EXACT SCIENCES CORP, 10-K filed on 2/21/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Feb. 20, 2017
Jun. 30, 2016
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, 2016 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 1,177,885,275 
Entity Common Stock, Shares Outstanding
 
110,603,808 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current Assets:
 
 
Cash and cash equivalents
$ 48,921 
$ 41,135 
Marketable securities
262,179 
265,744 
Accounts receivable, net
8,526 
4,933 
Inventory, net
6,833 
6,677 
Prepaid expenses and other current assets
7,114 
7,375 
Total current assets
333,573 
325,864 
Property and Equipment, at cost:
 
 
Computer equipment and computer software
20,767 
14,025 
Laboratory equipment
14,749 
12,786 
Leasehold improvements
13,549 
7,118 
Assets under construction
6,711 
8,038 
Buildings
4,792 
4,777 
Furniture and fixtures
2,515 
1,265 
Property and Equipment, gross
63,083 
48,009 
Less-Accumulated depreciation
(24,941)
(13,913)
Net property and equipment
38,142 
34,096 
Other long-term assets
5,325 
4,070 
Total assets
377,040 
364,030 
Current Liabilities:
 
 
Accounts payable
710 
3,308 
Accrued liabilities
28,106 
22,253 
Debt and capital lease obligation, current portion
174 
166 
Other short-term liabilities
1,702 
996 
Total current liabilities
30,692 
26,723 
Long-term debt
4,633 
4,789 
Other long-term liabilities
5,734 
4,601 
Lease incentive obligation, less current portion
686 
1,061 
Total liabilities
41,745 
37,174 
Commitments and contingencies
   
   
Stockholders' Equity:
 
 
Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—no shares at December 31, 2016 and 2015
   
   
Common stock, $0.01 par value Authorized—200,000,000 shares issued and outstanding—110,236,127 and 96,674,786 shares at December 31, 2016 and 2015
1,102 
967 
Additional paid-in capital
1,080,432 
904,932 
Accumulated other comprehensive loss
(418)
(433)
Accumulated deficit
(745,821)
(578,610)
Total stockholders' equity
335,295 
326,856 
Total liabilities and stockholders’ equity
$ 377,040 
$ 364,030 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2016
Dec. 31, 2015
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
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
110,236,127 
96,674,786 
Common stock, outstanding shares
110,236,127 
96,674,786 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Revenue
 
 
 
Laboratory service revenue
$ 99,376 
$ 39,437 
$ 1,504 
License fees
 
 
294 
Total revenue
99,376 
39,437 
1,798 
Cost of sales
45,195 
24,501 
4,325 
Gross margin
54,181 
14,936 
(2,527)
Operating expenses:
 
 
 
Research and development
33,473 
33,914 
28,669 
General and administrative
76,898 
57,950 
30,435 
Sales and marketing
112,826 
82,140 
38,908 
Total operating expenses
223,197 
174,004 
98,012 
Loss from operations
(169,016)
(159,068)
(100,539)
Other income (expense)
 
 
 
Investment income
2,018 
1,271 
542 
Interest expense
(213)
(6)
(51)
Total other income
1,805 
1,265 
491 
Net loss
$ (167,211)
$ (157,803)
$ (100,048)
Net loss per share-basic and diluted (in dollars per share)
$ (1.63)
$ (1.71)
$ (1.25)
Weighted average common shares outstanding-basic and diluted (in shares)
102,335 
92,135 
80,232 
Condensed Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Condensed Consolidated Statements of Comprehensive Loss
 
 
 
Net loss
$ (167,211)
$ (157,803)
$ (100,048)
Other comprehensive loss, net of tax:
 
 
 
Unrealized gain (loss) on available-for-sale investments
230 
(329)
(240)
Foreign currency translation gain (loss)
(215)
11 
 
Comprehensive loss
$ (167,196)
$ (158,121)
$ (100,288)
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, 2013
$ 711 
$ 455,239 
$ 125 
$ (320,759)
$ 135,316 
Balance (in shares) at Dec. 31, 2013
71,071,838 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
Issuance of common stock, net of issuance costs of $7.3, $4.4, and $11.0 million for 2016, 2015, and 2014, respectively
155 
238,425 
 
 
238,580 
Issuance of common stock, net of issuance costs (in shares)
15,500,000 
 
 
 
 
Exercise of common stock options and warrants
15 
2,625 
 
 
2,640 
Exercise of common stock options and warrants (in shares)
1,522,753 
 
 
 
 
Issuance of common stock to fund the Company's 401(k) match
 
456 
 
 
456 
Issuance of common stock to fund the Company's 401(k) match (in shares)
32,666 
 
 
 
 
Compensation expense related to issuance of stock options and restricted stock awards
11,516 
 
 
11,520 
Compensation expense related to issuance of stock options and restricted stock awards (in shares)
410,619 
 
 
 
 
Purchase of employee stock purchase plan shares
759 
 
 
760 
Purchase of employee stock purchase plan shares (in shares)
88,166 
 
 
 
 
Net loss
 
 
 
(100,048)
(100,048)
Accumulated other comprehensive income
 
 
(240)
 
