2020
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Delaware | 02-0478229 | ||||
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| 5505 Endeavor Lane, Madison WI | 53719 | |||||
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code Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company Page September 30, December 31, 2017 2016 ASSETS Current Assets: Cash and cash equivalents $ 50,837 $ 48,921 Marketable securities 411,684 262,179 Accounts receivable, net 24,553 8,526 Inventory, net 18,064 6,833 Prepaid expenses and other current assets 8,551 7,114 Total current assets 513,689 333,573 Property and Equipment, at cost: Computer equipment and computer software 27,374 20,767 Laboratory equipment 20,352 14,749 Leasehold improvements 14,200 13,549 Assets under construction 20,868 6,711 Buildings 4,792 4,792 Furniture and fixtures 3,156 2,515 90,742 63,083 Less—Accumulated depreciation (35,036) (24,941) Net property and equipment 55,706 38,142 Other long-term assets, net 17,784 5,325 Total assets $ 587,179 $ 377,040 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 8,774 $ 710 Accrued liabilities 38,390 28,106 Debt, current portion 180 174 Other short-term liabilities 2,345 1,702 Total current liabilities 49,689 30,692 Long-term debt 4,511 4,633 Other long-term liabilities 5,611 5,734 Lease incentive obligation, less current portion 224 686 Total liabilities 60,035 41,745 Commitments and contingencies Stockholders’ Equity: Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—no shares at September 30, 2017 and December 31, 2016 — — Common stock, $0.01 par value Authorized—200,000,000 shares issued and outstanding—119,590,733 and 110,236,127 shares at September 30, 2017 and December 31, 2016 1,196 1,102 Additional paid-in capital 1,365,112 1,080,432 Accumulated other comprehensive loss (314) (418) Accumulated deficit (838,850) (745,821) Total stockholders’ equity 527,144 335,295 Total liabilities and stockholders’ equity $ 587,179 $ 377,040 EXACT SCIENCES CORPORATION Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 Laboratory service revenue $ 72,574 $ 28,115 $ 178,583 $ 64,135 Cost of sales 20,729 12,174 55,701 31,330 Gross margin 51,845 15,941 122,882 32,805 Operating expenses: Research and development 11,725 7,625 29,464 26,391 General and administrative 30,763 20,292 75,442 55,400 Sales and marketing 37,768 26,308 113,297 82,320 Total operating expenses 80,256 54,225 218,203 164,111 Loss from operations (28,411) (38,284) (95,321) (131,306) Other income (expense) Investment income 1,334 535 2,612 1,426 Interest expense (54) Total other income Net loss before tax (27,128) (37,803) (92,864) (130,041) Income tax benefit 231 — 231 — Net loss $ (26,897) $ (37,803) $ (92,633) $ (130,041) Net loss per share—basic and diluted $ (0.23) $ (0.36) $ (0.81) $ (1.30) Weighted average common shares outstanding—basic and diluted 119,215 104,807 114,246 100,006 EXACT SCIENCES CORPORATION Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 Net loss $ (26,897) $ (37,803) $ (92,633) $ (130,041) Other comprehensive loss, net of tax: Unrealized gain (loss) on available-for-sale investments 49 (145) 7 410 Foreign currency translation gain (loss) 16 (25) 97 (164) Comprehensive loss $ (26,832) $ (37,973) $ (92,529) $ (129,795) EXACT SCIENCES CORPORATION Nine Months Ended September 30, 2017 2016 Cash flows from operating activities: Net loss $ (92,633) $ (130,041) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of fixed assets 10,507 8,237 Loss on disposal of property and equipment 301 101 Deferred tax benefit (231) — Stock-based compensation 23,002 16,773 Amortization of other liabilities (1,199) (713) Amortization of deferred financing costs 40 40 Amortization of premium on short-term investments 56 412 Amortization of intangible assets 645 150 Changes in assets and liabilities, net of effects of acquisition: Accounts receivable, net (15,663) (2,930) Inventory, net (11,231) (989) Prepaid expenses and other current assets (1,391) 1,702 Accounts payable 8,022 (973) Accrued liabilities 9,306 5,453 Other short-term liabilities (29) — Lease incentive obligation (462) (159) Net cash used in operating activities (70,960) (102,937) Cash flows from investing activities: Purchases of marketable securities (345,039) (151,456) Maturities of marketable securities 195,485 142,813 Purchases of property and equipment (24,442) (12,166) Business acquisition, net of cash acquired (2,996) — Internally developed software (25) — Purchased intangible assets (8,442) — Net cash used in investing activities (185,459) (20,809) Cash flows from financing activities: Proceeds from exercise of common stock options 3,350 1,049 Proceeds from sale of common stock, net of issuance costs 253,389 144,247 Payments on mortgage payable (130) (124) Proceeds in connection with the Company's employee stock purchase plan 1,629 1,048 Net cash provided by financing activities 258,238 146,220 Effects of exchange rate changes on cash and cash equivalents 97 (164) Net increase in cash and cash equivalents 1,916 22,310 Cash and cash equivalents, beginning of period 48,921 41,135 Cash and cash equivalents, end of period $ 50,837 $ 63,445 Supplemental disclosure of non-cash investing and financing activities: Property and equipment acquired but not paid $ 3,930 $ 549 Unrealized gain on available-for-sale investments $ 7 $ 410 Issuance of 158,717 and 341,507 shares of common stock to fund the Company’s 401(k) matching contribution for 2016 and 2015, respectively $ 3,008 $ 2,151 Interest paid $ 151 $ 157 EXACT SCIENCES CORPORATION SIGNIFICANT ACCOUNTING POLICIES cancer, with the goal of bringing new innovative cancer tests to patients throughout the world. and Principles of Consolidation Use of Estimates These estimates include revenue recognition, valuation of convertible notes, 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 2019 Form 10-K. Marketable Securities September 30, 2017 Gains in Accumulated Losses in Accumulated Other Comprehensive Other Comprehensive Estimated Fair (In thousands) Amortized Cost Income Income Value Corporate bonds $ 213,058 $ 27 $ (80) $ 213,005 Asset backed securities 101,167 2 (56) 101,113 U.S. government agency securities 64,972 — (103) 64,869 Commercial paper 20,894 2 (1) 20,895 Certificates of deposit 11,800 2 — 11,802 Total available-for-sale securities $ 411,891 $ 33 $ (240) $ 411,684 December 31, 2016 Gains in Accumulated Losses in Accumulated Other Comprehensive Other Comprehensive Estimated Fair (In thousands) Amortized Cost Income Income Value Corporate bonds $ 137,013 $ 17 $ (93) $ 136,937 Asset backed securities 55,667 3 (30) 55,640 U.S. government agency securities 49,591 3 (120) 49,474 Commercial paper 19,069 8 (1) 19,076 Certificates of deposit 1,053 — (1) 1,052 Total available-for-sale securities $ 262,393 $ 31 $ (245) $ 262,179 Accumulated Cumulative Unrealized Other Translation Gain (Loss) Comprehensive (In thousands) Adjustment on Securities Income (Loss) Balance at December 31, 2016 $ (204) $ (214) $ (418) Other comprehensive loss before reclassifications 97 (3) 94 Amounts reclassified from accumulated other comprehensive loss — 10 10 Net current period change in accumulated other comprehensive loss 97 7 104 Balance at September 30, 2017 $ (107) $ (207) $ (314) Accumulated Cumulative Unrealized Other Translation Gain (Loss) Comprehensive (In thousands) Adjustment on Securities Income (Loss) Balance at December 31, 2015 $ 11 $ (444) $ (433) Other comprehensive (loss) income before reclassifications (164) 346 182 Amounts reclassified from accumulated other comprehensive loss — 64 64 Net current period change in accumulated other comprehensive (loss) income (164) 410 246 Balance at September 30, 2016 $ (153) $ (34) $ (187) Affected Line Item in the Nine Months Ended September 30, Details about AOCI Components (In thousands) Statement of Operations 2017 2016 Change in value of available-for-sale investments Sales and maturities of available-for-sale investments Investment income $ 10 $ 64 Total reclassifications $ 10 $ 64 Property, Software (In thousands) 2017 $ 335 2018 1,338 2019 1,338 2020 1,338 2021 1,338 Thereafter 3,680 $ 9,367 (In thousands) 2017 $ 30 2018 118 2019 118 2020 118 2021 118 Thereafter 449 $ 951 September 30, (In thousands) 2017 2016 Shares issuable upon exercise of stock options 4,042 5,080 Shares issuable upon the release of restricted stock awards 6,164 5,989 10,206 11,069 Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2017 2016 2017 2016 Revenue recognized on an accrual basis $ 72,574 $ 24,510 $ 174,074 $ 57,592 Revenue recognized when cash is received — 3,605 4,509 6,543 Total $ 72,574 $ 28,115 $ 178,583 $ 64,135 September 30, December 31, (In thousands) 2017 2016 Raw materials $ 7,033 $ 2,408 Semi-finished and finished goods 11,031 4,425 Total inventory $ 18,064 $ 6,833 Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 Option Plan Shares Risk-free interest rates 2.06% (1) 2.06% - 2.13% 1.48% - 1.69% Expected term (in years) 6.56 (1) 6.56 - 6.59 6.25 - 6.74 Expected volatility 62.5% (1) 62.5% - 62.9% 58.9% - 59.4% Dividend yield 0% (1) 0% 0% Weighted average fair value per share of options granted during the period $ 27.03 (1) $ 25.18 $ 3.17 Market Measure-Based Shares Risk-free interest rates (2) 0.76% (2) 0.76% - 0.91% Expected term (in years) (2) 2.43 (2) 2.43 - 2.84 Expected volatility (2) 79.6% (2) 68.3% - 79.6% Dividend yield (2) 0% (2) 0% Weighted average fair value per share of stock purchase rights granted during the period (2) $ 13.42 (2) $ 3.77 ESPP Shares Risk-free interest rates (3) (3) 0.98% - 1.28% 0.41% - 0.8% Expected term (in years) (3) (3) 0.5 - 2.0 0.5 - 2.0 Expected volatility (3) (3) 66.4% - 85.5% 70.1% - 92.7% Dividend yield (3) (3) 0% 0% Weighted average fair value per share of stock purchase rights granted during the period (3) (3) $ 13.05 $ 3.08 Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Options Shares Price Term (Years) Value(1) (Aggregate intrinsic value in thousands) Outstanding, January 1, 2017 3,505,481 $ 7.00 5.5 Granted 942,997 21.68 Exercised (382,967) 8.75 Forfeited (23,879) 14.19 Outstanding, September 30, 2017 4,041,632 $ 10.22 5.9 $ 149,127 Exercisable, September 30, 2017 2,281,645 $ 5.81 3.6 $ 94,250 Weighted Restricted Average Grant Shares Date Fair Value Outstanding, January 1, 2017 5,601,316 $ 9.19 Granted 1,946,736 31.81 Released (1,075,538) 14.14 Forfeited (308,471) 18.60 Outstanding, September 30, 2017 6,164,043 $ 15.16 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. The following table presents the Company’s fair value measurements as of September 30, Fair Value Measurement at September 30, 2017 Using: Quoted Prices Significant in Active Other Significant Markets for Observable Unobservable Fair Value at Identical Assets Inputs Inputs (In thousands) September 30, 2017 (Level 1) (Level 2) (Level 3) Cash and cash equivalents Cash and money market $ 30,837 $ 30,837 $ — $ — U.S. government agency securities 20,000 — 20,000 — Available-for-sale Marketable securities Corporate bonds 213,005 — 213,005 — Asset backed securities 101,113 — 101,113 — U.S. government agency securities 64,869 — 64,869 — Commercial paper 20,895 — 20,895 — Certificates of deposit 11,802 — 11,802 — Total $ 462,521 $ 30,837 $ 431,684 $ — Fair Value Measurement at December 31, 2016 Using: Quoted Prices Significant in Active Other Significant Markets for Observable Unobservable Fair Value at Identical Assets Inputs Inputs (In thousands) December 31, 2016 (Level 1) (Level 2) (Level 3) Cash and cash equivalents Cash and money market $ 48,921 $ 48,921 $ — $ — Available-for-sale Marketable securities Corporate bonds 136,937 — 136,937 — Asset backed securities 55,640 — 55,640 — U.S. government agency securities 49,474 — 49,474 — Commercial paper 19,076 — 19,076 — Certificates of deposit 1,052 — 1,052 — Total $ 311,100 $ 48,921 $ 262,179 $ — September 30, 2017 Less than 12 months 12 months or greater Total (In thousands) Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss Fair Value Gross Unrealized Loss Marketable securities Corporate bonds $ 131,782 $ (70) $ 14,717 $ (10) $ 146,499 $ (80) Asset backed securities 93,585 (56) — — 93,585 (56) Commercial paper 5,458 (1) — — 5,458 (1) U.S. government agency securities 64,869 (103) — — 64,869 (103) Total $ 295,694 $ (230) $ 14,717 $ (10) $ 310,411 $ (240) The fair value of each option is based on the assumptions in the following Due one year or less Due after one year through four years (In thousands) Cost Fair Value Cost Fair Value Marketable securities Corporate bonds $ 138,989 $ 138,964 $ 74,069 $ 74,041 U.S. government agency securities 50,016 49,928 14,956 14,941 Commercial paper 20,894 20,895 — — Certificates of deposit 9,801 9,802 1,999 2,000 Asset backed securities 17,617 17,612 83,550 83,501 Total $ 237,317 $ 237,201 $ 174,574 $ 174,483 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 seven-year period. 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. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Statements Our Cologuard Test colorectal cancer. It is widely accepted that colorectal cancer is among the most preventable, yet least prevented cancers. other samples. In development assistance through January 2025. We are of our sites to help sustain operations and ensure continuity of services for patients during this unprecedented time. Despite the COVID-19 pandemic, many people still need to be screened for colorectal cancer, and treated for breast, colon, and prostate cancers. Our lab facilities presently remain operational so that we can continue to process results of our Cologuard, Oncotype DX and COVID-19 tests. goods sold expenses consistent with the reduction in revenue. These actions have contributed to significant cost savings in 2020 during the nine months ended September 30, 2020. Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2017 2016 2017 2016 Revenue recognized on an accrual basis $ 72,574 $ 24,510 $ 174,074 $ 57,592 Revenue recognized when cash is received — 3,605 4,509 6,543 Total $ 72,574 $ 28,115 $ 178,583 $ 64,135 Results of Operations Our healthcare providers. Three Months Ended September 30, (In millions) 2017 2016 Change Production costs $ 15.0 $ 8.3 $ 6.7 Personnel expenses 3.0 1.7 1.3 Facility and support expenses 2.2 1.9 0.3 Stock-based compensation 0.5 0.3 0.2 Total cost of sales expenses $ 20.7 $ 12.2 $ 8.5 Nine Months Ended September 30, (In millions) 2017 2016 Change Production costs $ 40.5 $ 20.2 $ 20.3 Personnel expenses 8.1 5.0 3.1 Facility and support expenses 5.7 5.3 0.4 Stock-based compensation 1.2 0.8 0.4 Other cost of sales 0.2 — 0.2 Total cost of sales expenses $ 55.7 $ 31.3 $ 24.4 Three Months Ended September 30, (In millions) 2017 2016 Change Direct research and development expenses $ 4.7 $ 3.0 $ 1.7 Personnel expenses 3.8 2.6 1.2 Stock-based compensation 2.1 1.0 1.1 Other research and development 0.6 0.5 0.1 Legal and professional fees 0.5 0.5 — Total research and development expenses $ 11.7 $ 7.6 $ 4.1 Nine Months Ended September 30, (In millions) 2017 2016 Change Direct research and development expenses $ 11.8 $ 10.8 $ 1.0 Personnel expenses 10.1 8.8 1.3 Stock-based compensation 4.4 3.0 1.4 Other research and development 1.7 2.2 (0.5) Legal and professional fees 1.5 1.6 (0.1) Total research and development expenses $ 29.5 $ 26.4 $ 3.1 General and administrative expenses. General and administrative expenses increased to Three Months Ended September 30, (In millions) 2017 2016 Change Personnel expenses $ 11.5 $ 7.4 $ 4.1 Stock-based compensation 6.4 3.9 2.5 Facility and support expenses 5.7 4.1 1.6 Professional and legal fees 5.3 3.4 1.9 Other general and administrative 1.9 1.5 0.4 Total general and administrative expenses $ 30.8 $ 20.3 $ 10.5 Nine Months Ended September 30, (In millions) 2017 2016 Change Personnel expenses $ 28.3 $ 21.4 $ 6.9 Professional and legal fees 15.8 8.9 6.9 Facility and support expenses 13.4 11.7 1.7 Stock-based compensation 12.8 10.0 2.8 Other general and administrative 5.1 3.4 1.7 Total general and administrative expenses $ 75.4 $ 55.4 $ 20.0 Three Months Ended September 30, (In millions) 2017 2016 Change Personnel expenses $ 19.2 $ 15.0 $ 4.2 Direct marketing costs and professional fees 16.5 10.0 6.5 Stock-based compensation 1.8 1.0 0.8 Other sales and marketing 0.3 0.3 — Total sales and marketing expenses $ 37.8 $ 26.3 $ 11.5 Nine Months Ended September 30, (In millions) 2017 2016 Change Direct marketing costs and professional fees $ 56.4 $ 35.6 $ 20.8 Personnel expenses 51.3 42.9 8.4 Stock-based compensation 4.6 3.0 1.6 Other sales and marketing 1.0 0.8 0.2 Total sales and marketing expenses $ 113.3 $ 82.3 $ 31.0 income tax benefit is primarily due to future limitations on and expiration of certain Federal and State deferred tax assets. Resources discretionary operating expenses due to cost saving measures as a result of the COVID-19 pandemic. We expect that cash and cash equivalents and marketable securities on hand at September 30, Estimates the determination of the debt component, and the associated non-cash interest expense. Pronouncements. Arrangements 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. move to dismiss the complaint. 10-K and in subsequently filed Quarterly Reports on Form 10-Q. Information Exhibits Exhibit Exhibit Description Certification Pursuant to Rule 13(a)-14(a) or Rule 15d-14(a) of Securities Exchange Act of 1934 Certification Pursuant to Rule 13(a)-14(a) or Rule 15d-14(a) of Securities Exchange Act of 1934 EXACT SCIENCES CORPORATION Date: October By: /s/ Kevin T. Conroy Kevin T. Conroy Date: October By: /s/ Jeffrey T. Elliott Jeffrey T. Elliott284-5700 535-8815 (Registrant’s telephone number, including area code)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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐Large accelerated filer ☒☒ ☐ ☐☐ ☐ (Do not check if a smaller reporting company) ☐☐ 27, 2017,26, 2020, the registrant had 119,730,401150,424,035 shares of common stock outstanding.
