UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~2019

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-35092

EXACT SCIENCES CORPORATION

(Exact name of registrant as specified in its charter)

~~DELAWARE~~Delaware		~~02-0478229~~02-0478229
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

441 Charmany Drive, MadisonWI		53719
(Address of principal executive offices)		(Zip Code)

~~(608) 284-5700~~ (608) 535-8815(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	EXAS	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, ~~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 ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐
~~(Do not check if a smaller reporting company)~~

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October ~~27, 2017,~~28, 2019, the registrant had ~~119,730,401~~129,832,089 shares of common stock outstanding.

Part I — Financial Information

EXACT SCIENCES CORPORATION

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share data - unaudited)

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


	September 30,		December 31,
	2019		2018
ASSETS
Current Assets:
Cash and cash equivalents	$	1,034,334	$	160,430
Marketable securities		126,211		963,752
Accounts receivable, net		82,200		45,329
Inventory, net		53,673		39,148
Prepaid expenses and other current assets		23,560		19,408
Total current assets		1,319,978		1,228,067
Long-term Assets:
Property, plant and equipment, net		370,532		245,259
Goodwill and intangibles, net		44,385		46,281
Other long-term assets, net		24,373		4,415
Total assets	$	1,759,268	$	1,524,022
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	19,158	$	28,141
Accrued liabilities		134,832		100,644
Accrued interest		1,168		4,172
Convertible notes, net, current portion		315,643		—
Debt, current portion		601		8
Other short-term liabilities		9,290		3,204
Total current liabilities		480,692		136,169
Long-term Liabilities:
Long-term convertible notes, net, less current portion		476,527		664,749
Long-term debt, less current portion		24,254		24,494
Other long-term liabilities		29,511		17,669
Total liabilities		1,010,984		843,081

Commitments and contingencies

Stockholders’ Equity:
Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—0 shares at September 30, 2019 and December 31, 2018		—		—
Common stock, $0.01 par value Authorized—200,000,000 shares issued and outstanding—129,817,885 and 123,192,540 shares at September 30, 2019 and December 31, 2018		1,299		1,232
Additional paid-in capital		1,945,046		1,716,894
Accumulated other comprehensive loss		(360)		(1,422)
Accumulated deficit		(1,197,701)		(1,035,763)
Total stockholders’ equity		748,284		680,941
Total liabilities and stockholders’ equity	$	1,759,268	$	1,524,022

The accompanying notes are an integral part of these condensed consolidated financial statements.

EXACT SCIENCES CORPORATION

Condensed Consolidated Statements of Operations

(Amounts in thousands, except per share data - unaudited)

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

(51)

(54)

(155)

(161)

Total other income

1,283

481

2,457

1,265

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue	$	218,805	$	118,291	$	580,718	$	311,481

Cost of sales		52,759		30,020		147,574		79,822
Gross margin		166,046		88,271		433,144		231,659

Operating expenses:
Research and development		34,945		17,631		97,164		47,278
General and administrative		80,565		46,729		208,329		121,861
Sales and marketing		86,196		64,836		265,325		172,675
Total operating expenses		201,706		129,196		570,818		341,814
Loss from operations		(35,660)		(40,925)		(137,674)		(110,155)

Other income (expense)
Investment income		9,093		6,292		23,417		14,882
Interest expense		(13,209)		(10,704)		(47,911)		(25,817)
Total other expense		(4,116)		(4,412)		(24,494)		(10,935)

Net loss before tax		(39,776)		(45,337)		(162,168)		(121,090)

Income tax benefit (expense)		(683)		(27)		230		(85)

Net loss	$	(40,459)	$	(45,364)	$	(161,938)	$	(121,175)

Net loss per share—basic and diluted	$	(0.31)	$	(0.37)	$	(1.26)	$	(0.99)

Weighted average common shares outstanding—basic and diluted		129,567		122,671		128,344		121,946

The accompanying notes are an integral part of these condensed consolidated financial statements.

EXACT SCIENCES CORPORATION

Condensed Consolidated Statements of Comprehensive Loss

(Amounts in thousands - unaudited)

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)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net loss	$	(40,459)	$	(45,364)	$	(161,938)	$	(121,175)
Other comprehensive loss, before tax:
Unrealized gain (loss) on available-for-sale investments		(2,697)		462		1,431		(668)
Foreign currency translation gain (loss)		(66)		10		(28)		12
Comprehensive loss, before tax		(43,222)		(44,892)		(160,535)		(121,831)
Income tax benefit (expense) related to items of other comprehensive loss		643		—		(341)		—
Comprehensive loss, net of tax	$	(42,579)	$	(44,892)	$	(160,876)	$	(121,831)

The accompanying notes are an integral part of these condensed consolidated financial statements.

EXACT SCIENCES ~~CORPORATION~~CORPORATION

Condensed Consolidated Statements of ~~Cash Flows~~Stockholders’ Equity

(Amounts in thousands, except share data - unaudited)

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


	Common Stock			Additional		Other				Total
	Number of	$0.01		Paid In		Comprehensive		Accumulated		Stockholders’
	Shares	Par Value		Capital		Income (Loss)		Deficit		Equity
Balance, 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 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	—		—		—		—		(83,059)		(83,059)
Accumulated other comprehensive loss	—		—		—		1,776		—		1,776
Balance, March 31, 2019	129,083,822	$	1,292	$	1,894,116	$	354	$	(1,118,822)	$	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	—		—		—		—		(38,420)		(38,420)
Accumulated other comprehensive loss	—		—		—		1,406		—		1,406
Balance, June 30, 2019	129,361,048	$	1,295	$	1,919,719	$	1,760	$	(1,157,242)	$	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		—		—		—		—		—
Stock issuance costs	—		—		(409)		—		—		(409)
Net loss	—		—		—		—		(40,459)		(40,459)
Accumulated other comprehensive loss	—		—		—		(2,120)		—		(2,120)
Balance, September 30, 2019	129,817,885	$	1,299	$	1,945,046	$	(360)	$	(1,197,701)	$	748,284

The accompanying notes are an integral part of these condensed consolidated financial statements.

EXACT SCIENCES CORPORATION

Condensed Consolidated Statements of Stockholders’ Equity

(Amounts in thousands, except share data - unaudited)


	Common Stock			Additional		Other				Total
	Number of	$0.01		Paid In		Comprehensive		Accumulated		Stockholders’
	Shares	Par Value		Capital		Income (Loss)		Deficit		Equity
Balance, January 1, 2018	120,497,426	$	1,205	$	1,380,577	$	(750)	$	(860,614)	$	520,418
Equity component of convertible notes, net of issuance costs	—		—		189,456		—		—		189,456
Exercise of common stock options	420,129		4		1,387		—		—		1,391
Issuance of common stock to fund the Company’s 2017 401(k) match	86,828		1		4,299		—		—		4,300
Compensation expense related to issuance of stock options and restricted stock awards	862,376		9		12,454		—		—		12,463
Net loss	—		—		—		—		(39,424)		(39,424)
Accumulated other comprehensive loss	—		—		—		(1,586)		—		(1,586)
Balance, March 31, 2018	121,866,759	$	1,219	$	1,588,173	$	(2,336)	$	(900,038)	$	687,018
Equity component of convertible notes, net of issuance costs	—		—		70,788		—		—		70,788
Exercise of common stock options	365,566		3		4,250		—		—		4,253
Issuance of common stock to fund the Company’s 2017 401(k) match	54		—		3		—		—		3
Compensation expense related to issuance of stock options and restricted stock awards	87,322		1		15,592		—		—		15,593
Purchase of employee stock purchase plan shares	285,013		3		2,659		—		—		2,662
Net loss	—		—		—		—		(36,387)		(36,387)
Accumulated other comprehensive loss	—		—		—		458		—		458
Balance, June 30, 2018	122,604,714	$	1,226	$	1,681,465	$	(1,878)	$	(936,425)	$	744,388
Exercise of common stock options	62,366		1		734		—		—		735
Compensation expense related to issuance of stock options and restricted stock awards	222,774		2		16,496		—		—		16,498
Net loss	—		—		—		—		(45,364)		(45,364)
Accumulated other comprehensive loss	—		—		—		472		—		472
Balance, September 30, 2018	122,889,854	$	1,229	$	1,698,695	$	(1,406)	$	(981,789)	$	716,729

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

EXACT SCIENCES CORPORATION

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands, except share data - unaudited)


	Nine Months Ended September 30,
	2019		2018
Cash flows from operating activities:
Net loss	$	(161,938)	$	(121,175)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property, plant and equipment		21,750		14,349
Loss on disposal of property, plant and equipment		880		853
Realized gain on sale of marketable securities		(3,340)		(243)
Deferred tax benefit		(341)		—
Stock-based compensation		60,657		44,554
Loss on settlement of convertible notes		10,558		—
Non-cash lease expense		2,681		—
Amortization of liabilities		27,656		18,433
Amortization of premium on short-term investments		(2,889)		(2,338)
Amortization of intangible assets		2,426		1,847
Changes in assets and liabilities:
Accrued interest		(3,004)		1,901
Accounts receivable, net		(36,871)		(15,497)
Inventory, net		(14,525)		(12,590)
Prepaid expenses and other current assets		434		(13,777)
Accounts payable		(8,983)		16,603
Accrued liabilities		24,779		(1,600)
Other short-term liabilities		196		87
Other long-term liabilities		16,302		504
Other long-term assets		(22,754)		—
Net cash used in operating activities		(86,326)		(68,089)
Cash flows from investing activities:
Purchases of marketable securities		(604,129)		(1,081,662)
Maturities and sales of marketable securities		1,449,330		407,287
Purchases of property, plant and equipment		(130,970)		(97,987)
Internally developed software		(530)		(135)
Net cash provided by (used in) investing activities		713,701		(772,497)
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net		729,477		896,431
Proceeds from financing obligation		—		6,750
Proceeds from exercise of common stock options		6,389		6,376
Proceeds in connection with the Company's employee stock purchase plan		4,137		2,663
Payments on settlement of convertible notes		(493,356)		—
Payments of deferred financing costs		—		(25)
Proceeds from construction loan		319		17,271
Payments on mortgage payable		—		(4,678)
Stock issuance costs		(409)		—
Net cash provided by financing activities		246,557		924,788

Effects of exchange rate changes on cash and cash equivalents		(28)		12

Net increase in cash and cash equivalents		873,904		84,214
Cash and cash equivalents, beginning of period		160,430		77,491
Cash and cash equivalents, end of period	$	1,034,334	$	161,705
Supplemental disclosure of non-cash investing and financing activities:
Property, plant and equipment acquired but not paid	$	16,933	$	25,714
Unrealized gain (loss) on available-for-sale investments, before tax	$	1,431	$	(668)
Issuance of 86,532 and 86,882 shares of common stock to fund the Company’s 401(k) matching contribution for 2018 and 2017, respectively	$	7,409	$	4,303
Issuance of 2,159,017 shares of common stock upon settlement of convertible notes	$	182,436	$	—
Retirement of equity component of convertible notes settled	$	(300,768)	$	—
Interest paid	$	9,117	$	4,638

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1) ORGANIZATION AND BASIS OF PRESENTATION

Organization

Exact Sciences Corporation ~~(“Exact”~~(together with its subsidiaries, “Exact,” or the “Company”) was incorporated in February 1995. Exact is a molecular diagnostics company currently focused on the early detection and prevention of some of the deadliest forms of cancer. The Company has developed an accurate, non-invasive, patient-friendly screening test called Cologuard® for the early detection of colorectal cancer and pre-cancer and is currently working on the development of additional tests for other types of ~~cancer.~~cancer, with the goal of becoming a leader in cancer screening and diagnostics.

Basis of Presentation

The accompanying condensed consolidated financial statements, which include the accounts of Exact Sciences Corporation and those of its wholly owned subsidiaries ~~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, ~~2016~~2018 included in the Company’s Annual Report on Form 10-K (the ~~“2016~~“2018 Form 10-K”). 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, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the results of operations have been included. 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 ~~2016~~2018 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 POLICIES

Principles of Consolidation

~~Principles of Consolidation~~

The 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. See Note 7 for the discussion of financing arrangements involving certain entities that are variable interest entities that are included in the Company’s condensed consolidated financial statements. All significant intercompany transactions and balances have been eliminated in consolidation.

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

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers cash on hand, demand deposits in bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents.

The Company had 0 restricted cash at September 30, 2019 or December 31, 2018.

Investments

~~Marketable Securities~~

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Debt securities carried at amortized cost are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair ~~value, with~~value. The unrealized gains and losses, net of tax, on the Company’s debt securities are reported in other comprehensive income and the unrealized gains and losses, net of tax, on the Company’s equity securities are reported in ~~other comprehensive loss.~~the condensed consolidated statement 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. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.

At September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the Company’s ~~investments~~marketable securities were comprised of fixed income investments, and all were deemed available-for-sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives. The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Investments in which the Company has the ability and intent, if necessary, to liquidate, in order to support its current operations (including those with a contractual term greater than one year from the date of purchase), are classified as current. All of the Company’s investments are considered ~~current. There~~current and realized gains, net of insignificant realized losses, are included in investment income. Realized gains, net of insignificant realized losses, were no$3.1 million and $0.1 million for the three months ended September 30, 2019, and 2018, respectively. Realized gains, net of insignificant realized losses, were $3.3 million and $0.2 million, for the nine months ended September 30, ~~2017~~2019 and ~~2016. Realized gains were $17,000 and $21,000 for the nine months ended September 30, 2017 and 2016,~~2018, respectively.

WeThe Company periodically ~~review our~~reviews investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, ~~our~~the Company’s intent not to sell the security, and whether it is more likely than not that wethe Company will have to sell the security before recovery of its cost basis. For the nine months ended September 30, ~~2017, no~~2019, 0 investments were identified with other-than-temporary declines in value.

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Available-for-sale securities at September 30, ~~2017~~2019 consisted of the following:


	September 30, 2019
			Gains in Accumulated		Losses in Accumulated
			Other Comprehensive		Other Comprehensive		Estimated Fair
(In thousands)	Amortized Cost		Income (Loss) (1)		Income (Loss) (1)		Value
Cash equivalents
U.S. government agency securities	$	539,087	$	15	$	—	$	539,102
Commercial paper		39,961		—		(4)		39,957
Certificates of deposit		7,000		—		—		7,000
Total cash equivalents		586,048		15		(4)		586,059
Marketable securities
U.S. government agency securities		90,503		17		(6)		90,514
Certificates of deposit		20,504		9		—		20,513
Corporate bonds		11,670		3		—		11,673
Commercial paper		1,999		—		—		1,999
Asset backed securities		1,512		—		—		1,512
Total marketable securities		126,188		29		(6)		126,211
Total available-for-sale securities	$	712,236	$	44	$	(10)	$	712,270

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

(1)	Gains and losses in accumulated other comprehensive income (loss) are reported before tax impact.

