EXACT SCIENCES CORP - Quarter Report: 2022 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-35092
EXACT SCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 02-0478229 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||
5505 Endeavor Lane, Madison WI | 53719 | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
(608) 535-8815 (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.01 par value per share | EXAS | The Nasdaq Stock Market LLC | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 1, 2022, the registrant had 176,959,543 shares of common stock outstanding.
EXACT SCIENCES CORPORATION
INDEX
| Page Number | ||||||||
2
EXACT SCIENCES CORPORATION
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share data - unaudited)
Part I — Financial Information
| June 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 213,421 | $ | 315,471 | |||||||
| Marketable securities | 514,623 | 715,005 | |||||||||
| Accounts receivable, net | 186,542 | 216,645 | |||||||||
| Inventory | 115,172 | 104,994 | |||||||||
| Prepaid expenses and other current assets | 71,875 | 74,122 | |||||||||
| Total current assets | 1,101,633 | 1,426,237 | |||||||||
| Long-term Assets: | |||||||||||
| Property, plant and equipment, net | 663,653 | 580,248 | |||||||||
| Operating lease right-of-use assets | 182,494 | 174,225 | |||||||||
| Goodwill | 2,345,922 | 2,335,172 | |||||||||
| Intangible assets, net | 2,046,773 | 2,094,411 | |||||||||
| Other long-term assets, net | 96,680 | 74,591 | |||||||||
| Total assets | $ | 6,437,155 | $ | 6,684,884 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | 84,167 | $ | 67,829 | |||||||
| Accrued liabilities | 308,219 | 398,556 | |||||||||
| Operating lease liabilities, current portion | 25,813 | 19,710 | |||||||||
| Other current liabilities | 25,132 | 30,973 | |||||||||
| Total current liabilities | 443,331 | 517,068 | |||||||||
| Long-term Liabilities: | |||||||||||
| Convertible notes, net | 2,183,145 | 2,180,232 | |||||||||
| Long-term debt | 50,000 | — | |||||||||
| Other long-term liabilities | 364,107 | 417,782 | |||||||||
| Operating lease liabilities, less current portion | 187,226 | 182,166 | |||||||||
| Total liabilities | 3,227,809 | 3,297,248 | |||||||||
| Commitments and contingencies (Note 14) | |||||||||||
| Stockholders’ Equity: | |||||||||||
Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—no shares at June 30, 2022 and December 31, 2021 | — | — | |||||||||
Common stock, $0.01 par value Authorized—400,000,000 shares issued and outstanding—176,801,434 and 173,674,067 shares at June 30, 2022 and December 31, 2021 | 1,769 | 1,738 | |||||||||
| Additional paid-in capital | 6,204,742 | 6,028,861 | |||||||||
| Accumulated other comprehensive loss | (8,645) | (1,443) | |||||||||
| Accumulated deficit | (2,988,520) | (2,641,520) | |||||||||
| Total stockholders’ equity | 3,209,346 | 3,387,636 | |||||||||
| Total liabilities and stockholders’ equity | $ | 6,437,155 | $ | 6,684,884 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
EXACT SCIENCES CORPORATION
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data - unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | 521,640 | $ | 434,819 | $ | 1,008,211 | $ | 836,896 | |||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Cost of sales (exclusive of amortization of acquired intangible assets) | 144,600 | 113,968 | 279,305 | 223,961 | |||||||||||||||||||
| Research and development | 106,083 | 106,235 | 208,331 | 221,802 | |||||||||||||||||||
| Sales and marketing | 215,922 | 194,827 | 448,103 | 380,968 | |||||||||||||||||||
| General and administrative | 181,672 | 167,629 | 351,442 | 435,356 | |||||||||||||||||||
| Amortization of acquired intangible assets | 26,356 | 23,824 | 51,010 | 47,014 | |||||||||||||||||||
| Intangible asset impairment charge | 6,591 | — | 6,591 | — | |||||||||||||||||||
| Total operating expenses | 681,224 | 606,483 | 1,344,782 | 1,309,101 | |||||||||||||||||||
| Loss from operations | (159,584) | (171,664) | (336,571) | (472,205) | |||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Investment income (expense), net | (3,719) | 3,429 | (5,206) | 34,617 | |||||||||||||||||||
| Interest expense | (4,511) | (4,652) | (8,989) | (9,268) | |||||||||||||||||||
| Total other income (expense) | (8,230) | (1,223) | (14,195) | 25,349 | |||||||||||||||||||
| Net loss before tax | (167,814) | (172,887) | (350,766) | (446,856) | |||||||||||||||||||
| Income tax benefit (expense) | 1,751 | (4,025) | 3,766 | 238,780 | |||||||||||||||||||
| Net loss | $ | (166,063) | $ | (176,912) | $ | (347,000) | $ | (208,076) | |||||||||||||||
| Net loss per share—basic and diluted | $ | (0.94) | $ | (1.03) | $ | (1.98) | $ | (1.22) | |||||||||||||||
| Weighted average common shares outstanding—basic and diluted | 176,364 | 171,494 | 175,396 | 170,469 | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
EXACT SCIENCES CORPORATION
Condensed Consolidated Statements of Comprehensive Loss
(Amounts in thousands - unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net loss | $ | (166,063) | $ | (176,912) | $ | (347,000) | $ | (208,076) | |||||||||||||||
| Other comprehensive loss, before tax: | |||||||||||||||||||||||
| Unrealized loss on available-for-sale investments | (1,488) | (297) | (6,455) | (629) | |||||||||||||||||||
| Foreign currency translation loss | (510) | — | (747) | — | |||||||||||||||||||
| Comprehensive loss, before tax | (168,061) | (177,209) | (354,202) | (208,705) | |||||||||||||||||||
| Income tax benefit related to items of other comprehensive loss | — | — | — | 170 | |||||||||||||||||||
| Comprehensive loss, net of tax | $ | (168,061) | $ | (177,209) | $ | (354,202) | $ | (208,535) | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
EXACT SCIENCES CORPORATION
Condensed Consolidated Statements of Stockholders’ Equity
(Amounts in thousands, except share data - unaudited)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Number of Shares | $0.01 Par Value | ||||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | 173,674,067 | $ | 1,738 | $ | 6,028,861 | $ | (1,443) | $ | (2,641,520) | $ | 3,387,636 | ||||||||||||||||||||||||
| Exercise of common stock options | 485,537 | 5 | 4,277 | — | — | 4,282 | |||||||||||||||||||||||||||||
| Compensation expense related to issuance of stock options and restricted stock awards | 1,391,797 | 14 | 52,427 | — | — | 52,441 | |||||||||||||||||||||||||||||
| Other | 7 | — | (7) | — | — | (7) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (180,937) | (180,937) | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (5,204) | — | (5,204) | |||||||||||||||||||||||||||||
| Balance, March 31, 2022 | 175,551,408 | $ | 1,757 | $ | 6,085,558 | $ | (6,647) | $ | (2,822,457) | $ | 3,258,211 | ||||||||||||||||||||||||
| Exercise of common stock options | 84,485 | 1 | 742 | — | — | 743 | |||||||||||||||||||||||||||||
| Issuance of common stock to fund the Company’s 2021 401(k) match | 391,129 | 4 | 29,198 | — | — | 29,202 | |||||||||||||||||||||||||||||
| Compensation expense related to issuance of stock options and restricted stock awards | 183,095 | 2 | 58,930 | — | — | 58,932 | |||||||||||||||||||||||||||||
| Issuance of common stock for business combinations | 265,186 | 2 | 14,788 | — | — | 14,790 | |||||||||||||||||||||||||||||
| Purchase of employee stock purchase plan shares | 326,131 | 3 | 15,526 | — | — | 15,529 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (166,063) | (166,063) | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (1,998) | — | (1,998) | |||||||||||||||||||||||||||||
| Balance, June 30, 2022 | 176,801,434 | $ | 1,769 | $ | 6,204,742 | $ | (8,645) | $ | (2,988,520) | $ | 3,209,346 | ||||||||||||||||||||||||
6
EXACT SCIENCES CORPORATION
Condensed Consolidated Statements of Stockholders’ Equity
(Amounts in thousands, except share data - unaudited)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Number of Shares | $0.01 Par Value | ||||||||||||||||||||||||||||||||||
| Balance, January 1, 2021 | 159,423,410 | $ | 1,595 | $ | 4,279,327 | $ | 526 | $ | (2,045,896) | $ | 2,235,552 | ||||||||||||||||||||||||
| Settlement of convertible notes, net of tax | 344 | — | 26 | — | — | 26 | |||||||||||||||||||||||||||||
| Exercise of common stock options | 967,107 | 10 | 8,749 | — | — | 8,759 | |||||||||||||||||||||||||||||
| Issuance of common stock to fund the Company’s 2020 401(k) match | 162,606 | 2 | 22,932 | — | — | 22,934 | |||||||||||||||||||||||||||||
| Compensation expense related to issuance of stock options and restricted stock awards | 1,355,435 | 13 | 158,239 | — | — | 158,252 | |||||||||||||||||||||||||||||
| Issuance of common stock for business combinations, net of issuance costs | 9,384,410 | 94 | 1,254,704 | — | — | 1,254,798 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (31,164) | (31,164) | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (162) | — | (162) | |||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 171,293,312 | $ | 1,714 | $ | 5,723,977 | $ | 364 | $ | (2,077,060) | $ | 3,648,995 | ||||||||||||||||||||||||
| Settlement of convertible notes, net of tax | 197 | — | 14 | — | — | 14 | |||||||||||||||||||||||||||||
| Exercise of common stock options | 140,478 | 1 | 2,857 | — | — | 2,858 | |||||||||||||||||||||||||||||
| Compensation expense related to issuance of stock options and restricted stock awards | 121,575 | 2 | 56,283 | — | — | 56,285 | |||||||||||||||||||||||||||||
| Issuance of common stock for business combinations | 126,026 | 1 | 16,119 | — | — | 16,120 | |||||||||||||||||||||||||||||
| Purchase of employee stock purchase plan shares | 173,717 | 2 | 12,036 | — | — | 12,038 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (176,912) | (176,912) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (297) | — | (297) | |||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 171,855,305 | $ | 1,720 | $ | 5,811,286 | $ | 67 | $ | (2,253,972) | $ | 3,559,101 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
EXACT SCIENCES CORPORATION
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands - unaudited)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (347,000) | $ | (208,076) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation | 48,498 | 42,007 | |||||||||
| Loss on disposal of property, plant and equipment | 166 | 639 | |||||||||
| Unrealized (gain) loss on equity investments | 4,247 | (2,486) | |||||||||
| Deferred tax benefit | (4,940) | (244,509) | |||||||||
| Stock-based compensation | 111,373 | 133,577 | |||||||||
| Post-combination expense for acceleration of unvested equity | — | 80,960 | |||||||||
| Realized gain on preferred stock investment | — | (30,500) | |||||||||
| Amortization of deferred financing costs, convertible note debt discount and issuance costs, and other liabilities | 3,420 | 3,282 | |||||||||
| Amortization of premium on short-term investments | 1,493 | 1,616 | |||||||||
| Amortization of acquired intangible assets | 51,010 | 47,014 | |||||||||
| Intangible asset impairment charge | 6,591 | — | |||||||||
| Asset acquisition IPR&D expense | — | 85,337 | |||||||||
| Remeasurement of contingent consideration | (51,759) | 9,201 | |||||||||
| Non-cash lease expense | 17,281 | 11,837 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | 30,632 | 8,995 | |||||||||
| Inventory, net | (10,178) | 4,267 | |||||||||
| Operating lease liabilities | (10,668) | (7,095) | |||||||||
| Accounts payable and accrued liabilities | (79,339) | 27,138 | |||||||||
| Other assets and liabilities | (5,497) | (94) | |||||||||
| Net cash used in operating activities | (234,670) | (36,890) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of marketable securities | (79,110) | (915,289) | |||||||||
| Maturities and sales of marketable securities | 269,310 | 325,380 | |||||||||
| Purchases of property, plant and equipment | (96,949) | (37,504) | |||||||||
| Business combination, net of cash acquired and issuance costs | 685 | (415,549) | |||||||||
| Asset acquisition | — | (58,073) | |||||||||
| Investments in privately held companies | (26,667) | (10,000) | |||||||||
| Other investing activities | (49) | (244) | |||||||||
| Net cash provided by (used in) investing activities | 67,220 | (1,111,279) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from accounts receivable securitization facility | 50,000 | — | |||||||||
| Proceeds from exercise of common stock options | 5,025 | 11,617 | |||||||||
| Proceeds in connection with the Company’s employee stock purchase plan | 15,529 | 12,038 | |||||||||
| Other financing activities | (4,407) | (3,068) | |||||||||
| Net cash provided by financing activities | 66,147 | 20,587 | |||||||||
| Effects of exchange rate changes on cash and cash equivalents | (747) | — | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (102,050) | (1,127,582) | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 315,768 | 1,491,594 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 213,718 | $ | 364,012 | |||||||
8
EXACT SCIENCES CORPORATION
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands - unaudited)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Supplemental disclosure of non-cash investing and financing activities | |||||||||||
| Property, plant and equipment acquired but not paid | $ | 34,604 | $ | 15,139 | |||||||
| Business combination contingent consideration liability | $ | 4,600 | $ | 350,348 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Interest paid | $ | 5,133 | $ | 5,414 | |||||||
| Reconciliation of cash, cash equivalents and restricted cash: | |||||||||||
| Cash and cash equivalents | $ | 213,421 | $ | 363,715 | |||||||
| Restricted cash — included in prepaid expenses and other current assets as of June 30, 2022, and other long-term assets, net as of June 30, 2021 | 297 | 297 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 213,718 | $ | 364,012 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Exact Sciences Corporation (together with its subsidiaries, “Exact,” or the “Company”) was incorporated in February 1995. Exact is a leading global cancer diagnostics company. It has developed some of the most impactful tests in cancer screening and diagnostics, including Cologuard® and Oncotype DX®. Exact is currently working on the development of additional tests, with the goal of bringing new, innovative cancer tests to patients throughout the world.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements, which include the accounts of Exact Sciences Corporation and those of its wholly owned subsidiaries and variable interest entities, are unaudited and have been prepared on a basis substantially consistent with the Company’s audited financial statements and notes as of and for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K (the “2021 Form 10-K”). All intercompany transactions and balances have been eliminated upon consolidation. These condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair statement of its financial position, operating results and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2021 has been derived from audited financial statements, but does not contain all of the footnote disclosures from the 2021 Form 10-K. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. The statements should be read in conjunction with the audited financial statements and related notes included in the 2021 Form 10-K.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those that affect the Company’s financial statements materially and involve difficult, subjective or complex judgments by management, and actual results could differ from those estimates. These estimates include revenue recognition, valuation of intangible assets and goodwill, and accounting for income taxes among others. The Company’s critical accounting policies and estimates are explained further in the notes to the condensed consolidated financial statements in this Quarterly Report and the 2021 Form 10-K.
The spread of the coronavirus (“COVID-19”) has affected many segments of the global economy, including the cancer screening and diagnostics industry. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of June 30, 2022 and through the date of the filing of this Quarterly Report on Form 10-Q. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, marketable and non-marketable investments, software, and the carrying value of the goodwill and other long-lived assets. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods.
The pandemic and related precautionary measures began to materially disrupt the Company's operations in March 2020 and may continue to disrupt the business for an unknown period of time. As a result, the pandemic had an impact on the Company’s revenues and operating results.
The ultimate impact of COVID-19 depends on factors beyond the Company’s knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, the Company is unable to estimate the extent to which COVID-19 will negatively impact its financial results or liquidity.
10
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Significant Accounting Policies
During the six months ended June 30, 2022, there were no changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, except as described in the Collateralized Debt Instruments and Recently Adopted Accounting Pronouncements sections below.
Collateralized Debt Instruments
Debt instruments that are collateralized by security interests in financial assets held by the Company are accounted for as a secured borrowing and therefore: (i) the asset balances pledged as collateral are included within the applicable balance sheet line item and the borrowings are included within long-term debt in the condensed consolidated balance sheet; (ii) interest expense is included within the condensed consolidated statements of operations; and (iii) in the case of collateralized accounts receivable, receipts from customers related to the underlying accounts receivable are reflected as operating cash flows, and (iv) borrowings and repayments under the collateralized loans are reflected as financing cash flows within the condensed consolidated statements of cash flows.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation in the condensed consolidated financial statements and accompanying notes to the condensed consolidated financial statements.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In October 2021, The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805). This update requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification (“ASC”) 606. This differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. The amendments in this update should be applied prospectively, and are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company early adopted the amendments in this update during the first quarter of fiscal year 2022. There was no material impact to the Company’s condensed consolidated financial statements.
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.
11
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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:
| June 30, | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Shares issuable in connection with acquisitions (1) | 45 | 157 | ||||||||||||
| Shares issuable upon exercise of stock options | 1,683 | 2,486 | ||||||||||||
| Shares issuable upon the release of restricted stock awards | 5,772 | 4,334 | ||||||||||||
| Shares issuable upon the release of performance share units | 992 | 867 | ||||||||||||
| Shares issuable upon conversion of convertible notes | 20,309 | 20,309 | ||||||||||||
| 28,801 | 28,153 | |||||||||||||
______________
(1)During the third quarter of 2021, shares were issued related to holdback amounts on the previously closed acquisition of Viomics, Inc. (“Viomics”) causing the decrease in shares issuable as of June 30, 2022 as compared to June 30, 2021. The remaining issuable shares relate to the previously closed acquisition of Paradigm Diagnostics, Inc. (“Paradigm”) in March 2020.