NumberNumber 34567233636 373737373737383940 September 30,
2020December 31,
2019ASSETS Current Assets: Cash and cash equivalents $ 806,678 $ 177,254 Marketable securities 476,324 146,401 Accounts receivable, net 206,606 130,667 Inventory 80,427 61,724 Prepaid expenses and other current assets 36,592 40,913 Total current assets 1,606,627 556,959 Long-term Assets: Property, plant and equipment, net 456,455 455,325 Operating lease right-of-use assets 129,837 126,444 Goodwill 1,237,672 1,203,197 Intangible assets, net 871,660 1,143,550 Other long-term assets, net 52,119 20,293 Total assets $ 4,354,370 $ 3,505,768 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 26,061 $ 25,973 Accrued liabilities 182,945 193,329 Operating lease liabilities, current portion 10,746 7,891 Debt, current portion 1,319 834 Other current liabilities 31,761 8,467 Total current liabilities 252,832 236,494 Long-term Liabilities: Convertible notes, net 1,554,967 803,605 Long-term debt, less current portion 22,643 24,032 Other long-term liabilities 62,821 34,911 Operating lease liabilities, less current portion 124,007 118,665 Total liabilities 2,017,270 1,217,707 Commitments and contingencies Stockholders’ Equity: Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—0 shares at September 30, 2020 and December 31, 2019 0 0 Common stock, $0.01 par value Authorized—400,000,000 shares issued and outstanding—150,373,486 and 147,625,696 shares at September 30, 2020 and December 31, 2019 1,505 1,477 Additional paid-in capital 3,865,990 3,406,440 Accumulated other comprehensive income (loss) 1,084 (100) Accumulated deficit (1,531,479) (1,119,756) Total stockholders’ equity 2,337,100 2,288,061 Total liabilities and stockholders’ equity $ 4,354,370 $ 3,505,768 (51) (155) (161) 1,283 481 2,457 1,265 Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue $ 408,363 $ 218,805 $ 1,025,052 $ 580,718 Operating expenses Cost of sales (exclusive of amortization of acquired intangible assets) 95,061 52,335 254,559 146,301 Research and development 31,471 34,714 107,653 96,471 Sales and marketing 136,481 86,196 423,092 265,325 General and administrative 115,589 80,538 336,265 208,067 Amortization of acquired intangible assets 23,430 748 70,199 2,256 Intangible asset impairment charge 209,666 0 209,666 0 Total operating expenses 611,698 254,531 1,401,434 718,420 Other operating income 0 0 23,665 0 Loss from operations (203,335) (35,726) (352,717) (137,702) Other income (expense) Investment income, net 2,523 9,093 5,532 23,417 Interest expense (23,582) (13,209) (71,647) (47,911) Total other income (expense) (21,059) (4,116) (66,115) (24,494) Net loss before tax (224,394) (39,842) (418,832) (162,196) Income tax benefit (expense) 4,510 (683) 7,109 230 Net loss $ (219,884) $ (40,525) $ (411,723) $ (161,966) Net loss per share—basic and diluted $ (1.46) $ (0.31) $ (2.76) $ (1.26) Weighted average common shares outstanding—basic and diluted 150,155 129,567 149,346 128,344 Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net loss $ (219,884) $ (40,525) $ (411,723) $ (161,966) Other comprehensive loss, before tax: Unrealized gain on available-for-sale investments (405) (2,697) 1,159 1,431 Foreign currency adjustment 0 0 25 0 Comprehensive loss, before tax (220,289) (43,222) (410,539) (160,535) Income tax expense related to items of other comprehensive loss 0 643 0 (341) Comprehensive loss, net of tax $ (220,289) $ (42,579) $ (410,539) $ (160,876) Common Stock Additional
Paid-In
CapitalOther
Comprehensive
Income (Loss)Accumulated
DeficitTotal
Stockholders’
Equity Number of
SharesBalance, January 1, 2020 147,625,696 $ 1,477 $ 3,406,440 $ (100) $ (1,119,756) $ 2,288,061 Equity component of convertible notes, net of tax and issuance costs — — 346,641 — — 346,641 Settlement of convertible notes, net of tax — — (64,199) — — (64,199) Exercise of common stock options 160,286 2 4,298 — — 4,300 Issuance of common stock to fund the Company’s 2019 401(k) match 136,559 1 12,006 — — 12,007 Compensation expense related to issuance of stock options and restricted stock awards 1,141,376 11 29,549 — — 29,560 Issuance of common stock for business combinations 382,947 4 28,593 — — 28,597 Net loss — — — — (105,697) (105,697) Accumulated other comprehensive loss — — — (1,617) — (1,617) Balance, March 31, 2020 149,446,864 $ 1,495 $ 3,763,328 $ (1,717) $ (1,225,453) $ 2,537,653 Exercise of common stock options 208,434 2 6,636 — — 6,638 Compensation expense related to issuance of stock options and restricted stock awards 157,579 2 40,037 — — 40,039 Purchase of employee stock purchase plan shares 167,921 2 9,797 — — 9,799 Net loss — — — — (86,142) (86,142) Accumulated other comprehensive income — — — 3,206 — 3,206 Balance, June 30, 2020 149,980,798 $ 1,501 $ 3,819,798 $ 1,489 $ (1,311,595) $ 2,511,193 Exercise of common stock options 140,145 1 4,469 — — 4,470 Compensation expense related to issuance of stock options and restricted stock awards 249,197 2 41,474 — — 41,476 Issuance of common stock for business combinations 3,346 1 249 — — 250 Net loss — — — — (219,884) (219,884) Accumulated other comprehensive loss — — — (405) — (405) Balance, September 30, 2020 150,373,486 $ 1,505 $ 3,865,990 $ 1,084 $ (1,531,479) $ 2,337,100 6 Common Stock Additional Paid-In Capital Other
Comprehensive
Income (Loss)Accumulated
DeficitTotal
Stockholders’
Equity Number of
SharesBalance, January 1, 2019 123,192,540 $ 1,232 $ 1,716,894 $ (1,422) $ (1,035,763) $ 680,941 Equity component of convertible notes, net of tax and issuance costs — — 268,390 — — 268,390 Shares issued to settle convertible notes 2,158,991 22 182,413 — — 182,435 Settlement of convertible notes — — (300,768) — — (300,768) Exercise of common stock options 235,278 2 3,648 — — 3,650 Issuance of common stock to fund the Company’s 2018 401(k) match 86,532 1 7,408 — — 7,409 Compensation expense related to issuance of stock options and restricted stock awards 3,410,481 35 16,131 — — 16,166 Net loss — — — — (82,939) (82,939) Accumulated other comprehensive income — — — 1,656 — 1,656 Balance, March 31, 2019 129,083,822 $ 1,292 $ 1,894,116 $ 234 $ (1,118,702) $ 776,940 Equity component of convertible notes, net of issuance costs — — (22) — — (22) Exercise of common stock options 78,793 1 1,347 — — 1,348 Compensation expense related to issuance of stock options and restricted stock awards 104,845 1 20,142 — — 20,143 Purchase of employee stock purchase plan shares 93,588 1 4,136 — — 4,137 Net loss — — — — (38,502) (38,502) Accumulated other comprehensive income — — — 1,488 — 1,488 Balance, June 30, 2019 129,361,048 $ 1,295 $ 1,919,719 $ 1,722 $ (1,157,204) $ 765,532 Settlement of convertible notes 26 — 1 — — 1 Exercise of common stock options 178,628 2 1,389 — — 1,391 Compensation expense related to issuance of stock options and restricted stock awards 278,180 2 24,346 — — 24,348 Purchase of employee stock purchase plan shares 3 — — — — 0 Stock issuance costs — — (409) — — (409) Net loss — — — — (40,525) (40,525) Accumulated other comprehensive loss — — — (2,054) — (2,054) Balance, September 30, 2019 129,817,885 $ 1,299 $ 1,945,046 $ (332) $ (1,197,729) $ 748,284 Nine Months Ended September 30, 2020 2019 Cash flows from operating activities: Net loss $ (411,723) $ (161,966) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 53,345 21,920 Loss on disposal of property, plant and equipment 930 880 Unrealized gain on equity investments (1,183) 0 Deferred tax benefit (7,976) (341) Stock-based compensation 111,075 60,657 Loss on settlement of convertible notes 7,954 10,558 Amortization of convertible note debt discount and issuance costs 55,222 30,778 Amortization of deferred financing costs and other liabilities (3,614) (2,421) Amortization of premium on short-term investments 1,040 (6,229) Amortization of acquired intangible assets 70,199 2,256 Intangible asset impairment charge 209,666 0 Non-cash lease expense 11,041 2,681 Changes in assets and liabilities: Accounts receivable, net (73,642) (36,871) Inventory, net (18,472) (14,525) Operating lease liabilities (6,135) (2,628) Accounts payable and accrued liabilities (7,608) 16,279 Other assets and liabilities 34,959 (7,382) Net cash provided by (used in) operating activities 25,078 (86,354) Cash flows from investing activities: Purchases of marketable securities (890,012) (604,129) Maturities and sales of marketable securities 559,907 1,449,330 Purchases of property, plant and equipment (47,782) (130,970) Business combination, net of cash acquired (6,658) 0 Investments in privately held companies (10,610) 0 Other investing activities (244) (530) Net cash provided by (used in) investing activities (395,399) 713,701 Cash flows from financing activities: Proceeds from issuance of convertible notes, net 1,125,547 729,477 Proceeds from exercise of common stock options 15,408 6,389 Proceeds in connection with the Company’s employee stock purchase plan 9,799 4,137 Payments on settlement of convertible notes (150,054) (493,356) Other financing activities (938) (90) Net cash provided by financing activities 999,762 246,557 Net increase in cash, cash equivalents and restricted cash 629,441 873,904 Cash, cash equivalents and restricted cash, beginning of period 177,528 160,430 Cash, cash equivalents and restricted cash, end of period $ 806,969 $ 1,034,334 Nine Months Ended September 30, 2020 2019 Supplemental disclosure of non-cash investing and financing activities Property, plant and equipment acquired but not paid $ 7,209 $ 16,933 Unrealized gain on available-for-sale investments, before tax $ 1,159 $ 1,431 Issuance of 136,559 and 86,535 shares of common stock to fund the Company’s 401(k) matching contribution for 2019 and 2018, respectively $ 12,007 $ 7,409 Issuance of 2,159,017 shares of common stock upon settlement of convertible notes $ 0 $ 182,435 Retirement of equity component of convertible notes settled $ (64,199) $ (300,768) Issuance of 386,293 shares for business combination $ 28,847 $ 0 Supplemental disclosure of cash flow information: Interest paid $ 9,239 $ 4,944 ORGANIZATION AND BASISSUMMARY OF PRESENTATIONOrganization(“Exact”(together with its subsidiaries, “Exact,” or the “Company”) was incorporated in February 1995. Exact is a molecularleading global cancer diagnostics company currently focused on the early detection and prevention ofcompany. It has developed some of the deadliest forms of cancer. The Company has developed an accurate, non-invasive, patient-friendlymost impactful brands in cancer screening test calledand diagnostics, including Cologuard® for the early detection of colorectal cancer and pre-cancer, andOncotype DX®. Exact is currently working on the development of additional tests for other types of cancer. Exact Sciences Laboratories, LLC, Exact Sciences Finance Corporation, CG Growth, LLC, Sampleminded, Inc., Exact Sciences Europe LTD, Beijing Exact Sciences Medical Technology Company Limited, 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, 20162019 included in the Company’s Annual Report on Form 10-K (the “2016“2019 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 financial statements contain all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentationstatement of its financial position, operating results and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2019 has been derived from audited financial statements, but does not contain all of the results of operations have been included.footnote disclosures from the 2019 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 20162019 Form 10-K. Management has evaluated subsequent events for disclosure or recognition in the accompanying financial statements up to the filing of this report.(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of ConsolidationThe accompanying condensed consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries, Exact Sciences Laboratories, LLC, Exact Sciences Finance Corporation, CG Growth, LLC, Sampleminded, LLC, Exact Sciences Europe LTD, Beijing Exact Sciences Medical Technology Company Limited, and variable interest entities. All significant intercompany transactions and balances have been eliminated in consolidation.References to “Exact”, “we”, “us”, “our”, or the “Company” refer to Exact Sciences Corporation and its wholly owned subsidiaries.ActualCritical 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.7Marketable equity securities and debtDebt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value. The unrealized gains and losses, net of tax, on the Company’s debt securities are reported in other comprehensive income. Marketable equity securities are measured at fair value withand the unrealized gains and losses, net of tax, reportedare recognized in other comprehensive loss.income (expense) in the condensed consolidated statements of operations. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity computed under the straight-line method. Such amortization is included in investment income.income, net. Realized gains and losses and declines in value judged to be other-than-temporaryas a result of credit losses on available-for-sale securities are included in the condensed consolidated statements of operations as investment income.income, net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in the condensed consolidated statements of operations as investment income.At September 30, 2017 and December 31, 2016, the Company’s investments were comprisedincome, net.provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives. Condensed Consolidated Financial Statements All of the Company’s investments are considered current. There were no realized losses for the nine months ended September 30, 2017 and 2016. Realized gains were $17,000 and $21,000 for the nine months ended September 30, 2017 and 2016, respectively.Wereview our investmentsevaluates its available-for-sale debt securities in unrealized loss positions for other-than-temporary impairments.to determine whether any impairment is a result of a credit loss or other factors. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, our intent notadverse conditions specifically related to sell the security, and whether itthe payment structure of the security.more likelyevaluated on a regular basis and adjusted when trends, significant events or other substantive evidence indicate that expected collections will be less than applicable accrual rates. At September 30, 2020 and December 31, 2019, the allowance for doubtful accounts recorded was not that we will havematerial to sell the security before recovery of its cost basis.Company’s condensed consolidated balance sheets. For the three and nine months ended September 30, 2017,2020 and 2019, there was an immaterial amount of bad debt expense written off against the allowance and charged to operating expense.investments were identifiedlonger meet quality specifications, or has a cost basis in excess of its estimated realizable value and records a charge to cost of sales for such inventory as appropriate.other-than-temporary declinesprobable future economic benefit are capitalized. Validation costs incurred for other research and development activities, which are not permitted to be sold, have been expensed to research and development in value.Available-for-sale securities at September 30, 2017the Company’s condensed consolidated statements of operations.8(In thousands) September 30,
2020December 31,
2019Raw materials $ 33,842 $ 24,958 Semi-finished and finished goods 46,585 36,766 Total inventory $ 80,427 $ 61,724 Available-for-sale securities at December 31, 2016 consisted of the following:Changes in Accumulated Other Comprehensive Income (Loss)The amounts recognized in accumulated other comprehensive income (loss) (“AOCI”) for the nine months ended September 30, 2017 were as follows:The amounts recognized in AOCI for the nine months ended September 30, 2016 were as follows:Amounts reclassified from AOCI for the nine months ended September 30, 2017Property, Plant and 2016 were as follows:9and EquipmentPropertyplant and equipment are stated at cost and depreciated using the straight-line method over the assets’ estimated useful lives. MaintenanceLand is stated at cost and does not depreciate. Additions and improvements are capitalized, including direct and indirect costs incurred to validate equipment and bring it to working conditions. Revalidation costs, including maintenance and repairs are expensed when incurred; additions and improvements are capitalized. The estimated useful lives of fixed assets are as follows:EstimatedAsset ClassificationUseful LifeLaboratory equipment3 - 5 yearsComputer equipment and computer software3 yearsLeasehold improvementsLesser of the remaining lease term or useful lifeBuilding ImprovementsLesser of the remaining building life or useful lifeFurniture and fixtures3 yearsBuildings30 yearsAt September 30, 2017, the Company had $20.9 million of assets under construction which consisted of $10.0 million related to machinery and equipment, $8.0 million related to buildings and leasehold improvements, $2.7 million related to computer equipment and computer software projects and $0.2 million related to furniture and fixtures. Depreciation will begin on these assets once they are placed into service. The Company expects to incur an additional $8.4 million to complete the machinery and equipment, $11.9 million to complete the building and leasehold improvements, and minimal costs to complete the computer equipment and computer software projects and furniture and fixtures. These projects are expected to be completed in 2017 and 2018. There were no impairment losses for the periods ended September 30, 2017 and December 31, 2016.Capitalization PolicySoftware development costsDevelopment Coststhree stages of development:3 stages: the preliminary project stage, the application development stage, and the post-implementation stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Costs incurred during the application development stage that meet the criteria for capitalization are capitalized and amortized, when the software is ready for its intended use, using the straight-line basis over the estimated useful life of the software.Patent Costssoftware, or the duration of the hosting agreement. which have historically consisted of related legal fees, are capitalized as incurred, only if the Company determines that there is some probable future economic benefit to be derived from the transaction. A capitalized patent is amortized over its estimated useful life, beginning when such patent is approved. Capitalized patent costs are expensed upon disapproval, upon a decision by the Company to no longer pursue the patent or when the related intellectual property is either sold or deemed to be no longer of value to the Company. The Company determined that all patent costs incurred during the three and nine months ended September 30, 20172020 and 2019 should be expensed and not capitalized as the future economic benefit to be derived from the transactionspatent costs incurred cannot be determined.Undertechnology licensebusiness combination that are not complete are capitalized and royalty agreement entered intoaccounted for as indefinite-lived intangible assets until completion or abandonment of the related R&D efforts. Upon successful completion of the project, the capitalized amount is amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. There are often major risks and uncertainties associated with MDxHealth (“MDx”), dated July 26, 2010 (as subsequently amended, the “License Agreement”), the Company wasIPR&D projects as we are required to pay MDx milestone-based royaltiesobtain regulatory approvals in order to be able to market the resulting products. Such approvals require completing clinical trials that demonstrate the products effectiveness. Consequently, the eventual realized value of the IPR&D project may vary from its fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods.salesan annual basis during the fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying amount of products or services covered bysuch assets may not be recoverable. Qualitative factors considered in this assessment include industry and market conditions, overall financial performance, and other relevant events and factors affecting the licensed intellectual property. OnceCompany's business. Based on the achievementqualitative assessment, if it is determined that the fair value of goodwill is more likely than not to be less than its carrying amount, the fair value of a milestone occurred or was considered probable,reporting unit will be calculated and compared with its carrying amount and an intangible asset and corresponding liability was reported in other long-term assets and accrued liabilities, respectively. The intangible asset is being amortized overimpairment charge will be recognized for the estimated ten-year useful life ofamount that the licensed intellectual property through 2024, and such amortization is reported in cost of sales. The liability was relieved oncecarrying value exceeds the milestone was achieved and payment was made. Payment for all remaining milestones under the License Agreement was made as part of the Royalty Buy-Out agreement outlined below.Effective April 25, 2017, the Company and MDx entered into a Royalty Buy-Out Agreement (“Royalty Buy-Out Agreement”), which terminated the License Agreement. Pursuant to the Royalty Buy-Out Agreement, the Company paid MDx a one-time fee of $8.0 million in exchange for an assignment of certain patents covered by the License Agreement and the elimination of all ongoing royalties and other payments by the Company to MDx under the License10