~~Table of Contents~~

Available-for-sale securities at December 31, ~~2016~~2018 consisted of the following:


	December 31, 2018
			Gains in Accumulated		Losses in Accumulated
			Other Comprehensive		Other Comprehensive		Estimated Fair
(In thousands)	Amortized Cost		Income (Loss) (1)		Income (Loss) (1)		Value
Cash equivalents
U.S. government agency securities	$	49,982	$	3	$	—	$	49,985
Commercial paper		24,072		—		(2)		24,070
Certificates of deposit		11,000		—		—		11,000
Total cash equivalents		85,054		3		(2)		85,055
Marketable securities
Corporate bonds		392,973		33		(719)		392,287
Asset backed securities		277,538		30		(569)		276,999
U.S. government agency securities		250,606		43		(178)		250,471
Certificates of deposit		31,875		—		(31)		31,844
Commercial paper		12,158		—		(7)		12,151
Total marketable securities		965,150		106		(1,504)		963,752
Total available-for-sale securities	$	1,050,204	$	109	$	(1,506)	$	1,048,807

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

(1)	Gains and losses in accumulated other comprehensive income (loss) are reported before tax impact.

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Changes in Accumulated Other Comprehensive Income (Loss)

The ~~amounts~~amount recognized in accumulated other comprehensive income (loss) (“AOCI”) for the nine months ended September 30, ~~2017~~2019 were as follows:

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)



	Foreign		Unrealized		Accumulated
	Currency		Gain (Loss)		Other
	Translation		on Marketable		Comprehensive
(In thousands)	Adjustments		Securities		Income (Loss)
Balance at December 31, 2018	$	(25)	$	(1,397)	$	(1,422)
Other comprehensive income (loss) before reclassifications		(28)		815		787
Amounts reclassified from accumulated other comprehensive loss		—		616		616
Net current period change in accumulated other comprehensive loss, before tax		(28)		1,431		1,403
Income tax expense related to items of other comprehensive income		—		(341)		(341)
Balance at September 30, 2019	$	(53)	$	(307)	$	(360)

The amounts recognized in AOCI for the nine months ended September 30, ~~2016~~2018 were as follows:


	Foreign		Unrealized		Accumulated
	Currency		Gain (Loss)		Other
	Translation		on Marketable		Comprehensive
(In thousands)	Adjustments		Securities		Income (Loss)
Balance at December 31, 2017	$	(61)	$	(689)	$	(750)
Other comprehensive loss before reclassifications		12		(883)		(871)
Amounts reclassified from accumulated other comprehensive loss		—		215		215
Net current period change in accumulated other comprehensive loss		12		(668)		(656)
Balance at September 30, 2018	$	(49)	$	(1,357)	$	(1,406)

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)

Amounts reclassified from AOCI for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 were as follows:


	Affected Line Item in the	Nine Months Ended September 30,

						Affected Line Item in the	Nine Months Ended September 30,
Details about AOCI Components (In thousands)	Statement of Operations	2017		2016		Statements of Operations	2019		2018
Change in value of available-for-sale investments
Sales and maturities of available-for-sale investments	Investment income	$	10	$	64	Investment income	$	616	$	215
Total reclassifications		$	10	$	64		$	616	$	215

Property, Plant and Equipment

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


	Estimated		September 30,		December 31,
(In thousands)	Useful Life		2019		2018
Property, plant and equipment
Land		(1)	$	4,466	$	4,466
Leasehold and building improvements		(2)		61,951		38,895
Land improvements		15 years		1,766		1,530
Buildings		30 years		115,104		7,928
Computer equipment and computer software		3 years		42,506		36,969
Laboratory equipment		3 - 10 years		80,966		37,518
Furniture and fixtures		3 years		11,342		8,353
Assets under construction		(3)		119,163		167,462
Property, plant and equipment, at cost				437,264		303,121
Accumulated depreciation				(66,732)		(57,862)
Property, plant and equipment, net			$	370,532	$	245,259

(1)	Not depreciated.

(2)
	~~Estimated~~
~~Asset Classification~~	~~Useful Life~~
~~Laboratory equipment~~	~~3 - 5 years~~
~~Computer equipment and computer software~~	~~3 years~~
~~Leasehold improvements~~	Lesser of ~~the~~ remaining lease term, ~~or useful life~~
~~Building Improvements~~	~~Lesser of the remaining~~ building life, or useful ~~life~~
~~Furniture and fixtures~~	~~3 years~~
~~Buildings~~	~~30 years~~	life.

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Patent Costs, ~~and~~ Intangible Assets and Goodwill

Patent costs, ~~which have historically~~Intangible assets, and Goodwill 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~~following:


	September 30,		December 31,
(In thousands)	2019		2018
Finite-lived intangible assets
Finite-lived intangible assets	$	33,415	$	33,058
Less: Accumulated amortization		(6,533)		(4,107)
Finite-lived intangible assets, net		26,882		28,951
Internally developed technology in process		224		51
Total finite-lived intangible assets, net		27,106		29,002
Goodwill		17,279		17,279
Goodwill and intangible assets, net	$	44,385	$	46,281

Finite-Lived Intangible Assets

The following table summarizes the ~~transaction. A capitalized patent is amortized over its~~net-book-value and 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 nine months ended September 30, 2017 should be expensed and not capitalized as the future economic benefit to be derived from the transactions cannot be determined.

Under a technology license and royalty agreement entered into with MDxHealth (“MDx”), dated July 26, 2010 (as subsequently amended, the “License Agreement”), the Company was required to pay MDx milestone-based royalties on sales of products or services covered by the licensed intellectual property. Once the achievement of a milestone occurred or was considered probable, an intangible asset and corresponding liability was reported in other long-term assets and accrued liabilities, respectively. The intangible asset is being amortized over the estimated ten-year usefulremaining life of the ~~licensed intellectual property through 2024, and such amortization is reported in cost~~Company’s finite-lived intangible assets as of sales. The liability was relieved once 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.September 30, 2019:


			Weighted
	Net Balance at		Average
	September 30,		Remaining
(In thousands)	2019		Life (Years)
Trade name	$	653		14.1
Customer relationships		2,521		14.1
Patents		17,281		9.0
Acquired developed technology		5,708		13.1
Internally developed technology		719		2.5
Total	$	26,882

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 License

~~Table of Contents~~

Agreement. Also included in the Royalty Buy-Out Agreement is a mutual release of liabilities, 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 Agreement and Patent Purchase Agreement, net of liabilities relieved of $6.6 million, was recorded as an intangible asset and is being amortized over the estimated 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~~2019, the License Agreement and intangible assets acquired as part of the Royalty Buy-Out Agreement and Patent Purchase Agreement is reported 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 associated with the Company’s finite-lived intangible assets for each of the five succeeding fiscal years is as ~~of September 30, 2017:~~follows:



(In thousands)
2017	$	335
2018		1,338
2019		1,338	$	829
2020		1,338		3,312
2021		1,338		3,210
2022				3,025
2023				2,953
Thereafter		3,680		13,553
	$	9,367
			$	26,882

The Company ~~reviews long-lived assets and certain~~evaluates identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no0 impairment losses for ~~the~~ periods ended September 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

~~Goodwill and~~Patent costs are capitalized as incurred, only if the Company determines that there is some probable future economic benefit derived from the patent costs incurred. 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

Table of Contents

of value to the Company. Other ~~Intangible Assets~~

~~Goodwill~~

~~As more fully described in Note 11,~~than the transactions discussed below, the Company determined that all patent costs incurred during the ~~third quarter~~nine months ended September 30, 2019 and 2018 should be expensed and not capitalized as the future economic benefit derived from the patent costs incurred cannot be determined.

Under a technology license and royalty agreement entered into with MDx Health (“MDx”), dated July 26, 2010 (as subsequently amended, the “MDx License Agreement”), the Company was required to pay MDx milestone-based royalties on sales of products or services covered by the licensed intellectual property. Once the achievement of a milestone occurred or was considered probable, an intangible asset and corresponding liability was reported in goodwill and intangible assets and accrued liabilities, respectively. The liability was relieved once the milestone was achieved and payment made. The intangible asset is being amortized over the estimated ten-years useful life of the licensed intellectual property through 2024, and such amortization is reported in cost of sales. Payment for all remaining milestones under the MDx License Agreement was made as part of the Royalty Buy-Out Agreement described below.

Effective April 2017, the Company ~~recognized~~and MDx entered into a royalty buy-out agreement (“Royalty Buy-Out Agreement”), which terminated the MDx License Agreement. Pursuant to the Royalty Buy-Out Agreement, the Company paid MDx a one-time fee of $8.0 million in exchange for an assignment of certain patents covered by the MDx License Agreement and the elimination of all ongoing royalties and other payments by the Company to MDx under the MDx License Agreement. Also included in the Royalty Buy-Out Agreement is a mutual release of liabilities, which includes all amounts previously accrued under the MDx License Agreement. Concurrently with entering into the Royalty Buy-Out Agreement, the Company entered into a patent purchase agreement (“Patent Purchase Agreement”) with MDx under which it paid MDx an additional $7.0 million in exchange for the assignment of certain other patent rights that were not covered by the MDx License Agreement. The total $15.0 million paid by the Company pursuant to the Royalty Buy-Out Agreement and Patent Purchase Agreement, net of liabilities relieved of $6.6 million, was recorded as an intangible asset and is being amortized over the estimated remaining useful life of the licensed intellectual property through 2024, and such amortization is reported in cost of sales. The $6.6 million of liabilities relieved were related to historical milestones and accrued royalties under the MDx License Agreement.

As of September 30, 2019, and December 31, 2018, an intangible asset of $6.7 million and $7.7 million, respectively, related to historical milestone payments made under the MDx License Agreement and intangible assets acquired as part of the Royalty Buy-Out Agreement and Patent Purchase Agreement is reported in net goodwill and intangible assets on the Company’s condensed consolidated financial statements. Amortization expense was $0.3 million for the three months ended September 30, 2019 and 2018. Amortization expense was $1.0 million for the nine months ended September 30, 2019 and 2018.

In December 2017, the Company entered into an asset purchase agreement (the “Armune Purchase Agreement”) with Armune BioScience, Inc. (“Armune”), pursuant to which the Company acquired intellectual property and certain other assets underlying Armune’s APIFINY®, APIFINY® PRO and APIFINY® ACTIVE SURVEILLANCE prostate cancer diagnostic tests. The Company has utilized the Armune assets in its research and development program. The total consideration was comprised of ~~$2.0~~an up-front cash payment of $12.0 million and $17.5 million in contingent payment obligations that will become payable upon the Company’s achievement of development and commercial milestones using the acquired intellectual property. The satisfaction of these milestones is subject to many risks and is therefore uncertain. The Company will not record the contingent consideration until it is probable that the milestones will be met. There is no other consideration due to Armune beyond the milestone payments and the Company is not subject to future royalty obligations should a product be developed and commercialized. In connection with the Armune Purchase Agreement, Armune terminated a license agreement pursuant to which it licensed certain patent rights and know-how from the Regents of the University of Michigan (“University of Michigan”), and the Company entered into a license agreement with the University of Michigan with respect to such patent rights and know-how, as well as certain additional intellectual property rights. Pursuant to the Company’s agreement with the University of Michigan, it is required to pay the University of Michigan a low single-digit royalty on its net sales of products using the licensed intellectual property.

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The Company accounted for the transaction as an asset acquisition under GAAP. The asset is comprised of a portfolio of biomarkers, related technology and know-how, which is a group of complementary assets concentrated in a single identifiable asset. The transaction costs directly related to the asset acquisition were added to the asset in accordance with GAAP. As such, the collective asset value from the acquisition resulted in an intangible asset of $12.2 million. The intellectual property asset, which includes related transaction costs, is being amortized on a straight-line basis over the period the Company expects to be benefited, which is in line with the legal life of the patents acquired. The Company capitalized these costs as there is a reasonable expectation that the assets acquired will be used in an alternative manner in the future, that is not contingent on future development subsequent to acquisition, and the Company anticipates there to be economic benefit from these alternative uses. For the three and nine months ended September 30, 2019 and 2018, the Company recorded amortization expense of $0.2 million and $0.7 million, respectively. At September 30, 2019 and December 31, 2018, the net balance of $10.6 million and $11.3 million, respectively, is reported in net goodwill and intangible assets in the Company’s condensed consolidated balance sheet.

In August 2017, the Company acquired all of the equity interests 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 excess of the fair value.

~~Other Intangible Assets~~

(“Sampleminded”). As a result of the ~~Sampleminded~~ acquisition, the Company recorded an intangible asset of $1.0 million, which was comprised of developed technology acquired of $0.9 million, customer relationships of $0.1 million, and non-compete agreements of $32,000. The intangible assets acquired are being amortized over the remaining useful life, which was determined to be eight years for developed technology acquired, ~~thirteen~~three years for customer relationships, and five years for non-compete agreements. ~~As of~~For the three months ended September 30, ~~2017,~~2019 and 2018, the Company recorded ~~$20,000 in amortization expense.~~

~~Table of Contents~~

~~The table below represents estimated future~~ amortization expense of ~~these~~$36,000. For the nine months ended September 30, 2019 and 2018, the Company recorded amortization expense of $0.1 million. At September 30, 2019 and December 31, 2018, the net balance of $0.7 million and $0.8 million, respectively, is reported in net intangible assets asin the Company’s condensed consolidated balance sheets.

In October 2018, the Company completed a full acquisition of Biomatrica, Inc. (“Biomatrica”, and the “Biomatrica Acquisition”). As a result of the Biomatrica Acquisition, the Company recorded an intangible asset of $8.8 million which was comprised of acquired developed technology of $5.4 million, customer relationships of $2.7 million, and trade names of $0.7 million. The intangible assets acquired are being amortized over the remaining useful life, which was determined to be fifteen years for the acquired developed technology, fifteen years for the customer relationships, and fifteen years for the trade names. For the three and nine months ended September 30, ~~2017:~~2019, the Company recorded amortization expense of $0.1 million and $0.5 million, respectively. At September 30, 2019 and December 31, 2018, the net balance of $8.2 million and $8.7 million, respectively, is reported in net goodwill and intangible assets in the Company’s condensed consolidated balance sheets.

(In thousands)

2017

$
30

2018

118

2019

118

2020

118

2021

118

Thereafter

449

$
951

Goodwill

In 2018, the Company recognized goodwill of $15.3 million from the acquisition of Biomatrica. Goodwill is reported in net goodwill and intangible assets in the Company’s condensed consolidated balance sheet. The Company ~~reviews these identifiable intangibles for~~evaluates goodwill impairment ~~whenever events~~on an annual basis, or ~~changes~~more frequently should an event or change in ~~circumstances indicate~~circumstance occur that indicates the carrying amount ~~of an asset may not be recoverable. Recoverability of assets to be held and used~~ is ~~measured by a comparison~~in excess of the ~~carrying amount of an asset to future undiscounted net cash flows expected to be generated by~~fair value. There were 0 impairment losses for 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.~~periods ended September 30, 2019 and December 31, 2018.