(2) REVENUE
The Company’s revenue is primarily generated by its laboratory testing services utilizing its Cologuard, Oncotype, and COVID-19 tests. The services are completed upon release of a patient’s test result to the ordering healthcare provider.
Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by revenue source:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Screening | ||||||||||||||||||||||||||
| Medicare Parts B & C | $ | 135,252 | $ | 111,387 | $ | 249,007 | $ | 212,946 | ||||||||||||||||||
| Commercial | 181,186 | 140,149 | 342,866 | 268,023 | ||||||||||||||||||||||
| Other | 37,456 | 12,401 | 68,543 | 23,296 | ||||||||||||||||||||||
| Total Screening | 353,894 | 263,937 | 660,416 | 504,265 | ||||||||||||||||||||||
| Precision Oncology | ||||||||||||||||||||||||||
| Medicare Parts B & C | $ | 52,621 | $ | 48,310 | $ | 105,186 | $ | 93,147 | ||||||||||||||||||
| Commercial | 45,940 | 47,144 | 92,002 | 93,956 | ||||||||||||||||||||||
| International | 28,341 | 26,848 | 57,784 | 52,904 | ||||||||||||||||||||||
| Other | 27,093 | 15,507 | 51,643 | 27,209 | ||||||||||||||||||||||
| Total Precision Oncology | 153,995 | 137,809 | 306,615 | 267,216 | ||||||||||||||||||||||
| COVID-19 Testing | $ | 13,751 | $ | 33,073 | $ | 41,180 | $ | 65,415 | ||||||||||||||||||
| Total | $ | 521,640 | $ | 434,819 | $ | 1,008,211 | $ | 836,896 | ||||||||||||||||||
Screening revenue primarily includes laboratory service revenue from the Cologuard test while Precision Oncology revenue primarily includes laboratory service revenue from global Oncotype® products.
At each reporting period end, the Company conducts an analysis of the estimates used to calculate the transaction price to determine whether any new information available impacts those estimates made in prior reporting periods. The Company recognized revenue from a change in transaction price of $7.1 million and $11.3 million for the three and six months ended June 30, 2022, respectively. The Company recorded a downward adjustment to revenue from a change in transaction price of $14.7 million and $13.0 million for the three and six months ended June 30, 2021, respectively.
12
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company had deferred revenue of $1.2 million and $1.0 million as of June 30, 2022 and December 31, 2021, respectively. Deferred revenue is reported in other current liabilities in the Company’s condensed consolidated balance sheets.
Revenue recognized for the three months ended June 30, 2022 and 2021, which was included in the deferred revenue balance at the beginning of each period, was $0.1 million and $10.4 million, respectively. Of the $10.4 million of revenue recognized for the three months ended June 30, 2021, $10.3 million related to COVID-19 testing. Revenue recognized for the six months ended June 30, 2022 and 2021, which was included in the deferred revenue balance at the beginning of each period, was $0.4 million and $24.4 million, respectively. Of the $24.4 million of revenue recognized for the six months ended June 30, 2021, $24.1 million related to COVID-19 testing.
(3) MARKETABLE SECURITIES
The following table sets forth the Company’s cash, cash equivalents, restricted cash, and marketable securities at June 30, 2022 and December 31, 2021:
| (In thousands) | June 30, 2022 | December 31, 2021 | ||||||||||||
| Cash, cash equivalents, and restricted cash | ||||||||||||||
| Cash and money market | $ | 157,219 | $ | 247,335 | ||||||||||
| Cash equivalents | 56,202 | 68,136 | ||||||||||||
| Restricted cash | 297 | 297 | ||||||||||||
| Total cash, cash equivalents, and restricted cash | 213,718 | 315,768 | ||||||||||||
| Marketable securities | ||||||||||||||
| Available-for-sale debt securities | $ | 513,520 | $ | 711,669 | ||||||||||
| Equity securities | 1,103 | 3,336 | ||||||||||||
| Total marketable securities | 514,623 | 715,005 | ||||||||||||
| Total cash and cash equivalents, restricted cash and marketable securities | $ | 728,341 | $ | 1,030,773 | ||||||||||
Available-for-sale debt securities at June 30, 2022 consisted of the following:
| (In thousands) | Amortized Cost | Gains in Accumulated Other Comprehensive Income (Loss) (1) | Losses in Accumulated Other Comprehensive Income (Loss) (1) | Estimated Fair Value | ||||||||||||||||||||||
| Cash equivalents | ||||||||||||||||||||||||||
| Commercial paper | $ | 53,265 | $ | — | $ | — | $ | 53,265 | ||||||||||||||||||
| U.S. government agency securities | 2,937 | — | — | 2,937 | ||||||||||||||||||||||
| Total cash equivalents | 56,202 | — | — | 56,202 | ||||||||||||||||||||||
| Marketable securities | ||||||||||||||||||||||||||
| Corporate bonds | $ | 157,170 | $ | 1 | $ | (2,290) | $ | 154,881 | ||||||||||||||||||
| U.S. government agency securities | 250,731 | 1 | (4,555) | 246,177 | ||||||||||||||||||||||
| Certificates of deposit | 24,211 | — | (12) | 24,199 | ||||||||||||||||||||||
| Commercial paper | 10,208 | — | (1) | 10,207 | ||||||||||||||||||||||
| Asset backed securities | 79,121 | — | (1,065) | 78,056 | ||||||||||||||||||||||
| Total marketable securities | 521,441 | 2 | (7,923) | 513,520 | ||||||||||||||||||||||
| Total available-for-sale securities | $ | 577,643 | $ | 2 | $ | (7,923) | $ | 569,722 | ||||||||||||||||||
______________
(1)Gains and losses in accumulated other comprehensive income (loss) (“AOCI”) are reported before tax impact.
13
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Available-for-sale debt securities at December 31, 2021 consisted of the following:
| (In thousands) | Amortized Cost | Gains in Accumulated Other Comprehensive Income (Loss) (1) | Losses in Accumulated Other Comprehensive Income (Loss) (1) | Estimated Fair Value | ||||||||||||||||||||||
| Cash equivalents | ||||||||||||||||||||||||||
| U.S. government agency securities | $ | 3,543 | $ | — | $ | — | $ | 3,543 | ||||||||||||||||||
| Commercial paper | 64,593 | — | — | 64,593 | ||||||||||||||||||||||
| Total cash equivalents | 68,136 | — | — | 68,136 | ||||||||||||||||||||||
| Marketable securities | ||||||||||||||||||||||||||
| U.S. government agency securities | $ | 250,793 | $ | — | $ | (873) | $ | 249,920 | ||||||||||||||||||
| Asset backed securities | 94,565 | 2 | (107) | 94,460 | ||||||||||||||||||||||
| Commercial paper | 6,996 | — | — | 6,996 | ||||||||||||||||||||||
| Certificates of deposit | 47,147 | 2 | (10) | 47,139 | ||||||||||||||||||||||
| Corporate bonds | 313,634 | 13 | (493) | 313,154 | ||||||||||||||||||||||
| Total marketable securities | 713,135 | 17 | (1,483) | 711,669 | ||||||||||||||||||||||
| Total available-for-sale securities | $ | 781,271 | $ | 17 | $ | (1,483) | $ | 779,805 | ||||||||||||||||||
______________
(1)Gains and losses in AOCI are reported before tax impact.
The following table summarizes contractual underlying maturities of the Company’s available-for-sale debt securities at June 30, 2022:
| Due one year or less | Due after one year through five years | |||||||||||||||||||||||||
| (In thousands) | Cost | Fair Value | Cost | Fair Value | ||||||||||||||||||||||
| Cash equivalents | ||||||||||||||||||||||||||
| Commercial paper | $ | 53,265 | $ | 53,265 | $ | — | $ | — | ||||||||||||||||||
| U.S. government agency securities | 2,937 | 2,937 | — | — | ||||||||||||||||||||||
| Total cash equivalents | 56,202 | 56,202 | — | — | ||||||||||||||||||||||
| Marketable securities | ||||||||||||||||||||||||||
| U.S. government agency securities | $ | 224,768 | $ | 220,874 | $ | 25,963 | $ | 25,303 | ||||||||||||||||||
| Corporate bonds | 123,496 | 121,974 | 33,674 | 32,907 | ||||||||||||||||||||||
| Certificates of deposit | 24,211 | 24,199 | — | — | ||||||||||||||||||||||
| Asset backed securities | — | — | 79,121 | 78,056 | ||||||||||||||||||||||
| Commercial paper | 10,208 | 10,207 | — | — | ||||||||||||||||||||||
| Total marketable securities | 382,683 | 377,254 | 138,758 | 136,266 | ||||||||||||||||||||||
| Total | $ | 438,885 | $ | 433,456 | $ | 138,758 | $ | 136,266 | ||||||||||||||||||
14
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the gross unrealized losses and fair values of available-for-sale debt securities in an unrealized loss position as of June 30, 2022, aggregated by investment category and length of time those individual securities have been in a continuous unrealized loss position:
| Less than one year | One year or greater | Total | ||||||||||||||||||||||||||||||||||||
| (In thousands) | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | ||||||||||||||||||||||||||||||||
| Marketable securities | ||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 149,879 | $ | (2,290) | $ | — | $ | — | $ | 149,879 | $ | (2,290) | ||||||||||||||||||||||||||
| Certificates of deposit | 24,199 | (12) | — | — | 24,199 | (12) | ||||||||||||||||||||||||||||||||
| Asset backed securities | 78,056 | (1,065) | — | — | 78,056 | (1,065) | ||||||||||||||||||||||||||||||||
| U.S. government agency securities | 244,179 | (4,555) | — | — | 244,179 | (4,555) | ||||||||||||||||||||||||||||||||
| Commercial paper | 2,999 | (1) | — | — | 2,999 | (1) | ||||||||||||||||||||||||||||||||
| Total available-for-sale securities | $ | 499,312 | $ | (7,923) | $ | — | $ | — | $ | 499,312 | $ | (7,923) | ||||||||||||||||||||||||||
The Company evaluates investments that are in an unrealized loss position for impairment as a result of credit loss. It was determined that no credit losses exist as of June 30, 2022 and December 31, 2021, because the change in market value for those securities in an unrealized loss position has resulted from fluctuating interest rates rather than a deterioration of the credit worthiness of the issuers.
The gains and losses recorded on available-for-sale debt securities and equity securities are included in investment income, net in the Company’s condensed consolidated statements of operations. The gains and losses recorded were not significant for the three and six months ended June 30, 2022 and 2021.
(4) INVENTORY
Inventory consisted of the following:
| (In thousands) | June 30, 2022 | December 31, 2021 | ||||||||||||
| Raw materials | $ | 57,087 | $ | 51,321 | ||||||||||
| Semi-finished and finished goods | 58,085 | 53,673 | ||||||||||||
| Total inventory | $ | 115,172 | $ | 104,994 | ||||||||||
15
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(5) PROPERTY, PLANT AND EQUIPMENT
The carrying value and estimated useful lives of property, plant and equipment are as follows:
| (In thousands) | Estimated Useful Life | June 30, 2022 | December 31, 2021 | |||||||||||||||||
| Property, plant and equipment | ||||||||||||||||||||
| Land | n/a | $ | 4,716 | $ | 4,716 | |||||||||||||||
| Leasehold and building improvements | (1) | 166,559 | 147,083 | |||||||||||||||||
| Land improvements | 15 years | 5,207 | 5,206 | |||||||||||||||||
| Buildings | 30 - 40 years | 215,280 | 210,560 | |||||||||||||||||
| Computer equipment and computer software | 3 years | 123,464 | 109,119 | |||||||||||||||||
| Laboratory equipment | 3 - 10 years | 213,261 | 189,748 | |||||||||||||||||
| Furniture and fixtures | 3 - 10 years | 29,833 | 28,293 | |||||||||||||||||
| Assets under construction | n/a | 165,365 | 100,339 | |||||||||||||||||
| Property, plant and equipment, at cost | 923,685 | 795,064 | ||||||||||||||||||
| Accumulated depreciation | (260,032) | (214,816) | ||||||||||||||||||
| Property, plant and equipment, net | $ | 663,653 | $ | 580,248 | ||||||||||||||||
______________
(1)Lesser of remaining lease term, building life, or estimated useful life.
Depreciation expense for the three months ended June 30, 2022 and 2021 was $25.5 million and $21.5 million, respectively. Depreciation expense for the six months ended June 30, 2022 and 2021 was $48.5 million and $42.0 million, respectively.
At June 30, 2022, the Company had $165.4 million of assets under construction, which consisted of $94.1 million related to buildings, $41.5 million in laboratory equipment, $15.8 million in leasehold and building improvements, $13.0 million in capitalized costs related to software projects, and $1.0 million in land improvements. Depreciation will begin on these assets once they are placed into service upon completion.
16
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(6) INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The following table summarizes the net-book-value and estimated remaining life of the Company’s intangible assets as of June 30, 2022:
| (In thousands) | Weighted Average Remaining Life (Years) | Gross Carrying Amount | Accumulated Amortization | Net Balance at June 30, 2022 | ||||||||||||||||||||||
| Finite-lived intangible assets | ||||||||||||||||||||||||||
| Trade name | 13.0 | $ | 104,000 | $ | (17,028) | $ | 86,972 | |||||||||||||||||||
| Customer relationships | 8.5 | 4,000 | (222) | 3,778 | ||||||||||||||||||||||
| Patents | 3.2 | 10,942 | (7,458) | 3,484 | ||||||||||||||||||||||
| Acquired developed technology (1) | 8.1 | 920,334 | (219,788) | 700,546 | ||||||||||||||||||||||
| Supply agreements | 4.9 | 2,295 | (302) | 1,993 | ||||||||||||||||||||||
| Total finite-lived intangible assets | 1,041,571 | (244,798) | 796,773 | |||||||||||||||||||||||
| In-process research and development | n/a | 1,250,000 | — | 1,250,000 | ||||||||||||||||||||||
| Total intangible assets | $ | 2,291,571 | $ | (244,798) | $ | 2,046,773 | ||||||||||||||||||||
______________
(1)The gross carrying amount includes an immaterial foreign currency translation adjustment related to the intangible assets acquired as a result of the acquisition of OmicEra Diagnostics GmbH (“OmicEra”), whose functional currency is also its local currency. Intangible asset balances are translated into U.S. dollars using exchange rates in effect at period end, and adjustments related to foreign currency translation are included in other comprehensive income.
The following table summarizes the net-book-value and estimated remaining life of the Company’s intangible assets as of December 31, 2021:
| (In thousands) | Weighted Average Remaining Life (Years) | Gross Carrying Amount | Accumulated Amortization | Net balance at December 31, 2021 | ||||||||||||||||||||||
| Finite-lived intangible assets | ||||||||||||||||||||||||||
| Trade name | 13.4 | $ | 104,700 | $ | (13,554) | $ | 91,146 | |||||||||||||||||||
| Customer relationships | 9.6 | 6,700 | (1,577) | 5,123 | ||||||||||||||||||||||
| Patents and licenses | 3.6 | 10,942 | (6,763) | 4,179 | ||||||||||||||||||||||
| Acquired developed technology | 8.6 | 918,171 | (176,402) | 741,769 | ||||||||||||||||||||||
| Supply agreements | 5.4 | 2,295 | (101) | 2,194 | ||||||||||||||||||||||
| Total finite-lived intangible assets | 1,042,808 | (198,397) | 844,411 | |||||||||||||||||||||||
| In-process research and development | n/a | 1,250,000 | — | 1,250,000 | ||||||||||||||||||||||
| Total intangible assets | $ | 2,292,808 | $ | (198,397) | $ | 2,094,411 | ||||||||||||||||||||
17
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of June 30, 2022, 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) | ||||||||
| 2022 (remaining six months) | $ | 49,288 | ||||||
| 2023 | 98,574 | |||||||
| 2024 | 98,240 | |||||||
| 2025 | 97,192 | |||||||
| 2026 | 96,132 | |||||||
| Thereafter | 357,347 | |||||||
| $ | 796,773 | |||||||
The Company’s acquired intangible assets are being amortized on a straight-line basis over the estimated useful life.
During the second quarter of 2022, the Company recorded a non-cash, pre-tax impairment loss of $6.6 million related to the acquired developed technology intangible asset acquired as a result of the acquisition of Paradigm Diagnostics, Inc. due to lower than anticipated performance of the underlying product. The impairment is recorded in intangible asset impairment charge in the condensed consolidated statement of operations for the three and six months ended June 30, 2022.
Goodwill
The change in the carrying amount of goodwill for the periods ended June 30, 2022 and December 31, 2021 is as follows:
| (In thousands) | ||||||||
Balance, January 1, 2021 | $ | 1,237,672 | ||||||
| Thrive acquisition | 948,105 | |||||||
| Ashion acquisition | 56,758 | |||||||
| PreventionGenetics acquisition | 92,637 | |||||||
Balance, December 31, 2021 | 2,335,172 | |||||||
| OmicEra acquisition | 10,748 | |||||||
| PreventionGenetics acquisition adjustment | 42 | |||||||
| Effects of changes in foreign currency exchange rates (1) | (40) | |||||||
Balance June 30, 2022 | $ | 2,345,922 | ||||||
______________
(1)Represents the impact of foreign currency translation related to the goodwill acquired as a result of the acquisition of OmicEra. Goodwill balances are translated into U.S. dollars using exchange rates in effect at period end, and adjustments related to foreign currency translation are included in other comprehensive income.