fair value.Agreement. Also included inImpairment of Long-Lived AssetsRoyalty Buy-Out Agreement is a mutual releasefair value of liabilities,long-lived assets, which includes all amounts previously accrued under the License Agreement. Concurrently with entering into the Royalty Buy-Out Agreement, the Company entered into a Patent Purchase Agreement (“Patent Purchase Agreement”) with MDx under which it paid MDx an additional $7.0 million in exchange for the assignment of certain other patent rights that were not covered by the License Agreement. The total $15.0 million paid by the Company pursuant to the Royalty Buy-Out Agreementinclude property, plant and Patent Purchase Agreement, net of liabilities relieved of $6.6 million, was recorded as an intangible asset and is being amortized over the estimated ten-year useful life of the licensed intellectual property through 2024, and such amortization is reported in cost of sales. The $6.6 million of liabilities relieved were related to historical milestones and accrued royalties under the License Agreement.As of September 30, 2017, an intangible asset of $9.4 million related to historical milestone payments made under the License Agreement andequipment, finite-lived intangible assets, acquired as part of the Royalty Buy-Out Agreement and Patent Purchase Agreement is reportedinvestments in other long-term assets. As of December 31, 2016, an intangible asset of $1.6 million and a liability of $1.3 million related to historical milestone payments made under the License Agreement, were reported in other long-term assets and accrued liabilities, respectively. Amortization expense was $0.3 million and $0.1 million for the three months ended September 30, 2017 and September 30, 2016, respectively. Amortization expense was $0.6 million and $0.2 million for the nine months ended September 30, 2017 and September 30, 2016, respectively. The estimated remaining useful life of the intangible asset is seven years. The table below represents future amortization expense as of September 30, 2017:The Company reviews long-lived assets and certain identifiable intangiblesprivately held companies, for impairment whenever events or changes in circumstances indicate that the carrying amountamounts of an assetthe assets may not be fully recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no impairment lossesRefer to Note 5 for the periods ended September 30, 2017 and December 31, 2016.Goodwill and Other Intangible AssetsGoodwillAs more fully described in Note 11, during the third quarter of 2017, the Company recognized goodwill of $2.0 million from the acquisition of Sampleminded, Inc., which was completed during the period. The Company will evaluate goodwill impairment on an annual basis or more frequently should an event or change in circumstance occur that indicate the carrying amount is in excessdiscussion of the fair value.Other Intangible AssetsAs a result of the Sampleminded acquisition, the Companyimpairment charges recorded an intangible asset of $1.0 million which was comprised of developed technology acquired of $0.9 million, customer relationships of $0.1 million, and non-compete agreements of $32,000. The intangible assets acquired are being amortized over the remaining useful life which was determined to be eight years for developed technology acquired, thirteen years for customer relationships, and five years for non-compete agreements. As of September 30, 2017, the Company recorded $20,000 in amortization expense.11The table below represents estimated future amortization expense of these intangible assets as of September 30, 2017:The Company reviews these identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.Net Loss Per ShareBasic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period. Basic and diluted net loss per share are the same because all outstanding common stock equivalents have been excluded, as they are anti-dilutive due to the Company’s losses.The following potentially issuable common shares were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect due to net losses for each period:Revenue RecognitionLaboratory Service Revenue.The Company’s laboratory service revenues are generated by performing screening services using our Cologuard test, and the service is completed upon delivery of a test result to an ordering physician. The Company recognizes revenue in accordance with the provisions of ASC 954-605, Health Care Entities - Revenue Recognition. The Company recognizes revenue on an accrual basis, net of contractual and other adjustments, when amounts that will ultimately be collected can be reasonably estimated. Contractual and other adjustments represent the difference between the list price (the billing rate) and the estimated aggregate reimbursement rate from payers and patients. Upon ultimate collection, the aggregate amount received from payers and patients where reimbursement was estimated is compared to previous collection estimates and, if necessary, the contractual allowance is adjusted.The estimates of amounts that will ultimately be collected require significant judgment by management, and the Company’s judgments will continue to evolve as it gains payment experience with payers and patients. Historically, in the absence of the ability to reasonably estimate the amount that will ultimately be collected for services, revenue was recognized upon cash receipt. Effective during the first quarter of 2017, the Company determined that it had the ability to reasonably estimate the amount that will ultimately be collected from all payers, including the impact of patient cost-share collections. Accordingly, the Company now recognizes revenue on an accrual basis for all billed claims.12The components of laboratory service revenue, as recognized upon accrual or cash receipt, for the three and nine months ended September 30, 2017 and 2016 were as follows:InventoryInventory is stated at the lower of cost or market value (net realizable value). The Company determines the cost of inventory using the first-in, first out method (“FIFO”). The Company estimates the recoverability of inventory by reference to internal estimates of future demands and product life cycles, including expiration. The Company periodically analyzes its inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated net realizable value, and records a charge to cost of sales for such inventory, as appropriate. In addition, the Company's products are subject to strict quality control and monitoring which the Company performs throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or become obsolete due to expiration, the Company records a charge to cost of sales to write down such unmarketable inventory to its estimated net realizable value.Direct and indirect manufacturing costs incurred during process validation and for other research and development activities, which are not permitted to be sold, have been expensed to research and development. Inventory consists of the following:Foreign Currency TranslationFor the Company’s international subsidiaries, the local currency is the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at the period-end exchange rate or historical rates, as appropriate. Condensed consolidated statements of operations are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the condensed consolidated balance sheet as a component of accumulated other comprehensive loss in total Exact Sciences Corporation’s stockholders’ equity. Transaction gains and losses are included in the condensed consolidated statement of operations.ReclassificationsCertain prior period amounts have been reclassified to conform to the current period presentation in the condensed consolidated financial statements and accompanying notes to the condensed consolidated financial statements.13(3) MAYO LICENSE AGREEMENTOverviewAs more fully described in the 2016 Form 10-K, in June 2009 the Company entered into a patent license agreement with MAYO Foundation for Medical Education and Research (“MAYO”). The Company’s license agreement with MAYO was amended and restated in February 2015 and further amended in January 2016. Under the license agreement, MAYO granted the Company an exclusive, worldwide license to certain MAYO patents and patent applications, as well as a non-exclusive, worldwide license with regard to certain MAYO know-how. As expanded by the January 2016 amendment to the license agreement, the scope of the license includes any screening, surveillance or diagnostic tests or tools for use in connection with any type of cancers, pre-cancers, diseases or conditions.Pursuant to the Company’s agreement with MAYO, the Company is required to pay MAYO a low-single-digit royalty on the Company’s net sales of products using the licensed MAYO intellectual property, with minimum annual royalty fees of $25,000 each year through 2033, the year the last patent expires. The January 2016 amendment to the MAYO license agreement established various low-single-digit royalty rates on net sales of current and future products and clarified how net sales will be calculated. As part of the amendment, the royalty rate on the Company’s net sales of Cologuard increased and, if in the future, improvements are made to the Cologuard product, the royalty rate may further increase, but, pursuant to the terms of the January 2016 amendment, would remain a low-single-digit percentage of net sales.In addition to royalties, the Company is required to pay MAYO cash of $0.2 million, $0.8 million and $2.0 million upon each product using the licensed MAYO intellectual property reaching $5.0 million, $20.0 million and $50.0 million in cumulative net sales, respectively.As part of the February 2015 amendment and restatement of the license agreement, the Company agreed to pay MAYO an additional $5.0 million, payable in five annual installments, through 2019. The Company paid MAYO the annual installment of $1.0 million in the first quarter of each of 2015 and 2016. The Company paid MAYO the 2017 installment in December 2016. The Company records the $1.0 million installments to prepaid expenses and other current assets and amortizes each installment over a twelve-month period commencing on February 1 of each year. For the three and nine months ended September 30, 2017 and 2016 the Company has recorded $0.3 million and $0.7 million in amortization of the installments, respectively.In addition, the Company is paying MAYO for research and development efforts. As part of the Company’s research collaboration with MAYO, the Company incurred charges of $1.1 million and $3.2 million for the three and nine months ended September 30, 2017, respectively. The Company made payments of $0.3 million and $2.2 million for the three and nine months ended September 30, 2017, respectively. The Company recorded an estimated liability of $1.9 million for research and development efforts as of September 30, 2017. The Company incurred charges of $0.8 million and $2.6 million for the three and nine months ended September 30, 2016, respectively. The Company made payments of $1.0 million and $3.3 million for the three and nine months ended September 30, 2016, respectively. The Company recorded an estimated liability of $0.5 million for research and development efforts as of September 30, 2016.14(4) STOCK-BASED COMPENSATIONStock-Based Compensation PlansThe Company maintains the 2010 Omnibus Long-Term Incentive Plan (As Amended and Restated Effective July 27, 2017), the 2010 Employee Stock Purchase Plan, the 2015 Inducement Award Plan, the 2016 Inducement Award Plan and the 2000 Stock Option and Incentive Plan (collectively, the “Stock Plans”).Stock-Based Compensation ExpenseThe Company records stock-based compensation expense in connection with the amortization of restricted stock and restricted stock unit awards, stock purchase rights granted under the Company’s employee stock purchase plan and stock options granted to employees, non-employee consultants and non-employee directors. The Company recorded $10.8 million and $23.0 million in stock-based compensation expense during the three and nine months ended September 30, 2017, respectively. The Company recorded $6.2 million and $16.8 million in stock-based compensation expense during the three and nine months ended September 30, 2016, respectively.Determining Fair ValueValuation and Recognition – The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of each market measure-based award is estimated on the date of grant using a Monte Carlo simulation pricing model. The fair value of service-based awards for each restricted stock unit award is determined on the date of grant using the closing stock price on that day. The estimated fair value of these awards is recognized to expense using the straight-line method over the vesting period. For awards issued to non-employees, the measurement date is the date when the performance is complete or when the award vests, whichever is the earliest. Accordingly, non-employee awards are re-measured at each reporting period until the final measurement date. The fair value of the award is recognized as stock-based compensation expense over the requisite service period, generally the vesting period. The Black-Scholes and Monte Carlo pricing models utilize the following assumptions:Expected Term – Expected life of an option award is the average length of time over which the Company expects employees will exercise their options, which is based on historical experience with similar grants. Expected life of a market measure-based award is based on the applicable performance period.Expected Volatility - Expected volatility is based on the Company’s historical stock volatility data over the expected term of the awards.Risk-Free Interest Rate - The Company bases the risk-free interest rate used in the Black-Scholes and Monte Carlo valuation models on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent expected term.Forfeitures – Beginning in 2017, the Company adopted Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“Update 2016-09”). With the adoption of Update 2016-09, forfeiture estimates are no longer required, and the effects of actual forfeitures are recorded at the time they occur. The impact on the condensed consolidated balance sheet was a cumulative-effect adjustment of $0.4 million, increasing opening accumulated deficit and additional paid-in capital.15The fair value of each option and market measure-based award is based on the assumptions in the following table:(1)The Company did not grant options under its 2010 Stock Plan during the period indicated.(2)The Company did not issue market measure-based shares during the respective period.(3)The Company did not issue stock purchase rights under its 2010 Employee Stock Purchase Plan during the respective period.Stock Option and Restricted Stock ActivityA summary of stock option activity under the Stock Plans during the nine months ended September 30, 2017 is as follows:
2020.(1)The aggregate intrinsic value of options outstanding, exercisable and vested and expected to vest is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s common stock for options that had exercise prices that were lower than the $47.12 market price of the Company’s common16stock at September 30, 2017. The total intrinsic value of options exercised during the nine months ended September 30, 2017 and 2016 was $11.2 million and $5.6 million, respectively.As of September 30, 2017, there was $100.8 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all Stock Plans. Total unrecognized compensation cost will be adjusted for future forfeitures. The Company expects to recognize that cost over a weighted average period of 3.0 years.A summary of restricted stock and restricted stock unit activity under the Stock Plans during the nine months ended September 30, 2017 is as follows:(5) FAIR VALUE MEASUREMENTSThe Financial Accounting Standards BoardFASB has issued authoritative guidance whichthat requires that fair value shouldto be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under thethat standard, fair value measurements are separately disclosed by level within the fair value hierarchy. The fair value hierarchy establishes and prioritizes the inputs used to measure fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. September 30, (In thousands) 2020 2019 Shares issuable in connection with acquisitions 157 0 Shares issuable upon exercise of stock options 2,429 2,199 Shares issuable upon the release of restricted stock awards 4,654 3,902 Shares issuable upon conversion of convertible notes 20,309 12,197 27,549 18,298 Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2020 2019 2020 2019 Screening Medicare Parts B & C $ 98,847 $ 108,617 $ 256,589 $ 295,103 Commercial 106,002 99,352 280,451 261,521 Other 9,774 10,836 28,367 24,094 Total Screening 214,623 218,805 565,407 580,718 Precision Oncology Medicare Parts B & C $ 33,945 $ 0 $ 114,973 $ 0 Commercial 37,402 0 137,212 0 International 16,243 0 56,227 0 Other 3,989 0 14,493 0 Total Precision Oncology 91,579 0 322,905 0 COVID-19 Testing $ 102,161 $ 0 $ 136,740 $ 0 Total $ 408,363 $ 218,805 $ 1,025,052 $ 580,718 (In thousands) September 30, 2020 December 31, 2019 Cash, cash equivalents, and restricted cash Cash and money market $ 456,701 $ 146,932 Cash equivalents 349,977 30,322 Restricted cash (1) 291 274 Total cash, cash equivalents, and restricted cash 806,969 177,528 Marketable securities Available-for-sale debt securities 474,906 144,685 Equity securities 1,418 1,716 Total marketable securities 476,324 146,401 Total cash and cash equivalents, restricted cash and marketable securities $ 1,283,293 $ 323,929 (In thousands) Amortized Cost Gains in Accumulated
Other Comprehensive
Income (Loss)Losses in Accumulated
Other Comprehensive
Income (Loss)Estimated Fair
ValueCash equivalents U.S. government agency securities $ 349,975 $ 2 $ 0 $ 349,977 Total cash equivalents 349,975 2 0 349,977 Marketable securities Corporate bonds 191,651 970 0 192,621 U.S. government agency securities 257,102 60 0 257,162 Certificates of deposit 10,000 1 0 10,001 Asset backed securities 15,071 51 0 15,122 Total marketable securities 473,824 1,082 0 474,906 Total available-for-sale securities $ 823,799 $ 1,084 $ 0 $ 824,883 (In thousands) Amortized Cost Gains in Accumulated
Other Comprehensive
Income (Loss)Losses in Accumulated
Other Comprehensive
Income (Loss)Estimated Fair Value Cash equivalents U.S. government agency securities $ 30,320 $ 2 $ 0 $ 30,322 Total cash equivalents 30,320 2 0 30,322 Marketable securities U.S. government agency securities 140,745 10 (73) 140,682 Corporate bonds 4,017 0 (14) 4,003 Total marketable securities 144,762 10 (87) 144,685 Total available-for-sale securities $ 175,082 $ 12 $ (87) $ 175,007 Due one year or less Due after one year through four years (In thousands) Cost Fair Value Cost Fair Value Cash equivalents U.S. government agency securities $ 349,975 $ 349,977 $ — $ — Total cash equivalents 349,975 349,977 — — Marketable securities U.S. government agency securities 249,943 249,949 7,159 7,213 Corporate bonds 148,903 149,409 42,748 43,212 Certificates of deposit 10,000 10,001 0 0 Asset backed securities 0 0 15,071 15,122 Total marketable securities 408,846 409,359 64,978 65,547 Total $ 758,821 $ 759,336 $ 64,978 $ 65,547 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 (1) Cash equivalents U.S. government agency securities $ 49,996 $ 0 $ 0 $ 0 $ 49,996 $ 0 Total cash equivalents 49,996 0 0 0 49,996 0 Marketable securities U.S. government agency securities 24,994 0 0 0 24,994 0 Total marketable securities 24,994 0 0 0 24,994 0 Total available-for-sale securities $ 74,990 $ 0 $ 0 $ 0 $ 74,990 $ 0 (In thousands) Estimated
Useful LifeSeptember 30,
2020December 31,
