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EXACT SCIENCES CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 31, 2014]

EXACT SCIENCES CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of the financial condition and results of operations of Exact Sciences Corporation (together with its subsidiary, "Exact," "we," "us", "our" or the "Company") should be read in conjunction with the condensed 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, 2013, which has been filed with the SEC (the "2013 Form 10-K").



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 and 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," "could," "seek," "intend," "plan," "estimate," "anticipate" or other comparable terms. Forward-looking statements in this Quarterly Report on Form 10-Q may address the following subjects among others: statements regarding the sufficiency of our capital resources, expected operating losses, our ability to secure favorable reimbursement rates from Medicare and other third-party payors, our ability to establish a lab facility and secure the required certifications for that facility, estimated markets for our products and expected revenues, expected research and development expenses, expected general and administrative expenses and our expectations concerning our business strategy. Forward-looking statements involve inherent risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements, as a result of various factors including those risks and uncertainties described in the Risk Factors and in Management's Discussion and Analysis of Financial Condition and Results of Operations sections of our 2013 Form 10-K and our subsequently filed Quarterly Reports on Form 10-Q. We urge you to consider those risks and uncertainties in evaluating our forward-looking statements. We caution readers 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 disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement 21 -------------------------------------------------------------------------------- Table of Contents contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview We are a molecular diagnostics company currently focused on the early detection and prevention of colorectal cancer. We have developed an accurate, non-invasive, patient friendly screening test to meet our primary goal of becoming the market leader for early detection of colorectal pre-cancer and cancer.

Our strategic roadmap to achieve this goal includes the following key components: † commercialize an FDA-approved product that detects colorectal pre-cancer and cancer; and † secure favorable reimbursement for our product from payors.

Our Cologuard® test is designed to detect pre-cancerous lesions or polyps, and each of the four stages of colorectal cancer and is expected to be a powerful, preventive tool. Cologuard is a non-invasive, stool-based DNA (sDNA) screening test designed to detect DNA markers, which in published studies have been shown to be associated with colorectal cancer. In addition to DNA markers, our test includes a protein marker to detect blood in the stool utilizing an antibody-based fecal immunochemical test (FIT).

Colorectal cancer is the second leading cause of cancer deaths in the United States and the leading cause of cancer deaths among nonsmokers.

It is widely accepted that colorectal cancer is among the most preventable, yet least prevented cancers. Colorectal cancer can take up to 10-15 years to progress from a pre-cancerous lesion to metastatic cancer and death. Patients who are diagnosed early in the progression of the disease-with pre-cancerous lesions or polyps, or early-stage cancer-are more likely to have a complete recovery and to be treated less expensively. Accordingly, the American Cancer Society (ACS) recommends that all people age 50 and older undergo regular colorectal cancer screening. Of the more than 80 million people in the United States for whom routine colorectal cancer screening is recommended, nearly 47 percent have not been screened according to current guidelines. Poor compliance has meant that nearly two-thirds of colorectal cancer diagnoses are made in the disease's late stages. The five-year survival rates for stages 3 and 4 are 67 percent and 12 percent, respectively.

We believe the large population of unscreened and inadequately screened patients represents a significant opportunity for a patient friendly screening test like ours. A powerful preventive tool that detects pre-cancerous polyps and early stage colorectal cancer could significantly reduce colorectal cancer deaths and the health care costs associated with the disease. Pre-cancerous polyps are present in approximately 6 percent of average risk people 50 years of age and older who undergo routine colorectal cancer screening.

The competitive advantages of sDNA screening provide a significant market opportunity. Assuming a 30-percent test adoption rate and a three-year screening interval, we estimate the potential U.S. market for sDNA screening to be more than $2 billion and we estimate the potential global market opportunity to be greater than $3 billion.

Physicians and others assessing the effectiveness and value of our Cologuard test, will likely consider, among other things, our Cologuard test's sensitivity and specificity in identifying colorectal cancer and pre-cancerous polyps.

"Sensitivity" (also called the true positive rate) measures the percentage of colorectal cancer or pre-cancerous polyps that our Cologuard test correctly identifies. "Specificity" (also called the true negative rate) measures the percentage of people who our Cologuard test correctly identifies as not having colorectal cancer or pre-cancerous polyps.