There were no impairment losses for the three and six months ended June 30, 2022 and 2021.
(7) FAIR VALUE MEASUREMENTS
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.
18
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
The following table presents the Company’s fair value measurements as of June 30, 2022 along with the level within the fair value hierarchy in which the fair value measurements, in their entirety, fall.
| (In thousands) | Fair Value at June 30, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| Cash, cash equivalents, and restricted cash | ||||||||||||||||||||||||||
| Cash and money market | $ | 157,219 | $ | 157,219 | $ | — | $ | — | ||||||||||||||||||
| Commercial paper | 53,265 | — | 53,265 | — | ||||||||||||||||||||||
| U.S. government agency securities | 2,937 | — | 2,937 | — | ||||||||||||||||||||||
| Restricted cash | 297 | 297 | — | — | ||||||||||||||||||||||
| Marketable securities | ||||||||||||||||||||||||||
| Corporate bonds | $ | 154,881 | $ | — | $ | 154,881 | $ | — | ||||||||||||||||||
| Certificates of deposit | 24,199 | — | 24,199 | — | ||||||||||||||||||||||
| Commercial paper | 10,207 | — | 10,207 | — | ||||||||||||||||||||||
| U.S. government agency securities | 246,177 | — | 246,177 | — | ||||||||||||||||||||||
| Asset backed securities | 78,056 | — | 78,056 | — | ||||||||||||||||||||||
| Equity securities | 1,103 | 1,103 | — | — | ||||||||||||||||||||||
| Non-marketable securities | $ | 2,690 | $ | — | $ | — | $ | 2,690 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Contingent consideration | $ | (311,785) | $ | — | $ | — | $ | (311,785) | ||||||||||||||||||
| Total | $ | 419,246 | $ | 158,619 | $ | 569,722 | $ | (309,095) | ||||||||||||||||||
19
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents the Company’s fair value measurements as of December 31, 2021 along with the level within the fair value hierarchy in which the fair value measurements, in their entirety, fall.
| (In thousands) | Fair Value at December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||||||||
| Cash and money market | $ | 247,335 | $ | 247,335 | $ | — | $ | — | ||||||||||||||||||
| Commercial paper | 64,593 | — | 64,593 | — | ||||||||||||||||||||||
| U.S. government agency securities | 3,543 | — | 3,543 | — | ||||||||||||||||||||||
| Restricted cash | 297 | 297 | — | — | ||||||||||||||||||||||
| Marketable securities | ||||||||||||||||||||||||||
| U.S. government agency securities | $ | 249,920 | $ | — | $ | 249,920 | $ | — | ||||||||||||||||||
| Corporate bonds | 313,154 | — | 313,154 | — | ||||||||||||||||||||||
| Asset backed securities | 94,460 | — | 94,460 | — | ||||||||||||||||||||||
| Certificates of deposit | 47,139 | — | 47,139 | — | ||||||||||||||||||||||
| Commercial paper | 6,996 | — | 6,996 | — | ||||||||||||||||||||||
| Equity securities | 3,336 | 3,336 | — | — | ||||||||||||||||||||||
| Non-marketable securities | $ | 3,090 | $ | — | $ | — | $ | 3,090 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Contingent consideration | $ | (359,021) | $ | — | $ | — | $ | (359,021) | ||||||||||||||||||
| Total | $ | 674,842 | $ | 250,968 | $ | 779,805 | $ | (355,931) | ||||||||||||||||||
There have been no changes in valuation techniques or transfers between fair value measurement levels during the three and six months ended June 30, 2022. The fair value of Level 2 instruments classified as cash equivalents and marketable debt securities are valued using a third-party pricing agency where the valuation is based on observable inputs including pricing for similar assets and other observable market factors.
Contingent Consideration
The fair value of contingent consideration as of June 30, 2022 and December 31, 2021 was $311.8 million and $359.0 million, respectively, which was recorded in other long-term liabilities in the condensed consolidated balance sheets.
The following table provides a reconciliation of the beginning and ending balances of contingent consideration:
| (In thousands) | Contingent Consideration | |||||||
| Beginning balance, January 1, 2022 | $ | 359,021 | ||||||
| Purchase price contingent consideration (1) | 4,600 | |||||||
| Changes in fair value | (51,759) | |||||||
| Payments | (77) | |||||||
Ending balance, June 30, 2022 | $ | 311,785 | ||||||
______________
(1)The increase in contingent consideration liability is due to the contingent consideration associated with the acquisition of OmicEra. Refer to Note 16 for further information.
This fair value measurement of contingent consideration is categorized as a Level 3 liability, as the measurement amount is based primarily on significant inputs not observable in the market.
20
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The fair value of the contingent consideration liability recorded related to regulatory and product development milestones associated with the acquisitions of Thrive Earlier Detection Corporation (“Thrive”), Ashion Analytics, LLC (“Ashion”), and OmicEra acquisitions was $310.6 million and $357.8 million as of June 30, 2022 and December 31, 2021, respectively. The Company evaluates the fair value of the expected contingent consideration and the corresponding liability related to the regulatory and product development milestones using the probability-weighted scenario based discounted cash flow model, which is consistent with the initial measurement of the expected contingent consideration liabilities. Probabilities of success are applied to each potential scenario and the resulting values are discounted using a present-value factor. The passage of time in addition to changes in projected milestone achievement timing, present-value factor, the degree of achievement, if applicable, and probabilities of success may result in adjustments to the fair value measurement. The fair value of the contingent consideration liability recorded related to regulatory and product development milestones was determined using a weighted average probability of success of 91% as of June 30, 2022 and December 31, 2021, and a weighted average present-value factor of 6.5% and 2.3% as of June 30, 2022 and December 31, 2021, respectively. The projected fiscal year of payment range is from 2024 to 2027. Unobservable inputs were weighted by the relative fair value of the contingent consideration liability.
The fair value of the contingent consideration earnout liability related to certain revenue milestones associated with the Biomatrica acquisition was $1.2 million as of June 30, 2022 and December 31, 2021. The revenue milestone associated with the Ashion acquisition is not expected to be achieved and therefore no liability has been recorded for this milestone.
Non-Marketable Equity Investments
As of June 30, 2022 and December 31, 2021, the aggregate carrying amounts of the Company’s non-marketable equity securities without readily determinable fair values were $48.7 million and $25.3 million, respectively, which are classified as a component of other long-term assets, net in the Company’s condensed consolidated balance sheets. There have been no material downward or upward adjustments made on these investments since initial recognition.
The Company has committed capital to venture capital investment funds (the “Funds”) of $17.5 million, of which $14.4 million remained callable through 2033 as of June 30, 2022. The aggregate carrying amount of the Funds, which are classified as a component of other long-term assets, net in the Company’s condensed consolidated balance sheets, were $3.1 million and $1.5 million as of June 30, 2022 and December 31, 2021, respectively.
Derivative Financial Instruments
The Company enters into foreign currency forward contracts on the last day of each month to mitigate the impact of adverse movements in foreign exchange rates related to the remeasurement of monetary assets and liabilities and hedge our foreign currency exchange rate exposure. As of June 30, 2022 and December 31, 2021, the Company had open foreign currency forward contracts with notional amounts of $28.9 million and $46.7 million, respectively. The Company's foreign exchange derivative instruments are classified as Level 2 within the fair value hierarchy as they are valued using inputs that are observable in the market or can be derived principally from or corroborated by observable market data. The fair value of the open foreign currency forward contracts was zero at June 30, 2022 and December 31, 2021, and there were no gains or losses recorded to adjust the fair value of the open foreign currency contract held as of June 30, 2022. The contracts are closed subsequent to each month-end, and the gains and losses recorded from the contracts were not material for the three and six months ended June 30, 2022 and 2021.
(8) LONG-TERM DEBT
Accounts Receivable Securitization Facility
On June 29, 2022, the Company, through a wholly-owned special purpose entity, Exact Receivables LLC (“Exact Receivables”) entered into an accounts receivable securitization program (the “Securitization Facility”) with PNC Bank, National Association (“PNC”), with a scheduled maturity date of June 29, 2024. The Securitization Facility provides Exact Receivables with a revolving line-of-credit of up to $150.0 million of borrowing capacity, subject to certain borrowing base requirements, by collateralizing a security interest in the domestic customer accounts receivable of certain wholly-owned subsidiaries of the Company. The amount available under the Securitization Facility fluctuates over time based on the total amount of eligible customer accounts receivable generated by the Company during the normal course of operations. The Securitization Facility requires the Company to maintain minimum borrowings under the facility of $50.0 million. The debt issuance costs incurred related to the Securitization Facility were not material and are being amortized over the life of the Securitization Facility through interest expense within the condensed consolidated statements of operations.
21
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In connection with the Securitization Facility, the Company also entered into two Receivables Purchase Agreements (“Receivable Purchase Agreements”) on June 29, 2022. The Receivable Purchase Agreements are among the Company and certain wholly-owned subsidiaries of the Company, and between the Company and Exact Receivables. Under the agreements, the wholly-owned subsidiaries sell all of their right, title and interest of their accounts receivable to Exact Receivables. The receivables are used to collateralize borrowings made under the Securitization Facility. The Company retains the responsibility of servicing the accounts receivable balances pledged as collateral under the Securitization Facility and provides a performance guaranty.
As of June 30, 2022, the eligible borrowing base under the Securitization Facility was $119.2 million of which the Company elected to collateralize $50.0 million. As of June 30, 2022, the Company had an outstanding balance of $50.0 million, which is recorded to long-term debt on the Company’s condensed consolidated balance sheets. The outstanding balance accrues interest at a rate equal to a daily secured overnight financing rate (“SOFR”) rate plus a SOFR adjustment and an applicable margin. The interest rate was 3.24% at June 30, 2022.
Revolving Loan Agreement
During November 2021, the Company entered into a revolving loan agreement (the “Revolving Loan Agreement”) with PNC. The Revolving Loan Agreement provides the Company with a revolving line of credit of up to $150.0 million (the “Revolver”). The Revolver is collateralized by the Company’s marketable securities held by PNC, which must continue to maintain a minimum market value of $150.0 million. The Revolver is available for general working capital purposes and all other lawful corporate purposes. In addition, the Company may request, in lieu of cash advances, letters of credit with an aggregate stated amount outstanding not to exceed $20.0 million. The availability of advances under the line of credit will be reduced by the stated amount of each letter of credit issued and outstanding.
Borrowings under the Revolving Loan Agreement accrue interest at an annual rate equal to the sum of the daily Bloomberg Short-Term Bank Yield Index Rate plus the applicable margin of 0.60%. Loans under the Revolving Loan Agreement may be prepaid at any time without penalty. The Revolver’s maturity date is November 5, 2023.
The Company has agreed in the Revolving Loan Agreement to various financial covenants, and as of June 30, 2022, the Company is in compliance with all covenants.
During the fourth quarter of 2021, PNC issued a letter of credit of $2.9 million, which reduced the amount available for cash advances under the line of credit to $147.1 million as of June 30, 2022 and December 31, 2021. As of June 30, 2022 and December 31, 2021, the Company has not drawn funds from, nor are any amounts outstanding under, the Revolving Loan Agreement.
(9) CONVERTIBLE NOTES
Convertible note obligations included in the condensed consolidated balance sheet consisted of the following as of June 30, 2022:
| Fair Value (1) | ||||||||||||||||||||||||||||||||
| (In thousands) | Principal Amount | Unamortized Debt Discount and Issuance Costs | Net Carrying Amount | Amount | Leveling | |||||||||||||||||||||||||||
2028 Convertible notes - 0.375% | $ | 1,150,000 | $ | (17,313) | $ | 1,132,687 | $ | 767,625 | 2 | |||||||||||||||||||||||
2027 Convertible notes - 0.375% | 747,500 | (10,577) | 736,923 | 545,750 | 2 | |||||||||||||||||||||||||||
2025 Convertible notes - 1.000% | 315,005 | (1,470) | 313,535 | 291,058 | 2 | |||||||||||||||||||||||||||
22
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Convertible note obligations included in the condensed consolidated balance sheet consisted of the following as of December 31, 2021:
| Fair Value (1) | ||||||||||||||||||||||||||||||||
| (In thousands) | Principal Amount | Unamortized Debt Discount and Issuance Costs | Net Carrying Amount | Amount | Leveling | |||||||||||||||||||||||||||
2028 Convertible notes - 0.375% | $ | 1,150,000 | $ | (18,826) | $ | 1,131,174 | $ | 1,139,650 | 2 | |||||||||||||||||||||||
2027 Convertible notes - 0.375% | 747,500 | (11,691) | 735,809 | 771,794 | 2 | |||||||||||||||||||||||||||
2025 Convertible notes - 1.000% | 315,005 | (1,756) | 313,249 | 415,473 | 2 | |||||||||||||||||||||||||||
______________
(1)The fair values are based on observable market prices for this debt, which is traded in less active markets and therefore is classified as a Level 2 fair value measurement.
Summary of Conversion Features
Until the six-months immediately preceding the maturity date of the applicable series of the Company’s convertible notes (the “Notes”), each series of Notes is convertible only upon the occurrence of certain events and during certain periods, as set forth in the Indentures filed at the time of the original offerings. On or after the date that is six-months immediately preceding the maturity date of the applicable series of Notes until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert such Notes at any time. The Notes will be convertible into cash, shares of the Company’s common stock (plus, if applicable, cash in lieu of any fractional share), or a combination of cash and shares of the Company’s common stock, at the Company’s election.
It is the Company’s intent and policy to settle all conversions through combination settlement. The initial conversion rate is 13.26, 8.96, and 8.21 shares of common stock per $1,000 principal amount for the convertible notes due in 2025 (“2025 Notes”), 2027 (“2027 Notes”), and 2028 (“2028 Notes”), respectively, which is equivalent to an initial conversion price of approximately $75.43, $111.66, and $121.84 per share of the Company’s common stock for the 2025 Notes, 2027 Notes, and 2028 Notes, respectively. The 2025 Notes, 2027 Notes, and 2028 Notes are potentially convertible into up to 4.2 million, 6.7 million, and 9.4 million shares, respectively. The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the Indentures filed at the time of the original offerings but will not be adjusted for accrued and unpaid interest. In addition, holders of the Notes who convert their Notes in connection with a “make-whole fundamental change” (as defined in the Indenture), will, under certain circumstances, be entitled to an increase in the conversion rate.
If the Company undergoes a “fundamental change” (as defined in the Indenture), holders of the Notes may require the Company to repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest.
Based on the closing price of the Company’s common stock of $39.39 on June 30, 2022, the if-converted values on the Notes do not exceed the principal amount.
The Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company.
Ranking of Convertible Notes
The Notes are the Company’s senior unsecured obligations and (i) rank senior in right of payment to all of its future indebtedness that is expressly subordinated in right of payment to the Notes; (ii) rank equal in right of payment to each outstanding series thereof and to all of the Company’s future liabilities that are not so subordinated, unsecured indebtedness; (iii) are effectively junior to all of the Company’s existing and future secured indebtedness and other secured obligations, to the extent of the value of the assets securing that indebtedness and other secured obligations; and (iv) are structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries.
23
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Issuance Costs
Issuance costs are amortized to interest expense over the term of the Notes. The following table summarizes the original issuance costs at the time of issuance for each set of Notes:
| (In thousands) | ||||||||
| January 2025 Notes | $ | 10,284 | ||||||
| June 2025 Notes | 7,362 | |||||||
| 2027 Notes | 14,285 | |||||||
| 2028 Notes | 24,453 | |||||||
Interest Expense
Interest expense includes the following:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Debt issuance costs amortization | $ | 1,428 | $ | 1,428 | $ | 2,840 | $ | 2,840 | ||||||||||||||||||
| Debt discount amortization | 37 | 37 | 73 | 73 | ||||||||||||||||||||||
| Coupon interest expense | 2,566 | 2,566 | 5,133 | 5,133 | ||||||||||||||||||||||
| Total interest expense on convertible notes | 4,031 | 4,031 | 8,046 | 8,046 | ||||||||||||||||||||||
| Other interest expense | 480 | 621 | 943 | 1,222 | ||||||||||||||||||||||
| Total interest expense | $ | 4,511 | $ | 4,652 | $ | 8,989 | $ | 9,268 | ||||||||||||||||||
The following table summarizes the effective interest rates of the Notes:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| 2025 Convertible Notes | 1.18 | % | 1.18 | % | 1.18 | % | 1.18 | % | ||||||||||||||||||
| 2027 Convertible Notes | 0.67 | % | 0.67 | % | 0.67 | % | 0.67 | % | ||||||||||||||||||
| 2028 Convertible Notes | 0.64 | % | 0.64 | % | 0.64 | % | 0.64 | % | ||||||||||||||||||
The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 2.55, 4.71, and 5.67 years for the 2025 Notes, 2027 Notes, and 2028 Notes, respectively.
(10) LICENSE AND COLLABORATION AGREEMENTS
The Company licenses certain technologies that are, or may be, incorporated into its technology under several license agreements, as well as the rights to commercialize certain diagnostic tests through collaboration agreements. Generally, the license agreements require the Company to pay single-digit royalties based on net revenues received using the technologies and may require minimum royalty amounts, milestone payments, or maintenance fees.
Mayo
In June 2009, the Company entered into a license agreement with the Mayo Foundation for Medical Education and Research (“Mayo”). The Company’s license agreement with Mayo was most recently amended and restated in September 2020. 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 covers any screening, surveillance or diagnostic test or tool for use in connection with any type of cancer, pre-cancer, disease or condition.