2019Property, plant and equipment Land n/a $ 4,466 $ 4,466 Leasehold and building improvements (1) 113,153 80,352 Land improvements 15 years 3,222 1,766 Buildings 30 - 40 years 200,141 112,815 Computer equipment and computer software 3 years 78,350 65,323 Laboratory equipment 3 - 10 years 136,462 104,008 Furniture and fixtures 3 - 10 years 23,950 14,539 Assets under construction n/a 26,472 149,687 Property, plant and equipment, at cost 586,216 532,956 Accumulated depreciation (129,761) (77,631) Property, plant and equipment, net $ 456,455 $ 455,325 (In thousands) Weighted Average
Remaining
Life (Years)Cost Accumulated Amortization Net Balance at September 30, 2020 Finite-lived intangible assets Trade name 15.2 $ 100,700 $ (5,683) $ 95,017 Customer relationships 13.1 2,700 (359) 2,341 Patents 4.0 10,441 (5,089) 5,352 Acquired developed technology 9.2 814,171 (73,022) 741,149 Supply agreements 6.8 30,000 (3,538) 26,462 Internally developed technology 2.4 1,883 (750) 1,133 Total finite-lived intangible assets 959,895 (88,441) 871,454 Internally developed technology in process n/a 206 — 206 Total intangible assets $ 960,101 $ (88,441) $ 871,660 (In thousands) Weighted Average
Remaining
Life (Years)Cost Accumulated Amortization Net Balance at December 31, 2019 Finite-lived intangible assets Trade name 15.9 $ 100,700 $ (961) $ 99,739 Customer relationships 13.6 2,700 (224) 2,476 Patents 8.8 22,690 (5,974) 16,716 Acquired developed technology 9.9 806,371 (12,345) 794,026 Supply agreements 7.5 30,000 (571) 29,429 Internally developed technology 2.5 1,229 (336) 893 Total finite-lived intangible assets 963,690 (20,411) 943,279 In-process research and development n/a 200,000 — 200,000 Internally developed technology in process n/a 271 — 271 Total intangible assets $ 1,163,961 $ (20,411) $ 1,143,550 (In thousands) 2020 $ 23,357 2021 93,322 2022 93,116 2023 92,812 2024 92,421 Thereafter 476,426 $ 871,454 (In thousands) Balance, January 1, 2019 $ 17,279 Genomic Health acquisition 1,185,918 Balance, December 31, 2019 1,203,197 Paradigm & Viomics acquisition 30,431 Genomic Health acquisition adjustment 4,044 Balance, September 30, 2020 $ 1,237,672 Level 1Quoted 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 for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.Level 3Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.Fixed-income securities and mutual funds are valued using a third-party pricing agency. The valuation is based on observable inputs including pricing for similar assets or liabilities in active markets and other observablequoted prices for identical or similar assets or liabilities in markets that are not active.factors. There has been no material change from periodparticipants would use in pricing the asset or liability. Unobservable inputs shall be used to period. The estimatedmeasure fair value ofto the Company’s long-term debt based on a market approach was approximately $4.5 million and $4.6 million as of September 30, 2017 and December 31, 2016, respectively, and represent Level 2 measurements. When determining the estimated fair value of the Company’s long-term debt, the Company used market-based risk measurements, such as credit risk.extent that observable inputs are not available.1720172020 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.(In thousands) Fair Value at September 30,
2020Quoted 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 $ 456,701 $ 456,701 $ 0 $ 0 U.S. government agency securities 349,977 0 349,977 0 Restricted cash 291 291 0 0 Marketable securities Corporate bonds 192,621 0 192,621 0 U.S. government agency securities 257,162 0 257,162 0 Certificates of deposit 10,001 0 10,001 0 Asset backed securities 15,122 0 15,122 0 Equity Securities 1,418 1,418 0 0 Liabilities Contingent consideration (2,638) 0 0 (2,638) Total $ 1,280,655 $ 458,410 $ 824,883 $ (2,638) 20162019 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,
2019Quoted 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 $ 146,932 $ 146,932 $ 0 $ 0 U.S. government agency securities U.S. government agency securities 30,322 0 30,322 0 Restricted cash Restricted cash 274 274 0 0 Marketable securities U.S. government agency securities U.S. government agency securities 140,682 0 140,682 0 Corporate bonds 4,003 0 4,003 0 Equity securities Equity securities 1,716 1,716 0 0 Liabilities Liabilities Contingent consideration Contingent consideration (2,879) 0 0 (2,879) Total $ 321,050 $ 148,922 $ 175,007 $ (2,879) (In thousands) Contingent consideration Balance, January 1, 2020 $ (2,879) Changes in fair value 0 Gains (losses) recognized in earnings 0 Payments 241 Balance, September 30, 2020 $ (2,638) gross unrealized lossesthe Company’s outstanding convertible notes and long-term debt: September 30, 2020 December 31, 2019 (In thousands) Carrying Amount (1) Fair Value Carrying Amount (1) Fair Value 2028 Convertible notes (2) $ 796,463 $ 1,251,085 $ 0 $ 0 2027 Convertible notes (2) 506,294 881,631 483,909 843,741 2025 Convertible notes (2) 252,210 494,627 319,696 592,482 Construction loan (3) 23,962 23,962 24,866 24,866 our investmentsthe 2025 convertible notes were settled in 2020 resulting in a decrease in the liability.unrealized loss positionexclusive, 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.2017, aggregated2020 and December 31, 2019, respectively, and is included in marketable securities on the Company's condensed consolidated balance sheets.investment categoryPfizer on behalf of the Company during the three months ended September 30, 2020 and 2019, respectively. The Company incurred charges of $57.6 million and $49.8 million for promotion, sales and marketing services performed by Pfizer on behalf of the Company during the nine months ended September 30, 2020 and 2019, respectively. Under the Original Promotion Agreement, the service fee was calculated based on incremental gross profits over specified baselines during the term. The Company incurred charges of $16.0 million and $54.5 million for this service fee during the three and nine months ended September 30, 2019. Under the Restated Promotion Agreement, the service fee was revised to a fee-for-service model, and includes certain fixed fees and performance-related bonuses. The Company incurred charges of $18.0 million and $37.5 million for the service fee during the three and nine months ended September 30, 2020. The Company will also pay Pfizer royalties for Cologuard related revenues over specified thresholds during the last year of the term of the Restated Promotion Agreement. The term of the Restated Promotion Agreement runs through December 31, 2022.(In thousands) Foreign
Currency
Translation
AdjustmentsUnrealized
Gain (Loss)
on Marketable
SecuritiesAccumulated
Other
Comprehensive
Income (Loss)Balance at December 31, 2019 $ (25) $ (75) $ (100) Other comprehensive income (loss) before reclassifications 0 1,159 1,159 Amounts reclassified from accumulated other comprehensive loss 25 0 25 Net current period change in accumulated other comprehensive loss 25 1,159 1,184 Balance at September 30, 2020 $ 0 $ 1,084 $ 1,084 (In thousands) Foreign
Currency
Translation
AdjustmentsUnrealized
Gain (Loss)
on Marketable
SecuritiesAccumulated
Other
Comprehensive
Income (Loss)Balance at December 31, 2018 $ (25) $ (1,397) $ (1,422) Other comprehensive loss before reclassifications 0 815 815 Amounts reclassified from accumulated other comprehensive loss 0 616 616 Net current period change in accumulated other comprehensive loss, before tax 0 1,431 1,431 Income tax expense related to items of other comprehensive income 0 (341) (341) Balance at September 30, 2019 $ (25) $ (307) $ (332) Affected Line Item in the
Statements of OperationsNine Months Ended September 30, Details about AOCI Components (In thousands) 2020 2019 Change in value of available-for-sale investments Sales and maturities of available-for-sale investments Investment income, net $ 0 $ 616 Foreign currency adjustment General and administrative 25 0 Total reclassifications $ 25 $ 616 that individual securities have been inover which the Company expects employees will exercise their options, which is based on historical experience with similar grants. Expected life of a continuous unrealized loss position:18
Risk-Free Interest Rate - The Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent expected term.summarizes contractual underlying maturitiestable: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Option Plan Shares Risk-free interest rates (1) (1) 0.11% - 1.47% 2.54% - 2.59% Expected term (in years) (1) (1) 0.25 - 6.15 6.28 Expected volatility (1) (1) 44.19% - 77.51% 64.95% - 65.00% Dividend yield (1) (1) 0% 0% Weighted average fair value per share of options granted during the period (1) (1) $58.57 $57.11 ESPP Shares Risk-free interest rates (2) (2) 0.12% - 0.2% 2.31% - 2.44% Expected term (in years) (2) (2) 0.5 - 2 0.5 - 2 Expected volatility (2) (2) 63.7% - 89.0% 55.0% - 58.0% Dividend yield (2) (2) 0% 0% Weighted average fair value per share of stock purchase rights granted during the period (2) (2) $30.60 $35.91 Options Shares Weighted
Average
Exercise
PriceWeighted
Average
Remaining
Contractual
Term(Years)Aggregate
Intrinsic
Value(1)(Aggregate intrinsic value in thousands) Outstanding, January 1, 2020 2,700,293 $ 34.01 6.7 Granted 309,143 97.66 Exercised (509,335) 30.34 Forfeited (71,364) 82.76 Outstanding, September 30, 2020 2,428,737 $ 41.45 6.3 $ 146,939 Exercisable, September 30, 2020 1,577,785 $ 26.96 5.4 $ 118,314 Company’s available-for-sale investments in debt securities atdate of exercise.2017:2020 is as follows: Restricted
Shares and RSUsWeighted
Average Grant
Date Fair ValueOutstanding, January 1, 2020 4,384,005 $ 63.41 Granted 2,166,913 90.94 Released (1,615,545) 48.97 Forfeited (280,899) 80.67 Outstanding, September 30, 2020 4,654,474 $ 80.10 (6)As more fully described in the 2016 Form 10-K, duringone1 of its Madison, Wisconsin facilities. This financing arrangement was structured with an unrelated third partythird-party financial institution (the “Investor”), an investment fund, and its majority owned community development entity in connection with the Company’s participation in transactions qualified under the federal New Markets Tax Credit (“NMTC”) program, pursuant to Section 45D of the Internal Revenue Code of 1986, as amended. The $2.4 millionCompany is required to be in compliance through December 2021 with various regulations and contractual provisions that apply to the NMTC arrangement. Noncompliance with applicable requirements could result in the Investor’s projected tax benefits not being realized and, therefore, require the Company to indemnify the Investor for any loss or recapture of NMTC related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations. The Company does not anticipate any credit recapture will be required in connection with this financing arrangement.recorded in Other Long-Term Liabilitiesreached based on the consolidated balance sheets. The benefitfollowing:this net $2.4 million contribution will be recognized asthe VIEs — collecting and remitting interest and fees and NMTC compliance — were all considered in the initial design and are not expected to significantly affect performance throughout the life of the VIE;decreasematerial interest in expenses,the underlying economics of the project; andcostthe consolidated financial statements. There are no other assets, liabilities or transactions in these VIEs outside of sales,the financing transactions executed as the Company amortizes the contribution liability over the seven-year compliance period as it is being earned through the Company’s on-going compliance with the conditionspart of the NMTC program.arrangement.has recorded $0.1is using the Construction Loan proceeds to finance the construction of an additional clinical laboratory and related facilities in Madison, Wisconsin. The Construction Loan is collateralized by the additional clinical laboratory and related facilities.$0.3$25.0 million, respectively, including $0.7 million of interest incurred, which is accrued for as an interest reserve and represents a decreaseportion of expenses for the three and nine months ended September 30, 2017, respectively. At September 30, 2017, the remaining balance of $1.4 million is included in Other Long-Term Liabilities.loan balance. The Company recorded $0.1capitalized the $0.7 million and $0.3 million as a decrease of expenses forinterest to the three and nine months ended September 30, 2016, respectively. At September 30, 2016, the remaining balance of $1.8 million was included in Other Long-Term Liabilities.construction project. The Company incurred approximately $0.2 million of debt issuance costs related to the above transactions,Construction Loan, which are recorded as a direct deduction from the liability. The debt issuance costs are being amortized over the life of the agreements.(7) LONG-TERM DEBTDuringConstruction Loan.2015,30, 2020 to include a financial covenant to maintain a minimum liquidity of $250 million and remove the minimum tangible net worth covenant. As of September 30, 2020, the Company is in compliance with the covenant included in the amended agreement.a $5.1 million credit agreement2 separate Tax Increment Financing Loan Agreements (“TIFs”) in February 2019 and June 2019 with an unrelated third-party financial institution to finance the purchaseCity of a facility located in Madison, Wisconsin. The credit agreementTIFs provide for $4.6 million of financing in the aggregate. In return for the loans, the Company is collateralized byobligated to create and maintain 500 full-time jobs over a five-year period, starting on the acquired building.Borrowings underdate of occupancy of the credit agreement bear interest at 4.15%. buildings constructed. In the event that the job creation goals are not met, the Company would be required to pay a penalty.made interest-only payments onrecords the outstanding principal balance forearned financial incentives as the full-time equivalent positions are filled. The amount earned is recorded as a liability and amortized as a reduction of operating expenses over a two-year period, between July 12, 2015 and September 12, 2015. Beginning on October 12, 2015 and continuingwhich is the timeframe when the TIFs will be repaid through May 12,property taxes.is required to make monthly principalhad earned and interest paymentsreceived payment of $31,000. The final principal$4.6 million from the City of Madison. As of September 30, 2020 and interest payment due on the maturity date of June 12,December 31, 2019, is $4.4 million.Additionally, the Company has recorded $73,000a liability of $ $0.3 million and $2.7 million, respectively, in mortgage issuance costs, which are recorded as a direct deduction fromother current liabilities on the mortgage liability. The issuance costs are being amortized through June 12, 2019. The Company has recorded $4,000 and $13,000 in amortization of mortgage issuance costs for eachCompany’s condensed consolidated balance sheets, reflecting when the expected benefit of the threefinancial benefits amortization will reduce future operating expenses.Nine Months Ended September 30, 2020 (In thousands) 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 12,827 $ 3,744 Operating cash flows from finance leases 125 0 Finance cash flows from finance leases 620 0 Non-cash investing and financing activities: Right-of-use assets obtained in exchange for new operating lease liabilities (1) 13,662 20,147 Right-of-use assets obtained in exchange for new finance lease liabilities 17,420 0 20172019, this includes right-of-use assets obtained from the initial adoption of ASC 842 of approximately $17.9 million.2016.(8)December 31, 2019, the Company’s right-of-use assets from operating leases are $129.8 million and $126.4 million, respectively, which are reported in operating lease right-of-use assets in the Company’s condensed consolidated balance sheets. As of September 30, 2020, the Company has outstanding operating lease obligations of $134.7 million, of which $10.7 million is reported in operating lease liabilities, current portion and $124.0 million is reported in operating lease liabilities, less current portion in the Company’s condensed consolidated balance sheets. As of December 31, 2019, the Company had outstanding operating lease obligations of $126.6 million, of which $7.9 million is reported in operating lease liabilities, current portion and $118.7 million is reported in operating lease liabilities, less current portion in the Company’s condensed consolidated balance sheets. The Company calculates its incremental borrowing rates for specific lease terms, used to discount future lease payments, as a function of the U.S. Treasury rate and an indicative Moody’s rating for operating leases. The Company’s weighted average discount rate and weighted average lease term remaining on operating lease liabilities is approximately 6.83% and 8.95 years, respectively.ifon the condition that the Company expends $26.3 million in capital investments and establishes and maintains 758 full-time positions in the state of Wisconsin over a seven-year period. 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 the192017,2020, the Company has earned $6.4all $9.0 million of the refundable tax credits and has received payment of $1.1$5.9 million from the WEDC. The unpaid portion is $5.3$3.1 million, of which $1.3$1.6 million is reported in prepaid expenses and other current assets and $4.0$1.5 million is reported in other long-term assets, reflecting when collection of the refundable tax credits is expected to occur. As of September 30, 2017,2020, the Company also has recorded a $1.5$0.5 million liability in other short-termcurrent liabilities, and a $3.1 million liability in other long-term liabilities, reflectingwhich reflects when the expected benefit of the tax credit amortization will reduce future operating expenses.2017,2020, the Company amortized $0.3$0.6 million and $0.9$1.7 million, respectively, of the tax credits earned as a reduction of operating expenses. During the three and nine months ended September 30, 2016,2019, the Company amortized $0.2$0.6 million and $0.5$1.8 million, respectively, of the tax credits earned as a reduction of operating expenses.(9) ISSUANCE OF EQUITYOn June 7, 2017,(In thousands) Coupon Interest Rate Effective Interest
RateFair Value of Liability Component at