In the first half of 2013 we completed our pivotal 10,000 patient DeeP-C study.

All patients provided a sample to be tested with our Cologuard test, and received a FIT test and a colonoscopy.

22 -------------------------------------------------------------------------------- Table of Contents Top-line data from the DeeP-C study showed that our Cologuard test demonstrated 92 percent sensitivity for the detection of colorectal cancer and 42 percent sensitivity for the detection of pre-cancerous polyps, including 66 percent sensitivity for pre-cancerous polyps equal to or greater than 2 centimeters. The test achieved a specificity of 87 percent during the clinical trial.

We submitted the results of our clinical trial to the FDA through a three part submission of a manufacturing module, analytical module, and clinical module.

The manufacturing module was submitted to the FDA in December 2012, the analytical module was submitted to the FDA in February 2013, and the clinical module was submitted to the FDA in June 2013. The FDA approved our PMA on August 11, 2014. The application included data from the DeeP-C study that was published online on March 19, 2014, in the New England Journal of Medicine. The peer-reviewed study, "Multi-target Stool DNA Testing for Colorectal-Cancer Screening" also appeared in the journal's April 3, 2014 print issue.

The FDA's Molecular and Clinical Genetics Panel of the Medical Devices Advisory Committee met on March 27, 2014 to review the premarket approval application (PMA) for our Cologuard test and determined by a unanimous vote of 10 to zero that the test has demonstrated safety, effectiveness and a favorable risk benefit profile. The FDA approved our PMA on August 11, 2014.

We obtained a final national coverage decision and a preliminary reimbursement rate from the Centers for Medicare & Medicaid Services (CMS) for our Cologuard test on October 9, 2014. The CMS coverage decision was a necessary element in achieving material commercial success. We worked with CMS to coordinate the CMS coverage review with the FDA pre-market approval through a parallel review process. This program provided a pathway to our CMS national coverage determination shortly after our FDA approval.

CMS also announced on October 9, 2014 its preliminary recommendation for its reimbursement rate for our Cologuard test, but final fee schedule determinations will be made by CMS after a thirty-day public comment period, and there can be no assurance when final determinations will be published or that the final fee schedule will be consistent with the preliminary determination. With over 50% of our target patient population being covered by Medicare, receipt of our positive coverage decision from CMS should help speed adoption of our test. A favorable CMS outcome is also critical to securing positive coverage decisions from major national and regional managed care organizations, insurance carriers, and self-insured employer groups.

We also believe that to achieve commercial success it will be necessary to secure favorable coverage and reimbursement from commercial payors. We believe that third-party payors' reimbursement of our Cologuard test will depend on a number of factors, including payors' determination that it is: sensitive for colorectal cancer, not experimental or investigational; approved by major guidelines organizations; reliable, safe and effective; medically necessary; appropriate for the specific patient; and cost-effective.

We continue to develop and execute our strategy for the commercialization of our Cologuard test. There are two elements to our targeting strategy for early adoption of Cologuard. First, we are focused on large healthcare systems and groups. These networks employ a high percentage of the physicians in the United States and they typically have strong screening programs. Second, we plan to focus on primary care physicians who prescribe a high volume of FOBT and FIT tests since this physician group has displayed a partiality for stool based screening methods.

We have generated limited operating revenues since inception and, as of September 30, 2014, we had an accumulated deficit of approximately $388.4 million. We expect to continue to incur losses for the next several years, and it is possible we may never achieve profitability.

23 -------------------------------------------------------------------------------- Table of Contents 2014 Priorities Our top priorities for 2014 included obtaining FDA approval of our PMA and securing a favorable national coverage decision from CMS for our Cologuard test.

The FDA approved our PMA in August of 2014 and CMS provided a national coverage decision in October of 2014. Another 2014 priority is to begin to secure favorable coverage and reimbursement from commercial payors.

In 2014 we also plan to continue implementing our commercialization plan, including building our manufacturing capacity, obtaining CLIA certification for our processing lab, integrating our IT infrastructure for ordering, processing, and billing, and deploying our sales and marketing teams. In July 2014 we successfully completed the FDA inspection of our processing lab without any findings or observations.