Net Loss Per Share

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

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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:


	September 30,
(In thousands)	2019	2018
Shares issuable upon exercise of stock options	2,199	2,856
Shares issuable upon the release of restricted stock awards	3,902	6,280
Shares issuable upon conversion of convertible notes	12,197	12,044
	18,298	21,180

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

Revenue Recognition

~~Laboratory Service Revenue.~~The Company’s ~~laboratory service revenues are~~revenue is primarily generated by ~~performing~~ screening services using ~~our~~its Cologuard test, and the service is completed upon delivery of a patient’s test result to anthe ordering physician. The Company ~~recognizes~~accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), which was adopted on January 1, 2018, using the ~~provisions~~modified retrospective method, which was elected to apply to all contracts. Application of the modified retrospective method did not impact amounts previously reported by the Company, nor did it require a cumulative effect adjustment upon adoption, as the Company’s method of recognizing revenue under ASC 606 was analogous to the method utilized immediately prior to adoption. Accordingly, there is no need for the Company to disclose the amount by which each financial statement line item was affected as a result of applying the new standard and an explanation of significant changes.

The core principle of ASC ~~954-605,~~ ~~Health Care Entities - Revenue Recognition.~~ 606 is that the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company recognizes revenue ~~on an accrual basis, net of contractual~~from its Cologuard test in accordance with that core principle, 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~~key aspects considered 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~~include the ~~ability to reasonably estimate~~following:

Contracts

The Company’s customer is the ~~amount that will ultimately be collected from all payers,~~patient. However, the Company does not enter into a formal reimbursement contract with a patient, as formal reimbursement contracts, including a national coverage determination for Cologuard by the ~~impact of patient cost-share collections.~~Centers for Medicare and Medicaid Services (“CMS”), are established with payers. Accordingly, the Company ~~now~~establishes a contract with a patient in accordance with other customary business practices.

●

Approval of a contract is established via the order submitted by the patient’s physician and the return of a sample by the patient.

●

The Company is obligated to perform its laboratory services upon receipt of a sample from a patient, and the patient and/or applicable payer are obligated to reimburse the Company for services rendered based on the patient’s insurance benefits.

●

Payment terms are a function of a patient’s existing insurance benefits, including the impact of coverage decisions with CMS and applicable reimbursement contracts established between the Company and payers, unless the patient is a self-pay patient, whereby the Company requires payment from the patient prior to the Company shipping a collection kit to the patient.

●

Once the Company delivers a patient’s test result to the ordering physician the contract with a patient has commercial substance, as the Company is legally able to collect payment and bill an insurer and/or patient and depending on payer contract status or patient insurance benefit status.

●

The Company’s consideration is deemed to be variable, and the Company considers collection of such consideration to be probable to the extent that it is unconstrained.

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Performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service (or a bundle of goods or services) to the customer. The Company’s contracts have a single performance obligation, which is satisfied upon rendering of services, which culminates in the delivery of a patient’s Cologuard test result to the ordering physician. The duration of time between sample receipt and delivery of a valid test result to the ordering physician is typically less than two weeks. Accordingly, the Company elects the practical expedient and therefore, the Company does not disclose the value of unsatisfied performance obligations.

Transaction price

The transaction price is the amount of consideration that the Company expects to collect in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration expected from a contract with a customer may include fixed amounts, variable amounts, or both.

The consideration derived from the Company’s contracts is deemed to be variable, though the variability is not explicitly stated in any contract. Rather, the implied variability is due to several factors, such as the amount of contractual adjustments, any patient co-payments, deductibles or patient adherence incentives, the existence of secondary payers and claim denials.

The Company estimates the amount of variable consideration using the expected value method, which represents the sum of probability-weighted amounts in a range of possible consideration amounts. When estimating the amount of variable consideration, the Company considers several factors, such as historical collections experience, patient insurance eligibility and payer reimbursement contracts.

The Company limits the amount of variable consideration included in the transaction price to the unconstrained portion of such consideration. In other words, the Company recognizes revenue ~~on an accrual basis for all billed claims.~~

~~Table~~up to the amount of ~~Contents~~

~~The components~~variable consideration that is not subject to a significant reversal until additional information is obtained or the uncertainty associated with the additional payments or refunds is subsequently resolved. Differences between original estimates and subsequent revisions, including final settlements, represent changes in the estimate of ~~laboratory service revenue, as~~variable consideration and are included in the period in which such revisions are made. Revenue recognized ~~upon accrual or cash receipt,~~from changes in transaction prices was $1.2 million and $2.4 million for the three months ended September 30, 2019 and 2018, respectively. Revenue recognized from changes in transaction prices was $4.6 million and $14.2 million for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018, respectively.

The Company monitors its estimates of transaction price to depict conditions that exist at each reporting date. If the Company subsequently determines that it will collect more consideration than it originally estimated for a contract with a patient, it will account for the change as an increase in the estimate of the transaction price (i.e., an upward revenue adjustment) in the period identified. Similarly, if the Company subsequently determines that the amount it expects to collect from a patient is less than it originally estimated, it will generally account for the change as a decrease in the estimate of the transaction price (i.e., a downward revenue adjustment), provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized.

When the Company does not have significant historical experience or that experience has limited predictive value, the constraint over estimates of variable consideration may result in no revenue being recognized upon delivery of a patient’s Cologuard test result to the ordering physician, with recognition, generally occurring at the date of cash receipt.

Allocate transaction price

The transaction price is allocated entirely to the performance obligation contained within the contract with a patient.

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Point in time recognition

The Company’s single performance obligation is satisfied at a point in time, and that point in time is defined as the date a patient’s successful test result is delivered to the patient’s ordering physician. The Company considers this date to be the time at which the patient obtains control of the promised Cologuard test service.

Disaggregation of Revenue

The following table presents the Company’s revenues disaggregated by revenue source:


	Three Months Ended September 30,
(In thousands)	2019		2018
Medicare Parts B & C	$	108,617	$	65,870
Commercial		99,352		48,624
Other		10,836		3,797
Total	$	218,805	$	118,291


	Nine Months Ended September 30,
(In thousands)	2019		2018
Medicare Parts B & C	$	295,103	$	178,052
Commercial		261,521		123,045
Other		24,094		10,384
Total	$	580,718	$	311,481

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable and deferred revenue on the condensed consolidated balance sheets. Generally, billing occurs subsequent to delivery of a patient’s test result to the ordering physician, resulting in an account receivable. However, the Company sometimes receives advance payment from a patient, particularly a self-pay patient, before a Cologuard test result is completed, resulting in deferred revenue. The deferred revenue balance is relieved upon delivery of the applicable patient’s test result to the ordering physician. Changes in accounts receivable and deferred revenue were not materially impacted by any other factors.

Deferred revenue balances are reported in other short-term liabilities in the Company’s condensed consolidated balance sheets and were $0.7 million and $0.5 million as ~~follows:~~of September 30, 2019 and December 31, 2018, respectively.

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

~~Inventory~~Revenue recognized for the three months ended September 30, 2019 and 2018, which was included in the deferred revenue balance at the beginning of each period was $0.2 million and $0.1 million, respectively. Revenue recognized for the nine months ended September 30, 2019 and 2018, which was included in the deferred revenue balance at the beginning of each period was $0.5 million and $0.1 million, respectively.

Practical Expedients

The Company does not adjust the transaction price for the effects of a significant financing component, as at contract inception, the Company expects the collection cycle to be one year or less.

The Company expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses in the Company’s condensed consolidated statements of operations.

The Company incurs certain other costs that are incurred regardless of whether a contract is obtained. Such costs are primarily related to legal services and patient communications (e.g. compliance reminder letters). These costs are expensed as incurred and recorded within general and administrative expenses in the Company’s condensed consolidated statements of operations.

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Inventory

Inventory is stated at the lower of cost or ~~market value (net~~net realizable ~~value).~~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~~materials used in performing Cologuard tests 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.~~ development in the Company’s condensed consolidated statements of operations.

Inventory ~~consists~~consisted of the following:


	September 30,		December 31,

					September 30,		December 31,
(In thousands)	2017		2016		2019		2018
Raw materials	$	7,033	$	2,408	$	19,009	$	12,761
Semi-finished and finished goods		11,031		4,425		34,664		26,387
Total inventory	$	18,064	$	6,833	$	53,673	$	39,148

Foreign Currency Translation

For the Company’s international subsidiaries, the local currency is the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at the period-end exchange rate or historical rates, as appropriate. 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 Company’s condensed consolidated balance sheet as a component of accumulated other comprehensive ~~loss~~income (loss) in ~~total Exact Sciences Corporation’s~~ stockholders’ equity. Transaction gains and losses are included in the Company’s condensed consolidated statement of operations.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation in the Company’s condensed consolidated financial statements and accompanying notes to the Company’s condensed consolidated financial statements.

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(3) MAYO LICENSE AGREEMENT

Overview

~~As more fully described in the 2016 Form 10-K, in~~In June 2009 the Company entered into a ~~patent~~ license agreement with ~~MAYO~~Mayo Foundation for Medical Education and Research (“~~MAYO”~~Mayo”). The Company’s license agreement with ~~MAYO~~Mayo was amended and restated in February 2015 and further amended in January ~~2016.~~2016, October 2017, and January 2019. Under the license agreement, ~~MAYO~~Mayo granted the Company an exclusive, worldwide license to certain ~~MAYO~~Mayo patents and patent applications, as well as a non-exclusive, worldwide license with regard to certain ~~MAYO~~Mayo know-how. ~~As expanded by the January 2016 amendment to the license agreement, the~~The scope of the license, ~~includes~~as amended, covers any screening, surveillance or diagnostic ~~tests~~test or ~~tools~~tool for use in connection with any type of ~~cancers, pre-cancers, diseases~~cancer, pre-cancer, disease or ~~conditions.~~condition.

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Pursuant to the Company’s agreement with ~~MAYO,~~Mayo, the Company is required to pay ~~MAYO~~Mayo a low-single-digit royalty on the Company’s net sales of products using the licensed ~~MAYO~~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~~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 October 2017 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 and October 2017 amendment, ~~would remain~~the rate remains a low-single-digit percentage of net sales.

In addition to royalties, the Company is required to pay ~~MAYO~~Mayo cash of $0.2 million, $0.8 million and $2.0 million upon each product using the licensed ~~MAYO~~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~~Mayo an additional $5.0 million, payable in ~~five~~5 annual installments, through 2019. The Company paid ~~MAYO~~Mayo the annual installment of $1.0 million in the first quarter of each of 2015, 2016, 2018, and ~~2016.~~2019. The Company paid ~~MAYO~~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~~2019 and ~~2016~~2018 the Company has recorded $0.3 million and $0.7 million in amortization of the installments, respectively.

In addition, the Company is paying ~~MAYO~~Mayo for research and development efforts. As part of the Company’s research collaboration with ~~MAYO,~~Mayo, the Company incurred charges of ~~$1.1~~$1.0 million and ~~$3.2~~$3.6 million for the three and nine months ended September 30, ~~2017, respectively.~~2019. The Company made payments of ~~$0.3~~$1.4 million and ~~$2.2~~$4.3 million for the three and nine months ended September 30, ~~2017, respectively.~~2019. The Company recorded an estimated liability of ~~$1.9~~$1.2 million for research and development efforts as of September 30, ~~2017.~~2019. The Company incurred charges of ~~$0.8~~$0.7 million and ~~$2.6~~$3.4 million for the three and nine months ended September 30, ~~2016, respectively.~~2018. The Company made payments of ~~$1.0~~$0.9 million and ~~$3.3~~$3.5 million for the three and nine months ended September 30, ~~2016, respectively.~~2018. The Company recorded an estimated liability of ~~$0.5~~$1.7 million for research and development efforts as of September 30, ~~2016.~~2018.

(4) PFIZER PROMOTION AGREEMENT

14In August 2018, the Company entered into a Promotion Agreement (“Promotion Agreement”) with Pfizer Inc. (“Pfizer”). Under the terms of the Promotion Agreement, Pfizer will promote Cologuard and provide certain sales, marketing, analytical and other commercial operations support services. The Company and Pfizer committed in the Promotion Agreement to invest specified amounts in the advertising and promotion of Cologuard.

The Company agreed to pay Pfizer for promotion, sales and marketing costs incurred on behalf of the Company. The Company incurred charges of $15.8 million and $49.8 million for promotion, sales and marketing services performed by Pfizer on behalf of the Company during the three and nine months ended September 30, 2019. The Company recorded a liability of $15.8 million and $0.5 million for promotion, sales and marketing services performed by Pfizer on behalf of the Company in accrued liabilities in the Company’s condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively. These costs are recorded in sales and marketing in the Company’s condensed consolidated statements of operations.

The Company also agreed to pay Pfizer a service fee based on incremental gross profits over specified baselines during the term and royalties for Cologuard related revenues for a specified period after the expiration or termination of the Promotion Agreement. The initial term of the Promotion Agreement runs through December 31, 2021. 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. These costs are recorded in sales and marketing in the Company’s condensed consolidated statements of operations. The Company recorded a liability of $16.0 million and $4.8 million for the service fee earned by Pfizer as of September 30, 2019 and December 31, 2018, respectively, in accrued liabilities in the Company’s condensed consolidated balance sheets.

~~(4)~~(5) STOCK-BASED COMPENSATION

Stock-Based Compensation Plans

The Company maintains the 2019 Omnibus Long-Term Incentive Plan, 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”). At the Company’s 2019 Annual Stockholders Meeting held July 25, 2019, the Company’s stockholders approved the Company’s 2019 Omnibus Long-Term Incentive Plan.

Stock-Based Compensation Expense

The Company records stock-based compensation expense in connection with the amortization of restricted stock and restricted stock unit awards (“RSUs”), stock purchase rights granted under the Company’s employee stock purchase plan and stock options granted to employees, non-employee consultants and non-employee directors. The Company recorded ~~$10.8~~$24.3 million and ~~$23.0~~$60.7 million in stock-based compensation expense during the three and nine months ended September 30, ~~2017, respectively.~~2019. The Company recorded ~~$6.2~~$16.5 million and ~~$16.8~~$44.6 million in stock-based compensation expense during the three and nine months ended September 30, ~~2016, respectively.~~2018.

In connection with the April 2018 transition of the Company’s former Chief Operating Officer, the Company accelerated the vesting of 69,950 shares under his previously unvested stock options and 54,350 shares under his previously unvested restricted stock units whereby such unvested stock options and unvested restricted stock units vested on December 31, 2018. It was determined that the continuing service to be provided by the Company’s Chief Operating Officer to the Company through December 31, 2018 was substantive and, as a result, the Company recognized the additional non-cash stock-based compensation expense for the modified awards evenly over the transition term of April 25, 2018 through December 31, 2018. During the transition period in 2018, the Company recorded $3.9 million of non-cash stock-based compensation expense for the modified awards.

In February 2019, the Company issued performance-based equity awards to certain employees which vest upon the achievement of certain performance goals, including financial performance targets and operational milestones. Determining the appropriate amount to expense based on the anticipated achievement of the stated goals requires judgment, including forecasting future financial results. The estimate of the timing of the expense recognition is revised periodically based on the probability of achieving the goals and adjustments are made as appropriate. The cumulative impact of any revision is reflected in the period of the change. If the financial performance targets and operational milestones are not achieved, the award would not vest, so no compensation cost would be recognized and any previously recognized stock-based compensation expense would be reversed.