24
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The licensed Mayo patents and patent applications contain both method and composition claims that relate to sample processing, analytical testing and data analysis associated with nucleic acid screening for cancers and other diseases. The jurisdictions covered by these patents and patent applications include the U.S., Australia, Canada, the European Union, China, Japan and Korea. 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.
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 current and future products using the licensed Mayo intellectual property each year during the term of the Mayo agreement.
As part of the most recent amendment, the Company agreed to pay Mayo an additional $6.3 million, payable in five equal annual installments through 2024. The annual installments are recorded in research and development expenses in the Company’s condensed consolidated statements of operations.
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 2039 (or later, if certain licensed patent applications are issued). However, if the Company is 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 the Company stops 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.
In addition to granting the Company a license to the covered Mayo intellectual property, Mayo provides the Company with product development and research and development assistance pursuant to the license agreement and other collaborative arrangements. In September 2020, Mayo also agreed to make available certain personnel to provide such assistance through January 2025. In connection with this collaboration, the Company incurred charges of $1.3 million and $1.0 million for the three months ended June 30, 2022 and 2021, respectively. The Company incurred charges of $2.7 million and $2.2 million for the six months ended June 30, 2022 and 2021, respectively. The charges incurred in connection with this collaboration are recorded in research and development expenses in the Company’s condensed consolidated statements of operations.
Johns Hopkins University (“JHU”)
Through the acquisition of Thrive, the Company acquired a worldwide exclusive license agreement with JHU for use of several JHU patents and licensed know-how. The license is designed to enable the Company to leverage JHU proprietary data in the development and commercialization of a blood-based, multi-cancer early detection test. The agreement terms include single-digit sales-based royalties and sales-based milestone payments of $10.0 million, $15.0 million, and $20.0 million upon achieving calendar year licensed product revenue using JHU proprietary data of $0.50 billion, $1.00 billion, and $1.50 billion, respectively.
(11) PFIZER PROMOTION AGREEMENT
In August 2018, the Company entered into a Promotion Agreement (the “Original Promotion Agreement”) with Pfizer Inc. (“Pfizer”), which was amended and restated in October 2020 (the “Restated Promotion Agreement”). The Restated Promotion Agreement extended the relationship between the Company and Pfizer and restructured the manner in which the Company compensates Pfizer for promotion of the Cologuard test through a service fee, and provision of certain other sales and marketing services related to the Cologuard test. The Restated Promotion Agreement included fixed and performance-related fees, some of which retroactively went into effect on April 1, 2020. In November 2021, the Company and Pfizer entered into an amendment to the Restated Promotion Agreement (the “November 2021 Amendment”), which provided that after November 30, 2021, Pfizer will no longer promote the Cologuard test to healthcare providers. The November 2021 Amendment provides that the Company will pay Pfizer a total of $35.9 million in three installments during the second, third, and fourth quarters of 2022. The November 2021 Amendment eliminated the Company's obligation to pay Pfizer royalties or other fees except for certain media fees, advertising fees, and any detail fees owed to Pfizer for promoting the Cologuard test prior to November 30, 2021. The $35.9 million fee incurred as a result of the November 2021 Amendment was recognized in full during the fourth quarter of 2021. All payments to Pfizer are recorded in sales and marketing expenses in the Company’s condensed consolidated statements of operations.
25
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Under the Original Promotion Agreement, the service fee was calculated based on incremental gross profits over specified baselines during the term. Under the Restated Promotion Agreement (and prior to giving effect to the November 2021 Amendment), the service fee provided a fee-for-service model that included certain fixed fees and performance-related bonuses. The performance-related bonuses were contingent upon the achievement of certain annual performance criteria with any applicable expense being recognized ratably upon achievement of the payment becoming probable. The Company incurred charges of $2.5 million and $24.1 million for the service fee for the three months ended June 30, 2022 and 2021, respectively. The Company incurred charges of $5.0 million and $46.8 million for the service fee for the six months ended June 30, 2022 and 2021, respectively. The Company incurred charges of $27.1 million and $31.1 million for promotion, sales and marketing services performed by Pfizer on behalf of the Company during the three months ended June 30, 2022 and 2021, respectively. The Company incurred charges of $65.5 million and $57.7 million for promotion, sales and marketing services performed by Pfizer on behalf of the Company during the six months ended June 30, 2022 and 2021, respectively.
(12) STOCKHOLDERS’ EQUITY
OmicEra Diagnostics Acquisition Stock Issuance
In May 2022, the Company completed its acquisition of OmicEra. In connection with the acquisition, which is further described in Note 16, the Company issued 0.3 million shares of the Company's common stock that had a fair value of $14.8 million.
PreventionGenetics LLC (“PreventionGenetics”) Acquisition Stock Issuance
In December 2021, the Company completed its acquisition of PreventionGenetics. In connection with the acquisition, which is further described in Note 16, the Company issued 1.1 million shares of the Company's common stock that had a fair value of $84.2 million.
Ashion Acquisition Stock Issuance
In April 2021, the Company completed its acquisition of Ashion. In connection with the acquisition, which is further described in Note 16, the Company issued 0.1 million shares of the Company’s common stock that had a fair value of $16.2 million.
Thrive Acquisition Stock Issuance
In January 2021, the Company completed its acquisition of Thrive. In connection with the acquisition, which is further described in Note 16, the Company issued 9.3 million shares of the Company’s common stock that had a fair value of $1.19 billion.
Targeted Digital Sequencing (“TARDIS”) License Acquisition Stock Issuance
In January 2021, the Company acquired a worldwide exclusive license to the TARDIS technology from The Translational Genomics Research Institute (“TGen”), which is further described in Note 16. As part of the consideration transferred, the Company issued 0.2 million shares of the Company’s common stock that had a fair value of $27.3 million.
26
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Changes in Accumulated Other Comprehensive Income (Loss)
The amount recognized in AOCI for the six months ended June 30, 2022 were as follows:
| (In thousands) | Foreign Currency Translation Adjustments | Unrealized Gain (Loss) on Marketable Securities (1) | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||
| Balance at December 31, 2021 | $ | 23 | $ | (1,466) | $ | (1,443) | ||||||||||||||
| Other comprehensive loss before reclassifications | (747) | (6,551) | (7,298) | |||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | 96 | 96 | |||||||||||||||||
| Net current period change in accumulated other comprehensive loss | (747) | (6,455) | (7,202) | |||||||||||||||||
| Balance at June 30, 2022 | $ | (724) | $ | (7,921) | $ | (8,645) | ||||||||||||||
______________
(1)There was no tax impact from the amounts recognized in AOCI for the three and six months ended June 30, 2022.
The amounts recognized in AOCI for the six months ended June 30, 2021 were as follows:
| (In thousands) | Unrealized Gain (Loss) on Marketable Securities | Accumulated Other Comprehensive Income (Loss) | ||||||||||||
| Balance at December 31, 2020 | $ | 526 | $ | 526 | ||||||||||
| Other comprehensive loss before reclassifications | (399) | (399) | ||||||||||||
| Amounts reclassified from accumulated other comprehensive income | (230) | (230) | ||||||||||||
| Net current period change in accumulated other comprehensive income, before tax | (629) | (629) | ||||||||||||
| Income tax benefit related to items of other comprehensive income | 170 | 170 | ||||||||||||
| Balance at June 30, 2021 | $ | 67 | $ | 67 | ||||||||||
Amounts reclassified from AOCI for the six months ended June 30, 2022 and 2021 were as follows:
| Affected Line Item in the Statements of Operations | Six Months Ended June 30, | |||||||||||||||||||
| Details about AOCI Components (In thousands) | 2022 | 2021 | ||||||||||||||||||
| Change in value of available-for-sale investments | ||||||||||||||||||||
| Sales and maturities of available-for-sale investments | Investment income (expense), net | $ | 96 | $ | (230) | |||||||||||||||
| Total reclassifications | $ | 96 | $ | (230) | ||||||||||||||||
(13) STOCK-BASED COMPENSATION
Stock-Based Compensation Plans
The Company maintains the following plans for which awards were granted from or had shares outstanding in 2022: 2010 Omnibus Long-Term Incentive Plan (As Amended and Restated Effective July 27, 2017), the 2019 Omnibus Long-Term Incentive Plan, and the 2010 Employee Stock Purchase Plan (collectively referred to as the “Stock Plans”).
27
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Stock-Based Compensation Expense
The Company records stock-based compensation expense in connection with the amortization of restricted stock and restricted stock unit awards (“RSUs”), stock purchase rights granted under the Company’s employee stock purchase plan and stock options granted to employees, non-employee consultants and non-employee directors. The Company recorded $58.9 million and $56.3 million in stock-based compensation expense during the three months ended June 30, 2022 and 2021, respectively. The Company recorded $111.4 million and $219.7 million in stock-based compensation expense during the six months ended June 30, 2022 and 2021, respectively.
As of June 30, 2022, there was approximately $472.7 million of expected total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. The Company expects to recognize that cost over a weighted average period of 2.9 years.
In connection with the acquisition of Thrive, the Company accelerated the vesting of shares of previously unvested stock options and restricted stock units for employees with qualifying termination events. During the three months ended June 30, 2021, the Company accelerated 4,982 shares of previously unvested stock options and 5,827 shares of previously unvested restricted stock awards and restricted stock units and recorded $1.0 million of non-cash stock-based compensation for the accelerated awards. During the six months ended June 30, 2021, the Company accelerated 103,996 shares of previously unvested stock options and 33,306 shares of previously unvested restricted stock awards and restricted stock units and recorded $14.5 million of non-cash stock-based compensation for the accelerated awards. As further discussed in Note 16, the Company also recorded $86.2 million in stock-based compensation related to accelerated vesting of awards held by Thrive employees in connection with the acquisition.
Stock Options
A summary of stock option activity under the Stock Plans is as follows:
| Options | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (1) | ||||||||||||||||||||||
| (Aggregate intrinsic value in thousands) | ||||||||||||||||||||||||||
| Outstanding, January 1, 2022 | 2,284,276 | $ | 34.65 | 5.5 | ||||||||||||||||||||||
| Granted | — | — | ||||||||||||||||||||||||
| Exercised | (570,138) | 8.83 | ||||||||||||||||||||||||
| Forfeited | (31,385) | 79.11 | ||||||||||||||||||||||||
| Outstanding, June 30, 2022 | 1,682,753 | $ | 42.57 | 5.3 | $ | 22,630 | ||||||||||||||||||||
Vested and expected to vest, June 30, 2022 | 1,682,753 | $ | 42.57 | 5.3 | $ | 22,630 | ||||||||||||||||||||
| Exercisable, June 30, 2022 | 1,448,347 | $ | 37.22 | 5.0 | $ | 20,988 | ||||||||||||||||||||
______________
(1)The total intrinsic value of options exercised during the six months ended June 30, 2022 and 2021 was $32.5 million and $140.2 million, respectively, determined as of the date of exercise.
The Company received approximately $5.0 million and $11.6 million from stock option exercises during the six months ended June 30, 2022 and 2021, respectively.
Restricted Stock and Restricted Stock Units
The fair value of restricted stock and restricted stock units is determined on the date of grant using the closing stock price on that day.
28
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of restricted stock and restricted stock unit activity during the six months ended June 30, 2022 is as follows:
| Restricted stock and restricted stock units | Shares | Weighted Average Grant Date Fair Value (1) | ||||||||||||
| Outstanding, January 1, 2022 | 4,320,910 | $ | 108.84 | |||||||||||
| Granted | 3,313,712 | 74.52 | ||||||||||||
| Released (2) | (1,256,999) | 97.38 | ||||||||||||
| Forfeited | (605,450) | 93.95 | ||||||||||||
| Outstanding, June 30, 2022 | 5,772,173 | $ | 92.31 | |||||||||||
______________
(1)The weighted average grant date fair value of the restricted stock units granted during the six months ended June 30, 2021 was $140.63.
(2)The fair value of restricted stock units vested and converted to shares of the Company’s common stock was $122.4 million and $93.1 million during the six months ended June 30, 2022 and 2021, respectively.
Performance Share Units
The Company has issued performance-based equity awards to certain employees which vest upon the achievement of certain performance goals, including financial performance targets and operational milestones.
In January 2022, the Company issued additional performance-based equity awards, which include a market condition in the form of a total shareholder return (“TSR”) modifier. At the end of the three-year performance period, the total units earned, if any, are adjusted by applying the modifier, ranging from 50% to 150%. The TSR modifier is based on stock price performance relative to a group of peer companies for the same three-year period. The fair value of the awards granted was calculated using a Monte Carlo simulation model, as the TSR modifier contains a market condition.
A summary of performance share unit activity is as follows:
| Performance share units | Shares (1) | Weighted Average Grant Date Fair Value (2) | ||||||||||||
| Outstanding, January 1, 2022 | 878,114 | $ | 107.18 | |||||||||||
| Granted | 744,844 | 92.05 | ||||||||||||
| Released (3) | (292,134) | 93.22 | ||||||||||||
| Forfeited | (338,977) | 114.78 | ||||||||||||
| Outstanding, June 30, 2022 | 991,847 | $ | 105.81 | |||||||||||
______________
(1)The performance share units listed above assumes attainment of maximum payout rates as set forth in the performance criteria. Applying actual or expected payout rates, the number of outstanding performance share units as of June 30, 2022 was 256,242.
(2)The weighted average grant date fair value of the performance share units granted during the six months ended June 30, 2021 was $140.96.
(3)The fair value of performance share units vested and converted to shares of the Company’s common stock was $27.2 million for the six months ended June 30, 2022. There were no performance share units vested and converted to shares of the Company’s common stock during the six months ended June 30, 2021.
29
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Employee Stock Purchase Plan (“ESPP”)
The fair value of ESPP shares is based on the assumptions in the following table:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| ESPP Shares | ||||||||||||||||||||||||||
| Risk-free interest rates | 1.49% - 2.73% | 0.04% - 0.16% | 1.49% - 2.73% | 0.04% - 0.16% | ||||||||||||||||||||||
| Expected term (in years) | 0.5 - 2 | 0.5 - 2 | 0.5 - 2 | 0.5 - 2 | ||||||||||||||||||||||
| Expected volatility | 50.94% - 60.34% | 48.38% - 68.51% | 50.94% - 60.34% | 48.38% - 68.51% | ||||||||||||||||||||||
| Dividend yield | —% | —% | —% | —% | ||||||||||||||||||||||
(14) COMMITMENTS AND CONTINGENCIES
Leases
Supplemental disclosure of cash flow information related to the Company’s cash and non-cash activities with its leases are as follows:
| Six Months Ended June 30, | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating leases | $ | 15,899 | $ | 12,309 | ||||||||||
| Operating cash flows from finance leases | 56 | 480 | ||||||||||||
| Finance cash flows from finance leases | 2,845 | 2,443 | ||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities (1) | $ | 22,158 | $ | 54,451 | ||||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | 6,033 | 2,308 | ||||||||||||
| Weighted-average remaining lease term - operating leases (in years) | 7.33 | 8.43 | ||||||||||||
| Weighted-average remaining lease term - finance leases (in years) | 3.64 | 3.28 | ||||||||||||
| Weighted-average discount rate - operating leases | 6.11 | % | 6.32 | % | ||||||||||
| Weighted-average discount rate - finance leases | 6.09 | % | 5.54 | % | ||||||||||
_____________
(1)For the six months ended June 30, 2022, this includes right-of-use assets recorded as a result of the lease modification discussed below of $8.1 million. For the six months ended June 30, 2021, this includes right-of-use assets acquired as part of the business combinations described in Note 16 of $39.6 million.
As of June 30, 2022 and December 31, 2021, the Company’s right-of-use assets from operating leases are $182.5 million and $174.2 million, respectively, which are reported in operating lease right-of-use assets in the Company’s condensed consolidated balance sheets. As of June 30, 2022, the Company has outstanding operating lease obligations of $213.0 million, of which $25.8 million is reported in operating lease liabilities, current portion and $187.2 million is reported in operating lease liabilities, less current portion in the Company’s condensed consolidated balance sheets. As of December 31, 2021, the Company had outstanding operating lease obligations of $201.9 million, of which $19.7 million is reported in operating lease liabilities, current portion and $182.2 million is reported in operating lease liabilities, less current portion in the Company’s condensed consolidated balance sheets.
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EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of June 30, 2022 and December 31, 2021, the Company’s right-of-use assets from finance leases are $9.5 million and $18.2 million, respectively, which are reported in , net in the Company’s condensed consolidated balance sheets. As of June 30, 2022, the Company has outstanding finance lease obligations of $9.7 million, of which $2.6 million is reported in and $7.1 million is reported in in the Company’s condensed consolidated balance sheets. As of December 31, 2021, the Company had outstanding finance lease obligations of $18.7 million, of which $6.2 million is reported in other current liabilities and $12.5 million is reported in other long-term liabilities in the Company’s condensed consolidated balance sheets.
On June 1, 2022, certain of the Company’s vehicle leases were amended. The Company determined that this amendment was a lease modification, effective June 1, 2022. Under the lease modification guidance within ASC 842, the Company reassessed the lease classification and remeasured the corresponding right-of-use assets and lease liabilities. The Company determined that a portion of the modified leases are to be accounted for as operating leases, and therefore derecognized the previous finance lease right-of-use asset of $10.3 million and the related finance lease liability of $10.8 million, and recognized an operating lease right-of-use asset of $8.1 million and the related operating lease liability of $8.6 million.