Issuance (1)September 30, 2020 December 31, 2019 2028 Convertible notes 0.375% 5.2% $ 790,608 $ 1,150,000 $ 0 2027 Convertible notes 0.375% 6.3% 472,501 747,500 747,500 2025 Convertible notes 1.000% 6.0% 227,103 315,049 415,049 Total Convertible notes 2,212,549 1,162,549 Less: Debt discount (2) (628,820) (342,463) Less: Debt issuance costs (3) (28,762) (16,481) Net convertible debt $ 1,554,967 $ 803,605 (In thousands) September 30, 2020 December 31, 2019 2028 Convertible notes $ 337,968 $ 0 2027 Convertible notes 232,038 253,340 2025 Convertible notes 58,814 89,123 Total unamortized discount $ 628,820 $ 342,463 (In thousands) September 30, 2020 December 31, 2019 2028 Convertible notes $ 15,569 $ 0 2027 Convertible notes 9,168 10,251 2025 Convertible notes 4,025 6,230 Total debt issuance costs $ 28,762 $ 16,481 completedissued and sold $690.0 million in aggregate principal amount of 1.0% Convertible Notes (the “January 2025 Notes”) with a maturity date of January 15, 2025. The January 2025 Notes accrue interest at a fixed rate of 1.0% per year, payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The net proceeds from the issuance of the January 2025 Notes were approximately $671.1 million, after deducting underwriting discounts and commissions and the offering expenses payable by the Company.underwritten publicadditional $218.5 million in aggregate principal amount of 1.0% Convertible Notes (the “June 2025 Notes”). The June 2025 Notes were issued under the same indenture pursuant to which the Company previously issued the January 2025 Notes (the “Indenture”). The January 2025 Notes and the June 2025 Notes (collectively, the “2025 Notes”) have identical terms (including the same January 15, 2025 maturity date) and will be treated as a single series of securities. The net proceeds from the issuance of the June 2025 Notes were approximately $225.3 million, after deducting underwriting discounts and commissions and the offering expenses payable by the Company.7,000,0000.375% Convertible Notes (the “2027 Notes”) with a maturity date of March 15, 2027. The 2027 Notes accrue interest at a fixed rate of 0.375% per year, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2019. The net proceeds from the issuance of the 2027 Notes were approximately $729.5 million, after deducting underwriting discounts and commissions and the offering expenses payable by the Company.at aper $1,000 principal amount for the 2025 Notes, 2027 Notes, and 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 conversion rate is subject to adjustment upon the publicoccurrence of $35.00 per share. On June 26, 2017,certain specified events but will not be adjusted for accrued and unpaid interest. In addition, holders of the underwriters partially exercisedNotes who convert their over-allotment optionNotes in connection with a “make-whole fundamental change” (as defined in the offeringIndenture), will, under certain circumstances, be entitled to an increase in the conversion rate.purchased an additional 450,000unpaid interest.(In thousands) January 2025 Notes June 2025 Notes 2027 Notes 2028 Notes Transaction costs allocated to: Liability component $ 13,569 $ 5,052 $ 11,395 $ 16,811 Equity component 5,340 2,311 6,632 7,642 Total transaction costs $ 18,909 $ 7,363 $ 18,027 $ 24,453 Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2020 2019 2020 2019 Debt issuance costs amortization $ 1,123 $ 658 $ 3,084 $ 1,989 Debt discount amortization 19,461 10,322 52,138 28,789 Loss on settlement of convertible notes 0 0 7,954 10,558 Coupon interest expense 2,567 1,739 7,065 5,585 Total interest expense on convertible notes 23,151 12,719 70,241 46,921 Other interest expense 431 490 1,406 990 Total interest expense $ 23,582 $ 13,209 $ 71,647 $ 47,911 at a$28.8 million was issued as of September 30, 2020, and the remaining $3.4 million, which was withheld and may become payable as additional merger consideration, is included in other current liabilities in the condensed consolidated balance sheet as of September 30, 2020. The purchase price was allocated to the publicunderlying assets acquired and liabilities assumed based upon their estimated fair values at the date of $35.00 per share. acquisition as follows:(In thousands) Net operating assets $ 5,373 Goodwill 30,431 Developed technology 7,800 Net operating liabilities (3,203) Total purchase price $ 40,401 received,agreed to issue to the previous investors in Viomics equity interests with an acquisition-date fair value of up to $8.4 million in Viomics, vesting over 4 years based on certain retention arrangements. Payment is contingent upon continued employment with the Company over the four year vesting period and is recognized as stock-based compensation expense in general and administrative expense in the aggregate, approximately $253.4 millioncondensed consolidated statement of net proceedsoperations.offering, after deducting $7.3operations of Paradigm and Viomics are included in the Company’s condensed consolidated financial statements and not disclosed separately due to immateriality. Pro forma disclosures have not been included due to immateriality.Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2020 2019 2020 2019 United States $ 392,120 $ 218,805 $ 968,825 $ 580,718 Outside of United States 16,243 0 56,227 0 Total revenues $ 408,363 $ 218,805 $ 1,025,052 $ 580,718 underwriting discountthree months ended September 30, 2020 and commissions and other stock issuance costs paid by the Company.(10) RELATED PARTY TRANSACTIONIn May 2017, the Company entered into a professional services agreement for recruiting and related services with a firm whose principal is a non-employee director. In accordance with the agreement, the Company is expected to make cash payments totaling up to an aggregate of $0.4 million under the agreement during 2017 and 2018.2019, respectively. The Company incurred chargesrecorded an income tax benefit of $0.1$7.1 million and $0.2 million for the nine months ended September 30, 2020 and 2019, respectively. The Company’s income tax benefit recorded during the three and nine months ended September 30, 2017.2020, is primarily related to future limitations on and expiration of certain Federal and State deferred tax assets. As a result of these limitations, the recording of a valuation allowance resulted in a deferred tax liability of approximately $21.5 million remaining as of September 30, 2020, which is included in other long-term liabilities on the Company’s condensed consolidated balance sheet. The Company made payments of $0.1 million and $0.2 million forCompany’s income tax benefit recorded during the three and nine months ended September 30, 2017.(11) ACQUISITIONSOn August 1, 2017,2019 was primarily related to the intraperiod tax allocation rules that required the Company acquired all ofto allocate the outstanding equity of Sampleminded, Inc. (“Sampleminded”), the primary operations of which were customized software development for laboratory information systems and clinical information systems, for cash consideration of $3.2 million and 86,357 of the Company’s restricted stock units. Prior to the acquisition, Sampleminded provided certain consulting and software support services to the Company, and it licensed certain software to the Company. The restricted stock units were recorded by the Company as employee stock-based compensation because their vesting is contingent upon continued employment with the Company of certain former stockholders of Sampleminded. The $3.2 million of cash consideration was allocated to the estimated fair market value of the net assets acquired of $0.2 million, including $1.0 million in identifiable intangible assets (comprised of developed technology, customer relationships and non-compete agreements) and a residual amount of goodwill of $2.0 million. The purposes of acquisition were to reduce costs by bringing certain technology and expertise in-house and to prepare for anticipated future growth.20(12) INCOME TAXESDuring the three and nine months ended September 30, 2017, the Company recorded an income tax benefit of approximately $0.2 million. After considering the Sampleminded acquisition completed on August 1, 2017 and the related deferred tax liability acquired as part of the acquisition, the projected post-combination results and all available evidence, the Company released $0.2 million of valuation allowance that was previously provided against the Company’s deferred tax assets. In accordance with ASC 805 740-30-3, the Company recorded this income tax benefit as a discrete item in the tax provision for the third quarterincome taxes between continuing operations and other categories of 2017.earnings. 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 that the benefit will not be realized.(13) RECENT ACCOUNTING PRONOUNCEMENTSIn May 2014,Financial Accounting Standards Board issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606), (the “New Revenue Standard”) requiring an entitynext 12 months that would affect its effective tax rate. Unrecognized tax benefits may change during the next 12 months for items that arise in the ordinary course of business.recognizeunrecognized tax benefits are recognized as part of the amountCompany’s income tax provision in its condensed consolidated statements of revenueoperations. The Company is subject to which it expects to be entitledU.S. federal income tax examinations for the transfertax years 2001 through 2020, state income tax examinations for the tax years 2003 through 2020, and for the years 2014 through 2020 in foreign jurisdictions.customers. Additional disclosures will also be required to enable users to understandCondensed Consolidated Financial Statementsnature, amount, timingCompany and uncertainty of revenuePfizer entered into an Amended and cash flows arising from contracts with customers.Restated Cologuard Promotion Agreement (the “Restated Agreement”), which modifies, and amends and restates in its entirety, the Promotion Agreement effective August 2018. The New Revenue Standard will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either the retrospective or modified retrospective method upon adoption. Adoptionterm of the New Revenue StandardRestated Agreement runs until December 31, 2022. The Restated Agreement extends the relationship between the Company and Pfizer and restructures the manner in which the Company compensates Pfizer for promotion of Cologuard and provision of certain other sales and marketing services related to Cologuard. The Company agreed to pay Pfizer specified amounts for each instance Pfizer promotes Cologuard to a healthcare provider that is requiredeligible to prescribe Cologuard, which includes a one-time lump sum payment for the promotion of Cologuard between April 1, 2020 and September 30, 2020. The Company also agreed to pay Pfizer certain bonuses during 2020 and 2021, certain quarterly fees in 2020 and 2021, and a one-time fee in connection with Pfizer securing certain media and advertising for Cologuard for 2022. During the last year of the term of the Restated Agreement, the Company agreed to pay Pfizer a royalty based on Cologuard revenues over a specified threshold. See Note 8 for further discussion on the Promotion Agreement with Pfizer.2018,2021, subject to customary closing conditions and the Company has not yet selected a transition method. The Company has completed its preliminary evaluation of the potential financial statement impact of the New Revenue Standard on prior and future reporting periods. The Company does not expect material changes to the timing of when the Company recognizes revenue or the method by which the Company measures its single revenue stream, lab service revenue. Further, regarding the contract acquisition cost component of the New Revenue Standard, the Company’s analysis supports use of the practical expedient when recognizing expense related to incremental costs incurred to acquire a contract, as the recovery of such costs is completed in less than one year’s time. Additionally, incremental costs to obtain contracts have been immaterial to date. Accordingly, the Company does not expect any material changes to the timing of when it recognizes expenses related to contract acquisition costs. The Company will continue its evaluation of the New Revenue Standard through the date of adoption.In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, Leases (Topic 842), (“Update 2016-02”) which requires recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of Update 2016-02 will have on the Company’s consolidated financial statements. The Company anticipates that the new guidance will impact the Company’s consolidated financial statements as it has several leases.In August 2016, the Financial Accounting Standards Board issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, (“Update 2016-15”). Current GAAP either is unclear or does not include specific guidance on the eight cash flow classification issues included in the amendments in Update 2016-15. The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice. The amendments in Update 2016-15 are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has evaluated Update 2016-15 and does not expect the adoption of this guidance to have a material impact on its statements of cash flows.In October 2016, the Financial Accounting Standards Board issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, (“Update 2016-16”). This amendment improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Update 2016-16 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of Update 2016-16 to have a significant impact on its consolidated financial statements.21In October 2016, the Financial Accounting Standards Board issued ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are Under Common Control, (“Update 2016-17”). The amendments in Update 2016-17 change how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. The amendment is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The Company adopted this guidance during the three months ended March 31, 2017. The impact of adoption did not have an impact on the Company’s consolidated financial statements.In November 2016, the Financial Accounting Standards Board issued ASU No. 2016-18, Statement of Cash Flows; Restricted Cash, (“Update 2016-18”). Update 2016-18 provides guidance on the classification of restricted cash in the statement of cash flows. The amendments are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The amendments in Update 2016-18 should be adopted on a retrospective basis. The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements, as the Company does not have restricted cash.In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, (“Update 2017-01”) in an effort to clarify the definition of a business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in Update 2017-01 are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is allowed for interim or annual periods for which the financial statements have not been issued or made available for issuance. The Company does not expect the adoption of this amendment to have a material effect on its consolidated financial statements.In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-03, Accounting Changes and Error Corrections, (“Update 2017-03”) which states that an entity should evaluate ASUs that have been issued but not yet adopted to determine the effects of those ASUs on the entity’s financial statements when adopted. If the effect is unknown or cannot be reasonably estimated, then additional qualitative disclosures should be considered, including a description of the effect of the accounting policies that the entity expects to apply, if determined, and a comparison to the entity’s current accounting policies, a description of the status of the entity’s process to implement the new standard and the significant implementation matters yet to be addressed. Transition guidance in certain issued but not yet adopted ASUs was updated to reflect Update 2017-03. Other than enhancements to the qualitative disclosures regarding the future adoption of new ASUs, adoption of Update 2017-03 is not expected to have any impact on the Company’s consolidated financial statements.In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, (“Update 2017-04”). Update 2017-04 eliminates Step 2 of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update is effective for public business entities for the first interim and annual reporting periods beginning after January 1, 2020 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has adopted this standard effective January 1, 2017, and will utilize this approach for any interim or annual goodwill impairment tests performed in 2017.In May 2017, the Financial Accounting Standards Board issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, (“Update 2017-09”). Update 2017-09 provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments in Update 2017-09 are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The amendments in Update 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact of this amendment on the Company’s consolidated financial statements.22OperationsDiscussiondiscussion of our financial condition and Analysisresults of Financial Condition and Results of Operations of Exact Sciences Corporation (together with its subsidiaries, “Exact,” “we,” “us,” “our” or the “Company”)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, 2016,2019, which has been filed with the SEC (the “2016“2019 Form 10-K”).Statementsobjectivesthe pending acquisition of Thrive Earlier Detection Corporation (“Thrive”) are forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding expected future operating results, anticipated results of our sales, marketing and marketingpatient adherence efforts, expectations concerning payer reimbursement, and the anticipated results of our product development efforts.efforts, the anticipated benefits of the pending acquisition of Thrive, including estimated synergies and other financial impacts, and the expected timing of completion of the transaction. Forward-looking statements are neither historical facts nor assurances of future performance.performance or events. Instead, they are based only on our 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. Our actualActual results, conditions and financial conditionevents 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 our actual results, conditions and financial conditionevents 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 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 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 success of our efforts to facilitate patient access to Cologuard via telehealth; the willingness of health insurance companies and other payers to cover Cologuardour products and services and adequately reimburse us for our performance of the Cologuard test;such products and services; the amount and nature of competition from other cancer screeningfor our products and services; the effects of the adoption, modification or repeal of any healthcare reform law, rule, order, interpretation or policy;policy relating to the healthcare system, including without limitation as a result of any judicial, executive or legislative action; the effects of changes in healthcare pricing, coverage and reimbursement for our products and services, including without limitation as a result of the Protecting Access to Medicare Act of 2014; recommendations, guidelines and quality metrics issued by various organizations such as the U.S. Preventive Services Task Force, the American Society of Clinical Oncology, the American Cancer Society, and the National Committee for Quality Assurance regarding cancer screening or our products and services; our ability to successfully develop new products and services;services and assess potential market opportunities; our ability to effectively enter into and utilize strategic partnerships, such as through our Restated Promotion Agreement with Pfizer, Inc., and acquisitions; our success establishing and maintaining collaborative, licensing and supplier arrangements; our ability, and the ability of Thrive and Base Genomics Limited (“Base”), to 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 foreign currency exchange rate fluctuations and our efforts to hedge such effects; the possibility that the anticipated benefits from our business acquisitions (including the pending acquisition of Thrive and recent acquisition of Base) cannot 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’ (including Thrive’s and Base’s) operations will be greater than expected and the possibility of disruptions to our business during integration efforts and strain on management time and resources; the outcome of any litigation, government investigations, enforcement actions or other legal proceedings; the ability of theManagement'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations sections of the 20162019 Form 10‑K10-K and subsequently filed Quarterly Report(s)Reports on Form 10-Q. WeYou 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.are a molecular diagnostics company currently focused on the early detection and prevention ofhave developed some of the deadliest forms of cancer. We have developed an accurate, non-invasive, patient-friendly screening test called Cologuard for the early detection of colorectalmost impactful brands in cancer and pre-cancer,diagnostics, and we are currently working on the development of additional tests for other types of cancer, with the goal of becoming a leader inbringing new innovative cancer diagnostics.tests to patients throughout the world.23Each yearIn 2020 in the U.S. there are approximately:·135,000projected to be approximately 148,000 new cases of colorectal cancer·50,000 deaths from colorectal cancerColorectal cancer treatment represents a significant, growing healthcare cost. As of 2010, $14 billion was spent annually in the U.S. on colorectal cancer treatment, and the projected annual treatment costs are expected to be $20 billion in 2020. The incidence of colorectal cancer in Medicare patients is expected to riseand 53,000 deaths from 106,000 cases in 2010 to more than 180,000 cases in 2030. 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 U.S. for whom routine colorectal cancer screening is recommended, 38 percent have not been screened according to current guidelines. Poor compliance with screening guidelines 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 underserved population of unscreened and inadequately screened patients represents a significant opportunity for a patient-friendly screening test.Eleven biomarkers are targeted that have been shown to be strongly associated with colorectal cancer and pre-cancer. Methylation, mutation, and hemoglobin results are combined in the laboratory analysis through a proprietary algorithm to provide a single positive or negative reportable result.On August 11, 2014Upon approval by the U.S. Food and Drug Administration (“FDA”) approvedin August 2014, Cologuard for use asbecame the first and only FDA-approved sDNA non-invasive colorectal cancer screening test. Cologuard is now indicated for average risk adults 45 years of age and older.