We also have identified a new opportunity for our sDNA colorectal cancer screening technology focused on the inflammatory bowel disease (IBD) patient population. We initiated an IBD clinical trial in the first quarter 2013 that will focus on this specific patient group, and plan on enrolling around 300 IBD patients into the trial. Furthermore, we will work on developing enhancements to our Cologuard test and identifying and conducting research on other potential pipeline products targeting other cancers, such as esophageal and pancreatic cancer.

Financial Overview Revenue. Our license fee revenue is comprised of the amortization of up-front license fees for the licensing of certain patent rights to Genzyme. We expect that license fee revenue for 2014 will be less than amounts recorded in 2013 due to the amortization of deferred revenue related to the Genzyme transaction ending in January 2014. Our laboratory service revenues will be generated primarily by the Cologuard test. Cologuard became available upon FDA approval on August 11, 2014 and no revenue recognition criteria have been met for tests performed as of September 30, 2014.

Our Cost Structure. Our selling, general and administrative expenses consist primarily of non-research personnel salaries, office expenses, professional fees, sales and marketing expenses incurred in support of our commercialization efforts and non-cash stock-based compensation.

Cost of sales includes costs related to inventory production and usage and the cost of laboratory services to process tests and provide results to physicians.

Gross margin as a percentage of laboratory service revenue is also affected by our current revenue recognition policy, which may result in costs being incurred in one period that relate to revenues recognized in a later period.

We expect that gross margin for our laboratory services will continue to fluctuate and be affected by the adoption rates of the Cologuard test, our revenue recognition policy, the levels of reimbursement, and payment patterns of third-party payors and patients.

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 United States (GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, tax positions and stock-based compensation. 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.

24 -------------------------------------------------------------------------------- Table of Contents While our significant accounting policies are more fully described in Note 2 of our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, we believe that the following accounting policies and judgments are most critical to aid in fully understanding and evaluating our reported financial results.

Revenue Recognition.

Laboratory service revenue. Our revenues will be generated primarily by the Cologuard test. Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. We assess whether the fee is fixed or determinable based on the nature of the fee charged for the laboratory services delivered and whether there are existing contractual arrangements with customers, third-party commercial payors (insurance carriers and health plans) or coverage of the test by CMS. When evaluating collectability, we consider factors such as collection experience for the healthcare industry, the financial standing of customers or third-party commercial payors, and whether we have sufficient collection history to reliably estimate a payor's individual payment patterns.

A significant portion of laboratory service revenues earned by us will initially be recognized on a cash basis because the above criteria will not have been met at the time the test results are delivered. We generally bill third-party payors upon generation and delivery of a test result to the ordering physician following completion of a test. As such, we take assignment of benefits and risk of collection with the third-party payor. Patients may have out-of-pocket costs for amounts not covered by their insurance carrier and we bill the patient directly for these amounts in the form of co-pays and deductibles in accordance with their insurance carrier and health plans. Some third-party payors may not cover the Cologuard test as ordered by the physician under their reimbursement policies. Consequently, we pursue reimbursement on a case-by-case basis directly from the patient.

For laboratory services performed, where the collectability is not reasonably assured, we will continue to recognize revenues upon cash collection until it can reliably estimate the amount that would be ultimately collected for the Cologuard test. In order to begin to record revenue on an accrual basis in these scenarios, we expect to use at least several months of payment history, review the number of tests paid against the number of tests billed, and consider the payor's outstanding balance for unpaid tests to determine whether payments are being made for a consistently high percentage of tests billed and at appropriate amounts given the contracted or historical payment amount. Our Cologuard test became available upon FDA approval on August 11, 2014 and no revenue recognition criteria have been met for tests performed as of September 30, 2014. The national coverage decision was released by CMS on October 9, 2014.

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

As more fully described in our 2013 Form 10-K, in connection with our January 2009 strategic transaction with Genzyme Corporation, , we deferred the initial $16.65 million in cash received at closing and amortized that up-front payment on a straight-line basis into revenue over the initial five-year collaboration period which ended in January 2014. In addition, in 2010 we received holdback amounts of $1.85 million, which were deferred at the time of receipt and were amortized on a straight-line basis into revenue over the then remaining term of the collaboration period.