(240)
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 $7.3, $4.4, and $11.0 million for 2016, 2015, and 2014, 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 
 
 
 
96,674,786 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
Issuance of common stock, net of issuance costs of $7.3, $4.4, and $11.0 million for 2016, 2015, and 2014, 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 
Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Consolidated Statements of Stockholders' Equity
 
 
 
Issuance of common stock, issuance costs
$ 7.3 
$ 4.4 
$ 11.0 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities:
 
 
 
Net loss
$ (167,211)
$ (157,803)
$ (100,048)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization of fixed assets
11,309 
7,600 
3,710 
Loss on disposal of property and equipment
151 
40 
49 
Stock-based compensation
23,732 
18,050 
11,520 
Amortization of deferred license fees
 
 
(294)
Amortization of other liabilities
(1,013)
(573)
 
Amortization of deferred financing costs
52 
44 
 
Forgiveness of long-term debt
 
(1,000)
 
Amortization of premium on short-term investments
463 
1,323 
842 
Amortization of intangible assets
200 
150 
 
Proceeds from refundable tax credits
800 
 
 
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(3,593)
(3,557)
(1,376)
Inventory, net
(156)
(2,660)
(4,017)
Prepaid expenses and other current assets
761 
(3,057)
(1,329)
Accounts payable
(2,598)
661 
1,886 
Accrued liabilities
7,349 
7,424 
8,064 
Lease incentive obligation
(312)
(553)
(487)
Accrued interest
 
(106)
22 
Net cash used in operating activities
(130,066)
(134,017)
(81,458)
Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(189,989)
(205,054)
(209,471)
Maturities of marketable securities
193,321 
162,283 
104,172 
Purchases of property and equipment
(14,851)
(20,084)
(11,991)
Purchases of intangible assets
 
(1,900)
 
Net cash used in investing activities
(11,519)
(64,755)
(117,290)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of common stock options
3,411 
1,248 
2,640 
Proceeds from sale of common stock, net of issuance costs
144,242 
174,140 
238,580 
Payments on capital lease obligations
 
(360)
(351)
Proceeds from mortgage payable
 
5,062 
 
Payments on mortgage payable
(166)
(44)
 
Proceeds from New Market Tax Credit financing agreements
 
 
2,399 
Proceeds in connection with the Company's employee stock purchase plan
2,099 
1,719 
760 
Net cash provided by financing activities
149,586 
181,765 
244,028 
Effects of exchange rate on cash and cash equivalents
(215)
11 
 
Net increase (decrease) in cash and cash equivalents
7,786 
(16,996)
45,280 
Cash and cash equivalents, beginning of period
41,135 
58,131 
 
Cash and cash equivalents, end of period
48,921 
41,135 
58,131 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Property and equipment acquired but not paid
655 
1,705 
546 
Unrealized gain on available-for-sale investments
230 
(329)
(240)
Issuance of 341,507, 21,826 and 32,666 shares of common stock to fund the Company's 401(k) matching contribution for 2015, 2014 and 2013, respectively
2,151 
836 
456 
Interest paid
$ 209 
$ 95 
$ 29 
Condensed Consolidated Statements of Cash Flows (Parenthetical)
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Condensed Consolidated Statements of Cash Flows
 
 
 
Issuance of shares of common stock to fund the Company's 401(k) matching contribution
341,507 
21,826 
32,666 
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, Exact Sciences Europe LTD, Beijing Exact Sciences Medical Technology Company Limited, and variable interest entities. See Note 11 for the discussion of financing arrangements involving certain entities that are variable interest entities that are included in our consolidated financial statements.  All significant intercompany transactions and balances have been eliminated in consolidation.

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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, 2016 and 2015.

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, 2016 and December 31, 2015 the Company’s investments were comprised of fixed income investments, and all were deemed available‑for‑sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives. The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations (including those with a contractual term greater than one year from the date of purchase) are classified as current. All of the Company’s investments are considered current. Realized gains were $24,132,  $14,205, and $11,000, net of insignificant realized losses, for the years ended December 31, 2016, 2015, and 2014, 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, 2016, no investments were identified with other-than-temporary declines in value.

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

 

 

Available‑for‑sale securities at December 31, 2015 consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

    

 

 

    

Gains in Accumulated

    

Losses in Accumulated

    

 

 

 

 

 

 

 

 

Other Comprehensive

 

Other Comprehensive

 

Estimated Fair

 

(In thousands)

 

Amortized Cost

 

Income

 

Income

 

Value

 

Corporate bonds

 

$

179,471

 

$

2

 

$

(262)

 

$

179,211

 

Asset backed securities

 

 

77,661

 

 

 —

 

 

(166)

 

 

77,495

 

U.S. government agency securities

 

 

7,057

 

 

 —

 

 

(18)

 

 

7,039

 

Certificates of deposit

 

 

1,999

 

 

 —

 

 

 —

 

 

1,999

 

Total available-for-sale securities

 

$

266,188

 

$

2

 

$

(446)

 

$

265,744

 

 

Changes in Accumulated Other Comprehensive Income (Loss)