·Cancer Sensitivity: 92%
•Cancer Sensitivity: 92%·Stage I and II Cancer Sensitivity: 94%
•Stage I and II Cancer Sensitivity: 94%·High-Grade Dysplasia Sensitivity: 69%
•High-Grade Dysplasia Sensitivity: 69%·Specificity: 87%The competitive advantagessDNA screening may provideclinical and genomic data into clinically actionable results for treatment planning throughout the cancer patient's journey, from diagnosis to treatment selection and monitoring. Our Oncotype IQ Genomic Intelligence Platform is currently comprised of our flagship line of Oncotype DX gene expression tests for breast, prostate and colon cancer, as well as Oncotype DX AR-V7 Nucleus Detect® test, a significant market opportunity. If theliquid-based test were used by 40-percent of the eligible screening population at a three-year screening interval, we estimate the potential U.S. market for sDNA screening would be more than $5.5 billion, annually.Our-Cologuard Commercialization StrategyOur commercialization strategy includes three main elements focusing on physicians, patients, and payers.Physicians and PatientsOur sales team actively engages with physicians and their staffs to emphasize the need for colorectal cancer screening, educate them on the value of Cologuard, and enroll them in our physician ordering system to enable them to prescribe the test. We focus on specific physicians based on Cologuard order history and on physician groups and larger regional and national health systems.24
advanced stage prostate cancer.Securing inclusionWe believe our Oncotype DX tests provide information that has the following benefits:a key part of our physician engagement strategy since many physicians rely on suchrecognized in international guidelines issued by the St. Gallen International Breast Cancer Expert Panel and European Society for Medical Oncology and has been included in certain guidelines and quality measures when making screening recommendations. In June 2016, the US Preventive Services Task Force (“USPSTF”) issued an updated recommendation statementrecommendations in England, Germany and Japan. We have obtained coverage for colorectalour invasive breast cancer screening and gave an “A” grade to colorectal cancer screening starting at age 50 and continuing until age 75. The statement specifies seven screening methods, including FIT-DNA (which is Cologuard).Many professional colorectal cancer screening guidelines intest outside of the U.S., including thosecoverage for certain patients in Canada, France, Spain, Germany, Italy, Ireland, Israel, Saudi Arabia, Switzerland, and the United Kingdom. We expect that broadening coverage and reimbursement for our Oncotype DX tests outside of the ACSUnited States will take years.National Comprehensive Cancer Network (“NCCN”), recommend regular screening using any ofclinical utility and addressable patient populations for our existing tests. These development efforts may lead to a variety of methods. Since 2008, joint colorectal cancerpossible new products, including risk assessment, screening guidelines endorsed by the ACS have included sDNA screening technology as a screening option for the detection of colorectal cancer in average risk, asymptomatic individuals age 50 and older. prevention, early disease diagnosis, adjuvant and/or neoadjuvant disease treatment, metastatic disease treatment selection and patient monitoring.2014,2020 we announced the ACS updated its colorectal cancer screening guidelines to specifically include Cologuard as a recommended screening test. In June 2016, the NCCN updated its Colorectal Cancer Screening Guidelines to add sDNA screening, at a once-every-three-years interval, to its list of recommended screening tests.In October 2016, the National Committee for Quality Assurance (“NCQA”) included Cologuard testing on a three-year interval in the 2017 Healthcare Effectiveness Data and Information Set (“HEDIS”) measures. More than 90 percent of America’s health plans measure quality based on HEDIS. In April 2017, the Centers for Medicare & Medicaid Services (“CMS”) included Cologuard in its updated 2018 Medicare Advantage Star Ratings program.A critical partintroduction of the value propositionOncotype MAP™ Pan-Cancer Tissue test (“Oncotype MAP” test). The Oncotype MAP test is a rapid, comprehensive tumor profiling panel that aids therapy selection for patients with advanced, metastatic, refractory, or recurrent cancer. The Oncotype MAP test utilizes next generation sequencing and immunohistochemistry to provide in-depth insights into genomic alterations in hundreds of Cologuard is our compliance program, which involvescancer-related genes. The Oncotype MAP test report supports clinical decision making by showing actionable biomarkers associated with more than 100 evidence-based therapies, over 45 combination therapies, and more than 650 active engagement with patients and physicians. This customer-service-oriented activity is focused on helping patientsclinical trial associations. The identification of these biomarkers helps to complete Cologuard tests that have been orderedinform treatment options for them by their physicians and supporting physicians in their efforts to have their patients screened.After the launcha breadth of Cologuard, we initiated a significant public relations effort to engage patients in the United States. We have conducted targeted direct-to-patient advertising campaigns through social media, print and other channels. In 2016, we began a national television advertising campaign. To date, we have focused our efforts on cable television most commonly viewed by our target patient demographic. We continue our targeted direct-to-patient advertising initiatives. During the second and third quarters of 2017 we launched new content for our television advertising campaign, highlighting the ease of use of Cologuard, which includes 30-second television spots intended to make our television advertising more cost effective.PayersThe cornerstone of our payer-engagement strategy was securing coverage from CMS. Medicare covers approximately 47% of patients in the screening population for Cologuard. On October 9, 2014, CMS issued a National Coverage Determination (“NCD”) for Cologuard following a parallel review process with FDA. Cologuard was the first screening test approved by FDA and covered by CMS through that process. As outlined in the NCD, Medicare Part B covers Cologuard once every three years for beneficiaries who meet all of the following criteria:·age 50 to 85 years,·asymptomatic (no signs or symptoms of colorectal disease including but not limited to lower gastrointestinal pain, blood in stool, positive guaiac fecal occult blood test or fecal immunochemical test), and·at average risk for developing colorectal cancer (e.g., no personal history of adenomatous polyps, colorectal cancer, or inflammatory bowel disease, including Crohn’s Disease and ulcerative colitis; no family history of colorectal cancers or adenomatous polyps, familial adenomatous polyposis, or hereditary non-polyposis colorectal cancer).In the 2017 Clinical Laboratory Fee Schedule, CMS established reimbursement for Cologuard at $512.43. Payments from CMS are currently subject to sequestration. Under the Protecting Access to Medicare Act of 2014 (“PAMA”), we anticipate that, effective January 1, 2018, the CMS reimbursement rate for Cologuard will be calculated based on the volume-weighted median of private payer rates for Cologuard. The initial data collection period for that purpose was January 1, 2016 to June 30, 2016. In the preliminary 2018 Clinical Laboratory Fee Schedule, CMS proposed reimbursement for Cologuard at $508.87. The finalized 2018 Clinical Laboratory Fee Schedule is expected to be released in November 2017, and it is possible that the final reimbursement for Cologuard could vary from that25
solid tumor types.proposed in the preliminary 2018 Clinical Laboratory Fee Schedule. We expect the CMS reimbursement rate establishedThrough our collaboration with Mayo Foundation for 2018 to remain in place for three years, after which it would be reset basedMedical Education and Research, we have successfully performed validation studies on the volume-weighted medianmultiple types of private payer rates for Cologuard during the data collection period between January 1, 2019cancer using tissue, blood and June 30, 2019. We do not anticipate applying for Advanced Diagnostic Laboratory Test (“ADLT”) status for Cologuard, which if granted would result in the rate being reset every year.addition to Medicare reimbursement, we seek to secure favorable coverage and in-network reimbursement agreements from commercial payers. Some commercial payers have issued positive coverage decisions for Cologuard and others haveSeptember 2020, Mayo agreed to cover Cologuard as an in-network service. In-network agreements with payers have varying termsmake available certain personnel to provide us product development and conditions, including reimbursement rate, termresearch and termination. From time to time in the ordinary course of our business, we may enter into new agreements, certain existing agreements may expire without renewal and certain other existing agreements may be terminated by us or the third-party payer. We believe that commercial payers’ reimbursement of Cologuard will depend on a number of factors, including payers’ determination that it is: sensitive and specific for colorectal cancer; not experimental or investigational; approved or recommended by major organizations’ guidelines; reliable, safe and effective; medically necessary; appropriate for the specific patient; and cost-effective. Also, some payers may apply various medical management requirements, including a requirement that they give prior authorization for a Cologuard test before they are willing to pay for it. Other payers may perform post-payment reviews or audits, which could lead to payment recoupments. Medical management, such as prior authorizations and post-payment review or audits, may require that we, patients, or physicians provide the payer with extensive medical records and other information.Coverage of Cologuard may also depend, in whole or in part, on whether payers determine, or courts and/or regulatory authorities determine, coverage is required under applicable federal or state laws mandating coverage of certain colorectal cancer screening services. For example, Section 2713 of the Patient Protection and Affordable Care Act (“ACA”) mandates that certain health insurers cover evidence-based items or services that have in effect a rating of “A” or “B” in the current recommendations of USPSTF without imposing any patient cost-sharing (“ACA Mandate”). Similarly, federal regulations require that Medicare Advantage plans cover “A” or “B” rated preventive services without patient cost-sharing. Following the June 2016 update to the USPSTF colorectal cancer screening recommendation statement, CMS issued an updated Evidence of Coverage notice for Medicare Advantage plans that affirms such plans must include coverage of Cologuard every three years without patient cost-sharing. While we believe the ACA Mandate will require certain health insurers to cover Cologuard without patient cost-sharing (following an initial phase-in period between one and two years from the date of the updated USPSTF recommendation statement depending on the date a given plan year commences), it is possible that certain health insurers will disagree. It is also possible that the ACA Mandate will be repealed or significantly modified in the future.Similarly, we believe the laws of approximately 30 states currently mandate coverage of Cologuard by certain health insurance plans. While some insurers have agreed with our interpretation regarding certain state mandates, other insurers have disagreed. In some cases, we have filed lawsuits in an effort to enforce state laws we believe require coverage of Cologuard, and we may file additional suits in the future. We may or may not be successful in any such lawsuit.pursuing a variety of strategies to increase commercial payer coverage for Cologuard, including providing cost effectiveness data to payers to make the case for Cologuard reimbursement. We arecurrently focusing our research and development efforts on large national and regional insurers and health plans that have affiliated health systems.We believe quality metrics may influence payers’ coverage decisions, as well as physicians’ cancer screening procedures. Some government and private payers are adopting pay-for-performance programs that differentiate payments for healthcare services based on the achievement of documented quality metrics, cost efficiencies or patient outcomes. Payers may look to quality measures such as the HEDIS and CMS Star Ratings measures to assess quality of care. We believe inclusion in the HEDIS measures and Star Ratings measures may have a positive impact on payers’ willingness to reimburse Cologuard, as well as on physicians’ willingness to prescribe the test. 26Our Clinical Lab FacilityAs part of our commercialization strategy, we established a state-of-the-art, highly automated lab facility that is certified pursuant to federal Clinical Laboratory Improvement Amendments (“CLIA”) requirements to process Cologuard tests and provide patient results. Our commercial lab operation is housed in a 50,000 square foot facility in Madison, Wisconsin. At our lab, we currently have the capacity to process approximately one million tests per year. We are expanding our current lab facility to increase our capacity to two and a half million or more tests per year. We are also evaluating options for a second lab facility to increase our total capacity to more than four and a half million tests per year.Product PipelineWe also are developingbuilding a pipeline of potential future products and services. services with a focus on improving Cologuard's performance characteristics and on developing blood or other fluid-based (“liquid biopsy”) tests. We expect to advance liquid biopsy through biomarker discovery and validation in tissue, blood, or other fluids.continuingpursuing the following opportunities:collaborate with MAYO Foundation for Medical Educationimprove upon Cologuard’s performance characteristics. In October 2019, we and Research (“MAYO”), our development partner for Cologuard, on developing new tests, withMayo presented at the goalAmerican College of becomingGastroenterology’s 2019 Annual Scientific Meeting findings from a leaderblinded-case control study showing enhanced colorectal cancer and advanced adenoma detection using newly discovered methylation biomarkers and hemoglobin. To establish the performance of the novel multi-target stool DNA test in November 2019, we launched the BLUE-C study, a multi-center, prospective study. We expect to enroll more than 10,000 patients 40 years of age and older in the early detectionBLUE-C study. The timing of cancer.any such enhancements to Cologuard is unknown and would be subject to FDA approval. We believe our proprietary technology platform providesare also working to develop a strong foundationblood-based screening test for the development of additional cancer diagnostic tests. Through our collaborationcolorectal cancer.MAYO,Mayo we have identified proprietary biomarkers for several major cancers.methylation markers with a 97% average accuracy in identifying cancers in tissue and blood. We have successfully performed validation studies on tissue samples for seven major cancers, including lung cancer, andalso presented results from an internal study using these markers on blood samples for four majorthat demonstrated 86% sensitivity at 95% specificity when looking at six different cancers.The ACS estimates that lung cancer will be diagnosed in 223,000 Americans and cause 156,000 deaths in the United States in 2017. Currently, more than half of lung cancer cases are diagnosed at an advanced stage, after symptoms appear, when the five-year survival rate is in the low single digits. developingseeking to develop a blood-based biomarker test to aidserve as an alternative to ultrasound and alpha-fetoprotein (“AFP”) for use in HCC testing. HCC is the most common type of liver cancer. Our goal is to develop a patient-friendly test that performs better than the current standard of care. In November 2019, we released the results of a 443-patient study which demonstrated 80% sensitivity at 90% specificity with a novel combination of six blood-based biomarkers for HCC. The study also showed 71% sensitivity for early stage HCC at 90% specificity. The study compared performance to the AFP test, which demonstrated 45% sensitivity at 90% specificity for early stage HCC.early detectionabsence of lung cancerlegal restrictions, businesses and individuals may voluntarily continue to limit in-person interactions and practice social distancing, and such behaviors may continue beyond the formal end of the pandemic, 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.individuals with lung nodules discovered throughMarch 2020 and may continue to disrupt our business for an unknown period of time. As a computerized tomographyresult, we anticipate significant impact to our 2020 operating results, including our revenues, margins, and cash utilization, among other measures.CT”Pfizer”), took similar precautions, including suspending face-to-face interactions between sales representatives and healthcare providers.other scan. Such a test may help reduce the number of unnecessary biopsiesinadequate precautions.follow-up procedures,actions taken in response to COVID-19, there has been a significant and thereby reduce costswidespread decline in standard wellness visits and improvepreventive services. That decline negatively impacted Cologuard test orders during the second quarter of 2020 in our Screening business, notwithstanding the availability of alternative ordering channels such as telehealth. During the third quarter, orders have recovered to pre-pandemic levels.outcomes.effects and the extent to which behavioral changes resulting from the pandemic continue even after it ends.recently completedhave partnered with various customers, including the State of Wisconsin Department of Health, 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 our COVID-19 testing business.multi-round studyresult of nearly 400COVID-19 and its impact to our business, we have re-prioritized our goals for 2020 with a focus on serving patients which demonstrated high accuracywho continue to need the healthcare services we provide while aligning our cost structure with the anticipated lower sales volumes and revenues. Our top priorities for detecting lung cancer2020 are (1) get people tested, (2) take care of our customers, and (3) preserve financial strength.stages.continue to explore opportunities for improving Cologuard, including improvements that could lower oursaw a reduction in certain volume based cost of sales.AcquisitionsAugust 1, 2017,October 26, 2020, we entered into a definitive agreement and plan of merger (“Thrive Merger Agreement”) with Thrive, which we currently expect to be completed in the first quarter of 2021. On October 26, 2020, we acquired all of the outstanding equitystock of Sampleminded, Inc.Base (“Sampleminded”Base Merger Agreement”), the primary operations of which were customized software development. Refer to Note 19 in our condensed consolidated financial statements included in this Quarterly Report for laboratory information systems and clinical information systems, for consideration consisting of $3.2 million of cash and 86,357 of our restricted stock units. Prior to the acquisition, Sampleminded provided certain consulting and software support services to us, and it licensed certain software to us. We recorded the restricted stock units as employee stock-based compensation because their vesting is contingent upon continued employment with us of certain former stockholders of Sampleminded. The $3.2 million in cash consideration was allocated to the estimated fair market value of the net assets acquired of $0.2 million, including $1.0 million in identifiable intangible assets (comprised of developed technology, customer relationships and non-compete agreements) and a residual amount of goodwill of $2.0 million. The purposes of acquisition were to reduce costs by bringing certain technology and expertise in-house and to prepare for future growth.How We Recognize RevenueFor tests performed where we have an agreed-upon reimbursement rate or where we can estimate the amount that we will ultimately collect at the time delivery is complete, we recognize the related revenue on an accrual basis upon delivery of a test result to an ordering physician. Accrual rates are based on the established billing rates less contractual and other adjustments, which yields the amount that we expect to ultimately collect. We determine the amount we expect to ultimately collect on a per-payer or per-agreement basis. 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, the existence of secondary payers and claim denials. 