In addition, we deferred a $1.53 million premium related to common stock purchased by Genzyme and amortized that amount on a straight-line basis into revenue over the initial five-year collaboration period which ended in January 2014.

We did not recognize revenue in connection with the amortization of the up-front payments from Genzyme during the three months ended September 30, 2014. We recognized approximately $1.0 million in license fee revenue in connection with the amortization of the up-front payments from Genzyme during the three months ended September 30, 2013. We recognized approximately $0.3 million and $3.1 million in license fee revenue in connection with the amortization of up-front payments from Genzyme during each of the nine months ended September 30, 2014 and September 30, 2013, respectively.

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

Direct and indirect manufacturing costs incurred during process validation and for other research and development activities, which are not permitted to be sold, have been expensed to research and development. Raw material inventory that was purchased in prior periods, and expensed to research and development, may still be on hand and used toward the production of commercial Cologuard, provided it has an appropriate remaining shelf life.

In connection with the launch of Cologuard, we have invested in its manufacturing operations to support future demand for Cologuard. Because of this investment in the future, we are not currently operating at normal capacity.

Charges related to excess capacity are included as current period charges to cost of sales, and are not capitalized into inventory.

Stock-Based Compensation. In accordance with GAAP, all stock-based payments, including grants of employee stock options, restricted stock and restricted stock units and shares purchased under an employee stock purchase plan (ESPP) (if certain parameters are not met), are recognized in the financial statements based on their fair values. The following assumptions are used in determining fair value for stock options, restricted stock and ESPP shares: † Valuation and Recognition - The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The estimated fair value of employee stock options is recognized to expense using the straight-line method over the vesting period.

† Expected Term - The Company uses the simplified calculation of expected life, described by the SEC's Staff Accounting Bulletins 107 and 110, as the Company does not currently have sufficient historical exercise data on which to base an estimate of expected term. Using this method, the expected term is determined using the average of the vesting period and the contractual life of the stock options granted.

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

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

† Forfeitures - The Company records stock-based compensation expense only for those awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. The Company's forfeiture rate used in the nine months ended September 30, 2014 was 4.99%. The Company's forfeiture rate used in the nine months ended September 30, 2013 was 2.76%.

The fair value of each restricted stock award and restricted stock unit is determined on the date of grant using the closing stock price on that day. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions in Note 4 to our condensed financial statements.

26 -------------------------------------------------------------------------------- Table of Contents Results of Operations Laboratory service revenue. Our laboratory service revenues will be generated primarily by the Cologuard test. Our Cologuard test became available upon FDA approval on August 11, 2014 and no revenue recognition criteria have been met for tests performed as of September 30, 2014.

License fee revenue. Total license fee revenue was $0.0 million and $1.0 million for the three month periods ended September 30, 2014 and September 30, 2013, respectively. License fee revenue was $0.3 million and $3.1 for the nine month period ended September 30, 2014 and September 30, 2013. License fee revenue is composed of the amortization of up-front technology license fee payments associated with our collaboration, license and purchase agreement with Genzyme.

The previously unamortized Genzyme up-front payment and holdback amounts were amortized on a straight-line basis over the initial Genzyme collaboration period, which ended in January 2014 therefore leading to a decline in revenue when compared to the prior year.

Research and development expenses. Research and development expenses increased to $9.1 million for the three months ended September 30, 2014 from $7.0 million for the three months ended September 30, 2013. Research and development expenses increased to $23.7 million for the nine months ended September 30, 2014 from $21.0 million for the nine months ended September 30, 2013. This was primarily due to an increase in personnel expenses, lab expenses, professional fees, clinical trial expenses, license and royalty fees, and stock-based compensation expenses due to increased headcount. The increase to stock-based compensation is primarily attributable to our recognition of $1.3 million of expense related to the vesting of a 2009 warrant grant to a consultant to purchase 75,000 shares of common stock. The vesting was triggered by FDA approval of our Cologuard test.