Determining Fair Value

Valuation and Recognition – The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of each market measure-based award is estimated on the date of grant using a Monte Carlo simulation pricing model. The fair value of service-based awards for each restricted stock unit award is determined on the date of grant using the closing stock price on that day. The estimated fair value of these awards is recognized to expense using the straight-line method over the vesting period. 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.

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Forfeitures ~~– Beginning in 2017, the~~ - 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~~records 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.~~

~~Table of Contents~~

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


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2019	2018	2019	2018
Option Plan Shares
Risk-free interest rates	(1)	(1)	2.54% - 2.59%	2.73% - 2.79%
Expected term (in years)	(1)	(1)	6.28	5.45 - 6.43
Expected volatility	(1)	(1)	64.95% - 64.99%	61.82% - 66.17%
Dividend yield	(1)	(1)	0 %	0 %
Weighted average fair value per share of options granted during the period	(1)	(1)	$ 57.11	$ 24.55
ESPP Shares
Risk-free interest rates	(2)	(2)	2.31% - 2.44%	2.05% - 2.50%
Expected term (in years)	(2)	(2)	0.5 - 2.0	0.5 - 2.0
Expected volatility	(2)	(2)	55.00% - 57.97%	51.75% - 65.39%
Dividend yield	(2)	(2)	0 %	0 %
Weighted average fair value per share of stock purchase rights granted during the period	(2)	(2)	$ 35.91	$ 18.68

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

(1)

~~(1)~~

The Company did not grant options under its 2010 ~~Stock~~Omnibus Long-Term Incentive Plan or 2019 Omnibus Long-Term Incentive Plan during the period indicated.

(2)

~~(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, Restricted Stock, and Restricted Stock Unit Activity

A summary of stock option activity under the Stock Plans during the nine months ended September 30, ~~2017~~2019 is as follows:


				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
Options	Shares	Price		Term (Years)	Value(1)
(Aggregate intrinsic value in thousands)
Outstanding, January 1, 2019	2,531,561	$	17.86	6.6
Granted	186,044		92.61
Exercised	(492,699)		12.97
Forfeited	(25,792)		33.25
Outstanding, September 30, 2019	2,199,114	$	25.10	6.4	$	143,943
Exercisable, September 30, 2019	1,252,387	$	15.28	5.4	$	94,038

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

(1)

~~(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~~$90.37 market price of the Company’s common

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stock at September 30, ~~2017.~~2019. The total intrinsic value of options exercised during the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~$11.2~~$41.7 million and ~~$5.6~~$40.1 million, respectively.

As of September 30, ~~2017,~~2019, there was ~~$100.8~~$188.4 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~~2.8 years.

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A summary of restricted stock and restricted stock unit activity under the Stock Plans during the nine months ended September 30, ~~2017~~2019 is as follows:

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


		Weighted
	Restricted	Average Grant
	Shares and RSUs	Date Fair Value
Outstanding, January 1, 2019	6,246,174	$	23.16
Granted	1,672,854		94.07
Released	(3,808,767)		14.80
Forfeited	(207,978)		55.96
Outstanding, September 30, 2019	3,902,283	$	60.37

~~(5)~~(6) FAIR VALUE MEASUREMENTS

The Financial Accounting Standards Board (“FASB”) has issued authoritative guidance ~~which~~that requires ~~that~~ fair value should 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 ~~the~~that standard, fair value measurements are separately disclosed by level within the fair value hierarchy. The fair value hierarchy establishes and prioritizes the inputs used to measure fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The three levels of the fair value hierarchy established are as follows:


Level 1		Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2		Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3		Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

Fixed-income securities ~~and mutual funds~~ are valued using a third-party pricing agency. The valuation is based on observable inputs including pricing for similar assets and other observable market factors. There has been no material pricing change from period to period. The estimated fair value of the Company’s long-term debt ~~based on~~represents 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.~~measurement. When determining the estimated fair value of the Company’s long-term debt, the Company used market-based risk measurements, such as credit risk. The fair value of contingent consideration related to the Biomatrica Acquisition was categorized as a Level 3 liability, as the measurement amount is based primarily on significant inputs not observable in the market. The Company evaluates the fair value of expected contingent consideration and the corresponding liability each annual reporting period using the Monte Carlo Method, which is consistent with the initial measurement of the expected Biomatrica Acquisition earn-out liability. This fair value measurement is considered a Level 3 measurement because the Company estimates projections during the earn-out period utilizing various potential pay-out scenarios. Probabilities were applied to each potential scenario and the resulting values were discounted using a rate that considers weighted average cost of capital as well as a specific risk premium associated with the riskiness of the earn out itself, the related projections, and the overall business. The contingent earn-out liability is classified as a component of other long-term liabilities in the Company’s condensed consolidated balance sheet. There were no changes in the fair value assessed between the acquisition date and September 30, 2019, however, there was an earn-out payment made during that time resulting in a decrease in the liability at September 30, 2019.

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The following table presents the Company’s fair value measurements as of September 30, ~~2017~~2019 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.

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

$
—


			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
(In thousands)	September 30, 2019		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents
Cash and money market	$	448,275	$	448,275	$	—	$	—
U.S. government agency securities		539,102		—		539,102		—
Commercial paper		39,957		—		39,957		—
Certificates of deposit		7,000		—		7,000		—
Available-for-sale
Marketable securities
Corporate bonds		11,673		—		11,673		—
Asset backed securities		1,512		—		1,512		—
U.S. government agency securities		90,514		—		90,514		—
Certificates of deposit		20,513		—		20,513		—
Commercial paper		1,999		—		1,999		—
Other long-term assets
Deferred compensation plan assets		470		—		470		—
Contingent consideration		(2,947)		—		—		(2,947)
Total	$	1,158,068	$	448,275	$	712,740	$	(2,947)

The following table presents the Company’s fair value measurements as of December 31, ~~2016~~2018 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.


			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
(In thousands)	December 31, 2018		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents
Cash and money market	$	75,375	$	75,375	$	—	$	—
U.S. government agency securities		49,985		—		49,985		—
Commercial paper		24,070		—		24,070		—
Certificates of deposit		11,000		—		11,000		—
Available-for-sale
Marketable securities
Corporate bonds		392,287		—		392,287		—
Asset backed securities		276,999		—		276,999		—
U.S. government agency securities		250,471		—		250,471		—
Certificates of deposit		31,844		—		31,844		—
Commercial paper		12,151		—		12,151		—
Contingent consideration		(3,060)		—		—		(3,060)
Total	$	1,121,122	$	75,375	$	1,048,807	$	(3,060)

The Company monitors investments for other-than-temporary impairment. It was determined that unrealized gains and losses as of September 30, 2019 and December 31, 2018 are temporary in nature because the change in market value for those securities has resulted from fluctuating interest rates rather than a deterioration of the credit worthiness of the issuers. So long as the Company holds these securities to maturity, it is unlikely to experience gains or losses. In the event that the Company disposes of these securities before maturity, it is expected that realized gains or losses, if any, will be immaterial.

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

$
—

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The following table summarizes the gross unrealized losses and fair values of ~~our~~ investments in an unrealized loss position as of September 30, ~~2017,~~2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

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)


		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
Cash equivalents
Commercial paper	$	39,957	$	(4)	$	—	$	—	$	39,957	$	(4)
Total cash equivalents		39,957		(4)		—		—		39,957		(4)
Marketable securities
Corporate bonds		5,170		—		—		—		5,170		—
U.S. government agency securities		14,994		(6)		—		—		14,994		(6)
Asset backed securities		503		—		—		—		503		—
Total marketable securities		20,667		(6)		—		—		20,667		(6)
Total available-for-sale securities	$	60,624	$	(10)	$	—	$	—	$	60,624	$	(10)

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The following table summarizes contractual underlying maturities of the Company’s available-for-sale investments ~~in debt securities~~ at September 30, ~~2017:~~2019:


		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	$	539,087	$	539,102	$	—	$	—
Commercial paper		39,961		39,957		—		—
Certificates of deposit		7,000		7,000		—		—
Total cash equivalents		586,048		586,059		—		—
Marketable securities
Corporate bonds		7,670		7,670		4,000		4,003
U.S. government agency securities		40,506		40,509		49,997		50,005
Asset backed securities		—		—		1,512		1,512
Certificates of deposit		20,504		20,513		—		—
Commercial paper		1,999		1,999		—		—
Total marketable securities		70,679		70,691		55,509		55,520
Total available-for-sale securities	$	656,727	$	656,750	$	55,509	$	55,520

Fair Value of Long-Term Debt and Convertible Notes

The Company measures the fair value of its convertible notes and long-term debt for disclosure purposes. The following table summarizes the Company’s outstanding convertible notes and long-term debt:


	September 30, 2019				December 31, 2018
(In thousands)		Carrying Amount (1)		Fair Value		Carrying Amount (1)		Fair Value
2027 Convertible notes (2)	$	476,527	$	810,514	$	—	$	—
2025 Convertible notes (2)		315,643		586,332		664,749		956,196
Construction loan (3)		24,855		24,855		24,502		24,502

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

(1)	The carrying amounts presented are net of debt discounts and debt issuance costs (see Note 8 and Note 11 of the condensed consolidated financial statements for further information).

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(2)	The fair values are based on observable market prices for this debt, which is traded in active markets and therefore is classified as a Level 2 fair value measurement.

(3)	The carrying amount of the construction loan approximates fair value due to the short-term nature of this instrument. The construction loan is privately held with no public market for this debt and therefore is classified as a Level 3 fair value measurement.

~~(6)~~(7) NEW MARKET TAX CREDIT

~~As more fully described in the 2016 Form 10-K, during~~During the fourth quarter of 2014, the Company received approximately $2.4 million in net proceeds from financing agreements related to working capital and capital improvements at ~~one~~1 of its Madison, Wisconsin facilities. This financing arrangement was structured with an unrelated ~~third party~~third-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 Investor and its majority owned community development entity are consolidated Variable Interest Entities (“VIEs”) and the Company is the primary beneficiary of the VIEs. Because the Company is the primary beneficiary of the VIEs, they have been included in the consolidated financial statements. There are no other assets, liabilities or transactions in these VIEs outside of the financing transactions executed as part of the NMTC arrangement. The $2.4 million was recorded in ~~Other Long-Term Liabilities~~other long-term liabilities on the Company’s condensed consolidated balance sheets. The benefit of this net $2.4 million contribution will be recognized as a decrease in expenses, included in cost of sales, 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 conditions of the NMTC program. The Company has recorded $0.1 million and $0.3 million as a decrease of expenses for the three and nine months ended September 30, ~~2017, respectively.~~2019. At September 30, ~~2017,~~2019, the remaining balance of ~~$1.4~~$0.7 million is included in ~~Other Long-Term Liabilities.~~other long-term liabilities in the Company’s condensed consolidated balance sheets. The Company recorded $0.1 million and $0.3 million as a decrease of expenses for the three and nine months ended September 30, ~~2016, respectively.~~2018. At ~~September 30, 2016,~~December 31, 2018, the remaining balance of ~~$1.8~~$1.0 million was included in ~~Other Long-Term Liabilities.~~other long-term liabilities in the Company’s condensed consolidated balance sheets. The Company incurred approximately $0.2 million of debt issuance costs related to the above transactions, which are recorded as a direct deduction from the liability. The debt issuance costs are being amortized over the life of the agreements.

~~(7)~~(8) LONG-TERM DEBT

Building Purchase Mortgage

During June 2015, the Company entered into a $5.1 million credit agreement with ~~an unrelated~~a third-party financial institution to finance the purchase of a ~~facility~~research and development building located in Madison, Wisconsin. The credit agreement iswas collateralized by the acquired building.

In September 2018, the Company entered into a Purchase and Sale Agreement with a third-party to sell its research and development building. The Company also simultaneously entered into a Master Lease Agreement with the third-party to lease the facility back. The sale-leaseback arrangement is recorded under the financing method of accounting as the Company has continuing involvement in planned expansions of the building and construction of the adjacent corporate headquarters building. Under the financing method, the Company does not recognize the proceeds received from the third party as a sale of the building. The facility remains in property, plant and equipment on the Company’s condensed consolidated balance sheet, and the consideration of $6.8 million received in the sale is recorded as a financing obligation in other long-term liabilities on the Company’s condensed consolidated balance sheet as of September 30, 2019. A portion of the proceeds received from the sale were used to repay the mortgage on the building, and as of September 2018, the $4.5 million outstanding balance of the mortgage had been fully repaid in connection with the termination of the credit agreement. The remaining proceeds were utilized to fund the initial construction of the Company’s corporate headquarters discussed in more detail in Note 9.

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Revolving Loan Agreement

During December 2017, the Company entered into a revolving loan agreement (the “Revolving Loan Agreement”) with Fifth Third Bank (formerly MB Financial Bank, N.A.). The Revolving Loan Agreement provides the Company with a 24-month secured revolving credit facility of up to $15.0 million (the “Revolver”). The Revolver is collateralized by the Company’s accounts receivable and inventory. The Revolver is available for general working capital purposes and all other lawful corporate purposes, provided that the Company may not use the Revolver to purchase or carry margin stock.

Borrowings under the ~~credit~~Revolving Loan Agreement accrue interest at one of the following per annum rates, as elected by the Company (i) the sum of the 1-month LIBOR rate plus 2.00 percent, (ii) the sum of the 3-month LIBOR rate plus 2.00 percent, or (iii) the Fifth Third Reference Rate minus 0.5 percent. Loans under the Revolving Loan Agreement may be prepaid at any time without penalty. The Revolver’s maturity date is December 10, 2019.

The Company has agreed in the Revolving Loan Agreement to various financial covenants including minimum liquidity and minimum tangible net worth. As of September 30, 2019, the Company is in compliance with all covenants.

As of September 30, 2019, the Company has not drawn funds from, nor are any amounts outstanding under, the Revolving Loan Agreement.

Construction Loan Agreement

During December 2017, the Company entered into a loan agreement with Fifth Third Bank (formerly MB Financial Bank, N.A.) (the “Construction Loan Agreement”), which provides the Company with a non-revolving construction loan (the “Construction Loan”) of $25.6 million. The Company is 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.

Pursuant to the Construction Loan Agreement, funds drawn will bear interest at ~~4.15%~~a rate equal to the sum of the 1-month LIBOR rate plus 2.25 percent. Regular monthly payments are interest-only for the first 24 months, with further payments based on a 20-year amortization schedule. Amounts borrowed pursuant to the Construction Loan Agreement may be prepaid at any time without penalty. The maturity date of the Construction Loan Agreement is December 10, 2022.

In November 2017, Fifth Third Bank, on behalf of the Company, issued an Irrevocable Standby Letter of Credit in the amount of $0.6 million in favor of the City of Madison, Wisconsin (the “City Letter of Credit”). The City Letter of Credit is deemed to have been issued pursuant to the Construction Loan Agreement. The amount of the City Letter of Credit will reduce, dollar for dollar, the amount available for borrowing under the Construction Loan Agreement.