The amount recognized in accumulated other comprehensive income (loss) (“AOCI”) for the years ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Cumulative

 

Unrealized

 

Other

 

 

 

Translation

 

Gain (Loss)

 

Comprehensive

 

(In thousands)

    

Adjustment

    

on Securities

    

Income (Loss)

 

Balance at January 1, 2014

 

$

 —

 

$

125

 

$

125

 

Other comprehensive (loss) income before reclassifications

 

 

 —

 

 

(200)

 

 

(200)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

 —

 

 

(40)

 

 

(40)

 

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

 

 

 —

 

 

(240)

 

 

(240)

 

Balance at December 31, 2014

 

$

 —

 

$

(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)

 

 

Amounts reclassified from accumulated other comprehensive income (loss) for the years ended December 31, 2016, 2015 and 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affected Line Item in the

 

Year Ended December 31,

Details about AOCI  Components (In thousands)

 

Statement of Operations

 

2016

 

2015

 

2014

Change in value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

Sales and maturities of available-for-sale investments

 

Investment income

 

$

113

 

$

32

 

$

(40)

Total reclassifications

 

 

 

$

113

 

$

32

 

$

(40)

 

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.  For the years ended December 31, 2016, 2015 and 2014, 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,

 

(In thousands)

    

2016

    

2015

 

Raw materials

 

$

2,408

 

$

1,772

 

Semi-finished and finished goods

 

 

4,425

 

 

4,905

 

Total inventory

 

$

6,833

 

$

6,677

 

Property and Equipment

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

 

 

 

 

 

 

 

Estimated

 

Asset Classification

    

Useful Life

 

Laboratory equipment

 

3 - 5 years

 

Computer equipment and computer software

 

3 years

 

Leasehold improvements

 

Lesser of the remaining lease term or useful life

 

Building Improvements

 

Lesser of the remaining building life or useful life

 

Furniture and fixtures

 

3 years

 

Buildings

 

30 years

 

 

Depreciation expense for the years ended December 31, 2016, 2015, and 2014 was $11.3 million, $7.6 million, and $3.7 million, respectively.

At December 31, 2016, the Company had $6.7 million of assets under construction which consisted of $0.1 million related to building and leasehold improvements, $1.7 million of capitalized costs related to software projects and $4.9 million of costs related to machinery and equipment. Depreciation will begin on these assets once they are placed into service. The Company expects to incur minimal costs to complete these projects and expects to be complete these projects in 2017. 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, 2016, 2015 or 2014.

Software Capitalization Policy

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

Patent Costs and Intangible Assets

Patent costs, which have historically consisted of related legal fees, are capitalized as incurred, only if the Company determines that there is some 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. The Company determined that all patent costs incurred during the year ended December 31, 2016, 2015 and 2014 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, the Company is required to pay MDx Health milestones on sales of products or services covered by the licensed intellectual property.  Once the achievement of a milestone has occurred or is considered probable, an intangible asset and corresponding liability is reported in other long-term assets and accrued expenses, respectively.  The intangible asset is amortized over the estimated ten-year useful life of the licensed intellectual property, and such amortization is reported in cost of sales. The liability is relieved once the milestone has been achieved and payment has been made. As of December 31, 2016, an intangible asset of $1.6 million and a liability of $1.3 million are reported in other long-term assets and accrued expenses, respectively.  Amortization expense for the years ended December 31, 2016 and 2015 was $0.2 million. 

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)

    

2016

    

2015

    

2014

 

Shares issuable upon exercise of stock options

 

3,505

 

4,937

 

4,934

 

Shares issuable upon the release of restricted stock awards

 

5,601

 

3,445

 

1,541

 

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

 

 —

 

 —

 

24

 

 

 

9,106

 

8,382

 

6,499

 

 

 

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

The estimates of amounts that will ultimately be collected require significant judgment by management. Some patients have out-of-pocket costs for amounts not covered by their insurance carrier, and the Company bills the patient directly for these amounts in the form of co-payments, deductibles and co-insurance in accordance with their insurance carrier and health plans. In the absence of the ability to estimate the amount that will ultimately be collected for the Company’s services, revenue is recognized upon cash receipt.

 

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

 

The components of our laboratory service revenue, as recognized upon accrual or cash receipt, for the years ended December 31, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

(In thousands)

 

2016

    

2015

    

 

2014

 

Revenue recognized on an accrual basis

 

$

87,037

 

$

36,364

 

$

1,388

 

 

Revenue recognized when cash is received

 

 

12,339

 

 

3,073

 

 

116

 

 

Total

 

$

99,376

 

$

39,437

 

$

1,504

 

 

 

License fees.  License fees for the licensing of product rights are recorded as deferred revenue upon receipt of cash and recognized as revenue on a straight‑line basis over the license period.