Three Months Ended September 30, 2014 2013 Change Stock-based compensation $ 2.1 $ 0.7 $ 1.4 Personnel expenses 2.0 2.2 (0.2 ) Lab expenses 1.7 0.9 0.8 Clinical trial expenses 0.8 1.0 (0.2 ) Professional fees 0.7 0.3 0.4 Other research and development 0.6 1.4 (0.8 ) Research collaborations 0.6 0.4 0.2 License and royalty fees 0.6 0.1 0.5 Total research and development expenses $ 9.1 $ 7.0 $ 2.1 Nine Months Ended September 30, 2014 2013 Change Personnel expenses $ 7.1 $ 6.9 $ 0.2 Lab expenses 3.5 2.0 1.5 Stock-based compensation 3.5 1.8 1.7 Other research and development 3.3 3.4 (0.1 ) Clinical trial expenses 2.6 4.2 (1.6 ) Research collaborations 1.7 1.4 0.3 Professional fees 1.3 1.0 0.3 License and royalty fees 0.7 0.3 0.4 Total research and development expenses $ 23.7 $ 21.0 $ 2.7 27 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses. General and administrative expenses increased to $9.0 million for the three months ended September 30, 2014 compared to $3.7 million for the three months ended September 30, 2013. General and administrative expenses increased to $19.8 million for the nine months ended September 30, 2014 compared to $10.0 million for the nine months ended September 30, 2013. The increase in general and administrative expenses was primarily a result of increased legal and professional fees, increased personnel costs and stock-based compensation expense due to increased headcount, additional information technology costs, and other general and administrative expenses to support the overall growth of the Company.

Three Months Ended September 30, 2014 2013 Change Legal and professional fees $ 2.2 $ 0.9 $ 1.3 Other general and administrative 2.2 0.9 1.3 Personnel expenses 2.0 0.6 1.4 Stock-based compensation 1.2 1.0 0.2 Information technology costs 1.2 0.1 1.1 Facility costs 0.2 0.2 - Total general and administrative expenses $ 9.0 $ 3.7 $ 5.3 Nine Months Ended September 30, 2014 2013 Change Legal and professional fees $ 5.2 $ 3.1 $ 2.1 Personnel expenses 4.4 2.0 2.4 Stock-based compensation 3.8 2.0 1.8 Other general and administrative 3.6 2.2 1.4 Information technology costs 2.2 0.3 1.9 Facility costs 0.6 0.4 0.2 Total general and administrative expenses $ 19.8 $ 10.0 $ 9.8 28 -------------------------------------------------------------------------------- Table of Contents Sales and marketing expenses. Sales and marketing expenses increased to $13.2 million for the three months ended September 30, 2014, from $1.6 million for the three months ended September 30, 2013. Sales and marketing expenses increased to $23.8 million for the nine months ended September 30, 2014 from $6.7 million for the nine months ended September 30, 2013.The increase in sales and marketing expense was a result of hiring additional sales and marketing personnel and increasing our advertising and patient marketing efforts to prepare for the commercialization of our Cologuard test. These increases were partially offset by a decrease in stock-based compensation for the nine months ended September 30, 2014 as compared to the same period in 2013 when we incurred one-time severance costs related to the resignation of Laura Stoltenberg, the Company's former Chief Commercial Officer.

Three Months Ended September 30, 2014 2013 Change Professional fees $ 7.1 $ 0.7 $ 6.4 Personnel expenses 5.0 0.6 4.4 Other sales and marketing 0.8 0.2 0.6 Stock-based compensation 0.3 0.1 0.2Total sales and marketing expenses $ 13.2 $ 1.6 $ 11.6 29 -------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, 2014 2013 Change Professional fees $ 13.0 $ 1.9 $ 11.1 Personnel expenses 8.3 2.4 5.9 Other sales and marketing 1.6 0.7 0.9 Stock-based compensation 0.9 1.7 (0.8 )Total sales and marketing expenses $ 23.8 $ 6.7 $ 17.1 Cost of Sales. Cost of sales includes costs related to inventory production and usage and the cost of laboratory services to process tests and provide results to physicians. Gross margin as a percentage of laboratory service revenue is also affected by our current revenue recognition policy, which may result in costs being incurred in one period that relate to revenues recognized in a later period. Cost of sales was $0.9 million for the three and nine months ended September 30, 2014 compared to none in the comparable prior year periods. The increase in cost of sales is related to the production of our Cologuard test which obtained FDA approval during the third quarter of 2014. Cost of sales includes $0.6 million related to excess capacity and $0.3 million related to inventory production and lab services costs.