As a condition to Fifth Third’s initial advance of loan proceeds under the Construction Loan Agreement, the Company was required to first invest at least $16.4 million of its own cash into the construction project. The Company fulfilled its required initial investment and made its first draw on the Construction Loan in June 2018. In accordance with the Construction Loan Agreement, the Company will make monthly interest-only payments through November 2019. The Company has made interest-only payments onof $0.2 million and $0.5 million during the three and nine months ended September 30, 2019. Starting in December 2019, the Company will make monthly payments towards the outstanding principal balance ~~for the period between July 12, 2015 and~~plus accrued interest. As of September ~~12, 2015. Beginning on October 12, 2015 and continuing through May 12,~~30, 2019, the Company has drawn $25.0 million from the Construction Loan, including $0.7 million of interest incurred, which is ~~required~~accrued for as an interest reserve and represents a portion of the $25.0 million loan balance as of September 30, 2019. The Company capitalized the $0.7 million of interest to ~~make monthly principal and interest payments~~the construction project. As of ~~$31,000. The final principal and interest payment due on the maturity date of June 12, 2019 is $4.4 million.~~

~~Additionally,~~December 31, 2018, the Company ~~has recorded $73,000 in mortgage~~had drawn $24.7 million from the Construction Loan. The Company incurred approximately $0.2 million of debt issuance costs related to the Construction Loan, which are recorded as a direct deduction from the ~~mortgage~~ liability. The debt issuance costs are being amortized ~~through June 12, 2019.~~ over the life of the Construction Loan.

The Company has ~~recorded $4,000~~agreed in the Construction Loan Agreement to various financial covenants including minimum liquidity and ~~$13,000~~minimum tangible net worth. As of September 30, 2019, the Company is in ~~amortization~~compliance with all covenants.

Table of ~~mortgage issuance costs~~Contents

Tax Increment Financing Loan Agreements

The Company entered into 2 separate Tax Increment Financing Loan Agreements (“TIFs”) in February 2019 and June 2019 with the City of Madison, Wisconsin. The TIFs provide for ~~each~~$4.6 million of financing in the aggregate. In return for the incentives, the Company is obligated to create and maintain 500 full-time jobs over a five-year period, starting on the date of occupancy of the ~~three~~buildings constructed. In the event that the job creation goals are not met, the Company would be required to pay a penalty.

The Company records the earned financial incentives as the full-time equivalent positions are filled. The amount earned is recorded as a liability and ~~nine months ended~~amortized as a reduction of operating expenses over a two-year period, which is the timeframe when the TIFs will be repaid through property taxes.

As of September 30, ~~2017~~2019, the Company has earned $4.6 million and ~~2016.~~received payment of $2.6 million from the City of Madison. The remaining receivable is $2.0 million, which is reported in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheet. As of September 30, 2019, the Company also has recorded a $2.9 million liability in other short-term liabilities and a $0.7 million liability in other long-term liabilities on the Company’s condensed consolidated balance sheet, reflecting when the expected benefit of the financial incentives amortization will reduce future operating expenses.

(9) COMMITMENTS AND CONTINGENCIES

~~(8)~~The Company acts as lessee under all its lease agreements, which includes operating leases for corporate offices, lab space, warehouse space, vehicles and certain lab and office equipment. As of September 30, 2019, the Company is not a party to any finance leases. The leases have remaining lease terms of 1 year to 6 years, some of which include options to extend the lease for up to 10 years, and some of which include options to terminate the lease within 1 year. The Company includes any renewal or termination option in its lease payment calculations if it is reasonably certain to exercise the option. “Reasonably certain” is assessed internally based on economic, industry, company, strategic and contractual factors. The components of lease expense were as follows:


	Three Months Ended		Nine Months Ended
(In thousands)	September 30, 2019		September 30, 2019
Operating lease cost (cost resulting from lease payments)	$	1,310	$	3,702
Short-term lease cost		37		140
Total	$	1,347	$	3,842

Certain vehicle leases include variable lease payments that depend on an index or rate. Those lease payments are initially measured using the index or rate at the lease commencement date.

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 lease liabilities is approximately 7.81% and 5.80 years, respectively.

Supplemental disclosure of cash flow information related to our operating leases included in cash flows provided by operating activities in our condensed consolidated statements of cash flows is as follows:


	Three Months Ended		Nine Months Ended
(In thousands)	September 30, 2019		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,325	$	3,744
Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities (1)	$	32	$	20,147

(1)	For the nine months ended September 30, 2019, this includes the amounts related to adopting ASC 842.

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As of September 30, 2019, the Company’s right-of-use assets are $19.1 million, which are reported in other long-term assets in the Company’s condensed consolidated balance sheet. As of September 30, 2019, the Company has outstanding lease obligations of $19.7 million, of which $3.6 million is reported in other short-term liabilities and $16.1 million is reported in long-term obligations in the Company’s condensed consolidated balance sheet.

The Company has taken advantage of certain practical expedients offered to registrants at adoption of ASC 842. The Company does not apply the recognition requirements of ASC 842 to short-term leases. Instead, those lease payments are recognized in profit or loss on a straight-line basis over the lease term. Further, as a practical expedient, all lease contracts are accounted for as one single lease component, as opposed to separating lease and non-lease components to allocate the consideration within a single lease contract.

Maturities of operating lease liabilities on an annual basis as of September 30, 2019 were as follows:


(In thousands)
2019	$	5,077
2020		4,592
2021		3,917
2022		3,775
2023		3,787
Thereafter		7,162
Total minimum lease payments		28,310
Imputed interest		(8,626)
Total	$	19,684

On January 1, 2019, the Company elected the modified retrospective method of transition to adopt the new lease standard ASC 842, which resulted in no restatement of prior period results. At December 31, 2018, prior to adoption of the new lease standard, operating lease obligations were not included as a liability on the balance sheet. Therefore, the operating lease obligations are included in the table for comparative purposes only and the total lease liability is not included as it is not applicable.

The Company’s future minimum lease payments as of December 31, 2018, were as follows:


(In thousands)
2019	$	3,861
2020		5,135
2021		4,995
2022		5,027
2023		5,146
Thereafter		44,286
Total minimum lease payments	$	68,450

The Company evaluates whether it is the accounting owner of leased assets during the construction period when it is involved in the construction of the leased asset. Due to the funding provided by the Company for costs related to the construction of its new headquarters, as of December 31, 2018, the Company was considered, for accounting purposes only, the owner of the construction project in accordance with build-to-suit accounting under the accounting guidance that was superseded by ASC 842 on January 1, 2019. As of December 31, 2018, the Company had contributed $2.7 million towards the project. All project construction costs paid by the landlord were accounted for as assets under construction. As of December 31, 2018, the landlord funded $3.9 million towards construction costs related to this project, of which $2.1 million was included as a financing obligation and recorded in other long-term liabilities and $1.8 million was included as a financing obligation and recorded in accrued expenses in the Company’s condensed consolidated balance sheets. Upon transition to ASC 842 on January 1, 2019, the Company is no longer considered to be the owner of the construction project under build-to-suit accounting. As such, the amounts funded by the landlord, previously recognized as an asset under construction and corresponding financing obligation, have been de-recognized.

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The Company’s new headquarters building is expected to be completed in 2020. Upon completion, the Company will lease the building for an initial term of 15 years with an option to extend for an additional 10 years. Construction of the building is the responsibility of the landlord; however, the Company has funded $4.5 million of construction costs as of September 30, 2019. This contribution is accounted for as prepaid rent and will be included in the beginning right-of-use asset balance of the leased building. The Company can also receive up to $5.5 million as a tenant improvement allowance. The reimbursement will be accounted for as prepaid rent and will decrease the beginning right-of-use asset balance of the leased building. As of September 30, 2019, the Company earned $2.8 million of the available tenant improvement allowance. The Company anticipates an additional $32.2 million to be recognized at lease commencement for the right-of-use asset and lease liability.

(10) WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS

During the first quarter of 2015, the Company entered into an agreement with the Wisconsin Economic Development Corporation (“WEDC”) to earn $9.0 million in refundable tax credits if 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 the

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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.

The Company records the earned tax credits as job creation and capital investments occur. The amount of tax credits earned is recorded as a liability and amortized as a reduction of operating expenses over the expected period of benefit. The tax credits earned from capital investment are recognized as an offset to depreciation expense over the expected life of the acquired capital assets. The tax credits earned related to job creation are recognized as an offset to operational expenses over the life of the agreement, as the Company is required to maintain the minimum level of full-time positions through the seven-year period.

As of September 30, ~~2017,~~2019, the Company has earned ~~$6.4~~$9.0 million of tax credits and has received payment of ~~$1.1~~$4.3 million from the WEDC. The unpaid portion is ~~$5.3~~$4.7 million, of which ~~$1.3~~$1.6 million is reported in prepaid expenses and other current assets and ~~$4.0~~$3.1 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,~~2019, the Company also has recorded a ~~$1.5~~$2.3 million liability in other short-term liabilities and a ~~$3.1~~$0.5 million liability in other long-term liabilities, reflecting when the expected benefit of the tax credit amortization will reduce future operating expenses.

During the three and nine months ended September 30, ~~2017,~~2019, the Company amortized ~~$0.3~~$0.6 million and ~~$0.9~~$1.8 million, respectively, of the tax credits earned as a reduction of operating expenses. During the three and nine months ended September 30, ~~2016,~~2018, the Company amortized ~~$0.2~~$0.6 million and ~~$0.5~~$1.6 million, respectively, of the tax credits earned as a reduction of operating expenses.

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(11) CONVERTIBLE NOTES

~~(9) ISSUANCE OF EQUITY~~

~~On June 7, 2017,~~Convertible note obligations included in the condensed consolidated balance sheets consisted of the following:


(In thousands)	Coupon Interest Rate	Effective Interest Rate	Fair Value of Liability Component at Issuance (1)		September 30, 2019		December 31, 2018
2027 Convertible notes	0.375%	6.3%	$	472,501	$	747,500	$	—
2025 Convertible notes	1.000%	6.0%		299,187		415,102		908,500
Total Convertible notes						1,162,602		908,500
Less: Debt discount (2)						(353,283)		(227,403)
Less: Debt issuance costs (3)						(17,149)		(16,348)
Net convertible debt including current maturities						792,170		664,749
Less: Current maturities (4)						(315,643)		—
Net long-term convertible debt					$	476,527	$	664,749

(1)

As each of the convertible instruments may be settled in cash upon conversion, for accounting purposes, they were separated into a liability component and an equity component.The amount allocated to the equity component is the difference between the principal value of the instrument and the fair value of the liability component at issuance. The resulting debt discount is being amortized to interest expense at the respective effective interest rate over the contractual term of the debt. In March 2019, a portion of the 2025 Convertible Notes were extinguished. The fair value of the liability component at issuance reflected above represents the liability value at issuance for the applicable portion of the 2025 Notes which remain outstanding at September 30, 2019. The fair value of the liability component of the 2025 Notes at December 31, 2018 was $654.8 million with the equity component being $269.7 million including a $14.2 million premium.

(2)	The unamortized discount consists of the following:


(In thousands)	September 30, 2019		December 31, 2018
2027 Convertible notes	$	260,370	$	—
2025 Convertible notes		92,913		227,403
Total unamortized discount	$	353,283	$	227,403

(3)	Debt issuance costs consists of the following:


(In thousands)	September 30, 2019		December 31, 2018
2027 Convertible notes	$	10,602	$	—
2025 Convertible notes		6,547		16,348
Total debt issuance costs	$	17,149	$	16,348

(4)

As of September 30, 2019, the 2025 Convertible Notes were convertible and included within convertible notes, net, current portion on the condensed consolidated balance sheet. As of December 31, 2018, the 2025 Convertible Notes were not convertible and included within long-term convertible notes, net on the condensed consolidated balance sheet.

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Issuances and Settlements

In January 2018, the Company ~~completed~~issued and sold $690.0 million in aggregate principal amount of 1.0% Convertible Notes (the “January 2018 Notes”) with a maturity date of January 15, 2025 (the “Maturity Date”). The January 2018 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 2018 Notes were approximately $671.1 million, after deducting underwriting discounts and commissions and the offering expenses payable by the Company.

In June 2018, the Company issued and sold an ~~underwritten public~~additional $218.5 million in aggregate principal amount of 1.0% Convertible Notes (the “June 2018 Notes”). The June 2018 Notes were issued under the same indenture pursuant to which the Company previously issued the January 2018 Notes (the “Indenture”). The January 2018 Notes and the June 2018 Notes (collectively, the “2025 Notes”) have identical terms and will be treated as a single series of securities. The net proceeds from the issuance of the June 2018 Notes were approximately $225.3 million, after deducting underwriting discounts and commissions and the offering expenses payable by the Company.

In March 2019, the Company issued and sold $747.5 million in aggregate principal amount of ~~7,000,000~~0.375% Convertible Notes (the “2027 Notes” and, collectively with the 2025 Notes, the “Notes”) with a maturity date of March 15, 2027 (the “Maturity Date”). 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.

The Company utilized a portion of the proceeds from the issuance of the 2027 Notes to settle a portion of the 2025 Notes in privately negotiated transactions. In March 2019, the Company used cash of $494.0 million and an aggregate of 2.2 million shares of the Company’s common stock valued at $182.4 million for total consideration of $676.5 million to settle $493.4 million of the 2025 Notes, of which $375.1 million was allocated to the liability component, $300.8 million was allocated to the equity component, and $0.6 million was used to pay off interest accrued on the 2025 Notes. The consideration transferred was allocated to the liability and equity components of the 2025 Notes using the equivalent rate that reflected the borrowing rate for a similar non-convertible debt instrument immediately prior to settlement. The transaction resulted in a loss on settlement of convertible notes of $10.6 million, which is recorded in interest income (expense) in the Company’s condensed consolidated statement of operations. The loss represents the difference between (i) the fair value of the liability component and (ii) the sum of the carrying value of the debt component and any unamortized debt issuance costs at the time of repurchase.

Summary of Conversion Features

Until the six-months immediately preceding the maturity date of the applicable series of Notes, each series of Notes is convertible only upon the occurrence of certain events and during certain periods, as set forth in the Indenture. The Notes will be convertible into cash, shares of the Company’s common stock (plus, if applicable, cash in lieu of any fractional share), or a combination of cash and shares of the Company’s common stock, at the Company’s election. On or after the date that is six-months immediately preceding the maturity date of the applicable series of Notes until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert such Notes at any time.

It is the Company’s intent and policy to settle all conversions through combination settlement. The initial conversion rate is 13.2569 and 8.9554 shares of common stock ~~at a~~per $1,000 principal amount for the 2025 Notes and 2027 Notes, respectively, which is equivalent to an initial conversion price of approximately $75.43 and $111.66 per share of the Company’s common stock for the 2025 Notes and 2027 Notes, respectively. The conversion rate is subject to adjustment upon the ~~public~~occurrence 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 exercised~~Notes who convert their ~~over-allotment option~~Notes in connection with a “make-whole fundamental change” (as defined in the ~~offering~~Indenture), will, under certain circumstances, be entitled to an increase in the conversion rate.

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If the Company undergoes a “fundamental change” (as defined in the Indenture), holders of the Notes may require the Company to repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and ~~purchased an additional 450,000~~unpaid interest.