Legal Matters
The Company records reserves and accrues costs for certain legal proceedings and regulatory matters to the extent that it determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. While such reserves and accrued costs reflect the Company’s best estimate of the probable loss for such matters, the recorded amounts may differ materially from the actual amount of any such losses. In some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal and regulatory proceedings, which may be exacerbated by various factors, including but not limited to, they may involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; involve a large number of parties, claimants or regulatory bodies; are in the early stages of the proceedings; involve a number of separate proceedings and/or a wide range of potential outcomes; or result in a change of business practices.
As of the date of this Quarterly Report on Form 10-Q, amounts accrued for legal proceedings and regulatory matters were not material except for the amounts accrued related to the Medicare Date of Service Rule Investigation (the “DOS Rule Investigation”) discussed below. However, it is possible that in a particular quarter or annual period the Company’s financial condition, results of operations, cash flow and/or liquidity could be materially adversely affected by an ultimate unfavorable resolution of, or development in, legal and/or regulatory proceedings, including as described below. Except for the proceedings discussed below, the Company believes that the ultimate outcome of any of the regulatory and legal proceedings that are currently pending against it should not have a material adverse effect on financial condition, results of operations, cash flow or liquidity.
The Company is currently responding to civil investigative demands and administrative subpoenas issued pursuant to the Health Insurance Portability and Accountability Act of 1996 by the United States Department of Justice (“DOJ”) concerning Genomic Health’s compliance with the Medicare Date of Service billing regulations. The Company has been cooperating with these inquiries and has produced documents in response thereto.
During the second quarter of 2021, as part of ongoing discussions between the DOJ and the Company regarding the DOS Rule Investigation, the DOJ presented an initial estimate of civil damages in the amount of $48.2 million relating to alleged non-compliance with the Medicare Date of Service billing regulations from 2007 to 2020. The initial civil damages estimate did not include potential treble damages, civil or criminal penalties or other remedies that the DOJ could seek against the Company. The DOJ has since presented a total adjusted demand of $53.8 million for civil damages, which includes a multiplier and penalties. Based on the Company’s review and analysis of the DOJ presentation, ongoing discussions held with the DOJ, the civil damages estimate, and range of potential exposure, the Company recorded an accrual of approximately $10 million as of June 30, 2022.
As noted above, litigation outcomes are difficult to predict, and the estimation of probable losses requires an analysis of multiple possible outcomes that often depend on judgments about potential actions by third parties. Accordingly, the recorded accrual of approximately $10 million as of June 30, 2022 is based on several factors, considerations, and judgments, and the ultimate resolution of this matter could result in a material loss in excess of the recorded accrual.
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EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On June 24, 2019, Niles Rosen M.D. filed a sealed ex parte qui tam lawsuit against the Company in the United States District Court for the Middle District of Florida, that alleged a violation of the Federal Anti-Kickback Statute and False Claims Act for offering gift cards to patients in exchange for returning the Cologuard screening test (the “Qui Tam Suit”). Dr. Rosen seeks on behalf of the U.S. government and himself an award of civil penalties, treble damages and fees and costs. On February 25, 2020, the Company received a civil investigative demand by the DOJ related to the Company’s gift card program. The Company produced documents in response thereto. On March 25, 2021, the DOJ filed a notice of its election to decline intervention in the Qui Tam Suit. This election does not prevent Dr. Rosen from continuing the Qui Tam Suit. On April 12, 2021, Dr. Rosen filed an amended complaint against the Company, alleging violations of the Federal Anti-Kickback Statute and False Claims Act. The Company first learned of the Qui Tam Suit and the DOJ’s election to decline intervention in July 2021. The Company intends to vigorously defend itself against Dr. Rosen's claims and seek, among other things, the Company’s attorneys' fees and costs incurred in defending this action. Although the Company denies Dr. Rosen's allegations and believes that it has meritorious defenses to his False Claims Act claims, neither the outcome of the litigation nor can a reasonable estimate or an estimated range of loss associated with the litigation be determined at this time.
Adverse outcomes from the DOS Rule Investigation and the Qui Tam Suit could include the Company being required to pay treble damages, incur civil and criminal penalties, paying attorneys’ fees, entering into a corporate integrity agreement, being excluded from participation in government healthcare programs, including Medicare and Medicaid, and other adverse actions that could materially affect the Company’s business, financial condition, and results of operation.
(15) WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS
During February 2015, the Company entered into an agreement with the Wisconsin Economic Development Corporation (“WEDC,” “Original WEDC Agreement”) to earn $9.0 million in refundable tax credits on the condition that the Company expends $26.3 million in capital investments and establishes and maintains 758 full-time positions over a seven-year period.
During December 2021, the Company amended its agreement with the WEDC (“Amended WEDC Agreement”) to earn an additional $18.5 million in refundable tax credits on the condition that the Company expends $350.0 million in capital investments and establishes and maintains 1,300 additional full-time positions over a five-year period. The capital investment credits are earned at a rate of 10% of eligible capital investments up to a maximum of $7.0 million, while the jobs creation credits are earned annually pursuant to the agreement.
The tax credits earned are first applied against the tax liability otherwise due, and if there is no such liability present, the claim for tax credits will be reimbursed in cash to the Company. The maximum amount of the refundable tax credit to be earned for each year is fixed, and the Company earns the credits by meeting certain capital investment and job creation thresholds over the term of the agreement. Should the Company earn and receive the job creation tax credits but not maintain those full-time positions through the end of the agreement, the Company may be required to pay those credits back to the WEDC.
Under the Original WEDC Agreement, the Company recorded the earned tax credits as job creation and capital investments occurred. The tax credits earned from capital investment are being recognized as an offset to depreciation expense over the expected life of the acquired capital assets. The tax credits earned related to job creation were recognized as an offset to operational expenses through December 31, 2020.
As of June 30, 2022, the Company has earned all $9.0 million of the refundable tax credits and has received payment of $9.0 million from the WEDC under the Original WEDC Agreement.
Under the Amended WEDC Agreement, the Company records the earned tax credits as job creation and capital investments occurs. The tax credits earned from capital investment are recognized as a reduction to capital expenditures at the time the costs are incurred, and then as an offset to depreciation expense over the expected life of the acquired capital assets. The tax credits earned related to job creation are recognized as an offset to operational expenses in the period in which the credits are earned. The credits recognized will be required to be repaid if the Company does not maintain minimum cumulative job requirements.
As of June 30, 2022, the Company has earned $9.0 million of the refundable tax credits under the Amended WEDC Agreement. The unpaid portion is $9.0 million as of June 30, 2022, of which $1.7 million is reported in prepaid expenses and other current assets and $7.3 million is reported in other long-term assets, net in the Company’s condensed consolidated balance sheets reflecting when collection of the refundable tax credits is expected to occur.
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EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
During the three and six months ended June 30, 2022, the Company recorded zero and $1.0 million respectively, as a reduction to operational expenses for the credits earned for job creation.
(16) BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
Business Combinations
OmicEra Diagnostics, GmbH
On May 2, 2022, the Company completed the acquisition (the “OmicEra Acquisition”) of all of the outstanding equity interests of OmicEra Diagnostics GmbH. The OmicEra Acquisition provided the Company a state-of-the-art proteomics lab based in Planegg, Germany. OmicEra combines its mass spectrometry-based proteome analysis technology with its in-house proteomics scientific expertise to discover more reliable and valuable protein biomarkers, which will expand the Company’s research and development capabilities. The Company has included the financial results of OmicEra in the consolidated financial statements from the date of the combination.
The combination date fair value of the consideration transferred for OmicEra was approximately $19.4 million, which consisted of the following:
| (In thousands) | ||||||||
| Common stock issued | $ | 14,792 | ||||||
| Contingent consideration | 4,600 | |||||||
| Working capital adjustment to be settled in cash | 16 | |||||||
| Total purchase price | $ | 19,408 | ||||||
The fair value of the 265,186 common shares issued as part of the consideration transferred was determined on the basis of the average of the high and low market price of the Company’s shares on the acquisition date, which was $55.78.
The purchase agreement requires the Company to pay a maximum of $6.0 million of additional cash consideration to OmicEra upon the achievement of certain earnout conditions related to the identification of protein biomarkers, as well as the growth of the proteomics research and development team. The fair value of the contingent consideration at the acquisition date was $4.6 million. The fair value of the contingent consideration was estimated using a probability-weighted scenario-based discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The key assumptions are described in Note 7.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
| (In thousands) | ||||||||
| Net operating assets | $ | 2,586 | ||||||
| Developed technology | 10,000 | |||||||
| Total identifiable assets acquired | 12,586 | |||||||
| Net operating liabilities | (3,926) | |||||||
| Net identifiable assets acquired | 8,660 | |||||||
| Goodwill | 10,748 | |||||||
| Net assets acquired | $ | 19,408 | ||||||
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EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company recorded $10.0 million of identifiable intangible assets related to the developed technology associated with OmicEra’s proteome analysis platform. Developed technology represents purchased technology that had reached technological feasibility and for which OmicEra had substantially completed development as of the date of combination. The fair value of the developed technology has been determined using the income approach multi-period excess earnings method, which involves significant unobservable inputs (Level 3 inputs). These inputs include projected sales, margin, obsolescence factor, required rate of return, and tax rate. Cash flows were discounted to their present value as of the closing date. Developed technology is amortized on a straight-line basis over its estimated useful life of 16 years.
The calculation of the excess purchase price over the estimated fair value of the tangible net assets and intangible assets acquired was recorded to goodwill, which is primarily attributed to the acquired workforce expertise, the potential to enhance the capabilities of current and future products, and expected research and development synergies. The total goodwill related to this combination is not deductible for tax purposes.
The total purchase price allocation is preliminary and based upon estimates and assumptions that are subject to change within the measurement period as additional information for the estimates is obtained. The measurement period remains open pending the completion of valuation procedures related to certain acquired assets and liabilities assumed, primarily in connection with the developed technology intangible asset.
Pro forma impact and results of operations disclosures have not been included due to immateriality.
Acquisition-related costs were not material and have been recorded within general and administrative expenses in the condensed consolidated statement of operations. These costs include fees associated with financial, legal, accounting, and other advisors incurred to complete the merger.
PreventionGenetics LLC
On December 31, 2021, the Company completed the acquisition (the “PreventionGenetics Acquisition”) of all of the outstanding equity interests of PreventionGenetics, LLC. The PreventionGenetics Acquisition provided the Company a Clinical Laboratory Improvement Amendments (“CLIA”) certified and College of American Pathologist (“CAP”) accredited sequencing lab based in Marshfield, Wisconsin. PreventionGenetics provides more than 5,000 predefined genetic tests for nearly all clinically relevant genes, additional custom panels, and comprehensive germline, whole exome (“PGxome®”), and whole genome (“PGnome®”) sequencing tests.
Refer to the Company’s 2021 10-K for detailed disclosures on the combination, including the fair value of the consideration transferred, purchase price allocation, and goodwill and intangible assets identified in the transaction. During the three and six months ended June 30, 2022, there were no material changes to the purchase price and purchase price allocation. The measurement period remains open pending the completion of valuation procedures related to certain acquired assets and liabilities assumed, primarily in connection with the intangible assets.
Ashion Analytics, LLC
On April 14, 2021, the Company completed the acquisition (“Ashion Acquisition”) of all of the outstanding equity interests of Ashion Analytics, LLC from PMed Management, LLC (“PMed”), which is a subsidiary of TGen. The Ashion Acquisition provided the Company a CLIA certified and CAP accredited sequencing lab based in Phoenix, Arizona. Ashion developed the GEMExTra® test, a comprehensive genomic cancer test, and provides access to whole exome, matched germline, and transcriptome sequencing capabilities.
Refer to the Company’s 2021 10-K for detailed disclosures on the combination, including the fair value of the consideration transferred, purchase price allocation, and goodwill and intangible assets identified in the transaction. During the three and six months ended June 30, 2022, there were no changes to the purchase price allocation and the measurement period has closed.
34
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Thrive Earlier Detection Corporation
On January 5, 2021, the Company completed the acquisition of all of the outstanding capital stock of Thrive Earlier Detection Corporation. Thrive, headquartered in Cambridge, Massachusetts, is a healthcare company dedicated to incorporating earlier cancer detection into routine medical care. The Company expects that combining Thrive's early-stage multi-cancer early detection test with the Company’s scientific platform, clinical organization and commercial infrastructure will bring an accurate blood-based, multi-cancer detection test to patients faster.
Refer to the Company’s 2021 10-K for detailed disclosures on the combination, including the fair value of the consideration transferred, final purchase price allocation, and goodwill and intangible assets identified in the transaction.
Asset Acquisitions
PFS Genomics Inc.
On May 3, 2021, the Company acquired 90% of the outstanding capital stock of PFS Genomics Inc. (“PFS”). On June 23, 2021, the Company completed the acquisition of the remaining 10% interest in PFS. The Company expects this acquisition to expand its ability to help guide early-stage breast cancer treatment through individualized radiotherapy treatment decisions.
The transaction was treated as an asset acquisition under GAAP because substantially all of the fair value of the gross assets acquired were deemed to be associated with the acquired technology. Refer to the Company’s 2021 10-K for detailed disclosures on the asset acquisition, including the fair value of the consideration transferred and purchase price allocation.
TARDIS License Agreement
On January 11, 2021, the Company entered into a worldwide exclusive license to the proprietary TARDIS technology from TGen, an affiliate of City of Hope. Under the agreement, the Company acquired a royalty-free, worldwide exclusive license to proprietary TARDIS patents and know-how. The Company intends to develop and commercialize the TARDIS technology as a minimal residual disease test.
The Company accounted for this transaction as an asset acquisition. Refer to the Company’s 2021 10-K for detailed disclosures on the asset acquisition, including the fair value of the consideration transferred and information related to contingent milestones.
(17) SEGMENT INFORMATION
Management determined that the Company functions as a single operating segment, and thus reports as a single reportable segment. This operating segment is focused on the development and global commercialization of clinical laboratory services allowing healthcare providers and patients to make individualized treatment decisions. Management assessed the discrete financial information routinely reviewed by the Company's Chief Operating Decision Maker, its President and Chief Executive Officer, to monitor the Company's operating performance and support decisions regarding allocation of resources to its operations. Performance is continuously monitored at the consolidated level to timely identify deviations from expected results.
The following table summarizes total revenue from customers by geographic region. Product revenues are attributed to countries based on ship-to location.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| United States | $ | 493,299 | $ | 407,971 | $ | 950,427 | $ | 783,992 | ||||||||||||||||||
| Outside of United States | 28,341 | 26,848 | 57,784 | 52,904 | ||||||||||||||||||||||
| Total revenues | $ | 521,640 | $ | 434,819 | $ | 1,008,211 | $ | 836,896 | ||||||||||||||||||
Long-lived assets located in countries outside of the United States are not significant.
35
EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(18) INCOME TAXES
The Company recorded an income tax benefit of $1.8 million and an income tax expense of $4.0 million for the three months ended June 30, 2022 and 2021, respectively. The Company recorded an income tax benefit of $3.8 million and $238.8 million for the six months ended June 30, 2022 and 2021, respectively. The Company’s income tax benefit recorded during the three months ended June 30, 2022 is primarily related to the future limitations on and expiration of certain Federal and State deferred tax assets, offset by current foreign and state tax expense. The Company’s income tax benefit recorded during the six months ended June 30, 2022 is primarily related to the future limitations on and expiration of certain Federal and State deferred tax assets, offset by current foreign and state tax expense. A deferred tax liability of approximately $27.4 million was recorded as of June 30, 2022, which is included in other long-term liabilities on the Company’s condensed consolidated balance sheet. The Company continues to maintain a full valuation allowance against its deferred tax assets based on management’s determination that it is more likely than not the benefit will not be realized.
The Company had $24.4 million and $21.8 million of unrecognized tax benefits at June 30, 2022 and December 31, 2021, respectively. These amounts have been recorded as a reduction to the Company’s deferred tax asset, if recognized they would not have an impact on the effective tax rate due to the existing valuation allowance. Certain of the Company's unrecognized tax benefits could change due to activities of various tax authorities, including possible settlement of audits, or through normal expiration of various statutes of limitations. The Company does not expect a material change in unrecognized tax benefits in the next twelve months.
As of June 30, 2022, due to the carryforward of unutilized net operating losses and research and development credits, the Company is subject to U.S. federal income tax examinations for the tax years 2002 through 2022, and to state income tax examinations for the tax years 2002 through 2022. No interest or penalties related to income taxes have been accrued or recognized as of June 30, 2022.
(19) SUBSEQUENT EVENTS
On August 2, 2022, pursuant to an asset purchase agreement with MDxHealth SA (“MDxHealth”), the Company completed a divestiture of certain assets related to the Company’s Oncotype DX Genomic Prostate Score® for consideration of approximately $30.0 million, compromised of cash and equity. Up to an additional $70.0 million would be earned and receivable in cash and/or equity if certain sales earnout milestones are achieved by MDxHealth between 2023 and 2025. Further, the Company agreed to provide certain transitional services to MDxHealth, including employee leasing and lab services.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Objective
The purpose of this Management's Discussion and Analysis is to better allow our investors to understand and view our company from management's perspective. We are providing an overview of our business and strategy including a discussion of our financial condition and results of operations. The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021, which has been filed with the SEC (the “2021 Form 10-K”).