Investment income. Investment income increased to $160.0 thousand for the three months ended September 30, 2014 compared to $103.0 thousand for the three months ended September 30, 2013. Investment income increased to $392.0 thousand for the nine months ended September 30, 2014 compared to $220.0 thousand for the nine months ended September 30, 2013. This is primarily due to an increase in the average investment balance and a higher return on investment during the current year when compared to the same period in 2013.

30 -------------------------------------------------------------------------------- Table of Contents Interest expense. Interest expense decreased to $12.0 thousand for the three months ended September 30, 2014 from $16.0 thousand for the three months ended September 30, 2013. Interest expense decreased to $40.0 thousand for the nine months ended September 30, 2014 from $53.0 thousand for the nine months ended September 30, 2013. This decrease is primarily due to less interest expense recognized for our capital lease during the three and nine months ended September 30, 2014 when compared to the same period in 2013.

Liquidity and Capital Resources We have financed our operations since inception primarily through private and public offerings of our common stock. As of September 30, 2014, we had approximately $27.8 million in unrestricted cash and cash equivalents and approximately $183.3 million in marketable securities.

All of our investments in marketable securities are comprised 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, consistent with these two objectives. 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.

Net cash used in operating activities was $50.0 million for the nine months ended September 30, 2014 as compared to $30.0 million for the nine months ended September 30, 2013. The principal use of cash in operating activities for the nine months ended September 30, 2014 was to fund our net loss which increased from the nine months ended September 30, 2013 primarily due to increased sales and marketing efforts and general and administrative costs to prepare for the commercial launch of Cologuard and to support the overall growth of the Company.

Net cash used in investing activities was $73.2 million for the nine months ended September 30, 2014 as compared to $48.2 million of cash used in investing activities for the nine months ended September 30, 2013. The increase in cash used in investing activities for the nine months ended September 30, 2014 compared to the same period in 2013 was primarily the result of the timing of purchases and maturities of marketable securities. Excluding the impact of purchases and maturities of marketable securities, net cash used in investing activities consisted of purchases of property and equipment of $9.5 million for the nine months ended September 30, 2014 and $4.4 million for the same period in 2013. The increase in property and equipment purchases during the nine months ended September 30, 2014 was primarily the result of increased laboratory equipment purchases and software costs and the build out of our commercial lab operation as part of our commercialization efforts for Cologuard.

Net cash provided by financing activities was $138.2 million for the nine months ended September 30, 2014, as compared to net cash provided by financing activities of $74.5 million for the nine months ended September 30, 2013. The increase in cash provided by financing activities for the nine months ended September 30, 2014 was due to the receipt of $137.7 million of cash from our April 2014 common stock offering, the receipt of $0.4 million from stock option exercises, and the receipt of $0.3 million from proceeds in connection with the Company's employee stock purchase plan, slightly offset by capital lease payments of $0.3 million compared to the receipt of $73.3 million of cash from our June 2013 common stock offering, the receipt of $1.2 million from stock option exercises, and the receipt of $0.3 million from proceeds in connection with the Company's employee stock purchase plan, slightly offset by capital lease payments of $0.2 million for the same period in 2013.

We expect that cash and cash equivalents and marketable securities on hand at September 30, 2014, will be sufficient to fund our current operations for at least the next twelve months, based on current operating plans. However, since payments for our Cologuard test will be our only material revenue source and we have not yet begun to collect such payments and do not know the timing or amount of any such payments, it is possible that we may need to raise additional capital to fully fund our current strategic plan. If we are unable to obtain sufficient additional funds to enable us to fund our operations through the completion of such plan, our results of operations and financial condition would be materially adversely affected and we may be required to delay the implementation of our plan and otherwise scale back our operations. Even if we successfully raise sufficient funds to complete our plan, we cannot assure that our business will ever generate sufficient cash flow from operations to become profitable.

31 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. We are currently evaluating the impact of this amendment on our financial position and results of operations.

Off-Balance Sheet Arrangements As of September 30, 2014, we had no off-balance sheet arrangements.

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