As more fully described in Note 3 below, in connection with the Company’s transaction with Genzyme Corporation, Genzyme agreed to pay the Company a total of $18.5 million, of which $16.65 million was paid on January 27, 2009 and $1.85 million was subject to a holdback by Genzyme to satisfy certain potential indemnification obligations in exchange for the assignment and licensing of certain intellectual property to Genzyme. The Company’s on‑going performance obligations to Genzyme under the Collaboration, License and Purchase Agreement (the “CLP Agreement”), as described below, including its obligation to deliver through licenses certain intellectual property improvements to Genzyme, if improvements are made during the initial five‑year collaboration period, were deemed to be undelivered elements of the CLP Agreement on the date of closing. Accordingly, the Company deferred the initial $16.65 million in cash received at closing and amortized that up‑front payment on a straight line basis into revenue over the initial five‑year collaboration period ending in January 2014. The Company received the first holdback amount of $962,000, which included accrued interest, due from Genzyme during the first quarter of 2010. The Company received the second holdback amount of $934,000 which included accrued interest due, from Genzyme during the third quarter of 2010. The amounts were deferred and were amortized on a straight‑line basis into revenue over the remaining term of the collaboration at the time of receipt.

In addition, Genzyme purchased 3,000,000 shares of common stock purchased from the Company on January 27, 2009 for $2.00 per share, representing a premium of $0.51 per share above the closing price of the Company’s common stock on that date of $1.49 per share. The aggregate premium paid by Genzyme over the closing price of the Company’s common stock on the date of the transaction of $1.53 million is deemed to be a part of the total consideration for the CLP Agreement. Accordingly, the Company deferred the aggregate $1.53 million premium and amortized that amount on a straight line basis into revenue over the initial five‑year collaboration period ending in January 2014.

The Company did not recognize license fee revenue for the years ended December 31, 2016 and 2015. The Company recognized approximately $0.3 million in license fee revenue for the year ended December 31, 2014 in connection with the amortization of the up-front payments from Genzyme.

Advertising Costs

The Company expenses the costs of media advertising at the time the advertising takes place. The Company expensed approximately $38.1 million, $10.8 million, and $5.3 million of media advertising during the years ended December 31, 2016, 2015, and 2014, 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 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 pricing change from period to period.

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 following table presents the Company’s fair value measurements as of December 31, 2015 along with the level within the fair value hierarchy in which the fair value measurements, in their entirety, fall.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at December 31, 2015 Using:

 

 

    

 

 

    

Quoted Prices

    

Significant

    

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

Fair Value at

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

December 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market

 

$

37,435

 

$

37,435

 

$

 —

 

$

 —

 

Commercial paper

 

 

3,700

 

 

 —

 

 

3,700

 

 

 —

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

179,211

 

 

 —

 

 

179,211

 

 

 —

 

Asset backed securities

 

 

77,495

 

 

 —

 

 

77,495

 

 

 —

 

U.S. government agency securities

 

 

7,039

 

 

 —

 

 

7,039

 

 

 —

 

Certificates of deposit

 

 

1,999

 

 

 —

 

 

1,999

 

 

 —

 

Total

 

$

306,879

 

$

37,435

 

$

269,444

 

$

 —

 

 

The Company monitors investments for other-than-temporary impairment.  It was determined that unrealized gains and losses at December 31, 2016 and 2015 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, 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 the gross unrealized losses and fair value of investments in an unrealized loss position as of December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Less than 12 months

 

12 months or greater

 

Total

(In thousands)

    

 

Fair Value

    

 

Gross Unrealized Loss

    

 

Fair Value

    

 

Gross Unrealized Loss

    

 

Fair Value

 

 

Gross Unrealized Loss

Marketable Securities

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Corporate bonds

    

$

166,238

    

$

(262)

    

$

 —

    

$

 —

    

$

166,238

 

$

(262)

U.S. government agency securities

    

 

7,039

    

 

(18)

    

 

 —

    

 

 —

    

 

7,039

 

 

(18)

Asset backed securities

    

 

72,792

    

 

(164)

    

 

3,887

    

 

(2)

    

 

76,679

 

 

(166)

Total

    

$

246,069

    

$

(444)

    

$

3,887

    

$

(2)

    

$

249,956

 

$

(446)

 

The following table summarizes contractual underlying maturities of the Company’s available‑for‑sale investments at December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due one year or less

 

Due after one year through four years

(In thousands)

    

 

Cost

    

 

Fair Value

 

 

Cost

    

 

Fair Value

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

128,443

 

$

128,389

 

$

8,570

 

$

8,548

Certificates of deposit

 

 

 —

 

 

 —

 

 

1,053

 

 

1,052

Commercial paper

 

 

19,069

 

 

19,076

 

 

 —

 

 

 —

U.S. government agency securities

 

 

14,553

 

 

14,545

 

 

35,038

 

 

34,929

Asset backed securities

 

 

 —

 

 

 —

 

 

55,667

 

 

55,640

Total

 

$

162,065

 

$

162,010

 

$

100,328

 

$

100,169

 