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as “believe,” “expect,” “may,” “will,” “should,” “would,” “could,” “seek,” “intend,” “plan,” “goal,” “project,” “estimate,” “anticipate” or other comparable terms. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q regarding our strategies, prospects, expectations, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding expected future operating results; our strategies, positioning, resources, capabilities and expectations for future events or performance; and the anticipated benefits of our acquisitions, including estimated synergies and other financial impacts. Forward-looking statements are neither historical facts nor assurances of future performance or events. Instead, they are based only on current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Actual results, conditions and events may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause actual results, conditions and events to differ materially from those indicated in the forward-looking statements include, among others, the following: uncertainties associated with the coronavirus (“COVID-19”) pandemic, including its possible effects on our operations, including our supply chain and clinical studies, and the demand for our products and services; our ability to efficiently and flexibly manage our business amid uncertainties related to COVID-19; our ability to meet our payment obligations under our indebtedness; our ability to raise additional capital in amounts and on terms satisfactory to us, if at all; our ability to successfully and profitably market our products and services; the acceptance of our products and services by patients and healthcare providers; our ability to meet demand for our products and services; the willingness of health insurance companies and other payers to cover our products and services and adequately reimburse us for such products and services; the amount and nature of competition for our products and services; the effects of any judicial, executive or legislative action affecting us or the healthcare system; recommendations, guidelines and quality metrics issued by various organizations regarding cancer screening or our products and services; our ability to successfully develop new products and services and assess potential market opportunities; our ability to effectively enter into and utilize strategic partnerships and acquisitions; our success establishing and maintaining collaborative, licensing and supplier arrangements; our ability to obtain and maintain regulatory approvals and comply with applicable regulations; our ability to manage an international business and our expectations regarding our international expansion and opportunities; the potential effects of changing macroeconomic conditions, including the effects of inflation and interest rate and foreign currency exchange rate fluctuations and any such efforts to hedge such effects; the possibility that the anticipated benefits from our business acquisitions will not be realized in full or at all or may take longer to realize than expected; the possibility that costs or difficulties related to the integration of acquired businesses’ operations or the divestiture of business operations will be greater than expected and the possibility that integration or divestiture efforts will disrupt our business and strain management time and resources; the outcome of any litigation, government investigations, enforcement actions or other legal proceedings; our ability to retain and hire key personnel. The risks included above are not exhaustive. Other important risks and uncertainties are described in the Risk Factors and in Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of the 2021 Form 10-K and subsequently filed Quarterly Reports on Form 10-Q. You are further cautioned not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
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Overview
Exact Sciences Corporation (together with its subsidiaries, “Exact,” “we,” “us,” “our” or the “Company”) is a leading, global, advanced cancer diagnostics company. We have developed some of the most impactful tests in cancer diagnostics, and we are currently working on the development of additional tests, with the goal of bringing new, innovative cancer tests to patients throughout the world.
Acquisitions and Divestitures
On May 2, 2022, we completed the acquisition of OmicEra Diagnostics GmbH (“OmicEra”). OmicEra is a life sciences company that provides us with a state-of-the-art proteomics lab in Planegg, Germany. OmicEra combines its mass spectrometry-based proteome analysis technology with its in-house proteomics scientific expertise to discover more reliable and valuable protein biomarkers, which will expand our research and development capabilities. We expect this acquisition to advance future products including our blood-based colorectal cancer and multi-cancer early detection (“MCED”) tests.
On August 2, 2022, we completed a divestiture of assets related to our Oncotype DX Genomic Prostate Score® test to MDxHealth SA ("MDxHealth"). As part of the transaction, certain members of our dedicated urology teams will transition to MDxHealth, a commercial-stage precision diagnostics company focused solely on prostate cancer and other urologic diseases. To ensure a smooth transition for patients, we have agreed to provide certain transitional services to MDxHealth, including employee leasing and lab services. We believe this will allow our team to focus on the highest impact projects core to our vision.
Our Screening Tests
Colorectal Cancer Screening
Colorectal cancer is the second leading cause of cancer deaths in the United States and the leading cause of cancer deaths in the United States among non-smokers. Each year in the United States there are approximately 150,000 new cases of colorectal cancer and 53,000 deaths. It is widely accepted that colorectal cancer is among the most preventable, yet least prevented cancers.
Our Cologuard® test is a non-invasive stool-based DNA (“sDNA”) screening test that utilizes a multi-target approach to detect DNA and hemoglobin biomarkers associated with colorectal cancer and pre-cancer. Upon approval by the U.S. Food and Drug Administration (“FDA”) in August 2014, our Cologuard test became the first and only FDA-approved sDNA non-invasive colorectal cancer screening test. Our Cologuard test is now indicated for average risk adults 45 years of age and older.
Clinical Genetic Testing
We provide more than 5,000 predefined genetic tests for nearly all clinically relevant genes, additional custom panels, and comprehensive germline, whole exome (“PGxome®”), and whole genome (“PGnome®”) sequencing tests.
Our Precision Oncology Tests
Our portfolio delivers actionable genomic insights to inform prognosis and cancer treatment after a diagnosis. In breast cancer, the Oncotype DX Breast Recurrence Score® test is the only test shown to predict the likelihood of chemotherapy benefit as well as recurrence in invasive breast cancer. The Oncotype DX® test is recognized as the standard of care and is included in all major breast cancer treatment guidelines. The Oncomap™ ExTra test applies comprehensive tumor profiling, utilizing whole exome and whole transcriptome sequencing, to aid in therapy selection for patients with advanced, metastatic, refractory, relapsed, or recurrent cancer. With an extensive panel of approximately 20,000 genes and 169 introns, the Oncomap ExTra test is one of the most comprehensive genomic (DNA) and transcriptomic (RNA) panels available today. We enable patients to take a more active role in their cancer care and makes it easy for providers to order tests, interpret results, and personalize medicine by applying real-world evidence and guideline recommendations.
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International Business Background and Products
We commercialize our Oncotype® tests internationally through employees in Canada, Japan and eight European countries, as well as through exclusive distribution agreements. We have provided our Oncotype tests in more than 90 countries outside of the United States. We do not offer our Cologuard test or COVID-19 testing outside of the United States.
Pipeline Research and Development
Our research and development efforts are focused on developing new products and enhancing existing products to address unmet cancer needs and expand the clinical utility and addressable patient populations for our existing tests. We expect to advance liquid biopsy through biomarker discovery and validation in tissue, blood, or other fluids and to leverage recent business development activities to accelerate our leadership in earlier cancer detection and treatment guidance. We are pursuing the following opportunities:
•Colorectal Cancer Screening. We are seeking opportunities to improve upon our Cologuard test’s performance characteristics. In January 2022, we and Mayo Foundation for Medical Education and Research (“Mayo”) presented at the American Society of Clinical Oncology Gastrointestinal Cancers Symposium findings from a study including prospectively collected samples that showed overall sensitivity of 95% for colorectal cancer at specificity of 92%. Subgroup analyses showed 83% sensitivity for high-grade dysplasia, the most dangerous pre-cancerous lesions, and 57% for all advanced pre-cancerous lesions. To establish the performance of an enhanced multi-target stool DNA test, we expect to enroll at least 20,000 patients 40 years of age and older in our multi-center, prospective BLUE-C study. The timing of any such enhancements to our Cologuard test is unknown and would be subject to FDA approval. We are also working to develop a blood-based screening test for colorectal cancer.
•MCED Test Development. We are currently seeking to develop a blood-based, MCED test. In January 2021, we completed the acquisition of Thrive Earlier Detection Corporation (“Thrive”), a healthcare company dedicated to developing a blood-based, MCED test. An early version of Thrive’s test has achieved promising results in a 10,000-patient, prospective, interventional study detecting 10 different types of cancer, including seven with no current recommended screening guidelines, with very few false positives. We intend to combine Thrive's expertise with our scientific capabilities, clinical organization, and commercial infrastructure to bring an accurate blood-based, multi-cancer early detection test to patients.
•Minimal Residual Disease (“MRD”) Test Development. We plan to offer both a tumor-informed and tumor-naive minimal residual disease test to help detect small amounts of tumor DNA that may remain in patients’ blood after they have undergone initial treatment. Our goal is to support all patients in MRD and recurrence monitoring, whether there is access to tumor tissue to inform patient-specific biomarker targets or no access to tissue such that a predefined biomarker panel is used. We are currently evaluating different technological approaches for both test types. In January 2021, we acquired an exclusive license to The Translational Genomics Research Institute (“TGen”) proprietary Targeted Digital Sequencing (“TARDIS”) technology to support development of our tumor-informed test. We have also published proof of concept data showing the ability of cancer-associated methylation markers to detect distantly recurrent colorectal cancer with promising performance.
•Hereditary Cancer Testing. In December 2021, we acquired PreventionGenetics, LLC (“PreventionGenetics”), a DNA testing laboratory that provides more than 5,000 predefined genetic tests for nearly all clinically relevant genes, additional custom panels, and comprehensive germline whole exome and whole genome sequencing tests. We intend to use PreventionGenetics' capabilities to expand the use of hereditary cancer testing in the U.S. and globally.
Research and development, which includes our clinical study programs, accounts for a material portion of our operating expenses. As we seek to enhance our current product portfolio and expand our product pipeline by developing additional cancer screening and diagnostic tests, we expect that our research and development expenditures will continue to increase.
COVID-19 Testing Business
In late March 2020, we began providing COVID-19 testing. We have partnered with various customers, including the State of Wisconsin Department of Health Services, to administer testing. Customers are responsible for employing trained personnel to collect specimens. Specimens are sent to our laboratory in Madison, Wisconsin, where we run the assay in our laboratories and provide test results to ordering providers. In light of the uncertainty surrounding the COVID-19 pandemic, we intend to periodically reassess offering COVID-19 testing.
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2022 Priorities
Our top priorities for 2022 are to (1) impact more lives, (2) advance new tests, and (3) take care of the people we serve.
Impact More Lives
We are committed to delivering critical answers to patients by getting more people tested with our laboratory testing services.
Advance New Tests
In 2022, we are focused on advancing new tests to provide better answers to patients, beginning with assessing risk for cancer through screening, and then changing the way cancer is detected and treated throughout the entire cancer journey. We plan to prioritize investments in clinical studies to support our three most important product development programs: (1) colon cancer screening tests, (2) multi-cancer early detection, and (3) minimal residual disease and recurrence testing.
Take Care of the People we Serve
We want to take even better care of everyone we serve. We plan to improve customer relations by delivering simple and smooth workflows, providing communication that is clear and easy to understand, and providing results that are fast and accurate. Our goal is to become a caring partner to answer questions and help people navigate what is a difficult time in their life.
Recent Developments and Trends
Impacts of COVID-19 and Current Inflationary Environment
The ongoing COVID-19 pandemic has affected many segments of the global economy, including the cancer screening and diagnostics industry. The pandemic and related precautionary measures have significantly impacted, and may continue to impact, our workforce, supply chain, and operating results including our testing volumes, revenues, margins, and cash utilization, among other measures. The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical, and long-lasting and may vary from location to location. As a result of the pandemic, we continue to provide COVID-19 testing. Our Screening and Precision Oncology businesses were negatively impacted by the pandemic but have in large part recovered. Future outbreaks of COVID-19 and its variants could diminish patients’ and our sales representatives’ access to healthcare provider offices. Pandemic-related supply chain disruptions, whether caused by restrictions or slowdowns in shipping or logistics, increases in demand for certain goods used in our operations, or otherwise, could impact our operations.
The inflationary environment has resulted in higher prices which have impacted our operations, including personnel-related costs. The severity and duration of the current inflationary environment remain uncertain and may continue to impact our operations.
Cologuard Promotion
In March 2022, we announced our partnership with Katie Couric, award winning journalist and colorectal cancer advocate, to continue to highlight the urgent need for people to get screened. Entitled ‘Mission to Screen,’ the year-long marketing and social-media campaign will educate Americans on the importance of early detection, starting colon cancer screening at age 45 for average risk individuals, and the availability of multiple screening options. 'Mission to Screen' will be placed in broadcast and digital outlets. It includes a national television commercial, a website featuring interviews with real doctors and patients, and a social media initiative encouraging people to share their reasons to screen.
Results of Operations
We have generated significant losses since inception and, as of June 30, 2022, we had an accumulated deficit of approximately $2.99 billion. We expect to continue to incur losses for the near future, and it is possible we may never achieve profitability.
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Revenue. Our revenue is primarily generated by our laboratory testing services from our Cologuard, Oncotype, and COVID-19 tests.
| Three Months Ended June 30, | ||||||||||||||||||||
| Amounts in millions | 2022 | 2021 | Change | |||||||||||||||||
| Screening | $ | 353.9 | $ | 263.9 | $ | 90.0 | ||||||||||||||
| Precision Oncology | 154.0 | 137.8 | 16.2 | |||||||||||||||||
| COVID-19 Testing | 13.8 | 33.1 | (19.3) | |||||||||||||||||
| Total | $ | 521.6 | $ | 434.8 | $ | 86.8 | ||||||||||||||
| Six Months Ended June 30, | ||||||||||||||||||||
| Amounts in millions | 2022 | 2021 | Change | |||||||||||||||||
| Screening | $ | 660.4 | $ | 504.3 | $ | 156.2 | ||||||||||||||
| Precision Oncology | 306.6 | 267.2 | 39.4 | |||||||||||||||||
| COVID-19 Testing | 41.2 | 65.4 | (24.2) | |||||||||||||||||
| Total | $ | 1,008.2 | $ | 836.9 | $ | 171.3 | ||||||||||||||
The increase in Screening revenue, which primarily includes laboratory service revenue from our Cologuard test, was mainly due to an increase in the number of completed Cologuard tests and revenue generated from new products as a result of our acquisition of PreventionGenetics in the fourth quarter of 2021. Improved sales team productivity, our partnership with Katie Couric, more patients rescreening with our Cologuard test, and first-time users in the 45 to 49 age group contributed to the increase in completed Cologuard tests for the three and six months ended June 30, 2022. Relative recovery from the COVID-19 pandemic contributed to sales team productivity for the three and six months ended June 30, 2022. The increase in Precision Oncology revenue, which primarily includes laboratory service revenue from our global Oncotype products, was mainly due to an increase in the number of completed Oncotype tests, both domestically and internationally, and revenue generated from new products as a result of our acquisition of Ashion Analytics, LLC (“Ashion”) in the second quarter of 2021. Continued adoption by node-positive patients following the RxPONDER publication in the New England Journal of Medicine also contributed to the increase in completed Oncotype tests for the three and six months ended June 30, 2022.
During the three and six months ended June 30, 2022, revenue recognized from changes in transaction price was $7.1 million and $11.3 million, respectively. During the three and six months ended June 30, 2021, there was a downward adjustment to revenue from a change in transaction price of $14.7 million and $13.0 million, respectively.
We expect continuing revenue growth for our Cologuard and Oncotype products subject to seasonal variability. We would expect revenue from our COVID-19 testing to decline as the pandemic abates and alternative testing options become more widely available. Our revenues are affected by the test volume of our products, patient adherence rates, payer mix, the levels of reimbursement, our order to cash operations, and payment patterns of payers and patients.
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Cost of sales (exclusive of amortization of acquired intangible assets). Cost of sales includes costs related to inventory production and usage, shipment of collection kits and tissue samples, royalties and the cost of services to process tests and provide results to healthcare providers. The increase in cost of sales for the three and six months ended June 30, 2022 is primarily due to an increase in production costs and personnel expenses, which is primarily due to an increase in completed Cologuard and Oncotype tests and the corresponding increase in headcount to support the increase in tests completed. In addition, our production costs and personnel expenses have risen as a result of the inflationary environment discussed above. The increase was partially offset by a reduction in the number of COVID-19 tests completed year over year. We expect that cost of sales will generally continue to increase in future periods as a result of an increase in our existing laboratory testing services and as we launch our pipeline products. We also expect to see a corresponding increase in personnel and support services associated with this growth.
| Three Months Ended June 30, | ||||||||||||||||||||
| Amounts in millions | 2022 | 2021 | Change | |||||||||||||||||
| Production costs | $ | 84.0 | $ | 64.2 | $ | 19.8 | ||||||||||||||
| Personnel expenses | 40.4 | 29.7 | 10.7 | |||||||||||||||||
| Facility and support services | 14.9 | 15.0 | (0.1) | |||||||||||||||||
| Stock-based compensation | 5.4 | 4.4 | 1.0 | |||||||||||||||||
| Other cost of sales expenses | (0.1) | 0.7 | (0.8) | |||||||||||||||||
| Total cost of sales expense | $ | 144.6 | $ | 114.0 | $ | 30.6 | ||||||||||||||
| Six Months Ended June 30, | ||||||||||||||||||||
| Amounts in millions | 2022 | 2021 | Change | |||||||||||||||||
| Production costs | $ | 157.3 | $ | 124.8 | $ | 32.5 | ||||||||||||||
| Personnel expenses | 79.4 | 60.7 | 18.7 | |||||||||||||||||
| Facility and support services | 32.2 | 29.3 | 2.9 | |||||||||||||||||
| Stock-based compensation | 9.7 | 8.5 | 1.2 | |||||||||||||||||
| Other cost of sales expenses | 0.7 | 0.7 | — | |||||||||||||||||
| Total cost of sales expense | $ | 279.3 | $ | 224.0 | $ | 55.3 | ||||||||||||||
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Research and development expenses. The decrease in research and development expenses for the three and six months ended June 30, 2022 was primarily due to the $52.3 million incurred for the acquisition of the exclusive license to TARDIS in January 2021 and the $33.1 million incurred for the acquisition of PFS Genomics, Inc., which was completed in June 2021. These acquisitions were accounted for as asset acquisitions, as opposed to the May 2022 OmicEra acquisition which was accounted for as a business combination, and are further described in Note 16 of our condensed consolidated financial statements in this Quarterly Report on Form 10-Q. When excluding the impact of these asset acquisitions, research and development expenses increased by $33.0 million and $71.8 million for the three and six months ended June 30, 2022 primarily due to an increase in BLUE-C and MCED clinical trial related expenses. In addition, personnel related costs increased due to an increase in headcount to support our ongoing clinical trials, which was partially offset by favorable stock-based compensation expense primarily driven by a decrease in expense associated with equity awards issued in connection with the Thrive acquisition. We expect that research and development expenses will generally continue to increase in future periods as we continue to invest to advance new tests.