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 contractual allowance is adjusted. Finally, should we recognize revenue from claims on an accrual basis and later27determine the judgments underlying estimated collections change, our financial results could be negatively impacted in future quarters. Historically, a portion of our revenue was recognized upon cash receipt when we were unable to reasonably estimate the amount that would ultimately be collected from a payer. Effective during the first quarter of 2017, we determined that we had the ability to reasonably estimate the amount that will ultimately be collected from all payers, including the impact of patient cost-share collections. Accordingly, we now recognize revenue on an accrual basis for all billed claims.Our average reimbursement per test, as further defined below, was approximately $428 and $393 through September 30, 2017 and 2016, respectively. This cumulative average Cologuard reimbursement rate will change over time due to a number of factors, such as medical coverage decisions by payers, changes in the payer mix, the effects of contracts signed with payers, changes in allowed amounts by payers, our ability to successfully win appeals for payment, settlements reached with payers regarding previously denied claims and our ability to collect cash payments from payers and individual patients. Historical average reimbursement is not necessarily indicative of future average reimbursement.We calculate the average Cologuard reimbursement per test on a trailing twelve-month basis for all tests that are at least six months old, since it can take that long, or in some cases longer, to collect from some payers and patients. Thus, the average reimbursement per test at September 30, 2017 represents the total cash collected through September 30, 2017 for all tests performed from April 1, 2016 through March 31, 2017 divided by the number of tests performed during that period.The components of our revenue, as recognized upon accrual or cash receipt, were as follows:Of the revenue recognized in the nine months ended September 30, 2017, approximately $4.3 million relates to the one-time impact of certain payers meeting the Company’s revenue recognition criteria for accrual-basis revenue recognition beginning with the period ended March 31, 2017. Approximately $1.0 million of this one-time impact relates to tests completed in the prior year and for which our accrual revenue recognition criteria were not met until 2017.2017 PrioritiesOur top priorities for 2017 are to (1) grow revenue for Cologuard, (2) improve the customer experience and continue to deliver world class service to patients and providers, and (3) expand our product portfolio by developing additional cancer diagnostic tests as further outlined in the product pipeline section above.Operations2017,2020, we had an accumulated deficit of approximately $838.9 million.$1.5 billion. We expect to continue to incur losses for the near future, and it is possible we may never achieve profitability.Laboratory service revenue. As mentioned in further detail above, the COVID-19 outbreak has had an adverse impact on our operations beginning in March 2020. While we have seen recovery in our Screening and Precision Oncology businesses, the impact of the pandemic in the fourth quarter of 2020 and after is uncertain and subject to factors beyond our control. laboratory service revenue is primarily generated by performing screeningour laboratory testing services, usingfrom our Cologuard, test.Oncotype DX and COVID-19 tests. For the three months ended September 30, 20172020 and 2016,2019, we completed approximately 161,000 and 68,000 Cologuard tests, respectively, and generated laboratory serviceScreening revenue of $72.6$214.6 million and $28.1$218.8 million, respectively. For the nine months ended September 30, 20172020 and 2016, the Company completed approximately 395,0002019, we generated Screening revenue of $565.4 million and 162,000 Cologuard tests, respectively, and generated$580.7 million, respectively. Screening includes laboratory service revenue from Cologuard and revenue from Biomatrica products. For the three months ended September 30, 2020, we generated Precision Oncology revenue of $178.6$91.6 million. For the nine months ended September 30, 2020, we generated Precision Oncology revenue of $322.9 million. Precision Oncology includes laboratory service revenue from global Oncotype DX and Paradigm products. For the three and nine months ended September 30, 2020, we also generated $102.2 million and $64.1$136.7 million, respectively. The increaserespectively, in revenue from our COVID-19 testing.primarily dueadversely impacted by the effects of the COVID-19 outbreak. In response to an increase in completed Cologuard teststhe pandemic, we are conducting COVID-19 testing, which has served as additional revenue outside our normal Screening and an increase in average revenue recognized per test during the current period.Precision Oncology testing services.28Cost Structure.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.test collection kits and tissue samples, royalties and the cost of laboratory services to process tests and provide results to physicians. We incur expense for tests in the period in which the activities occur, therefore, gross margin as a percentage of laboratory service revenue may vary due to costs being incurred in one period that relate to revenues recognized in a later period. laboratory services will continue to fluctuate and be affected by Cologuardthe test volume of our products, our operating efficiencies, patient complianceadherence rates, payer mix, the levels of reimbursement, and payment patterns of payers and patients.Sales. sales (exclusive of amortization of acquired intangible assets).Cost of sales increased to $20.7$95.1 million for the three months ended September 30, 2017 compared to $12.22020 from $52.3 million for the three months ended September 30, 2016.2019. Cost of sales increased to $55.7$254.6 million for the nine months ended September 30, 2017 compared to $31.32020 from $146.3 million for the nine months ended September 30, 2016.2019. The increase in cost of sales is primarily due to costs incurred on our Precision Oncology tests due to the increasecompletion of the combination with Genomic Health in completed Cologuard tests. The Company completed approximately 161,000November 2019 and 68,000 Cologuard tests for the three months ended September 30, 2017 and 2016, respectively. The Company completed approximately 395,000 and 162,000 Cologuard tests for the nine months ended September 30, 2017 and 2016, respectively.costs incurred from our COVID testing.Three Months Ended September 30, Amounts in millions Amounts in millions 2020 2019 Change Production costs $ 51.4 $ 36.5 $ 14.9 Personnel expenses 26.8 9.4 17.4 Facility and support services Facility and support services 13.3 4.9 8.4 Stock-based compensation 3.5 1.4 2.1 Other cost of sales expenses Other cost of sales expenses 0.1 0.1 — Total cost of sales expense Total cost of sales expense $ 95.1 $ 52.3 $ 42.8 Nine Months Ended September 30, Amounts in millions 2020 2019 Change Production costs $ 134.3 $ 103.4 $ 30.9 Personnel expenses 72.5 25.7 46.8 Facility and support services 38.2 13.2 25.0 Stock-based compensation 9.3 3.9 5.4 Other cost of sales expenses 0.3 0.1 0.2 Total cost of sales expense $ 254.6 $ 146.3 $ 108.3 increaseddecreased to $11.7$31.5 million for the three months ended September 30, 20172020 compared to $7.6$34.7 million for the three months ended September 30, 2016.2019. Research and development expenses increased to $29.5$107.7 million for the nine months ended September 30, 20172020 compared to $26.4$96.5 million for the nine months ended September 30, 2016.2019. The increase indecrease during the three months ended September 30, 2020 was primarily due to a reduction of certain direct research and development expensescosts due to the cost saving measures and the timing of certain expenditures as a result of the COVID-19 pandemic. The increase during the nine months ended September 30, 2020 was primarily due to an increase in personnel related costs due to an increased headcount and an increaseas a result of the combination with Genomic Health in November 2019, which was partially offset by a reduction in of certain direct research and development expenses for our pipeline.29Three Months Ended September 30, Amounts in millions 2020 2019 Change Personnel expenses $ 13.1 $ 7.9 $ 5.2 Direct research and development 7.3 16.4 (9.1) Stock-based compensation 5.0 6.9 (1.9) Facility and support services 5.0 1.2 3.8 Professional fees 0.6 1.8 (1.2) Other research and development 0.5 0.5 — Total research and development expenses $ 31.5 $ 34.7 $ (3.2) Nine Months Ended September 30, Amounts in millions 2020 2019 Change Personnel expenses $ 45.2 $ 23.7 $ 21.5 Direct research and development 32.4 51.3 (18.9) Stock-based compensation 14.6 12.9 1.7 Facility and support services 11.1 3.3 7.8 Professional fees 2.3 3.9 (1.6) Other research and development 2.1 1.4 0.7 Total research and development expenses $ 107.7 $ 96.5 $ 11.2 $30.8$115.6 million for the three months ended September 30, 20172020 compared to $20.3$80.5 million for the three months ended September 30, 2016.2019. General and administrative expenses increased to $75.4$336.3 million for the nine months ended September 30, 20172020 compared to $55.4$208.1 million for the nine months ended September 30, 2016.2019. The increase in general and administrative expenses was primarily a resultrelated to the operations of increased personnelGenomic Health being included in our results after the completion of the combination in November 2019, and an overall increase in headcount, information technology and customer care center costs stock-based compensation and legal and professional fees to support the overall growth of the Company.Three Months Ended September 30, Amounts in millions Amounts in millions 2020 2019 Change Personnel expenses $ 53.7 $ 29.2 $ 24.5 Professional and legal fees Professional and legal fees 15.9 20.1 (4.2) Stock-based compensation 21.5 11.1 10.4 Facility and support services Facility and support services 13.4 16.1 (2.7) Other general and administrative 11.1 4.0 7.1 Total general and administrative expenses $ 115.6 $ 80.5 $ 35.1 Nine Months Ended September 30, Amounts in millions 2020 2019 Change Personnel expenses $ 159.3 $ 85.9 $ 73.4 Professional and legal fees 52.9 39.4 13.5 Stock-based compensation 54.8 29.6 25.2 Facility and support services 42.4 42.0 0.4 Other general and administrative 26.9 11.2 15.7 Total general and administrative expenses $ 336.3 $ 208.1 $ 128.2 $37.8$136.5 million for the three months ended September 30, 20172020 compared to $26.3$86.2 million for the three months ended September 30, 2016.2019. Sales and marketing expenses increased to $113.3$423.1 million for the nine months ended September 30, 20172020 compared to $82.3$265.3 million for the nine months ended September 30, 2016.2019. The increase in sales and marketing expenses was a result of hiring additional sales and marketing personnel, and increasing ourincluding the Precision Oncology team added following the completion of the Genomic Health combination in November 2019, which was partially offset by a reduction in advertising and patient marketing effortsspend as parta result of the ongoing commercializationCOVID-19 pandemic. Three Months Ended September 30, Amounts in millions 2020 2019 Change Personnel expenses $ 67.4 $ 37.7 $ 29.7 Direct marketing costs and professional fees 26.9 23.0 3.9 Professional and legal fees 19.5 19.6 (0.1) Facility and support services 10.5 0.8 9.7 Stock-based compensation 11.5 4.9 6.6 Other sales and marketing expenses 0.7 0.2 0.5 Total sales and marketing expenses $ 136.5 $ 86.2 $ 50.3 Nine Months Ended September 30, Amounts in millions 2020 2019 Change Personnel expenses $ 209.0 $ 111.0 $ 98.0 Direct marketing costs and professional fees 90.0 68.9 21.1 Professional and legal fees 56.9 68.5 (11.6) Facility and support services 33.4 2.4 31.0 Stock-based compensation 32.4 14.3 18.1 Other sales and marketing expenses 1.4 0.2 1.2 Total sales and marketing expenses $ 423.1 $ 265.3 $ 157.8 our Cologuard test.30Investment income. Investment incomeacquired intangible assets increased to $1.3$23.4 million for the three months ended September 30, 20172020 compared to $0.5$0.7 million for the three months ended September 30, 2016. Investment income2019. Amortization of acquired intangible assets increased to $2.6$70.2 million for the nine months ended September 30, 20172020 compared to $1.4$2.3 million for the nine months ended September 30, 2016.2019. The increase in investment incomeamortization of acquired intangible assets was primarily due to an increase in the average cash and marketable securities balance and an increase in the average rate of return on investmentsGenomic Health combination.2017 when2020 compared to zero for the same periodsthree and nine months ended September 30, 2019. The impairment recorded during the nine months ended September 30, 2020 primarily relates to the impairment of the in-process research and development intangible asset acquired as part of the combination with Genomic Health.2016.InterestMay 2020.and expense. Net interest expense of $51,000 was realizednet. Investment income, net decreased to $2.5 million for the three months ended September 30, 20172020 compared to net interest expense of $54,000$9.1 million for the three months ended September 30, 2016. Net interest expense of $0.22019. Investment income, net decreased to $5.5 million was realized for each of the nine months ended September 30, 2017 and2020 compared to $23.4 million for the nine months ended September 30, 2016.2019. The decrease in investment income, net was due to a decrease in realized gains generated from the sale of marketable securities and a decrease in the average rate of return on investments due to an decrease in market interest rates and a lower average balance in marketable securities for the nine months ended September 30, 2020 when compared to the same period in 2019.relatedprimarily due to the mortgageissuance of additional convertible notes in February 2020, which was partially offset by lower interest rates on onethe convertible notes issued in February 2020. Interest expense recorded from our outstanding convertible notes totaled $23.2 million and $12.7 million during the three months ended September 30, 2020 and 2019, respectively. Of the interest expense recorded on outstanding convertible notes for the three months ended September 30, 2020 and 2019, $20.6 million and $11.0 million of interest expense relates to amortization of debt discount and debt issuance costs, respectively. Interest expense recorded from our outstanding convertible notes totaled $62.3 million and $36.4 million during the nine months ended September 30, 2020 and 2019, respectively. Of the interest expense recorded on outstanding convertible notes for the nine months ended September 30, 2020 and 2019, $55.2 million and $30.8 million of interest expense relates to amortization of debt discount and debt issuance costs, respectively. The remaining interest expense recorded on outstanding convertible notes relates to the stated interest that is paid out in cash. In addition to the interest expense recorded on outstanding convertible notes, an additional $8.0 million and $10.6 million was recorded during the nine months ended September 30, 2020 and 2019, respectively, as a result of the settlement of convertible notes. The convertible notes are further described in Note 15 of our facilitiescondensed consolidated financial statements included in Madison, WI which was entered intothis Quarterly Report. The remaining interest expense for the three and nine months ended September 30, 2020 and 2019, relates to the stated interest on our construction loan.June 2015.ResourcesCologuard.the Cologuard, and since the completion of our Genomic Health combination, of Oncotype DX tests. As of September 30, 2017,2020, we had approximately $50.8$806.7 million in unrestricted cash and cash equivalents and approximately $411.7$476.3 million in marketable securities.Allused inprovided by operating activities was $71.0$25.1 million for the nine months ended September 30, 2017 as2020 compared to $102.9cash use of $86.4 million for the nine months ended September 30, 2016.2019. The principal use ofincrease in cash inprovided by operating activities for the nine months ended September 30, 20172020 was to fund our net loss. Our net loss decreased from the nine months ended September 30, 2016 primarily due to increased salesthe increase in revenue and reduction of Cologuard.$185.5$395.4 million for the nine months ended September 30, 2017 as2020 compared to net cash used in investing activitiesprovided of $20.8$713.7 million for the nine months ended September 30, 2016.2019. The increase in cash used in investing activities for the nine months ended September 30, 20172020 compared to the same period in 20162019 was primarily the result of the timing of purchases, sales, and maturities of marketable securities. Excluding the impact$35.9$65.3 million for the nine months ended September 30, 2017. Such purchases consisted of property and equipment of $24.4 million, a business acquisition, net of cash acquired of $3.0 million, and purchased intangible assets of $8.4 million. For the same period in 2016 there were purchases of property and equipment of $12.2 million and no acquisitions or purchases of intangible assets. The intangible asset purchase during the nine months ended September 30, 2017 was the result of the royalty buy-out and patent purchase from MDx Health in April 2017. The property and equipment purchases during the nine months ended September 30, 2017 were primarily the result of increased laboratory equipment purchases, computer equipment and computer software purchases, and assets under construction in order2020 compared to continue to scale-up our operations. The business acquisition during the nine months ended September 30, 2017 was the result of the acquisition of Sampleminded, Inc.Net cash provided by financing activities was $258.2$131.5 million for the nine months ended September 30, 2017, as compared to $146.22019. Cash use consisted primarily of purchases of property and equipment of $47.8 million and $131.0 million for the nine months ended September 30, 2016.2020 and 2019, respectively, investments in privately held companies of $10.6 million, and an acquisition of $6.7 million. There were also minimal purchases of intangible assets during the nine months ended September 30, 2020 and 2019. increase in cash provided by financing activities for the nine months ended September 30, 2017 compared to the same period in 20162019 was primarily the result of proceeds of $729.5 million from our issuance of commonConvertible Notes with a maturity date of March 15, 2027 (the “2027 Notes”, and, collectively with the 2025 Notes and 2028 Notes, the “Notes”), and we used $493.4 million of cash to settle a portion of the 2025 Notes. In addition, during the nine months ended September 30, 2020 we received proceeds of $15.4 million from the exercise of stock options and $9.8 million from our employee stock purchase plan.an underwritten public offeringa cash transaction valued at approximately $410.0 million.June 2017.a cash and stock transaction valued at approximately $2.2 billion, of which $1.7 billion would be payable at closing. We currently expect the merger will be completed in the first quarter of 2021, subject to customary closing conditions and regulatory approvals. We anticipate that cash of approximately $0.6 billion will be required to pay the aggregate cash portion of the merger consideration.3120172020 will be sufficient to fund the cash portion of the purchase price to be paid in connection with the Thrive and Base acquisitions as well as our current operations for at least the next twelve months, based on current operating plans. However, we may need to raise additional capital to fully fund our current strategic plan, which includes successfully commercializing Cologuard and Oncotype DX and developing a pipeline of future products. Additionally, we may enter into transactions to acquire other businesses, products, services, or technologies as part of our 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 additionalsufficient funds to complete our plan, we cannot assure that our business will ever generate sufficient cash flow from operations to become profitable.EstimatesWhile our21 of our financial statements included in our 20162019 Form 10-K, we believe that the followingas well as our Management’s Discussion and Analysis of Financial Condition and Results of Operations on our 2019 Form 10-K. There have not been any significant changes to our critical accounting policies and judgmentsestimates during the nine months ended September 30, 2020.most criticalrecognized when control of the promised services are transferred to aidthe patient’s healthcare provider, in fully understandingan 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 evaluatingother adjustments, which yields the constrained amount that we expect to ultimately collect. We determine the amount we expect to ultimately collect on a per-payer or per-agreement basis, using historical collections, established reimbursement rates and other adjustments. 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 reported financial results.Revenue RecognitionLaboratory service revenue.contracts is fixed when we contract with a direct bill payer who assumes the downstream patient billing. Our ability to collect is not contingent on the customer’s ability to collect through their downstream billing efforts.revenues are generated by performing screening services using our Cologuard test,agreements (“LSAs”) with various organizations, the right to bill and collect exists prior to the service is completed upon deliveryreceipt of a specimen and release of a test result to anthe ordering physician.healthcare provider, which results in deferred revenue. The deferred revenue balance is relieved upon the release of the applicable patient’s test result to the ordering healthcare provider, the date a non-conforming specimen is received, 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 recognizebelieve these points in time represent our fulfillment of our obligations to the customer.in accordance withestimates. As such, we continually assess the provisionsstate of ASC 954-605, Health Care Entities - Revenue Recognition. We recognize revenue on an accrual basis, netour order to cash cycle for areas of contractualopportunity as we believe adequate operations support our ability to appropriately estimate receivables and other adjustments, when amounts that will ultimately be collected can be reasonably estimated. Contractual and other adjustments represent the difference between the list price (the billing rate) and the estimated aggregate reimbursement rate from payers and patients.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 contractual allowance is adjusted.The estimates of amounts that will ultimately be collected requires significant judgment by management, and our judgements will continue to evolve as Finally, should we gain payment experience with payers and patients. Historically, in the absence of the ability to reasonably estimate the amount that will ultimately be collected for our services, revenue was recognized upon cash receipt. Effective during the first quarter of 2017, we determined that we had the ability to reasonably estimate the amount that will ultimately be collected from all payers, including the impact of patient cost-share collections. Accordingly, we now recognize revenue on an accrual basis for all billed claims.Inventory.Inventory is stated at the lower of cost or market value (net realizable value). Welater determine the cost of inventory using the first-in, first out method (“FIFO”). We estimate the recoverability of inventory by reference to internal estimates ofjudgments underlying estimated collections change, our financial results could be negatively impacted in 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 net 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 net realizable value.Direct and indirect manufacturing costs incurred during process validation and for other research and development activities, which are not permitted to be sold, have been expensed to research and development. 32