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, 2016, 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 $47.9 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, 2016, all of the Company’s laboratory service revenues have been derived from the sale of Cologuard, and one payor, Centers for Medicare and Medicaid Services, has provided greater than 10% of revenue during the years ended December 31, 2016 and 2015.  Medicare revenue as a percentage of total laboratory service revenue was 60% and 71% for the years ended December 31, 2016 and 2015, respectively. Medicare accounts receivable as a percentage of total accounts receivable were 63% and 64% at December 31, 2016 and 2015, respectively. As the number of payors reimbursing for Cologuard increases, the percentage of laboratory service revenue derived from Medicare 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 $277.9 million and $215.1 million valuation allowance at December 31, 2016 and 2015 is necessary to reduce the tax assets to the amount that is more likely than not to be realized. The change in valuation allowance for December 31, 2016 and 2015 was $62.8 million and $53.2 million, respectively. 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 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. Adoption of the New Revenue Standard is permitted as early as the first quarter of 2017 and is required by the first quarter of 2018. The Company does not plan to early adopt this standard and has not yet selected a transition method. The Company has completed its preliminary evaluation of the potential financial statement impact of the New Revenue Standard on prior and future reporting periods.  The Company does not expect material changes to the timing of when the Company recognizes revenue or the method by which the Company measures its single revenue stream, lab service revenue. Further, regarding the contract acquisition cost component of the New Revenue Standard, the Company’s analysis supports 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 it recognizes expenses related to contract acquisition costs. The Company will continue its evaluation of the New Revenue Standard through the date of adoption.

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 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, and anticipate that the new guidance will impact the Company’s consolidated financial statements as it has several leases. As further described in Note 7. Commitments and Contingencies, as of December 31, 2016, we had future minimum operating lease payments of $6.9 million.

 

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-09, “Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”  (“Update 2016-09”) as part of its Simplification Initiative.  The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification in the statements of cash flows.  The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  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 Company will adopt Update 2016-09 in the first quarter of 2017 and will no longer use a forfeiture rate. The adoption of this aspect of the guidance is not expected to have a material impact on the Company’s financial statements.

 

Additionally, if in the future, the Company is able to utilize its deferred tax assets to offset taxes payable, excess tax benefit stock option deductions will be reflected in the consolidated statements of operations as a component of the provision for income taxes, whereas they previously would have been recognized in equity on the consolidated balance sheet.  As of December 31, 2016, the Company had $62.7 million in excess tax benefit stock option deductions which would be subject to this reclassification if the deferred tax assets are realized in the future. Upon adoption, all such deductions will be fully offset by the valuation allowance.

 

In August 2016, the Financial Accounting Standards Board issued Accounting Standards Update 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 we do not expect the adoption of this guidance to have a material impact on our statement of cash flows.

 

In October 2016, the Financial Accounting Standards Board issued Accounting Standards Update 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 Accounting Standards Update 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 does not expect the adoption of Update 2017-17 to have a material impact on its consolidated financial statements.

 

In November 2016, the Financial Accounting Standards Board issued Accounting Standards Update 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 Accounting Standards Update 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 ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on the Company’s 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 included in the consolidated balance sheet as a component of accumulated other comprehensive loss in total Exact Sciences Corporation’s shareholders’ equity. Transaction gains and losses are included in the consolidated statement of operations.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year

GENZYME STRATEGIC TRANSACTION
GENZYME STRATEGIC TRANSACTION

(3) GENZYME STRATEGIC TRANSACTION

 

Transaction summary

 

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

 

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

The Company’s on‑going performance obligations to Genzyme under the CLP were deemed to be undelivered elements of the CLP Agreement on the date of closing. Accordingly, the Company deferred the initial $16.65 million in cash received at closing and amortized that up‑front payment on a straight line basis into the License Fee Revenue line item in its statements of operations over the initial five year collaboration period. The Company received the first holdback amount of $962,000, which included accrued interest, due from Genzyme during the first quarter of 2010. The Company received the second holdback amount of $934,000 which included accrued interest due, from Genzyme during the third quarter of 2010. The amounts were deferred and were amortized on a straight‑line basis into revenue over the remaining term of the collaboration through January 2014.

 

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

 

The Company did not recognize license fee revenue from the CLP Agreement during the years ended December 31, 2016 and 2015. The Company recognized approximately $0.3 million in license fee revenue in connection with the amortization of the up-front payments and holdback amounts from Genzyme during the year ended December 31, 2014.

 

MAYO LICENSE AGREEMENT
MAYO LICENSE AGREEMENT

(4) MAYO LICENSE AGREEMENT 

On June 11, 2009, the Company entered into a 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. 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. The scope of the license, as amended, covers any screening, surveillance or diagnostic test or tool for use in connection with any type of cancer, pre-cancer, disease or condition. 

The licensed MAYO patents and patent applications contain both method and composition‑of‑matter claims that relate to sample processing, analytical testing and data analysis associated with nucleic screening for cancers and other diseases. The jurisdictions covered by these patents and patent applications include the U.S., Canada, the European Union and Japan. In addition to granting the Company a license to the covered MAYO intellectual property, MAYO agreed to make available personnel to provide the Company product development and research and development assistance. Under the license agreement, the Company assumed the obligation and expense of prosecuting and maintaining the licensed MAYO patents and is obligated to make commercially reasonable efforts to bring to market products using the licensed MAYO intellectual property.

MAYO has agreed to make available personnel through January 2020 to provide the Company product development and research and development assistance.