| Three Months Ended June 30, | ||||||||||||||||||||
| Amounts in millions | 2022 | 2021 | Change | |||||||||||||||||
| Direct research and development | $ | 42.8 | $ | 27.4 | $ | 15.4 | ||||||||||||||
| Personnel expenses | 35.9 | 22.9 | 13.0 | |||||||||||||||||
| Facility and support services | 11.0 | 6.4 | 4.6 | |||||||||||||||||
| Stock-based compensation | 9.9 | 12.4 | (2.5) | |||||||||||||||||
| Professional fees | 4.4 | 1.9 | 2.5 | |||||||||||||||||
| Other research and development | 2.1 | 2.1 | — | |||||||||||||||||
| Licensed technology acquisition | — | 33.1 | (33.1) | |||||||||||||||||
| Total research and development expenses | $ | 106.1 | $ | 106.2 | $ | (0.1) | ||||||||||||||
| Six Months Ended June 30, | ||||||||||||||||||||
| Amounts in millions | 2022 | 2021 | Change | |||||||||||||||||
| Direct research and development | $ | 86.9 | $ | 46.2 | $ | 40.7 | ||||||||||||||
| Personnel expenses | 71.4 | 44.6 | 26.8 | |||||||||||||||||
| Facility and support services | 20.6 | 12.4 | 8.2 | |||||||||||||||||
| Stock-based compensation | 19.5 | 27.2 | (7.7) | |||||||||||||||||
| Professional fees | 6.6 | 3.1 | 3.5 | |||||||||||||||||
| Other research and development | 3.3 | 3.0 | 0.3 | |||||||||||||||||
| Licensed technology acquisition | — | 85.3 | (85.3) | |||||||||||||||||
| Total research and development expenses | $ | 208.3 | $ | 221.8 | $ | (13.5) | ||||||||||||||
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Sales and marketing expenses. The increase in sales and marketing expenses was primarily due to an increase in direct marketing spend to support the future growth of our products and increased personnel expenses and stock-based compensation as a result of an increase in headcount, including the approximately 400 former Pfizer, Inc. (“Pfizer”) sales representatives that were onboarded in the third quarter of 2021. This increase was partially offset by a decrease in professional and legal fees primarily due to a decrease in expenses incurred related to our promotion agreement with Pfizer, which was amended in the fourth quarter of 2021 as further discussed in Note 11 of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. We expect that sales and marketing expenses will generally continue to increase in future periods to support the expected future growth of our Cologuard, Oncotype, and pipeline products. We expect sales and marketing expenses to decrease as a percentage of revenue over time.
| Three Months Ended June 30, | ||||||||||||||||||||
| Amounts in millions | 2022 | 2021 | Change | |||||||||||||||||
| Personnel expenses | $ | 114.4 | $ | 84.6 | $ | 29.8 | ||||||||||||||
| Direct marketing costs | 57.4 | 47.2 | 10.2 | |||||||||||||||||
| Stock-based compensation | 18.0 | 13.7 | 4.3 | |||||||||||||||||
| Facility and support services | 15.2 | 18.0 | (2.8) | |||||||||||||||||
| Professional and legal fees | 10.7 | 30.8 | (20.1) | |||||||||||||||||
| Other sales and marketing expenses | 0.2 | 0.5 | (0.3) | |||||||||||||||||
| Total sales and marketing expenses | $ | 215.9 | $ | 194.8 | $ | 21.1 | ||||||||||||||
| Six Months Ended June 30, | ||||||||||||||||||||
| Amounts in millions | 2022 | 2021 | Change | |||||||||||||||||
| Personnel expenses | $ | 237.3 | $ | 169.6 | $ | 67.7 | ||||||||||||||
| Direct marketing costs | 121.7 | 88.6 | 33.1 | |||||||||||||||||
| Stock-based compensation | 33.1 | 26.8 | 6.3 | |||||||||||||||||
| Professional and legal fees | 28.9 | 58.5 | (29.6) | |||||||||||||||||
| Facility and support services | 25.7 | 35.8 | (10.1) | |||||||||||||||||
| Other sales and marketing expenses | 1.4 | 1.7 | (0.3) | |||||||||||||||||
| Total sales and marketing expenses | $ | 448.1 | $ | 381.0 | $ | 67.1 | ||||||||||||||
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General and administrative expenses. The decrease in general and administrative expenses for the six months ended June 30, 2022 was primarily due to lower acquisition and integration related costs in the three and six months ended June 30, 2022, as compared to the prior year period. We incurred $12.9 million and $131.3 million in acquisition and integration related costs during the three and six months ended June 30, 2021 as part of our acquisitions completed during the year, which primarily consisted of integration related stock-based compensation and professional and legal fees incurred. Acquisition and integration related costs were not significant for the three and six months ended June 30, 2022. When excluding the impact of acquisition and integration related costs, personnel expenses increased due to an increase in headcount to support our growth in our operations and from our recent acquisitions. In addition, facility and support services increased to support the build out of our facilities and our increased headcount. The decrease in other general and administrative expenses is primarily due to gains of $25.1 million and $51.8 million recorded during the three and six months ended June 30, 2022 as a result of the change in fair value of our outstanding contingent consideration as further described in Note 7 of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. We expect significant leverage in general and administrative expenses going forward, but expenses will generally continue to increase in future periods due to an increase in headcount that will be necessary to support the growth in our existing and pipeline products.
| Three Months Ended June 30, | ||||||||||||||||||||
| Amounts in millions | 2022 | 2021 | Change | |||||||||||||||||
| Personnel expenses | $ | 98.7 | $ | 73.7 | $ | 25.0 | ||||||||||||||
| Facility and support services | 34.9 | 19.9 | 15.0 | |||||||||||||||||
| Professional and legal fees | 30.1 | 29.8 | 0.3 | |||||||||||||||||
| Stock-based compensation | 25.6 | 25.8 | (0.2) | |||||||||||||||||
| Other general and administrative | (7.6) | 18.4 | (26.0) | |||||||||||||||||
| Total general and administrative expenses | $ | 181.7 | $ | 167.6 | $ | 14.1 | ||||||||||||||
| Six Months Ended June 30, | ||||||||||||||||||||
| Amounts in millions | 2022 | 2021 | Change | |||||||||||||||||
| Personnel expenses | $ | 199.2 | $ | 146.2 | $ | 53.0 | ||||||||||||||
| Facility and support services | 66.6 | 35.2 | 31.4 | |||||||||||||||||
| Professional and legal fees | 57.0 | 65.1 | (8.1) | |||||||||||||||||
| Stock-based compensation | 49.1 | 157.2 | (108.1) | |||||||||||||||||
| Other general and administrative | (20.5) | 31.7 | (52.2) | |||||||||||||||||
| Total general and administrative expenses | $ | 351.4 | $ | 435.4 | $ | (84.0) | ||||||||||||||
Amortization of acquired intangible assets. Amortization of acquired intangible assets increased to $26.4 million for the three months ended June 30, 2022 compared to $23.8 million for the three months ended June 30, 2021. Amortization of acquired intangible assets increased to $51.0 million for the six months ended June 30, 2022, compared to $47.0 million for the six months ended June 30, 2021. The increase in amortization of acquired intangible assets was due to the amortization of intangible assets acquired as part of our acquisitions of Ashion in April 2021, PreventionGenetics in December 2021, and OmicEra in May 2022.
Intangible asset impairment charge. Intangible asset impairment charge was $6.6 million for the three and six months ended June 30, 2022 compared to zero for the three and six months ended June 30, 2021. The intangible asset impairment charge recorded during the three and six months ended June 30, 2022 related to the impairment of the acquired developed technology intangible asset acquired as part of the acquisition of Paradigm Diagnostics, Inc. (“Paradigm”).
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Investment income (expense), net. For the three months ended June 30, 2022, we had net investment expense of $3.7 million, compared to net investment income of $3.4 million for the three months ended June 30, 2021. For the six months ended June 30, 2022, we had net investment expense of $5.2 million, compared to net investment income of $34.6 million for the six months ended June 30, 2021. The net investment expense for the three and six months ended June 30, 2022 was primarily due to losses recorded on our equity securities. Net investment income for the six months ended June 30, 2021 was primarily due to the realized gain of $30.5 million that was recorded on our preferred stock investment in Thrive at closing in January 2021, which represented the adjustment to our historical investment to its fair value prior to our acquisition of Thrive. Our acquisition of Thrive is further described in Note 19 of our most recently filed Form 10-K for the year ended December 31, 2021.
Interest expense. Interest expense decreased to $4.5 million for the three months ended June 30, 2022 compared to $4.7 million for the three months ended June 30, 2021. Interest expense recorded from our outstanding convertible notes totaled $4.0 million during each of the three months ended June 30, 2022 and 2021. Interest expense decreased to $9.0 million for the six months ended June 30, 2022 compared to $9.3 million for the six months ended June 30, 2021. Interest expense recorded from our outstanding convertible notes totaled $8.0 million during each of the six months ended June 30, 2022 and 2021. The convertible notes are further described in Note 9 of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Income tax benefit (expense). Income tax benefit was $1.8 million for the three months ended June 30, 2022 compared to an expense of $4.0 million for the three months ended June 30, 2021. Income tax benefit decreased to $3.8 million for the six months ended June 30, 2022 compared to $238.8 million for the six months ended June 30, 2021. This decrease in income tax benefit is primarily due to an income tax benefit of $239.2 million recorded during the six months ended June 30, 2021 as a result of the change in the deferred tax asset valuation allowance resulting from the acquisition of Thrive.
Liquidity and Capital Resources
Overview
We have incurred losses and negative cash flows from operations since our inception, and have historically financed our operations primarily through public offerings of our common stock and convertible debt and through revenue generated by the sale of our laboratory testing services. We expect our operating expenditures to continue to increase to support future growth of our laboratory testing services, as well as an increase in research and development and clinical trial costs to support the advancement of our pipeline products and bringing new tests to market. We expect that cash and cash equivalents and marketable securities on hand at June 30, 2022, along with cash flows generated through our operations, will be sufficient to fund our current operations for at least the next twelve months based on current operating plans.
We have access to a revolving line-of-credit (the “Revolver”) of up to $150.0 million, which expires in November 2023. The Revolver is collateralized by certain marketable securities which must continue to maintain a minimum market value of $150.0 million. During the fourth quarter of 2021, PNC Bank, National Association issued a letter of credit of $2.9 million, which reduced the amount available for cash advances under the line of credit to $147.1 million. As of June 30, 2022, we had not drawn any funds under the Revolver. In addition to the Revolver, we have access to $150.0 million under an accounts receivable securitization facility (the “Securitization Facility”), which expires in June 2024. The amount that we may borrow is determined based on the amount of qualifying accounts receivable at a given point in time. The Securitization Facility is collateralized by our accounts receivables. As of June 30, 2022, we had $50.0 million outstanding under the Securitization Facility, which is the minimum amount that we must borrow under the terms of the Securitization Facility. The Revolver and Securitization Facility are further described in Note 8 of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
We may raise additional capital to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons. If we are unable to obtain sufficient additional funds to enable us to fund our business plans and strategic investments, our results of operations and financial condition could be materially adversely affected, and we may be required to delay the implementation of our plans or otherwise scale back our operations. There can be no certainty that we will ever be successful in generating sufficient cash flow from operations to achieve and maintain profitability and meet all of our obligations as they come due.
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Cash, Cash Equivalents and Marketable Securities
As of June 30, 2022, we had approximately $213.4 million in unrestricted cash and cash equivalents and approximately $514.6 million in marketable securities.
The majority of our investments in marketable securities consist of fixed income investments, and all are deemed available-for-sale. The objectives of this portfolio are to provide liquidity and safety of principal while striving to achieve the highest rate of return. Our 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.
Cash Flows
| Six Months Ended June 30, | ||||||||||||||
| Amounts In millions | 2022 | 2021 | ||||||||||||
| Net cash used in operating activities | $ | (234.7) | $ | (36.9) | ||||||||||
| Net cash provided by (used in) investing activities | 67.2 | (1,111.3) | ||||||||||||
| Net cash provided by financing activities | 66.1 | 20.6 | ||||||||||||
Operating activities
The increase in cash used in operating activities for the six months ended June 30, 2022 was primarily due to an increase in our net loss. The increase in our net loss was primarily due to an increase in expenses incurred to process our tests and an increase in operating expenses incurred to support the growth of our operations as further discussed above. The increase in cash used was also due to timing of payments on our accounts payable and accrued expenses, including payments made during the six months ended June 30, 2022 under our promotion agreement with Pfizer and for certain personnel related liabilities that were accrued for as of December 31, 2021. This was partially offset by an increase in revenue, which was driven by an increase in completed Cologuard and Oncotype tests.
Investing activities
Cash provided by investing activities for the six months ended June 30, 2022, was primarily due to a net cash inflow from purchases, sales, and maturities of marketable securities of $190.2 million, which was partially offset by purchases of property and equipment of $96.9 million and investments in privately held companies of $26.7 million. Cash used in investing activities for the six months ended June 30, 2021 was primarily due to a net cash outflow from purchases, sales, and maturities of marketable securities of $589.9 million, our acquisition of Thrive of $343.2 million, our acquisition of Ashion of $72.3 million, our asset acquisition of PFS Genomics of $33.1 million, our TARDIS license asset acquisition of $25.0 million, purchases of property and equipment of $37.5 million, and investments in privately held companies of $10.0 million.
Financing activities
The cash provided by financing activities during the six months ended June 30, 2022 consisted of proceeds of $50.0 million from our accounts receivable securitization facility, $15.5 million in connection with our employee stock purchase plan, and $5.0 million from the exercise of stock options, which was partially offset by cash outflows of $4.4 million for other financing activities. The cash provided by financing activities for the six months ended June 30, 2021 consisted of proceeds of $11.6 million from the exercise of stock options and $12.0 million in connection with our employee stock purchase plan, which was partially offset by $3.1 million for other financing activities.
Material Cash Requirements
A discussion of our material cash requirements as of December 31, 2021 was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operation of our 2021 Form 10-K. Other than the Securitization Facility described above, there were no material changes outside the ordinary course of our business in our specified material cash requirements during the six months ended June 30, 2022.
As of June 30, 2022, we had no off-balance sheet arrangements.
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Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 1 of our financial statements included in our 2021 Form 10-K, as well as our Management’s Discussion and Analysis of Financial Condition and Results of Operations on our 2021 Form 10-K, we believe that the following judgments are most critical to aid in fully understanding and evaluating our reported financial results.
Revenue Recognition. We recognize revenues when we release a result to the ordering healthcare provider, in an amount that reflects the consideration we expect to collect in exchange for those services. The amount of revenue we recognize is based on the established billing rates less contractual and other adjustments, which yields the unconstrained amount that we expect to ultimately collect.
We determine the amount we expect to ultimately collect using historical collections, established reimbursement rates, and other adjustments. Any changes in these inputs would ultimately impact the amount of revenue recognized during the period. The expected amount is typically lower than, if applicable, the agreed-upon reimbursement amount due to several factors, such as the amount of any patient co-payments, out-of-network payers, the existence of secondary payers, and claim denials. The consideration derived from our contracts is fixed when we contract with a direct bill payer. Our ability to collect is not contingent on the customer’s ability to collect through their downstream billing efforts.
In the case of some of our agreements, the right to bill and collect exists prior to the receipt of a specimen and release of a test result to the ordering healthcare provider, which results in deferred revenue. The deferred revenue balance is generally relieved upon the release of the applicable patient’s test result to the ordering healthcare provider or as of the date the customer has surpassed the window of time in which they are able to exercise their rights for testing services. We believe these points in time represent our fulfillment of our obligations to the customer.
The quality of our billing operations, most notably those activities that relate to obtaining the correct information in order to bill effectively for services provided, directly impacts the collectability of our receivables and revenue estimates. As such, we continually assess the state of our order to cash operations in order to identify areas of risk and opportunity that allow us to appropriately estimate receivables and revenue. Upon ultimate collection, the aggregate amount received from payers and patients where reimbursement was estimated is compared to previous collection estimates and, if necessary, the transaction price is adjusted. Finally, should we later determine the judgments underlying estimated collections change, our financial results could be negatively impacted in future quarters.
Tax Positions. We record a valuation allowance to reduce the deferred tax assets 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.
We compute our provision for income taxes based on the statutory tax rates and tax planning opportunities available to us in the various jurisdictions that we operate. Judgment is required in evaluating our tax positions and determining our annual tax provision.
We have incurred significant losses since our inception and due to the uncertainty of the amount and timing of future taxable income, it may be necessary to record an allowance to reduce the tax assets we have recognized.
Management has determined that a valuation allowance is necessary to reduce the tax assets to the amount that is more likely than not to be realized. Based on this determination, we continue to maintain a full valuation allowance against our deferred tax assets. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not impact our effective tax rate.
