients. Upon ultimate collection, the aggregate amount received from payers and patients where reimbursement was estimated is compared to previous estimates and, if necessary, the contractual allowance is adjusted.

The estimates of amounts that will ultimately be collected require significant judgment by management, and the Company’s judgments will continue to evolve as it gains payment experience with payers and patients. Historically, in the absence of the ability to reasonably estimate the amount that will ultimately be collected for services, revenue was recognized upon cash receipt. Effective, during the first quarter of 2017, the Company determined that it had the ability to reasonably estimate the amount that will ultimately be collected from all payers, including the impact of patient cost-share collections. Accordingly, the Company now recognizes revenue on an accrual basis for all billed claims.

 

The components of laboratory service revenue, as recognized upon accrual or cash receipt, for the years ended December 31, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

(In thousands)

    

 

2017

    

2016

    

2015

 

 

Revenue recognized on an accrual basis

 

 

$

261,480

 

$

87,037

 

$

36,364

 

 

Revenue recognized when cash is received

 

 

 

4,509

 

 

12,339

 

 

3,073

 

 

Total

 

 

$

265,989

 

$

99,376

 

$

39,437

 

 

 

Advertising Costs

The Company expenses the costs of media advertising at the time the advertising takes place. The Company expensed approximately $58.0 million, $38.1 million, and $10.8 million of media advertising during the years ended December 31, 2017, 2016, and 2015, respectively.

Fair Value Measurements

The FASB has issued authoritative guidance that requires fair value to 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 that 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 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 pricing change from period to period.

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

    

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

December 31, 2017

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

61,297

 

$

61,297

 

 

 —

 

 

 —

 

Commercial paper

 

 

10,995

 

 

 —

 

 

10,995

 

 

 —

 

Certificates of deposit

 

 

1,499

 

 

 —

 

 

1,499

 

 

 —

 

U.S. government agency securities

 

 

3,700

 

 

 —

 

 

3,700

 

 

 —

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

181,305

 

 

 —

 

 

181,305

 

 

 —

 

Asset backed securities

 

 

94,515

 

 

 —

 

 

94,515

 

 

 —

 

U.S. government agency securities

 

 

54,812

 

 

 —

 

 

54,812

 

 

 —

 

Commercial paper

 

 

9,946

 

 

 —

 

 

9,946

 

 

 —

 

Certificates of deposit

 

 

6,646

 

 

 —

 

 

6,646

 

 

 —

 

Total

 

$

424,715

 

$

61,297

 

$

363,418

 

$

 —

 

 

The following table presents the Company’s fair value measurements as of December 31, 2016 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, 2016 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

December 31, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

48,921

 

$

48,921

 

 

 —

 

 

 —

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

136,937

 

 

 —

 

 

136,937

 

 

 —

 

Asset backed securities

 

 

55,640

 

 

 —

 

 

55,640

 

 

 —

 

U.S. government agency securities

 

 

49,474

 

 

 —

 

 

49,474

 

 

 —

 

Commercial paper

 

 

19,076

 

 

 —

 

 

19,076

 

 

 —

 

Certificates of deposit

 

 

1,052

 

 

 —

 

 

1,052

 

 

 —

 

Total

 

$

311,100

 

$

48,921

 

$

262,179

 

$

 —

 

 

The Company monitors investments for other-than-temporary impairment.  It was determined that unrealized gains and losses at December 31, 2017 and 2016 are temporary in nature because the change in market value for those securities has resulted from fluctuating interest rates rather than a deterioration of the credit worthiness of the issuers. So long as the Company holds these securities to maturity, it is unlikely to experience gains or losses. In the event that the Company disposes of these securities before maturity, it is expected that realized gains or losses, if any, will be immaterial.

The following table summarizes the gross unrealized losses and fair values of investments in an unrealized loss position as of December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

Less than 12 months

 

12 months or greater

 

Total

 

(In thousands)

    

 

Fair Value

    

 

Gross Unrealized Loss

    

 

Fair Value

    

 

Gross Unrealized Loss

    

 

Fair Value

    

 

Gross Unrealized Loss

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

158,790

 

$

(340)

 

$

4,715

 

$

(4)

 

$

163,505

 

$

(344)

 

Asset backed securities

 

 

85,906

 

 

(179)

 

 

8,609

 

 

(6)

 

 

94,515

 

 

(185)

 

U.S. government agency securities

 

 

24,878

 

 

(90)

 

 

29,934

 

 

(72)

 

 

54,812

 

 

(162)

 

Commercial paper

 

 

19,944

 

 

(7)

 

 

 —

 

 

 —

 

 

19,944

 

 

(7)

 