quarters.Stock-Based Compensation.Convertible Notes. We account for convertible debt instruments that may be settled in cash or equity upon conversion by separating the liability and equity components of the instruments in a manner that reflects our nonconvertible debt borrowing rate. In accordanceFebruary 2020 we issued the 2028 Notes of $1,150.0 million in aggregate principal amount of 0.375% Convertible Notes with GAAP, all stock-based payments,a maturity date of March 1, 2028. As part of that issuance, we settled approximately $100.0 million in outstanding 2025 Notes. We determined the carrying amount of the liability component of the 2028 Notes by using assumptions that market participants would use in pricing a debt instrument, including grants of employee stock options, restricted stockmarket interest rates, credit standing, yield curves and restricted stock units, market measure-based awards and shares purchased under an employee stock purchase plan (“ESPP”) (if certain parameters are not met), are recognized involatilities. Determining the financial statements based on their fair values. The grant date fair value of market measure-based share-based compensation plans are calculated using a Monte Carlo simulation pricing model. 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 fair value of each market measure-based award is estimated on the date of grant using a Monte Carlo simulation pricing model. The fair value of service-based awards for each restricted stock unit award is determined on the date of grant using the closing stock price on that day. The estimated fair value of these awards is recognized to expense using the straight-line method over the vesting period. For awards issued to non-employees, the measurement date is the date when the performance is complete or when the award vests, whichever is the earliest. Accordingly, non-employee awards are re-measured at each reporting period until the final measurement date. The fair value of the award is recognized as stock-based compensation expense over the requisite service period, generally the vesting period. The Black-Scholes and Monte Carlo pricing models utilize the following assumptions:·Expected Term - Expected term is based on our historical life data and is determined using the average of the vesting period and the contractual life of the stock options granted. Expected life of a market measure-based award is based on the applicable performance period.·Expected Volatility - Expected volatility is based on our historical stock volatility data over the expected term of the awards.·Risk-Free Interest Rate – We base the risk-free interest rate used in the Black-Scholes and Monte Carlo valuation models on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent expected term.·Forfeitures – Beginning in 2017, we adopted Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“Update 2016-09”). With the adoption of Update 2016-09, forfeiture estimates are no longer required, and the effects of actual forfeitures are recorded at the time they occur. The impact on the condensed consolidated balance sheet was a cumulative-effect adjustment of $0.4 million, increasing opening accumulated deficit and additional paid-in capital.The fair value of each award is estimated on the date of grant based on the assumptions noted above and as further described in Note 4 to our condensed consolidated financial statements.33Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606), (the “New Revenue Standard”) requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Additional disclosures will also be required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The New Revenue Standard will replace most existing revenue recognition guidance in GAAP when it becomes effective and permitsdebt component requires the use of either the retrospective or modified retrospective method upon adoption. Adoption of the New Revenue Standard is required by the first quarter of 2018,accounting estimates and we have not yet selected a transition method. We have completed our preliminary evaluation of the potential financial statement impact of the New Revenue Standard on priorassumptions. These estimates and future reporting periods. We do not expect material changes to the timing of when we recognize revenue or the method by which we measure our single revenue stream, lab service revenue. Further, regarding the contract acquisition cost component of the New Revenue Standard, our preliminary analysis supports the use of the practical expedient when recognizing expense related to incremental costs incurred to acquire a contract, as the recovery of such costs is completedassumptions are judgmental in less than one year’s time. Additionally, incremental costs to obtain contracts have been immaterial to date. Accordingly, we do not expect any material changes to the timing of when we recognize expenses related to contract acquisition costs. We will continue our evaluation of the New Revenue Standard through the date of adoption.In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, Leases (Topic 842), (“Update 2016-02”) which requires recognition of lease assetsnature and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. We are currently evaluating the effects that the adoption of Update 2016-02 will have on our consolidated financial statements. We anticipate that the new guidance will impact our consolidated financial statements, as we have several leases.In August 2016, the Financial Accounting Standards Board issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, (“Update 2016-15”). Current GAAP either is unclear or does not include specific guidance on the eight cash flow classification issues included in the amendments in Update 2016-15. The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice. The amendments in Update 2016-15 are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We have evaluated Update 2016-15 and we do not expect the adoption of this guidance to have a material impact on our statements of cash flows.In October 2016, the Financial Accounting Standards Board issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, (“Update 2016-16”). This amendment improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Update 2016-16 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption is permitted. We do not anticipate that the adoption of Update 2016-16 willcould have a significant impact on our consolidated financial statements.October 2016,addition, debt issuance costs related to the Financial Accounting Standards Board issued ASU No. 2016-17, Consolidation (Topic 810): Interest Held through Related Parties That Are Under Common Control, (Update 2016-17”).2028 Notes was $24.4 million. We allocated the costs to the liability and equity components of the 2028 Notes based on their relative values. The amendmentsdebt issuance costs allocated to the liability component are being amortized over the life of the 2028 Notes as additional non-cash interest expense. The transaction costs allocated to the equity component are netted with the equity component of the convertible debt instrument in Update 2016-17 change how a reporting entity thatstockholders’ equity.single decision makerdate that the acquirer obtains control of a variable interest entity should treat indirect interests in the entity held through related partiesacquired business. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill. Acquisitions that are under common control with the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. The amendment is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The adoption of Update 2016-17 did not have an impact on our consolidated financial statements.34In November 2016, the Financial Accounting Standards Board issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, (“Update 2016-18”). Update 2016-18 provides guidance on the classification of restricted cash in the statement of cash flows. The amendments are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The amendments in the Update 2016-18 should be adopted on a retrospective basis. We do not expect that adoption of this amendment to have a material effect on our consolidated financial statements, as we do not have restricted cash.In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, (Update 2017-01) in an effort to clarifymeet the definition of a business withcombination under the objective of adding guidance to assist entities with evaluating whether transactions should beASC are accounted for as asset acquisitions. Asset acquisitions (or disposals)are accounted for by allocating the cost of the acquisition to the individual assets acquired and liabilities assumed on a relative fair value basis. Goodwill is not recognized in an asset acquisition with any consideration in excess of net assets acquired allocated to acquired assets on a relative fair value basis. Transaction costs are expensed in a business combination and are considered a component of the cost of the acquisition in an asset acquisition.businesses. The amendmentsmore frequently should an event or change in circumstance occur that indicates that the carrying amount is in excess of Update 2017-01 are effective for fiscal years beginning after December 15, 2017the fair value. Refer to Note 5 and interim periods within those fiscal years. Early adoption is allowed for interim or annual periods for whichNote 16 of the condensed consolidated financial statements have not been issued or made availableincluded in this Quarterly Report for issuance. We do not expect that adoption of this amendment to have a material effect on our consolidated financial statements. In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-03, Accounting Changes and Error Corrections, (“Update 2017-03”) which states that an entity should evaluate ASUs that have been issued but not yet adopted to determine the effects of those ASUs on the entity’s financial statements when adopted. If the effect is unknown or cannot be reasonably estimated, then additional qualitative disclosures should be considered, including a description of the effect of the accounting policies that the entity expects to apply, if determined, and a comparison to the entity’s current accounting policies, a description of the status of the entity’s process to implement the new standard and the significant implementation matters yet to be addressed. Transition guidance in certain issued but not yet adopted ASUs was updated to reflect Update 2017-03. Other than enhancements to the qualitative disclosures regarding the future adoption of new ASUs, adoption of Update 2017-03 is not expected to have any impact on our consolidated financial statements.In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, (“Update 2017-04”). Update 2017-04 eliminates Step 2further discussion of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparingrecorded.reporting unit with itscomparison of the carrying amount. An entity should recognizeamount 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 charge forto be recognized is measured by the amount by which the carrying amount of the assets exceeds the reporting unit’s fair value; however,value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.recognized should not exceedof $200.0 million related to the total amountin-process research and development intangible asset acquired as part of goodwill allocatedthe business combination with Genomic Health and an impairment loss of $9.7 million relating to that reporting unit. An entity still has the optionabandonment of certain research and development efforts using intangible assets acquired as part of an asset purchase agreement with Armune Biosciences, Inc. The determination to performrecord these impairment charges was made in connection with the qualitative assessmentpreparation of the financial statements as of September 30, 2020. Refer to Note 5 of the condensed consolidated financial statements included in this Quarterly Report for a reporting unitfurther discussion on the impairment charges recorded. determine if the quantitative impairment test is necessary. The update is effective for public business entitiesCondensed Consolidated Financial Statements for the first interim and annual reporting periods beginning after January 1, 2020 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this standard effective January 1, 2017, and will utilize this approach for any interim or annual goodwill impairment tests performed in 2017.In May 2017, the Financialdiscussion of Recent Accounting Standards Board issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, (“Update 2017-09”). Update 2017-09 provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments in Update 2017-09 are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The amendments in Update 2017-09 should be applied prospectively to an award modified on or after the adoption date. We are currently evaluating the impact of this amendment on our consolidated financial statements.Arrangements2017,2020, we had no off-balance sheet arrangements.35governmentgovernments and its agencies and in investment-grade, highly liquid investments consisting of commercial paper, bank certificates of deposit, asset backed securities and corporate bonds, which as of September 30, 20172020 and December 31, 2019 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.2017,2020, 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.Duringfiscal quarter covered by this report,Company acquired all of the outstanding capital stock of Genomic Health (see Note 16 to the accompanying consolidated financial statements for additional information). As of September 30, 2020, management is in the process of evaluating and integrating the internal controls of Genomic Health into the Company’s existing operations. Other than the controls enhanced or implemented to integrate the Genomic Health business, there have been no significant changes in the Company’s internal controlcontrols over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal controlcontrols over financial reporting.36 not currently a party to any pendingvarious legal proceedings that we believe will have a material adverse effect on our business, financial condition or results of operations. We may, however, be subject to various claims and legal actions 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.from timefinancial condition and results of operations.time.2016 Form 10-K. Therefactors set forth below, there have been no material changes to the risk factors described in the 20162019 Form 10-K.InformationResignation of Lionel Sterling as Director; Election of Eli Casdin as Director.26, 2017, Lionel Sterling submitted his resignation23, 2020, we notified The Nasdaq Stock Market (“Nasdaq”) of an inadvertent noncompliance with Nasdaq Listing Rule 5605(c) (“Rule 5605(c)”), which prohibits members of a listed company’s audit committee from receiving, directly or indirectly, consulting fees of any amount. During the time period from July 25, 2019, to October 22, 2020, Pierre Jacquet, a member of our board of directors, served as a member of our Audit and Finance Committee. Mr. Jacquet is Vice Chairman, Global Healthcare Managing Director at L.E.K. Consulting, a global management consulting firm that we have engaged from time to time to perform strategic consulting services for theBoard of Directors of the Company for personal reasons. Mr. Sterling did not indicate that his resignationAudit and Finance Committee on October 22, 2020.a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.On October 26, 2017, the Board elected Eli Casdin to serve as a Class II director until the 2020 Annual Meeting of Stockholders. Mr. Casdin will serve as a member of each of the Audit Committee and Compensation Committee of the Board of Directors. Mr. Casdin, age 44, founded Casdin Capital, LLC, a life sciences and healthcare investment company, in 2011 and has served as Chief Investment Officer and Managing Partner since its founding. Prior to founding Casdin Capital, Mr. Casdin was Vice President at Alliance Bernstein from 2007 to 2011 where he researched investment implications of new technologies for the life sciences and healthcare sectors. Prior to that, Mr. Casdin served as a research analyst at Bear Stearns and Cooper Hill Partners, specializing in healthcare investments in life sciences tools, diagnostics and medical devices. Mr. Casdin earned a bachelor’s degree from Columbia University and an MBA from Columbia Business School.Mr. Casdin will receive compensation for his service as a directormade in accordance with Nasdaq Rule 5625, which requires a company with common securities listed on Nasdaq to report any noncompliance of Nasdaq’s Rule 5600 Series. This report shall not constitute an admission that the Company’s Non-Employee Director Compensation Policy (the “Director Compensation Policy”), whichinadvertent noncompliance reported herein is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and incorporated herein by reference. Pursuant to the Director Compensation Policy, in connection with his initial appointment to the Board of Directors, Mr. Casdin received a stock option award covering 10,100 shares of Company common stock.37Third Amended and Restated By-lawsOn October 26, 2017, the Board of Directors of the Company approved the Company’s Third Amended and Restated By-laws (the “Third Amended and Restated By-laws”), effective as of October 31, 2017. The Third Amended and Restated By-laws amend and restate in their entirety the Company’s bylaws to, among other things:·amend Article 3 to remove the specific requirement that certain officers be elected at the meeting of the board of directors immediately following each annual meeting, as the Company’s officers may be appointed by the Board at any time as it deems appropriate;·clarify that the voting requirement for matters to be approved by the stockholders is a majority of the voting power of stockholders present or represented, in person or by proxy, and voting on a matter, unless a different standard is required or permitted by express provision of law, the Certificate of Incorporation, the by-laws, or the rules and regulations of any stock exchange applicable to the Company or pursuant to any regulation applicable to the Company or its securities; and·clarify that shares of the Company’s stock may be certificated or uncertificated, as provided under Delaware law, and to clarify the procedures for transfer of uncertificated shares and the issuance of uncertificated shares in replacement of lost, stolen or destroyed certificates.The foregoing summary is subject to, and qualified in its entirety by, the full text of the Third Amended and Restated By-laws, a copy of which is filed as Exhibit 3.3 to this Quarterly Report on Form 10-Q and incorporated herein by reference.exhibits required to befollowing documents are filed as a part of this report are listed in the Exhibit Index.Form 10-Q.38
NumberFiled
with
This
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by Reference
herein from
Form or
ScheduleFiling
DateSEC File /
Registration
Number S-1 (Exhibit 3.3) 12/4/2000 and incorporated herein by reference)333-48812 8-K (Exhibit 3.1) 7/24/2020 001-35092 3.3+ThirdFourth Amended and Restated By-Laws of the Registrant dated October 31, 2017 8-K (Exhibit 3.1) 1/31/2020 001-35092 10.1+*License Agreement, effective January 31, 2020, by and between Mayo Foundation for Medical Education and Research and the Registrant * X 10.2+*Non-Employee Director Compensation Policy, dated January 31, 2017Amended and effective July 27, 20178-K
(Exhibit 10.1)10/7/2020 001-35092 31.1+X 31.2+X 32.1+X 101+Interactive Data FilesX 104 The cover page from our Quarterly Report for the period ended September 30, 2020, filed with the Securities and Exchange Commission on October 27, 2020, is formatted in Inline Extensible Business Reporting Language (“iXBRL”) X +Filed herewith*Indicates a management contract or any compensatory plan, contract or arrangement.39 30, 2017 30, 2017 40