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Business Combinations and Asset Acquisitions. We account for acquired businesses using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Goodwill is the residual after allocating the purchase price to net assets acquired, unless the transaction is an asset acquisition in which the excess is allocated to acquired assets on a relative fair value basis. Determining the fair value of identifiable assets and liabilities, particularly intangible assets and contingent consideration, requires management to make significant judgements and estimates.
As a result of the acquisition of OmicEra, we identified a developed technology intangible asset, which we determined to have a fair value of $10.0 million. Key assumptions used to value our finite lived intangible assets acquired through business combinations include projected revenue growth, projected gross margin and operating expenses, discount rates, terminal growth rate, and other factors. We believe that the estimates applied are based on reasonable assumptions, but the estimates are inherently uncertain. As a result, the actual results may differ from the assumptions and judgments used to determine fair value of the assets acquired, which could result in material impairment charges in the future. Determining the useful life of the developed technology also requires judgment and actual useful life may differ.
In-process research and development (“IPR&D”) assets may be identified as a result of business combinations. There are major risks and uncertainties associated with IPR&D due to the regulatory approvals needed, which rely on the success of clinical trials that demonstrate product effectiveness. Key assumptions used to calculate the fair value of the IPR&D asset included inputs such as projected revenues, gross margin, required rate of return, tax rate, probability of commercial success, and obsolescence factor. We believe that the estimates applied are based on reasonable assumptions, but the estimates are inherently uncertain. As a result, the eventual realized value of the IPR&D project may vary from its fair value at the date of acquisition, and material IPR&D impairment charges may occur in future periods.
Business Combinations may include contingent consideration to be paid based on the occurrence of future events, such as the achievement of certain development, regulatory and sales milestones. Contingent consideration is a financial liability recorded at fair value at the acquisition date. The estimate of fair value contains uncertainties as it involves judgement about the likelihood and timing of achieving milestones as well as the present-value factor. We recorded a contingent consideration liability of $4.6 million as a result of the acquisition of OmicEra
Remeasurement of Contingent Consideration. We remeasure the fair value of outstanding contingent consideration liabilities at each reporting period. The estimate of fair value contains uncertainties as it involves judgement about the likelihood and timing of achieving milestones as well as the present-value factor. A change in the probability of success assumption could have a material impact on the estimated fair value.
Impairment of Indefinite-Lived Assets. We test indefinite-lived assets for impairment on an annual basis during the fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Based on the qualitative assessment, if it is determined that the fair value of indefinite-lived intangible assets is more likely than not to be less than its carrying amount, the fair value will be calculated and compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value. Determining whether impairment indicators exist and estimating the fair value of our indefinite-lived intangible assets if necessary for impairment testing requires significant judgment. Qualitative factors considered in this assessment include industry and market conditions, overall financial performance, and other relevant events and factors. We also perform our annual IPR&D assessment using a qualitative assessment. Qualitative factors considered in this assessment include industry and market conditions, financial and strategic factors, the status of product development, and the consideration of legal, competitive, regulatory, and technical risks. There were no events or changes in circumstances that indicated that the carrying amount of our indefinite-lived assets may not be recoverable six months ended June 30, 2022.
Impairment of Long-Lived Assets. We evaluate the fair value of long-lived assets, which include property, plant and equipment, finite-lived intangible assets, and investments in privately held companies, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. The review of qualitative factors requires significant judgement. 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. We recorded an impairment charge of $6.6 million during the three and six months ended June 30, 2022 related to the acquired developed technology intangible asset acquired as part of the acquisition of Paradigm. We utilized the income approach to measure the fair value of the acquired developed technology, which required management to make estimates including revenue projections, estimated cash flows and discount rate.
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Recent Accounting Pronouncements
See Note 1 in the Notes to Condensed Consolidated Financial Statements for the discussion of Recent Accounting Pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk is principally confined to our cash, cash equivalents and marketable securities and our outstanding variable-rate debt. We invest our cash, cash equivalents, and marketable securities in securities of the U.S. governments and its agencies and in investment-grade, highly liquid investments consisting of commercial paper, bank certificates of deposit, and corporate bonds, which as of June 30, 2022 and December 31, 2021 were classified as available-for-sale. We place our cash, cash equivalents, restricted cash, and marketable securities with high-quality financial institutions, limit the amount of credit exposure to any one institution, and have established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity.
Based on a hypothetical 100 basis point decrease in market interest rates, the potential losses in future earnings, fair value of risk-sensitive financial instruments, and cash flows are immaterial, although the actual effects may differ materially from the hypothetical analysis. While we believe our cash, cash equivalents, restricted cash, and marketable securities do not contain excessive risk, we cannot provide absolute assurance that, in the future, our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash, cash equivalents, restricted cash, and marketable securities at one or more financial institutions that are in excess of federally insured limits. Given the potential instability of financial institutions, we cannot provide assurance that we will not experience losses on these deposits. We do not utilize interest rate hedging agreements or other interest rate derivative instruments.
As of June 30, 2022, we had $50.0 million in outstanding variable rate debt. Based on a hypothetical 100 basis point increase in market interest rates, annual interest expense on variable rate debt as of June 30, 2022 would increase by approximately $0.5 million. If we were to draw down additional amounts under either our Revolving Loan or Securitization Facility, the impact of increases in prevailing market interest rates would be even greater. All of our other significant interest-bearing liabilities bear interest at fixed rates and therefore are not subject to fluctuations in market interest rates; however, because these interest rates are fixed, we may be paying a higher interest rate, relative to market, in the future if circumstances change.
Foreign Currency Risk
The functional currency for most of our international subsidiaries is the U.S. dollar, and as a result we are not subject to material gains and losses from foreign currency translation of the subsidiary financial statements. Substantially all of our revenues are recognized in U.S. dollars, although a small portion is denominated in foreign currency as we continue to expand into markets outside of the U.S. Certain expenses related to our international activities are payable in foreign currencies. As a result, factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets will affect our financial results.
We enter into forward contracts to mitigate the impact of adverse movements in foreign exchange rates related to the re-measurement of monetary assets and liabilities and hedge our foreign currency exchange rate exposure. As of June 30, 2022, we had open foreign currency forward contracts with notional amounts of $28.9 million. Although the impact of currency fluctuations on our financial results has been immaterial in the past, there can be no guarantee that the impact of currency fluctuations related to our international activities will not be material in the future.
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Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our principal executive officer and our principal financial officer concluded that, as of June 30, 2022, our disclosure controls and procedures were effective. Disclosure controls and procedures enable us to record, process, summarize and report information required to be included in our Exchange Act filings within the required time period. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the periodic reports filed with the SEC is accumulated and communicated to our management, including our principal executive, financial and accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There have been no significant changes in internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II - Other Information
Item 1. Legal Proceedings
From time to time we are a party to various legal proceedings arising in the ordinary course of our business. Legal proceedings, including litigation, government investigations and enforcement actions could result in material costs, occupy significant management resources and entail civil and criminal penalties. The information called for by this item is incorporated by reference to the information in Note 14 of the Notes to Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I, “Item 1A. Risk Factors” in the 2021 Form 10-K and in Part II, “Item 1A. Risk Factors” in our subsequently filed Quarterly Reports on Form 10-Q. Other than the factors set forth below, there have been no material changes to the risk factors described in the 2021 Form 10-K.
Our indebtedness could adversely affect our business, financial condition, and results of operations and our ability to meet our payment obligations under such indebtedness and limit our ability to raise additional capital to fund our operations.
We have a significant amount of indebtedness. As of June 30, 2022, we had total indebtedness of $2.26 billion, including $2.21 billion in aggregate principal and interest due under our 1.0%, 0.375% and 0.375% convertible senior notes due 2025, 2027 and 2028 and $50.0 million of borrowings under our Securitization Facility. We also had $2.9 million of letters of credit issued under our Revolver. This level of debt could have significant consequences on our future operations, including:
•increasing our vulnerability to adverse economic and industry conditions;
•making it more difficult for us to meet our payment and other obligations;
•making it more difficult to obtain any necessary future financing for working capital, capital expenditures, debt service requirements, or other purposes;
•requiring the dedication of a substantial portion of any cash flow from operations to service our indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures;
•placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital than we have; and
•limiting our flexibility in planning for, or reacting to, changes in our business and the markets in which we compete.
Any of the above-listed factors could have an adverse effect on our business, financial condition, and results of operations and our ability to meet our payment obligations under our indebtedness.
Our ability to meet our payment and other obligations under our indebtedness depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us, in an amount sufficient to enable us to meet our payment obligations under our indebtedness and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital and of which such events could have an adverse effect on our business, financial condition, and results of operations.
Our credit facilities contain certain customary representations, warranties, affirmative covenants and negative covenants, events of default as well as termination events which would permit the lenders to terminate upon the occurrence of certain specified events, including, among others, failure to pay amounts when due, certain defaults on other material indebtedness, certain judgments, a change of control and bankruptcy and insolvency events. A breach of any covenant in our credit facilities or the agreements and indentures governing any other indebtedness that we may have outstanding from time to time would result in a default under that agreement or indenture after any applicable grace periods. A default, if not waived, could result in
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acceleration of the debt outstanding under the agreement and in a default with respect to, and an acceleration of, the debt outstanding under other debt agreements. If that occurs, we may not be able to make all of the required payments or borrow sufficient funds to refinance such debt. Even if new financing were available at that time, it may not be on terms that are acceptable to us or terms as favorable as our current agreements. If our debt is in default for any reason, our business, results of operations and financial condition could be materially and adversely affected.
We may engage in acquisitions or divestitures that are not successful and which could disrupt our business and reduce our financial resources and shareholder value.
We undertake acquisition activities from time to time. For example, in January 2021 we acquired Thrive Earlier Detection Corporation, in April 2021 we acquired Ashion Analytics, LLC, in June 2021 we acquired PFS Genomics Inc., in December 2021 we acquired PreventionGenetics, LLC, and in May 2022 we acquired OmicEra Diagnostics GmbH. Certain risks may exist as a result of these and other acquisition activities, including, among others, that:
•we may encounter potential unknown liabilities and unforeseen increased expenses, delays or unfavorable conditions in connection with the integration of the acquired businesses into our business;
•we may be unable to successfully integrate the acquired businesses into our business;
•we may lose key employees;
•we may encounter potential unknown liabilities and unforeseen risks associated with contracts containing consent and/or other provisions that may be triggered by the acquisitions;
•we may be unable to realize the anticipated benefits of the acquisitions or do so within the anticipated timeframe;
•our future results will suffer if we do not effectively manage our expanded operations; and
•the market price of our common stock may decline as a result of the acquisitions.
In the future, we may enter into transactions to acquire other businesses, products, services or technologies, which may ultimately be unsuccessful. If we do identify suitable candidates, we may not be able to make such acquisitions on favorable terms or at all. Any acquisitions we make may not strengthen our competitive position, and these transactions may be viewed negatively by investors, healthcare providers, patients and others. In addition to the risks outlined above, we may decide to incur debt in connection with an acquisition or issue our common stock or other securities to the stockholders of the acquired company, which would reduce the percentage ownership of our existing stockholders. We cannot predict the number, timing or size of future acquisitions or the effect that any such transactions might have on our operating results.
We may also pursue strategic divestitures from time to time. For example, in August 2022 we completed a divestiture of assets related to our Oncotype DX Genomic Prostate Score to MDxHealth SA. A successful divestiture depends on various factors, including our ability to effectively transfer liabilities, contracts, facilities and employees to the purchaser, identify and separate the personnel, contracts and assets, including intellectual property, to be divested from the intellectual property that we wish to keep and reduce fixed costs previously associated with the divested assets or business. In exiting a business, we may still retain liabilities associated with those businesses and other indemnification obligations. We may also need to provide transition services to the buyer for an extended period of time following the closing, which may cause us to incur unanticipated costs and distraction. With respect to any divestiture, we may encounter difficulty finding potential acquirers or other divestiture options on favorable terms. Any divestiture could affect our profitability as a result of the gains or losses on such sale of a business or service, the loss of the operating income resulting from such sale or the costs or liabilities that are not assumed by the acquirer (i.e., stranded costs) that may negatively impact profitability subsequent to any divestiture. The Company may also be required to recognize impairment charges as a result of a divestiture.
Our business is affected by macroeconomic conditions.
Various macroeconomic factors could adversely affect our business and the results of our operations and financial condition, including changes in inflation, interest rates and foreign currency exchange rates and overall economic conditions and uncertainties, including those resulting from the current and future conditions in the global financial markets. For instance, we experienced inflationary pressures in 2022 and expect such pressures to continue in 2023. Cost inflation, including increases in raw material prices, labor rates, and transportation costs may impact our profitability. Our ability to recover these cost increases through price increases is significantly limited by the process by which we are reimbursed for our products and services by government and private payers. The volatility of the capital markets could also affect the value of our investments and our ability to liquidate our investments in order to fund our operations.
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Increasing interest rates and reduced access to capital markets could also adversely affect the ability of our suppliers, distributors, licensors, collaborators, contract manufacturers and other commercial partners to remain effective business partners or to remain in business. The loss of a critical business partner, or a failure to perform by a critical business partner, could have a disruptive effect on our business and could adversely affect our results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 2, 2022, we completed the acquisition of OmicEra Diagnostics GmbH. As part of the purchase price, we issued to the selling equity holders an aggregate of 265,186 shares of common stock as consideration for their ownership in OmicEra Diagnostics GmbH.
We believe that the offers and sales of the securities referenced above were exempt from registration under the Securities Act of 1933 (the “Securities Act”) by virtue of Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder as transactions not involving any public offering. Use of this exemption is based on the following facts:
•Neither we nor any person acting on our behalf solicited any offer to buy or sell securities by any form of general solicitation or advertising.
•At the time of the acquisition, the recipients of the securities were accredited investors, as defined in Rule 501(a) of the Securities Act.
•The recipients of the securities have had access to information regarding the Company and are knowledgeable about us and our business affairs.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
The following documents are filed as part of this Form 10-Q.
| Exhibit Number | Exhibit Description | Filed with This Report | Incorporated by Reference herein from Form or Schedule | Filing Date | SEC File / Registration Number | |||||||||||||||||||||||||||
| Sixth Amended and Restated Certificate of Incorporation of the Registrant | S-1 (Exhibit 3.3) | 12/4/2000 | 333-48812 | |||||||||||||||||||||||||||||
| Amendment to Sixth Amended and Restated Certificate of Incorporation of the Registrant | 8-K (Exhibit 3.1) | 7/24/2020 | 001-35092 | |||||||||||||||||||||||||||||
| Sixth Amended and Restated By-Laws of the Registrant | 8-K (Exhibit 3.1) | 1/28/2022 | 001-35092 | |||||||||||||||||||||||||||||
Amendment No. 1 to Exact Sciences Corporation 2019 Omnibus Long-Term Incentive Plan | 8-K (Exhibit 10.1) | 6/10/2022 | 001-35092 | |||||||||||||||||||||||||||||
Amended and Restated Exact Sciences Corporation 2010 Employee Stock Purchase Plan | 8-K (Exhibit 10.2) | 6/10/2022 | 001-35092 | |||||||||||||||||||||||||||||
Receivables Financing Agreement dated as of June 29, 2022 by and among Exact Receivables LLC, as borrower, the persons from time to time party thereto as lenders and group agents, PNC Bank, National Association, as administrative agent, Exact Sciences Laboratories, LLC, as initial servicer, and PNC Capital Markets, LLC, as structuring agent | 8-K (Exhibit 10.1) | 6/30/2022 | 001-35092 | |||||||||||||||||||||||||||||
Receivables Purchase Agreement dated as of June 29, 2022 by and among Exact Sciences Corporation, as seller, Exact Sciences Laboratories, LLC, as initial servicer, and Exact Receivables LLC, as buyer | 8-K (Exhibit 10.2) | 6/30/2022 | 001-35092 | |||||||||||||||||||||||||||||
Receivables Purchase Agreement dated as of June 29, 2022 by and among the entities from time to time party thereto as originators, Exact Sciences Laboratories, LLC, as initial servicer, and Exact Sciences Corporation, as buyer | 8-K (Exhibit 10.3) | 6/30/2022 | 001-35092 | |||||||||||||||||||||||||||||
| Certification Pursuant to Rule 13(a)-14(a) or Rule 15d-14(a) of Securities Exchange Act of 1934 | X | |||||||||||||||||||||||||||||||
| Certification Pursuant to Rule 13(a)-14(a) or Rule 15d-14(a) of Securities Exchange Act of 1934 | X | |||||||||||||||||||||||||||||||
| Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||||||||
| 101 | The following materials from the Quarterly Report on Form 10-Q of Exact Sciences Corporation for the quarter ended June 30, 2022 filed on August 2, 2022, formatted in Inline eXtensible Business Reporting Language (“iXBRL”): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) related notes to these financial statements | X | ||||||||||||||||||||||||||||||
| 104 | The cover page from our Quarterly Report for the period ended June 30, 2022, filed with the Securities and Exchange Commission on August 2, 2022, is formatted in Inline Extensible Business Reporting Language (“iXBRL”) | X | ||||||||||||||||||||||||||||||
(*) Indicates a management contract or any compensatory plan, contract or arrangement.
(**) Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the U.S. Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| EXACT SCIENCES CORPORATION | ||||||||
Date: August 2, 2022 | By: | /s/ Kevin T. Conroy | ||||||
| Kevin T. Conroy | ||||||||
President and Chief Executive Officer (Principal Executive Officer) | ||||||||
Date: August 2, 2022 | By: | /s/ Jeffrey T. Elliott | ||||||
| Jeffrey T. Elliott | ||||||||
Executive Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer) | ||||||||
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