Certificates of deposit

 

 

2,997

 

 

(2)

 

 

 —

 

 

 —

 

 

2,997

 

 

(2)

 

Total

 

$

292,515

 

$

(618)

 

$

43,258

 

$

(82)

 

$

335,773

 

$

(700)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 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

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Corporate bonds

    

$

94,999

    

$

(93)

    

$

 —

    

$

 —

    

$

94,999

 

$

(93)

Asset backed securities

 

 

41,656

 

 

(27)

 

 

3,506

 

 

(2)

 

 

45,162

 

 

(29)

U.S. government agency securities

    

 

44,911

    

 

(120)

    

 

 —

    

 

 —

    

 

44,911

 

 

(120)

Commercial paper

 

 

5,606

 

 

(2)

 

 

 —

 

 

 —

 

 

5,606

 

 

(2)

Certificates of deposit

    

 

1,052

    

 

(1)

    

 

 —

    

 

 —

    

 

1,052

 

 

(1)

Total

    

$

188,224

    

$

(243)

    

$

3,506

    

$

(2)

    

$

191,730

 

$

(245)

 

The following table summarizes contractual underlying maturities of the Company’s available‑for‑sale investments at December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due one year or less

 

Due after one year through four years

(In thousands)

    

 

Cost

    

 

Fair Value

 

 

Cost

    

 

Fair Value

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

126,908

 

$

126,756

 

$

54,731

 

$

54,549

U.S. government agency securities

 

 

54,974

 

 

54,812

 

 

 —

 

 

 —

Commercial paper

 

 

9,953

 

 

9,946

 

 

 —

 

 

 —

Certificates of deposit

 

 

6,647

 

 

6,646

 

 

 —

 

 

 —

Asset backed securities

 

 

20,369

 

 

20,343

 

 

74,331

 

 

74,172

Total

 

$

218,851

 

$

218,503

 

$

129,062

 

$

128,721

 

Concentration of Credit Risk

In accordance with GAAP, the Company is required to disclose any significant off‑balance‑sheet risk and credit risk concentration. The Company has no significant off‑balance‑sheet risk, such as foreign exchange contracts or other hedging arrangements. Financial instruments that subject the Company to credit risk consist of cash, cash equivalents and marketable securities. As of December 31, 2017, the Company had cash and cash equivalents deposited in financial institutions in which the balances exceed the federal government agency insured limit of $250,000 by approximately $76.5 million. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk.

Through December 31, 2017, all of the Company’s laboratory service revenues have been derived from the sale of Cologuard. The following is a breakdown of revenue and accounts receivable from major payers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Revenue for the years ended December 31,

 

% Accounts Receivable at December 31,

 

Major Payer

    

 

2017

    

2016

    

2015

 

2017

    

2016

    

2015

 

Centers for Medicare and Medicaid Services

 

 

 

44%

 

 

60%

 

 

71%

 

 

39%

 

 

63%

 

 

64%

 

Payer A

 

 

 

11%

 

 

(1)

 

 

(1)

 

 

10%

 

 

(1)

 

 

(1)

 

 

(1)

Payer was less than 10 percent of revenue for the year.

 

As the number of payers reimbursing for Cologuard increases, the percentage of laboratory service revenue derived from major payers will continue to change as a percentage of revenue and accounts receivable.

Tax Positions

A valuation allowance to reduce the deferred tax assets is reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has incurred significant losses since its inception and due to the uncertainty of the amount and timing of future taxable income, the Company has determined that a $233.8 million and $277.9 million valuation allowance at December 31, 2017 and 2016 is necessary to reduce the tax assets to the amount that is more likely than not to be realized. The change in valuation allowance as of December 31, 2017 and 2016 was a decrease of $44.1 million and an increase of $62.8 million, respectively. The decrease in our deferred tax asset and valuation allowance as of December 31, 2017 is due to the reduction in the US federal corporate income tax rate from 35 percent to 21 percent as part of the Tax Cuts and Jobs Act (H.R. 1) which was signed into law on December 22, 2017. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

Subsequent Events

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

Recent Accounting Pronouncements 

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606), (the “New Revenue Standard”) requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Additional disclosures will also be required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The New Revenue Standard, which must be adopted by the first quarter of 2018, will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either the retrospective or modified retrospective method upon adoption.