Pursuant to the Company’s agreement with MAYO, the Company is required to pay MAYO a low single digit royalty on the Company’s net sales of products using the licensed MAYO intellectual property, with minimum annual royalty fees of $25,000 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.  As part of the amendment, the royalty rate on the Company’s net sales of Cologuard increased and, if in the future, improvements are made to the Cologuard product, the royalty rate may further increase, but, pursuant to the terms of the January 2016 amendment, would remain a low-single-digit percentage of net sales.

In addition to royalties, the Company is required to issue stock or cash to MAYO upon achievement of several milestones. The Company is required to issue MAYO shares of the Company’s common stock with a value of $0.2 million upon commercial launch of its second and third products that use the licensed MAYO intellectual property. Additionally, for the second and third products that use licensed MAYO intellectual property, the Company is required to pay MAYO cash of $0.2 million upon commercialization and cash of $0.2 million, $0.8 million and $2.0 million upon such product 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 and 2016.

In addition, the Company is paying MAYO for research and development efforts. As part of the Company’s research collaboration with MAYO, the Company has incurred charges of $3.6 million and has made payments of $3.9 million for the year ended December 31, 2016. The Company has recorded an estimated liability in the amount of $1.0 million for research and development efforts as of December 31, 2016. The Company incurred charges of $2.6 million and made payments of $2.6 million for the year ended December 31, 2015. The Company recorded an estimated liability in the amount of $1.3 million for research and development efforts at December 31, 2015. The Company incurred charges of $2.3 million and made payments of $0.7 million for the year ended December 31, 2014.

The MAYO license agreement required, among other things, a $0.5 million milestone payment upon FDA approval of the Company’s Cologuard test. The Company received this FDA approval, and paid the milestone payment, in August 2014.

Pursuant to the license agreement, the Company granted MAYO two common stock purchase warrants with an exercise price of $1.90 per share covering 1,000,000 and 250,000 shares of common stock, respectively. The warrant covering 1,000,000 shares was fully exercised as of September 2011. The warrant covering 250,000 shares was exercised at various dates in 2013 and 2014 and became fully exercised as of June 2014. 

 

The license agreement will remain in effect, unless earlier terminated by the parties in accordance with the agreement, until the last of the licensed patents expires in 2033 (or later, if certain licensed patent applications are issued). However, if we are still using the licensed MAYO know‑how or certain MAYO‑provided biological specimens or their derivatives on such expiration date, the term shall continue until the earlier of the date we stop using such know‑how and materials and the date that is five years after the last licensed patent expires. The license agreement contains customary termination provisions and permits MAYO to terminate the license agreement if the Company sues MAYO or its affiliates, other than any such suit claiming an uncured material breach by MAYO of the license agreement.

ISSUANCES OF EQUITY
ISSUANCES OF EQUITY

(5) ISSUANCES OF EQUITY

Underwritten Public Offerings

On April 2, 2014, the Company completed an underwritten public offering of 11.5 million shares of common stock at a price of $12.75 per share to the public. The Company received approximately $137.7 million of net proceeds from the offering, after deducting $8.9 million for the underwriting discount and commissions and other stock issuance costs paid by the Company.

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

On July 24, 2015 the Company completed an underwritten public offering of 7.0 million shares of common stock at a price of $25.50 per share to the public. The Company received approximately $174.1 million of net proceeds from the offering, after deducting $4.4 million for the underwriting discount and commissions and other stock issuance costs paid by the Company.

On August 2, 2016 the Company completed an underwritten public offering of 9.8 million shares of common stock at a price of $15.50 per share to the public. The Company received approximately $144.2 million of net proceeds from the offering after deducting $7.3 million for the underwriting discount and commissions and other stock issuance costs paid by the Company.

Rights Agreement

In February 2011, the Company adopted a rights agreement and subsequently distributed to the Company’s stockholders preferred stock purchase rights. Under certain circumstances, each right can be exercised for one one‑thousandth of a share of Series A Junior Participating Preferred Stock. In general, the rights will become exercisable in the event of an announcement of an acquisition of 15% or more of the Company’s outstanding common stock or the commencement or announcement of an intention to make a tender offer or exchange offer for 15% or more of the Company’s outstanding common stock. If any person or group acquires 15% or more of the Company’s common stock, the Company’s stockholders, other than the acquiror, will have the right to purchase additional shares of the Company’s common stock (in lieu of the Series A Junior Participating Preferred Stock) at a substantial discount to the then prevailing market price. The rights agreement could significantly dilute such acquiror’s ownership position in the Company’s shares, thereby making a takeover prohibitively expensive and encouraging such acquiror to negotiate with the Company’s board of directors. The ability to exercise these rights is contingent on events that the Company has determined to be unlikely at this time, and therefore this provision has not been considered in the computation of equity or earnings per share.

 

STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION

(6) STOCK‑BASED COMPENSATION

Stock‑Based Compensation Plans

The Company maintains the 2010 Omnibus Long‑Term Incentive Plan, the 2010 Employee Stock Purchase Plan, the 2015 Inducement Award Plan, the 2016 Inducement Award Plan and the 2000 Stock Option and Incentive Plan (collectively, the “Stock Plans”).