As of September 30, 2019, the 2027 Notes were not convertible. The holders of the 2025 Notes had the right to convert their debentures between July 1, 2019 and September 30, 2019, and two notes were converted during the period, which were settled through the issuance of common shares equivalent to the conversion rate with any fractional shares settled in cash. The holders of the 2025 Notes will continue to have the right to convert their debentures between October 1, 2019 and December 31, 2019, because the closing price of the Company’s common stock exceeded the Conversion Price by 130% for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading days ending on September 30, 2019.

Based on the closing price of our common stock of $90.37 on September 30, 2019, the if-converted values on our 2025 Notes exceed the principal amount by $82.2 million and the 2027 Notes fall short of the principal amount by $142.5 million, respectively.

Ranking of Convertible Notes

The Notes are the Company’s senior unsecured obligations and (i) rank senior in right of payment to all of its future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to all of the Company’s future liabilities that are not so subordinated, unsecured indebtedness; (ii) are effectively junior to all of our existing and future secured indebtedness and other secured obligations, to the extent of the value of the assets securing that indebtedness and other secured obligations; and (iii) are structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries.

The 2025 Notes are classified as current on the Company’s condensed consolidated balance sheets at September 30, 2019, while the 2027 Notes are classified as long-term on the Company’s condensed consolidated balance sheets at September 30, 2019. The future convertibility and resulting balance sheet classification of the Notes will be monitored at each quarterly reporting date and will be analyzed dependent upon market prices of the Company’s common stock during the prescribed measurement periods. In the event that the holders of the Notes have the election to convert the Notes at any time during the prescribed measurement period, the Notes would then be classified as a current obligation.

The Company allocated the total transaction costs of approximately $18.8 million related to the issuance of the January 2018 Notes to the liability and equity components of the January 2018 Notes based on their relative values, with $13.6 million being allocated to the liability component of the January 2018 Notes. Transaction costs attributable to the liability component are amortized to interest expense over the seven-year term of the January 2018 Notes, and transaction costs attributable to the equity component are netted with the equity component in stockholders’ equity.

The Company allocated the total transaction costs of approximately $7.4 million related to the issuance of the June 2018 Notes to the liability and equity components of the June 2018 Notes based on their relative values, with $5.1 million being allocated to the liability component of the June 2018 Notes. Transaction costs attributable to the liability component are amortized to interest expense over the remaining six-and-a-half-year term of the June 2018 Notes, and transaction costs attributable to the equity component are netted with the equity component in stockholders’ equity.

The Company allocated the total transaction costs of approximately $18.0 million related to the issuance of the 2027 Notes to the liability and equity components of the 2027 Notes based on their relative values, with $11.4 million being allocated to the liability component of the 2027 Notes. Transaction costs attributable to the liability component are amortized to interest expense over the eight-year term of the 2027 Notes, and transaction costs attributable to the equity component are netted with the equity component in stockholders’ equity.

The Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company.

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Interest expense includes the following:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2019		2018		2019		2018
Debt issuance costs amortization	$	658	$	677	$	1,989	$	1,597
Debt discount amortization		10,322		7,737		28,789		18,559
Loss on settlement of convertible notes		—		—		10,558		—
Coupon interest expense		1,739		2,242		5,585		5,513
Total interest expense on convertible notes		12,719		10,656		46,921		25,669
Other interest expense		490		48		990		148
Total interest expense	$	13,209	$	10,704	$	47,911	$	25,817

The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 7.46 years and 5.30 years for the 2027 Notes and 2025 Notes, respectively.

(12) ACQUISITIONS

On July 28, 2019, the Company entered into a definitive agreement and plan of merger (the “Merger Agreement”) with Genomic Health, Inc. (“Genomic Health”), and Spring Acquisition Corp., a wholly owned subsidiary of the Company (“Merger Sub”). Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Genomic Health, with Genomic Health surviving as a wholly owned subsidiary of the Company (the “Merger”), in a cash and stock transaction valued at approximately $2.8 billion. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, which has been unanimously approved by the boards of directors of Genomic Health and the Company, at the effective time of the Merger each share of Genomic Health common stock issued and outstanding immediately prior to the effective time of the Merger (except for certain excluded shares as otherwise provided in the Merger Agreement) will be converted into the right to receive (a) $27.50 in cash, without interest, and (b) a number of shares of Exact Sciences common stock ~~at a price~~equal to (i) 0.36854, if the average of the volume-weighted prices per share of Exact Sciences common stock on the Nasdaq Stock Market for each of the fifteen consecutive trading days ending immediately prior to the ~~public of $35.00 per share.~~closing date (the “measurement price”) is equal to or greater than $120.75, (ii) an amount equal to the quotient obtained by dividing $44.50 by the measurement price if the measurement price is greater than $98.79 but less than $120.75, and (iii) 0.45043, if the measurement price is equal or less than $98.79, less any applicable withholding taxes. The Company ~~received,~~currently expects the Merger will be completed in November 2019, subject to the ~~aggregate, approximately $253.4~~approval of Genomic Health’s stockholders and other customary closing conditions.

(13) INCOME TAXES

The Company recorded an income tax expense of $0.7 million and income tax benefit of ~~net proceeds from the offering, after deducting $7.3~~$0.2 million for the ~~underwriting discount~~three and ~~commissions~~nine months ended September 30, 2019, respectively, and an income tax expense of $27,000 and $0.1 million for the three and nine months ended September 30, 2018, respectively, in continuing operations. The Company’s income tax benefit recorded during the three and nine months ended September 30, 2019, is primarily related to the intraperiod tax allocation rules that require the Company to allocate the provision for income taxes between continuing operations and other ~~stock issuance costs paid by~~categories of 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 the ~~Company.~~benefit will not be realized.

~~(10)~~

(14) RELATED PARTY TRANSACTION

In 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 Company did not incur charges or make any payments during the ~~agreement, the Company is expected to make cash payments totaling up to an aggregate of $0.4 million under the agreement during 2017~~three and ~~2018.~~nine months ended September 30, 2019. The Company incurred charges of ~~$0.1~~$0.2 million and ~~$0.2~~$0.3 million for the three and nine months ended September 30, ~~2017.~~2018. The Company made payments of ~~$0.1~~$0.2 million and ~~$0.2~~$0.3 million for the three and nine months ended September 30, ~~2017.~~2018.

~~(11) ACQUISITIONS~~

On August 1, 2017, the Company acquired all of 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.

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~~(12) INCOME TAXES~~

During 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 quarter of 2017. 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)~~(15) RECENT ACCOUNTING PRONOUNCEMENTS

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

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, Leases (Topic 842)and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01, (“collectively, “Update 2016-02”). Update ~~2016-02”) which~~2016-02 requires recognition of ~~lease~~right-of-use assets and lease liabilities ~~by lessees for~~on the balance sheet, including those leases classified as operating leases under previous GAAP. Update 2016-02 provides an option of recognizing a cumulative-effect adjustment to the opening balance of retained earnings upon adoption. 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 Company adopted Update 2016-02 on January 1, 2019 using the ~~beginning~~modified retrospective method of adoption. As a result of the ~~earliest period presented using a modified retrospective approach. Early~~ adoption, the Company recorded an opening right-of-use asset balance of $20.6 million, which is ~~permitted. The Company is currently evaluating the effects that the adoption of Update 2016-02 will have on~~included in other long-term assets in the Company’s condensed consolidated financial statements. The Company ~~anticipates that the new guidance will impact~~also recorded an opening lease liability of $20.1 million, of which $3.0 million was classified in other short-term liabilities and $17.1 million was classified in long-term obligations in the Company’s condensed consolidated financial ~~statements as it has several leases.~~statements. See Note 9 for more detail.

In ~~August 2016,~~June 2018, the Financial Accounting Standards Board issued ASU No. ~~2016-15,~~ ~~Statement~~2018-07 (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, (“Update 2018-07”). Update 2018-07 expands the scope of ~~Cash Flows (Topic 230): Classification of Certain Cash Receipts~~Topic 718 to include share-based payment transactions for acquiring goods and ~~Cash Payments,~~ ~~(“Update 2016-15”). Current GAAP either is unclear or does not include specific guidance on~~services from nonemployees. An entity should apply the ~~eight cash flow classification issues included~~requirements to Topic 718 to nonemployee awards except for certain exemptions specified in the ~~amendments in Update 2016-15.~~amendment. 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~~is effective for fiscal years beginning after December 15, ~~2017, and~~2018, including interim reporting periods within ~~those~~that fiscal ~~years.~~year. The Company ~~has evaluated Update 2016-15 and does not expect the adoption of~~adopted this guidance toon January 1, 2019, and it did not have ~~a material~~an impact on ~~its statements of cash flows.~~the Company’s condensed consolidated financial statements.

In ~~October 2016,~~July 2018, the Financial Accounting Standards Board issued ASU 2018-09, Codification Improvements, (“Update 2018-09”). Update 2018-09 provided various minor codification updates and improvements to address comments that the FASB had received regarding unclear or vague accounting guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year. The Company adopted this guidance on January 1, 2019, and it did not have an impact on the Company’s condensed consolidated financial statements.

In July 2019, the Financial Accounting Standards Board issued ASU No. ~~2016-16,~~ ~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,~~ 2019-07, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (“Update ~~2016-16”~~2019-07”). ~~This amendment improves~~Update 2019-07 simplifies 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 2016-16disclosure requirements in certain areas to ~~have a significant impact on its consolidated financial statements.~~

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~~In October 2016, the Financial Accounting Standards Board issued ASU No. 2016-17,~~ ~~Consolidation (Topic 810): Interests Held through Related Parties That Are Under Common Control,~~ ~~(“Update 2016-17”).~~avoid redundant disclosures. 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 isthis update were effective ~~for fiscal years and interim periods within those years beginning after December 15, 2016.~~upon issuance. The Company adopted this guidance ~~during the three months ended March 31, 2017. The impact of adoption~~on July 1, 2019, and it did not have an impact on the Company’s condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In ~~November 2016,~~August 2018, the Financial Accounting Standards Board issued ASU ~~No. 2016-18,~~ ~~Statement of Cash Flows; Restricted Cash,~~ (“2018-13, Fair Value Measurement (Topic 820); Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, (“Update ~~2016-18”~~2018-13”). Update ~~2016-18 provides~~2018-13 provided an update to the disclosure requirements for fair value measurements under the scope of ASC 820. The 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.2019. The Company is currently evaluating the impact of ~~this amendment~~the guidance on ~~the Company’s~~its condensed consolidated financial statements.

In August 2018, the Financial Accounting Standards Board issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software, (“Update 2018-15”). Update 2018-15 provided guidance for evaluating the accounting for fees paid by a customer in a cloud computing arrangement that is a service contract. The guidance is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of the guidance on its condensed consolidated financial statements.

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In November 2018, the Financial Accounting Standards Board issued ASU 2018-18, Collaborative Arrangements (Topic 808), (“Update 2018-18”). Update 2018-18 provided additional guidance regarding the interaction between Topic 808 on Collaborative Arrangements and Topic 606 on Revenue Recognition. The guidance is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of the guidance on its condensed consolidated financial statements.

In April 2019, the Financial Accounting Standards Board issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, (“Update 2019-04”). Update 2019-04 provides clarity regarding measurement of securities without readily determinable fair values. The guidance is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of the guidance on its condensed consolidated financial statements.

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Item 2. Management’s Discussion and ~~Analysis~~Analysis of Financial Condition and Results of Operations

The following Discussion and Analysis of Financial Condition and Results of Operations of Exact Sciences Corporation (together with its subsidiaries, “Exact,” “we,” “us,” “our” or the “Company”) 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,~~2018, which has been filed with the SEC (the ~~“2016~~“2018 Form 10-K”).

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as “believe,” “expect,” “may,” “will,” “should,” “would,” “could,” “seek,” “intend,” “plan,” “goal,” “project,” “estimate,” “anticipate” or other comparable terms. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q regarding our strategies, prospects, financial condition, operations, costs, plans, objectives and ~~objectives~~the proposed acquisition of Genomic Health by Exact 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 and marketing efforts, expectations concerning payer reimbursement, ~~and~~ the anticipated results of our product development ~~efforts.~~efforts, the anticipated benefits of the proposed acquisition of Genomic Health, 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. 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 actual~~Actual results, conditions and ~~financial condition~~events may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause ~~our~~ actual results, conditions and ~~financial condition~~events to differ materially from those indicated in the forward-looking statements include, among others, the following: our ability to successfully and profitably market our products and services; the acceptance of our products and services by patients and healthcare providers; our ability to meet demand for our products and services; the willingness of health insurance companies and other payers to cover ~~Cologuard~~our 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 screening and diagnostic 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 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; our ability to effectively utilize strategic partnerships, such as through our Promotion Agreement with Pfizer, Inc., and acquisitions; our success establishing and maintaining collaborative, licensing and supplier arrangements; our ability to maintain regulatory approvals and comply with applicable regulations; the ability of Exact and Genomic Health to receive the approval of Genomic Health’s stockholders for the proposed merger and to satisfy the other conditions to the closing of the transaction on a timely basis or at all; the occurrence of events that may give rise to a right of one or both of Exact and Genomic Health to terminate the merger agreement; negative effects of the announcement or the consummation of the transaction on the market price of our common stock and/or on our business, financial condition, results of operations and financial performance; risks relating to the value of the Exact shares to be issued in the transaction; significant transaction costs and/or unknown liabilities; the possibility that the anticipated benefits from the proposed acquisition of Genomic Health cannot be realized in full or at all or may take longer to realize than expected; risks associated with contracts containing consent and/or other provisions that may be triggered by the proposed acquisition of Genomic Health; risks associated with transaction-related litigation; the possibility that costs or difficulties related to the integration of Genomic Health’s operations with those of Exact will be greater than expected; the ability of Genomic

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Health and the combined company to retain and hire key personnel; and the other risks and uncertainties described in the Risk Factors and in Management's Discussion and Analysis of Financial Condition and Results of Operations sections of the ~~2016~~2018 Form ~~10‑K~~10-K and subsequently filed Quarterly ~~Report(s)~~Reports on Form 10-Q. There can be no assurance that the proposed acquisition of Genomic Health will in fact be consummated in the manner described or at all. 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.

Overview

We are a molecular diagnostics company ~~currently~~ focused on the early detection and prevention of some of the deadliest forms of cancer. We have developed an accurate, non-invasive, patient-friendly screening test called ~~Cologuard~~Cologuard® for the early detection of colorectal cancer and pre-cancer, and we are currently working on the development of additional tests for other types of cancer, with the goal of becoming a leader in cancer screening and diagnostics.

~~Table~~On July 28, 2019, we entered into a definitive agreement and plan of ~~Contents~~

merger (the “Merger Agreement”) with Genomic Health, Inc. (“Genomic Health”), under which we agreed to acquire Genomic Health in a cash and stock transaction valued at approximately $2.8 billion. Genomic Health is a leading provider of genomic-based diagnostic tests that help optimize cancer care. Following the merger with Genomic Health, we would be the provider of two of the strongest brands in cancer diagnostics, Cologuard and Oncotype DX®, providing a robust platform for continued growth. Refer to Note 12 in our condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information.