 

The Company will adopt the New Revenue Standard on January 1, 2018 utilizing the modified retrospective transition method, meaning that the cumulative effect of applying the New Revenue Standard is to be recognized in opening retained earnings at the date of initial application. Further, the Company has elected to apply the modified retrospective transition method to all contracts. The Company has completed an analysis of its contracts to identify potential differences that would result from applying the requirements under the New Revenue Standard, and the Company has determined that there are no material differences resulting from the adoption of the New Revenue Standard, as the Company’s method of recognizing revenue for its single revenue stream under the New Revenue Standard is analogous to the method utilized immediately prior to adoption. Accordingly, there is no need for the Company to record a cumulative effect adjustment upon adoption, nor will the Company need to disclose in future filings the amount by which each financial statement line item was affected, and an explanation of significant changes, as a result of applying the New Revenue Standard. The Company believes its business processes, systems and controls are appropriate to support recognition and disclosure under the New Revenue Standard. 

 

Regarding the contract acquisition cost component of the New Revenue Standard, the Company’s analysis supports the use of the practical expedient when recognizing expense related to incremental costs incurred to acquire a contract, as the recovery of such costs is completed in less than one year’s time. Additionally, incremental costs to obtain contracts have been immaterial to date. Accordingly, the Company does not expect any material changes to the timing of when the Company recognizes expenses related to contract acquisition costs.

 

In January 2016, the Financial Accounting Standards Board issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“Update 2016-01”).  Update 2016-01 modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, “Fair Value Measurements,” and as such these investments may be measured at cost. Update 2016-01 will be effective for the Company’s fiscal year beginning January 1, 2018, and subsequent interim periods. The adoption of Update 2016-01 is not expected to have a material impact on the Company’s financial statements.

 

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, Leases (Topic 842), (“Update 2016-02”) 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. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of Update 2016-02 will have on the Company’s consolidated financial statements. The Company anticipates that the new guidance will impact the Company’s consolidated financial statements as it has several leases. As further described in Note 6. Commitments and Contingencies, as of December 31, 2017, the Company had future minimum operating lease payments of $9.2 million.

 

In August 2016, the Financial Accounting Standards Board issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, (“Update 2016-15”). Current GAAP either is unclear or does not include specific guidance on the eight cash flow classification issues included in the amendments in Update 2016-15. The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice. The amendments in Update 2016-15 are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has evaluated Update 2016-15 and the Company does not expect the adoption of this guidance to have a material impact on its statement of cash flows.

 

In October 2016, the Financial Accounting Standards Board issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, (“Update 2016-16”). This amendment improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Update 2016-16 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption is permitted. The Company does not anticipate that the adoption of Update 2016-16 to have a significant impact on its consolidated financial statements.

 

In October 2016, the Financial Accounting Standards Board issued ASU No. 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are Under Common Control,” (“Update 2016-17”). The amendments in Update 2016-17 change how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. The amendment is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The Company adopted this guidance during the three months ended March 31, 2017. The impact of adoption did not have an impact on the Company’s consolidated financial statements.

 

In November 2016, the Financial Accounting Standards Board issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, (“Update 2016-18”). Update 2016-18 provides guidance on the classification of restricted cash in the statement of cash flows. The amendments are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The amendments in the Update 2016-18 should be adopted on a retrospective basis. The Company does not expect that adoption of this amendment to have a material effect on its consolidated financial statements as the Company does not have restricted cash.

 

In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, (“Update 2017-01”). In an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is allowed for interim or annual periods for which the financial statements have not been issued or made available for issuance. The Company adopted this guidance in the fourth quarter of 2017, and the adoption of this guidance did not have a material impact on the Company’s financial statements.

 

In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-03, Accounting Changes and Error Corrections, (“Update 2017-03”) which states that an entity should evaluate ASUs that have been issued but not yet adopted to determine the effects of those ASUs on the entity’s financial statements when adopted. If the effect is unknown or cannot be reasonably estimated, then additional qualitative disclosures should be considered, including a description of the effect of the accounting policies that the entity expects to apply, if determined, and a comparison to the entity’s current accounting policies, a description of the status of the entity’s process to implement the new standard and the significant implementation matters yet to be addressed. This ASU is effective upon issuance. Transition guidance in certain issued but not yet adopted ASUs was updated to reflect Update 2017-03. Other than enhancements to the qualitative disclosures regarding the future adoption of new ASUs, adoption of Update 2017-03 is not expected to have any impact on the Company’s consolidated financial statements.

   

In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, (“Update 2017-04”). Update 2017-04 eliminates Step 2 of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update is effective for public business entities for the first interim and annual reporting periods beginning after January 1, 2020, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted this standard effective January 1, 2017 and it did not have any impact on our consolidated financial statements.

   

In May 2017, the Financial Accounting Standards Board issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, (“Update 2017-09”). Update 2017-09 provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments in Update 2017-09 are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The amendments in Update 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact of this amendment on the Company’s consolidated financial statements.

 

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 i