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

The 2000 Option Plan was administered by the compensation committee of the Company’s board of directors, which selected the individuals to whom equity‑based awards would be granted and determined the option exercise price and other terms of each award, subject to the provisions of the 2000 Option Plan. The 2000 Option Plan provides that upon an acquisition of the Company, all options to purchase common stock will accelerate by a period of one year. In addition, upon the termination of an employee without cause or for good reason prior to the first anniversary of the completion of the acquisition, all options then outstanding under the 2000 Option Plan held by that employee will immediately become exercisable. At December 31, 2016, options to purchase 1,063,476 shares were outstanding under the 2000 Option Plan. There were no shares of restricted stock outstanding under the 2000 Option Plan.

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

The 2010 Stock Plan is administered by the compensation committee of the Company’s board of directors, which selects the individuals to whom equity‑based awards will be granted and determines the option exercise price and other terms of each award, subject to the provisions of the 2010 Stock Plan. The 2010 Stock Plan provides that upon an acquisition of the Company, all equity will accelerate by a period of one year. In addition, upon the termination of an employee without cause or for good reason prior to the first anniversary of the completion of the acquisition, all equity awards then outstanding under the 2010 Stock Plan held by that employee will immediately vest. At December 31, 2016, options to purchase 2,442,005 shares were outstanding under the 2010 Stock Plan and 4,943,782 shares of restricted stock and restricted stock units were outstanding. On July 23, 2015 the Company’s stockholders approved an amendment and restatement of the 2010 Stock Plan which, among other items, increased the number of shares available for issuance thereunder by 8,360,000 shares. At December 31, 2016, there were 1,426,375 shares available for future grant under the 2010 Stock Plan.

2015 Inducement Award Plan  The Company adopted the 2015 Inducement Award Plan (the “2015 Inducement Plan”) on February 9, 2015. The 2015 Inducement Plan expired on July 27, 2015 and after such date no further awards could be granted under the plan. Under the terms of the 2015 Inducement Plan, the Company is authorized to grant incentive stock options, as defined under the Internal Revenue Code, non-qualified options, restricted stock awards and other stock awards to employees who were not previously an employee of the Company or any of its Subsidiaries. Options granted under the 2015 Inducement Plan expire ten years from the date of grant. Grants made from the 2015 Inducement Plan generally vest over a period of three to four years.

The 2015 Inducement Plan is administered by the compensation committee of the Company’s board of directors, which selects the individuals to whom equity-based awards will be granted and determines the option exercise price and other terms of each award, subject to the provisions of the 2015 Inducement Plan. The 2015 Inducement Plan provides that upon an acquisition of the Company, all equity will accelerate by a period of one year. In addition, upon termination of an employee without cause or for good reason prior to the first anniversary of the completion of the acquisition, all equity awards then outstanding under the 2015 Inducement Plan held by that employee will immediately vest. At December 31, 2016, there were 132,550 shares of restricted stock and restricted stock units outstanding under the 2015 Inducement Award Plan. At December 31, 2016, there were no shares available for future grant under the 2015 Inducement Plan.

2016 Inducement Award Plan  The Company adopted the 2016 Inducement Award Plan (the “2016 Inducement Plan”) on January 25, 2016. The 2016 Inducement Plan will expire on the date of the Company’s 2017 Annual Stockholder’s Meeting and after such date no further awards may be granted under the plan. Under the terms of the 2016 Inducement Plan, the Company is authorized to grant incentive stock options, as defined under the Internal Revenue Code, non-qualified options, restricted stock awards and other stock awards to employees who were not previously an employee of the Company or any of its Subsidiaries. Options granted under the 2016 Inducement Plan expire ten years from the date of grant. Grants made from the 2016 Inducement Plan generally vest over a period of three to four years.

The 2016 Inducement Plan is administered by the compensation committee of the Company’s board of directors, which selects the individuals to whom equity-based awards will be granted and determines the option exercise price and other terms of each award, subject to the provisions of the 2016 Inducement Plan. The 2016 Inducement Plan provides that upon an acquisition of the Company, all equity will accelerate by a period of one year. In addition, upon termination of an employee without cause or for good reason prior to the first anniversary of the completion of the acquisition, all equity awards then outstanding under the 2016 Inducement Plan held by that employee will immediately vest. At December 31, 2016, there were 524,984 shares of restricted stock and restricted stock units outstanding under the 2016 Inducement Award Plan. At December 31, 2016, there were 845,604 shares available for future grant under the 2016 Inducement Plan.

2010 Employee Stock Purchase Plan  The 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) was adopted by the Company on July 16, 2010. The 2010 Purchase Plan provides participating employees the right to purchase shares of common stock at a discount through a series of offering periods. The 2010 Purchase Plan will expire on October 31, 2020. On July 24, 2014, the Company’s stockholders approved an amendment to the 2010 Employee Stock Purchase Plan to increase the number of shares available for purchase thereunder by 500,000 shares. On July 28, 2016 the Company’s stockholders approved an amendment to the 2010 Employee Stock Purchase Plan to increase the number of shares available for purchase thereunder by 2,000,000 shares. At December 31, 2016, there were 2,006,569 shares of common stock available for purchase by participating employees under the 2010 Purchase Plan.