We currently expect the merger will be completed in November 2019, subject to the approval of Genomic Health’s stockholders and other customary closing conditions. We anticipate that approximately $1.1 billion will be required to pay the aggregate cash portion of the merger consideration. The merger will be financed in part by the use of our cash on hand and in part by the use of Genomic Health’s cash on hand.

Our Cologuard Test

Colorectal cancer is the second leading cause of cancer deaths in the ~~United States~~U.S. and the leading cause of cancer deaths in the U.S. among non-smokers. Each year in the U.S. there are approximately:

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~~135,000~~146,000 new cases of colorectal cancer

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~~50,000~~51,000 deaths from colorectal cancer

Colorectal 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 rise from 106,000 cases in 2010 to more than 180,000 cases in 2030.

It is widely accepted that colorectal cancer is among the most preventable, yet least prevented cancers. Colorectal cancer can take up to 10-15 years to progress from a pre-cancerous lesion to metastatic cancer and death. Patients who are diagnosed early in the progression of the disease—with pre-cancerous lesions or polyps or early-stage cancer—are more likely to have a complete recovery and to be treated less expensively. ~~Accordingly,~~Of the 106 million Americans between the ages of 45 and 85 who are at average-risk for colorectal cancer, an estimated 40 percent are not up-to-date with screening according to the American Cancer ~~Society~~Society’s (“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~~guidelines. Internal studies have ~~not been screened according to current guidelines.~~shown that nearly 50% of surveyed Cologuard users were previously unscreened for colorectal cancer. 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 6771 percent and 1214 percent, ~~respectively.~~respectively, compared to a 90 percent survival rate if the disease is diagnosed earlier in stage 1. We believe the large underserved population of unscreened and inadequately screened patients represents a significant opportunity for a patient-friendly screening test.

Our Cologuard test is a non-invasive stool-based DNA (“sDNA”) screening test that utilizes a multi-target approach to detect DNA and hemoglobin biomarkers associated with colorectal cancer and pre-cancer. 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~~an algorithm to provide a single positive or negative reportable result.

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Changes in DNA methylation, and the occurrence of mutations, alter gene expression and other mechanisms for cell cycle regulation and differentiation. As a result, the affected cells continue to proliferate, often resulting in malignancies associated with colorectal cancer and pre-cancer. Hemoglobin is the protein complex responsible for transporting oxygen in red blood cells. During the progression of cancer, the probability of bleeding into the colon increases. The presence of hemoglobin, released from red blood cells, can be detected in the stool. Using sDNA, Cologuard purifies, amplifies and detects increased levels of methylation, and presence of mutations, in specific genes. By combining these DNA indicators with a test for hemoglobin, Cologuard produces a multi-marker result effective for the detection of colorectal cancer and pre-cancerous adenomas.

In August ~~11,~~ 2014, the U.S. Food and Drug Administration (“FDA”) ~~approved~~granted premarket approval (“PMA”) to Cologuard for use as a colorectal cancer screening test in adults 50 years of age and older who are at a typical average-risk for colorectal cancer. Upon approval, Cologuard became the first and only FDA-approved sDNA non-invasive colorectal cancer screening test. In September 2019, the FDA expanded Cologuard’s indication to include average-risk individuals ages 45-49. Cologuard is now indicated for average risk adults 45 years of age and older.

Our original PMA submission to the FDA for Cologuard included the results of our pivotal DeeP-C clinical trial that had over 10,000 patients enrolled at 90 sites in the U.S. and Canada. The results of our DeeP-C clinical trial for Cologuard were published in the New England Journal of Medicine in April 2014. The peer-reviewed study, “Multi-target Stool DNA Testing for Colorectal-Cancer Screening,” highlighted the performance of Cologuard in the trial population:

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Cancer Sensitivity: 92%

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Stage I and II Cancer Sensitivity: 94%

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High-Grade Dysplasia Sensitivity: 69%

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Specificity: 87%

~~The~~We believe the competitive advantages of sDNA screening ~~may~~ provide a significant market opportunity. IfThere are 106 million people in the ~~test were used by 40-percent~~U.S. between the ages of ~~the eligible screening population~~45 and 85 who are at average risk for colorectal cancer. At a three-year screening interval ~~we estimate the~~and an average revenue per test of $500 this represents a potential ~~U.S.~~$18 billion market for ~~sDNA screening would be more than $5.5 billion, annually.~~Cologuard, of which our current share is approximately 5.2 percent.

~~Our-Cologuard Commercialization Strategy~~

Our ~~commercialization strategy includes three main elements focusing on physicians, patients, and payers.~~

~~Physicians and Patients~~

Our 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.

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Securing inclusion in guidelines and quality measures is a key part of our physician engagement strategy since many physicians rely on such guidelines and quality measures when making screening recommendations. In June 2016, the US Preventive Services Task Force (“USPSTF”) issued an updated recommendation statement for colorectal 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 in the U.S., including those of the ACS and the National Comprehensive Cancer Network (“NCCN”), recommend regular screening using any of a variety of methods. Since 2008, joint colorectal cancer 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. In October 2014, 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 part of the value proposition of Cologuard is our compliance program, which involves active engagement with patients and physicians. This customer-service-oriented activity is focused on helping patients to complete Cologuard tests that have been ordered for them by their physicians and supporting physicians in their efforts to have their patients screened.

After the launch 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.

~~Payers~~

The 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 that~~

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proposed in the preliminary 2018 Clinical Laboratory Fee Schedule. We expect the CMS reimbursement rate established for 2018 to remain in place for three years, after which it would be reset based on the volume-weighted median of private payer rates for Cologuard during the data collection period between January 1, 2019 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.Manufacturing Facilities

In 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 have agreed to cover Cologuard as an in-network service. In-network agreements with payers have varying terms and conditions, including reimbursement rate, term 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.

We are 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 are focusing our 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.

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~~Our Clinical Lab Facility~~

As 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~~initial clinical lab operation is housed in a ~~50,000~~55,000 square foot facility in Madison, Wisconsin. At ~~our~~this lab, we currently have the capacity to process approximately ~~one~~three million tests per year. ~~We are expanding our current~~

During the third quarter of 2019, we began operations at a second clinical lab facility ~~to increase our~~in Madison, Wisconsin. Our total lab 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~~at both facilities is approximately seven million tests per ~~year.~~year, with the opportunity to add additional capacity to our new facility, if needed.

~~Product Pipeline~~

We ~~also~~currently manufacture our Cologuard test kit in a facility in Madison, Wisconsin. As we expand the commercialization of Cologuard, we believe it will be necessary to expand our manufacturing capacity. Accordingly, we are ~~developing a pipeline~~in the process of ~~potential future products and services.~~building an additional manufacturing facility for which we expect to receive FDA approval for commercial production in 2020. We are ~~continuing~~committed to ~~collaborate with MAYO Foundation~~manufacturing and providing medical devices and related products that meet customer expectations and applicable regulatory requirements. We adhere to manufacturing and safety standards required by federal, state, and local laws and regulations and operate our manufacturing facilities under a quality management system. We purchase certain components for ~~Medical Education~~our Cologuard test from third-party suppliers and ~~Research (“MAYO”), our development partner for Cologuard, on developing new tests, with the goal~~manufacturers.

Table of becoming a leader in the early detection of cancer. We believe our proprietary technology platform provides a strong foundation for the development of additional cancer diagnostic tests. Through our collaboration with MAYO, we have identified proprietary biomarkers for several major cancers. We have successfully performed validation studies on tissue samples for seven major cancers, including lung cancer, and on blood samples for four major cancers.Contents

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. We are currently developing a blood-based biomarker test to aid in the early detection of lung cancer in individuals with lung nodules discovered through a computerized tomography (“CT”) or other scan. Such a test may help reduce the number of unnecessary biopsies and other follow-up procedures, and thereby reduce costs and improve health outcomes. We recently completed a multi-round study of nearly 400 patients, which demonstrated high accuracy for detecting lung cancer at all stages.

~~We also continue to explore opportunities for improving Cologuard, including improvements that could lower our cost of sales.~~

~~Acquisitions~~

On August 1, 2017, we acquired all of 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 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 Revenue

~~For~~We recognize revenue on the delivery of a test result to an ordering physician for tests ~~performed where we have an agreed-upon reimbursement rate or where we can~~performed. The amount recognized is based on our estimate ~~the amount that~~of what we will ultimately collect at the time delivery is ~~complete,~~complete. The amount of revenue we recognize ~~the related revenue on an accrual basis upon delivery of a test result to an ordering physician. Accrual rates are~~is based on the established billing rates less contractual and other 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. The~~basis, using historical collections, established reimbursement rates and other adjustments. To the extent we have agreed on a reimbursement amount with a payer, 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 later

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determine 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~~because we were unable to reasonably estimate the amount that would ultimately be collected from ~~a payer.~~certain payers. 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, as noted above, we now recognize revenue ~~on an accrual basis~~ for all billed ~~claims.~~claims at the time the test results are delivered to the ordering provider.

Our average reimbursement per Cologuard test, as further defined below, was approximately ~~$428~~$481 and ~~$393~~$470 through September 30, ~~2017~~2019 and ~~2016,~~2018, 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, non-renewal or termination of payer contracts, 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~~2019 and 2018, respectively, represents the total cash collected through ~~September 30, 2017~~such dates for ~~all~~ tests performed ~~from April 1, 2016 through~~during the twelve-month periods ended March 31, ~~2017~~2019 and March 31, 2018, respectively, divided by the number of tests performed during ~~that period.~~those same periods.

~~The components of our revenue, as recognized upon accrual or cash receipt, were as follows:~~

2019 Priorities

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 Priorities~~

Our top priorities for ~~2017~~2019 are to (1) power our partnership with Pfizer, (2) enhance Cologuard through label expansion and product improvements, and (3) advance liquid biopsy.

Power the Partnership

In August 2018, we entered into a Promotion Agreement with Pfizer. Under the terms of the Promotion Agreement, Pfizer agreed to promote Cologuard and provide certain other sales and marketing services. We and Pfizer committed in the Promotion Agreement to invest specified amounts in the advertising and promotion of Cologuard. Pfizer has a large primary care sales team that has extensive experience with large health system organizations and enhances our physician and consumer marketing capabilities. A priority for 2019 is executing on the Pfizer partnership in order to grow ~~revenue~~the Cologuard brand and get more patients screened.

Enhance Cologuard

In May 2018, the ACS updated its guidelines to recommend colorectal cancer screening begin at age 45, rather than 50, for people at average risk of the disease, due to the rising incidence rate within the 45-49 year-old population. There are nearly 21 million people who are between the ages of 45-49, and we estimate approximately 19 million of them are at average risk for colorectal cancer and would be eligible for screening under the ACS guidelines. In September 2019, we obtained FDA approval to expand Cologuard’s indication to include individuals between the ages of 45 and 49 who are at average risk for colorectal cancer.

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In addition, we are seeking opportunities to improve upon Cologuard’s performance characteristics. For example, we are evaluating whether new biomarkers and improved laboratory processes would increase specificity while maintaining sensitivity. If we could increase the specificity of Cologuard, ~~(2) improve~~we believe that would enhance its adoption as a front-line screening test. We are also evaluating ways that we might make Cologuard even easier for patients to use and potential opportunities to lower the ~~customer experience~~cost of goods sold for Cologuard.

The timing of any such enhancements to Cologuard is unknown and would be subject to FDA approval.

Advance Liquid Biopsy

We are also focusing our research and development efforts on building a pipeline of potential future products and services with a focus on blood or other fluid-based (“liquid biopsy”) tests. We will continue to ~~deliver world class service to patients~~advance liquid biopsy through biomarker discovery and ~~providers,~~validation in tissue, blood, or other fluids. We have identified proprietary biomarkers for several cancers, including liver cancer and ~~(3) expand~~pancreatic cancer. Through our ~~product portfolio by developing additional cancer diagnostic tests as further outlined in the product pipeline section above.~~collaboration with Mayo Foundation for Medical Education and Research, we have successfully performed validation studies on tissue samples for thirteen cancers and on blood or other fluid samples for nine cancers.

Results of Operations

We have generated significant losses since inception and, as of September 30, ~~2017,~~2019, we had an accumulated deficit of approximately ~~$838.9 million.~~$1.2 billion. We expect to continue to incur losses for the near future, and it is possible we may never achieve profitability.

~~Laboratory service revenue.~~ Revenue.Our ~~laboratory service~~consolidated revenue is primarily generated by performing screening services using our Cologuard test. For the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, we completed approximately ~~161,000~~456,000 and ~~68,000~~241,000 Cologuard tests, respectively, and generated ~~laboratory service~~ revenue of ~~$72.6~~$218.8 million and ~~$28.1~~$118.3 million, respectively. For the nine months ended September 30, ~~2017~~2019 and ~~2016, the Company~~2018, we completed approximately ~~395,000~~1.2 million and ~~162,000~~0.6 million Cologuard tests, respectively, and generated ~~laboratory service~~ revenue of ~~$178.6~~$580.7 million and ~~$64.1~~$311.5 million, respectively. The increase in revenue was primarily due to an increase in completed Cologuard tests ~~and an increase in average revenue recognized per test~~ during the current ~~period.~~period primarily due to increased selling and marketing efforts.

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Our ~~Cost 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.

Cost of sales includes costs related to inventory production and usage, shipment of test collection kits, royalties and the cost of ~~laboratory~~ services to process tests and provide results to physicians. We incur ~~expense~~expenses 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.

We expect that gross margin for our ~~laboratory~~ services will continue to fluctuate and be affected by Cologuard test volume, our operating efficiencies, patient compliance rates, payer mix, the levels of reimbursement, and payment patterns of payers and patients.

Cost of ~~Sales.~~ sales. Cost of sales increased to ~~$20.7~~$52.8 million for the three months ended September 30, ~~2017~~2019 compared to ~~$12.2~~$30.0 million for the three months ended September 30, ~~2016.~~2018. Cost of sales increased to ~~$55.7~~$147.6 million for the nine months ended September 30, ~~2017~~2019 compared to ~~$31.3~~$79.8 million for the nine months ended September 30, ~~2016.~~2018. The increase in cost of sales is primarily due to the increase in completed Cologuard tests. The Company completed approximately ~~161,000~~456,000 and ~~68,000~~241,000 Cologuard tests for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The Company completed approximately ~~395,000~~1.2 million and ~~162,000~~0.6 million Cologuard tests for the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

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	Three Months Ended September 30,
(In millions)	2019		2018		Change
Production costs	$	36.8	$	20.4	$	16.4
Personnel expenses		9.4		5.4		4.0
Facility and support expenses		5.0		3.1		1.9
Stock-based compensation		1.4		1.0		0.4
Other cost of sales		0.2		0.1		0.1
Total cost of sales expenses	$	52.8	$	30.0	$	22.8


	Nine Months Ended September 30,
(In millions)	2019		2018		Change
Production costs	$	104.4	$	54.9	$	49.5
Personnel expenses		25.6		14.3		11.3
Facility and support expenses		13.4		7.8		5.6
Stock-based compensation		3.8		2.5		1.3
Other cost of sales		0.4		0.3		0.1
Total cost of sales expenses	$	147.6	$	79.8	$	67.8

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

Research and development expenses. Research and development expenses increased to ~~$11.7~~$34.9 million for the three months ended September 30, ~~2017~~2019 compared to ~~$7.6~~$17.6 million for the three months ended September 30, ~~2016.~~2018. Research and development expenses increased to ~~$29.5~~$97.2 million for the nine months ended September 30, ~~2017~~2019 compared to ~~$26.4~~$47.3 million for the nine months ended September 30, ~~2016.~~2018. The increase in research and development expenses was primarily due to an increase in ~~personnel costs due to an increased headcount and an increase in~~ direct research and development expenses for our ~~pipeline.~~pipeline and improvements to Cologuard as well as personnel costs due to increased headcount.