The compensation committee of the Company’s board of directors administers the 2010 Purchase Plan. Generally, all employees whose customary employment is more than 20 hours per week and more than five months in any calendar year are eligible to participate in the 2010 Purchase Plan. Participating employees authorize an amount, between 1% and 15% of the employee’s compensation, to be deducted from the employee’s pay during the offering period. On the last day of the offering period, the employee is deemed to have exercised the employee’s option to purchase shares of Company common stock, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the 2010 Purchase Plan, the option exercise price is an amount equal to 85% of the fair market value, as defined under the 2010 Purchase Plan, and no employee can purchase more than $25,000 of Company common stock under the 2010 Purchase Plan in any calendar year. Rights granted under the 2010 Purchase Plan terminate upon an employee’s voluntary withdrawal from the 2010 Purchase Plan at any time or upon termination of employment. At December 31, 2016, there were 793,431 cumulative shares issued under the 2010 Purchase Plan, and 356,823 shares were issued in the year ended December 31, 2016, as follows:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted Average

 

Offering period ended

 

Number of Shares

 

price per Share

 

April 30, 2016

 

177,331

 

$

5.95

 

October 31, 2016

 

179,492

 

$

5.95

 

 

Stock‑Based Compensation Expense

The Company recorded approximately $23.7 million, $18.1 million, and $11.5 million in stock‑based compensation expense during the years ended December 31, 2016, 2015, and 2014, respectively, in connection with the amortization of restricted stock and restricted stock unit awards, stock purchase rights granted under the Company’s employee stock purchase plan and stock options granted to employees, non‑employee consultants and non‑employee directors. Non‑cash stock‑based compensation expense by expense category for the years ended December 31, 2016, 2015, and 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

(In thousands)

    

2016

    

2015

    

2014

 

Cost of sales

 

$

1,064

 

$

876

 

$

279

 

Research and development

 

 

4,014

 

 

3,744

 

 

4,149

 

General and administrative

 

 

14,597

 

 

9,358

 

 

5,575

 

Sales and marketing

 

 

4,057

 

 

4,072

 

 

1,517

 

    Total stock-based compensation

 

$

23,732

 

$

18,050

 

$

11,520

 

 

In connection with the November 8, 2016 retirement of the Company’s former Chief Financial Officer, the Company modified the vesting of 118,341 shares of his previously unvested restricted stock units whereby such restricted stock units vested on January 1, 2017. He forfeited all other unvested restricted stock units and stock option awards. In the fourth quarter of 2016, the Company recorded $1.5 million of non-cash stock-based compensation expense for the modified award.

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 option, which is based on historical experience with similar grants. Expected life of a market measure-based award is based on the applicable performance period.

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

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

Forfeitures—The Company records stock‑based compensation expense only for those awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. The Company’s forfeiture used in the twelve months ended December 31, 2016, 2015 and 2014 was 3.48%,  4.99%, and 4.99%, respectively. 

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

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

December 31,

 

 

    

2016

    

2015

    

2014

    

Option Plan Shares

 

 

 

 

 

 

 

Risk-free interest rates

 

1.48%  -  1.69%

 

1.5%  -  1.92%

 

1.96%  -  2.01%

 

Expected term (in years)

 

6.25  -  6.74

 

6.25  -  6.6

 

6.25

 

Expected volatility

 

58.9%  -  59.4%

 

67.1%  -  73.2%

 

77.6%  -  80.8%

 

Dividend yield

 

0 %

 

0 %

 

0 %

 

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

 

$ 3.17

 

$ 15.81

 

$ 10.05

 

Market Measure-Based Shares

 

   

 

   

 

 

 

Risk-free interest rates

 

0.76%  -  0.91%

 

 1.12  %

 

(1)

 

Expected term (in years)

 

2.43  -  2.84

 

3.16

 

(1)

 

Expected volatility

 

68.3  -  79.6%

 

 64.3  %

 

(1)

 

Dividend yield

 

0 %

 

0 %

 

(1)

 

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

 

$ 3.77

 

$ 5.91

 

(1)

 

ESPP Shares

 

   

 

   

 

 

 

Risk-free interest rates

 

0.41%  -  0.83%

 

0.25%  -  0.75%

 

0.1%  -  0.5%

 

Expected term (in years)

 

0.5  -  2

 

0.5  -  2

 

0.5  -  2

 

Expected volatility

 

70.1%  -  92.7%

 

51.2%  -  110%

 

42.5%  -  62.7%

 

Dividend yield

 

0 %

 

0 %

 

0 %

 

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

 

$ 3.30

 

$ 4.67

 

$ 6.30

 

 

(1)

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

Stock Option, Restricted Stock, and Restricted Stock Unit Activity

A summary of stock option activity under the Stock Plans during the years ended 2016, 2015 and 2014 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, 2014

 

6,062,587

 

$

2.78

 

6.6

 

 

 

 

Granted

 

266,477

 

 

14.28

 

 

 

 

 

 

Exercised

 

(1,378,372)

 

 

1.91