	Three Months Ended September 30,
(In millions)	2019		2018		Change
Direct research and development expenses	$	15.9	$	7.1	$	8.8
Personnel expenses		7.5		4.8		2.7
Stock-based compensation		6.9		3.1		3.8
Other research and development		2.3		1.6		0.7
Legal and professional fees		2.3		1.0		1.3
Total research and development expenses	$	34.9	$	17.6	$	17.3


	Three Months Ended September 30,

							Nine Months Ended September 30,
(In millions)	2017		2016		Change		2019		2018		Change
Direct research and development expenses	$	4.7	$	3.0	$	1.7	$	50.7	$	19.4	$	31.3
Personnel expenses		3.8		2.6		1.2		22.9		13.7		9.2
Stock-based compensation		2.1		1.0		1.1		12.9		7.9		5.0
Other research and development		0.6		0.5		0.1		6.4		4.0		2.4
Legal and professional fees		0.5		0.5		—		4.3		2.3		2.0
Total research and development expenses	$	11.7	$	7.6	$	4.1	$	97.2	$	47.3	$	49.9

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 ~~$30.8~~$80.6 million for the three months ended September 30, ~~2017~~2019 compared to ~~$20.3~~$46.7 million for the three months ended September 30, ~~2016.~~2018. General and administrative expenses increased to ~~$75.4~~$208.3 million for the nine months ended September 30, ~~2017~~2019 compared to ~~$55.4~~$121.9 million for the nine months ended September 30, ~~2016.~~2018. The increase in general and administrative expenses was primarily ~~a result of increased personnel costs, stock-based compensation and legal and professional fees~~ to support the overall growth of the Company. In addition, we incurred $9.2 million in costs related to the upcoming merger with Genomic Health during the three and nine months ended September 30, 2019.


	Three Months Ended September 30,
(In millions)	2019		2018		Change
Personnel expenses	$	29.7	$	16.7	$	13.0
Facility and support expenses		15.4		10.1		5.3
Stock-based compensation		11.1		9.0		2.1
Professional and legal fees		21.4		9.0		12.4
Other general and administrative		3.0		1.9		1.1
Total general and administrative expenses	$	80.6	$	46.7	$	33.9


	Nine Months Ended September 30,
(In millions)	2019		2018		Change
Personnel expenses	$	87.5	$	47.0	$	40.5
Facility and support expenses		40.0		26.4		13.6
Stock-based compensation		29.8		25.2		4.6
Professional and legal fees		43.5		18.6		24.9
Other general and administrative		7.5		4.7		2.8
Total general and administrative expenses	$	208.3	$	121.9	$	86.4

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

Sales and marketing expenses. Sales and marketing expenses increased to ~~$37.8~~$86.2 million for the three months ended September 30, ~~2017~~2019 compared to ~~$26.3~~$64.8 million for the three months ended September 30, ~~2016.~~2018. Sales and marketing expenses increased to ~~$113.3~~$265.3 million for the nine months ended September 30, ~~2017~~2019 compared to ~~$82.3~~$172.7 million for the nine months ended September 30, ~~2016.~~2018. The increase in sales and marketing expenses was a result of hiring additional sales and marketing personnel, ~~and~~ increasing our advertising and patient marketing efforts for our Cologuard test, and expenses incurred related to our Promotion Agreement with Pfizer as ~~part of the ongoing commercialization~~further described in Note 4 of our ~~Cologuard test.~~condensed consolidated financial statements included in this Quarterly Report.


	Three Months Ended September 30,
(In millions)	2019		2018		Change
Direct marketing costs and professional fees	$	42.3	$	32.8	$	9.5
Personnel expenses		37.7		27.3		10.4
Stock-based compensation		4.9		3.4		1.5
Other sales and marketing		1.3		1.3		—
Total sales and marketing expenses	$	86.2	$	64.8	$	21.4


	Nine Months Ended September 30,
(In millions)	2019		2018		Change
Direct marketing costs and professional fees	$	135.8	$	87.9	$	47.9
Personnel expenses		111.0		72.9		38.1
Stock-based compensation		14.2		9.0		5.2
Other sales and marketing		4.3		2.9		1.4
Total sales and marketing expenses	$	265.3	$	172.7	$	92.6

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

Table of Contents

Interest ~~income and~~ expense. ~~Net interest~~Interest expense ~~of $51,000 was realized~~increased to $13.2 million for the three months ended September 30, ~~2017~~2019 compared to ~~net interest expense of $54,000~~$10.7 million for the three months ended September 30, ~~2016. Net interest~~2018. Interest expense ~~of $0.2~~increased to $47.9 million ~~was realized~~ for ~~each of~~ the nine months ended September 30, ~~2017 and~~2019 compared to $25.8 million for the nine months ended September 30, ~~2016.~~2018. Interest expense ~~is related~~recorded from our outstanding convertible notes totaled $12.7 million and $10.7 million during the three months ended September 30, 2019 and 2018, respectively. Interest expense from our outstanding convertible notes totaled $36.3 million and $25.7 million during the nine months ended September 30, 2019 and 2018, respectively. In addition to the ~~mortgage~~$36.3 million in interest expense recorded on ~~one~~outstanding convertible notes, an additional $10.6 million was recorded as a result of the settlement of convertible notes, as further described in Note 11 of our ~~facilities~~condensed consolidated financial statements included in ~~Madison, WI which~~this Quarterly Report. $11.0 million and $8.4 million of interest expense relates to amortization of debt discount and debt issuance costs for the three months ended September 30, 2019 and 2018, respectively. $30.8 million and $20.2 million of interest expense relates to amortization of debt discount and debt issuance costs for the nine months ended September 30, 2019 and 2018, respectively. The remaining $2.2 million and $6.5 million of interest expense for the three and nine months ended September 30, 2019 relates to the stated interest that was ~~entered into~~paid in ~~June 2015.~~cash during the year on our outstanding convertible notes and construction loan.

Liquidity and Capital Resources

We have financed our operations since inception primarily through public offerings of our common stock and convertible debt and through revenue generated by the sale of ~~Cologuard.~~the Cologuard test. As of September 30, ~~2017,~~2019, we had approximately ~~$50.8 million~~$1.0 billion in unrestricted cash and cash equivalents and approximately ~~$411.7~~$126.2 million in marketable securities. During the nine months ended September 30, 2019, there were proceeds of $1.4 billion from maturities and sales of marketable securities, which are primarily being held in cash and cash equivalents to use for the upcoming merger with Genomic Health.

All of our investments in marketable securities consist of fixed income investments, and all are deemed available-for-sale. The objectives of this portfolio are to provide liquidity and safety of principal while striving to achieve the highest rate of return. Our investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.

Net cash used in operating activities was ~~$71.0~~$86.3 million for the nine months ended September 30, ~~2017 as~~2019 compared to ~~$102.9~~$68.1 million for the nine months ended September 30, ~~2016.~~2018. The principal use of cash in operating activities for the nine months ended September 30, ~~2017~~2019 and 2018 was to fund our net loss. ~~Our net loss decreased from the nine months ended September 30, 2016 primarily due to increased sales of Cologuard.~~

Net cash ~~used in~~provided by investing activities was ~~$185.5~~$713.7 million for the nine months ended September 30, ~~2017 as~~2019 compared to ~~net~~ cash ~~used in investing activities~~use of ~~$20.8~~$772.5 million for the nine months ended September 30, ~~2016.~~2018. The increase in cash ~~used in~~provided by investing activities for the nine months ended September 30, ~~2017~~2019 compared to the same period in ~~2016~~2018 was primarily the result of the timing of purchases, sales, and maturities of marketable securities. Excluding the impact of purchases, sales, and maturities of marketable securities, net cash used in investing activities was ~~$35.9~~$131.5 million for the nine months ended September 30, ~~2017. Such purchases~~2019 compared to $98.1 million for the nine months ended September 30, 2018. Cash use consisted primarily 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~~$131.0 million and ~~no acquisitions or~~$98.0 million for the nine months ended September 30, 2019 and 2018, respectively. There were also minimal purchases of intangible ~~assets. The intangible asset purchase~~assets during the nine months ended September 30, ~~2017 was the result~~2019 and 2018. The increase in purchases 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~~2019 was primarily the result of increased laboratory equipment purchases, computer equipment and computer software purchases, and assets under construction in order to continue to scale-up our ~~operations. The business acquisition during the nine months ended September 30, 2017 was the result~~operations for future expected growth of ~~the acquisition~~our Cologuard business.

Table of ~~Sampleminded, Inc.~~Contents

Net cash provided by financing activities was ~~$258.2~~$246.6 million for the nine months ended September 30, ~~2017, as~~2019 compared to ~~$146.2~~$924.8 million for the nine months ended September 30, ~~2016.~~2018. During the nine months ended September 30, 2019, we received net cash of $729.5 million from the issuance of Convertible Notes with a maturity date of March 15, 2027 (the “2027 Notes”), and we used $493.4 million of cash to settle Convertible Notes with an original maturity date of January 15, 2025 (the “2025 Notes”, and, collectively with the 2025 Notes, the “Notes”). The ~~increase in~~ cash provided by financing activities for the nine months ended September 30, ~~2017 compared to the same period in 2016~~2018 was primarily the result of proceeds from our issuance of ~~common~~the 2025 Notes in January 2018 and June 2018. In addition, during the nine months ended September 30, 2019 we received proceeds of $4.1 million from our employee stock purchase plan, $0.3 million from drawing on our construction loan, $6.4 million from the exercise of stock options, and made payments of $0.4 million for stock issuance costs.

As described above, on July 28, 2019, we entered into a Merger Agreement under which we agreed to acquire Genomic Health in ~~an underwritten public offering~~a cash and stock transaction valued at approximately $2.8 billion. We currently expect the merger will be completed in ~~June 2017.~~November 2019, subject to the approval of Genomic Health’s stockholders and other customary closing conditions. We anticipate that cash of approximately $1.1 billion will be required to pay the aggregate cash portion of the merger consideration.

~~Table of Contents~~

We expect that cash and cash equivalents and marketable securities on hand at September 30, ~~2017~~2019, combined with cash, cash equivalents, and marketable securities received as part of the Genomic Health acquisition, will be sufficient to fund the cash portion of the purchase price to be paid in connection with the Genomic Health acquisition 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 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 additional funds, we cannot assure that our business will ever generate sufficient cash flow from operations to become profitable.

A table reflecting certain of our specified contractual obligations as of December 31, 2018 was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operation of our 2018 Form 10-K and updated information concerning our contractual obligations under the Notes was included in the Management’s Discussion and Analysis of Financial Condition and Results of Operation of our subsequently filed Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019. Because the closing price of the Company’s common stock exceeded the Conversion Price by 130% for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading days ending on September 30, 2019, the holders of the 2025 Notes have the right to convert their Notes between October 1, 2019 and December 31, 2019. The 2025 Notes were previously classified as long-term convertible notes, net on the condensed consolidated balance sheet before being reclassified to convertible notes, net, current portion on the condensed consolidated balance sheet. See Note 11 of the condensed consolidated financial statements included in this Quarterly Report for further details. With the exception of this item, there were no material changes outside the ordinary course of our business in the specified contractual obligations during the nine months ended September 30, 2019.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, tax positions and stock-based compensation. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Table of Contents

While our significant accounting policies are more fully described in Note 2 of our financial statements included in our ~~2016~~2018 Form 10-K, we believe that the following accounting policies and judgments are most critical to aid in fully understanding and evaluating our reported financial results.

Revenue Recognition

~~Laboratory service revenue.~~Revenue. Our ~~laboratory service revenues are~~revenue is primarily generated by performing screening services using our Cologuard test, and the service is completed upon delivery of a patient’s test result to anthe ordering physician. We ~~recognize~~account for revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), which we adopted on January 1, 2018, using the ~~provisions~~modified retrospective method, which we elected to apply to all contracts. Application of the modified retrospective method did not impact amounts previously reported by us, nor did it require a cumulative effect adjustment upon adoption, as our method of recognizing revenue under ASC 606 was analogous to the method utilized immediately prior to adoption. Accordingly, there is no need for us to disclose the amount by which each financial statement line item was affected as a result of applying the new standard and an explanation of significant changes.

The core principle of ASC ~~954-605,~~ ~~Health Care Entities - Revenue Recognition.~~ 606 is that we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We recognize revenue from our Cologuard test in accordance with that core principle, and key aspects considered include the following:

Contracts

Our customer is the patient. However, we do not enter into a formal reimbursement contract with a patient, as formal reimbursement contracts, including a national coverage determination for Cologuard by the Centers for Medicare and Medicaid Services (“CMS”), are established with payers. Accordingly, we establish a contract with a patient in accordance with other customary business practices.

●

Approval of a contract is established via the order submitted by the patient’s physician and the return of a sample by the patient.

●

We are obligated to perform our laboratory services upon receipt of a sample from a patient, and the patient and/or applicable payer are obligated to reimburse us for services rendered based on the patient’s insurance benefits.

●

Payment terms are a function of a patient’s existing insurance benefits, including the impact of coverage decisions with CMS and applicable reimbursement contracts established between us and payers, unless the patient is a self-pay patient, whereby we require payment from the patient prior to us shipping a collection kit to the patient.

●

Once we deliver a patient’s test result to the ordering physician, we are legally able to collect payment and bill an insurer and/or patient and depending on payer contract status or patient insurance benefit status.

●

Our consideration is deemed to be variable, and we consider collection of such consideration to be probable to the extent that it is unconstrained.

Performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service (or a bundle of goods or services) to the customer. Our contracts have a single performance obligation, which is satisfied upon rendering of services, which culminates in the delivery of a patient’s Cologuard test result to the ordering physician. The duration of time between sample receipt and delivery of a valid test result to the ordering physician is typically less than two weeks. Accordingly, we elect the practical expedient and therefore, we do not disclose the value of unsatisfied performance obligations.

Table of Contents

Transaction price

The transaction price is the amount of consideration that we expect to collect in exchange for transferring promised goods or services to a customer, excluding amounts collected on ~~an accrual basis, net~~behalf of third parties (for example, some sales taxes). The consideration expected from a contract with a customer may include fixed amounts, variable amounts, or both.

The consideration derived from our contracts is deemed to be variable, though the variability is not explicitly stated in any contract. Rather, the implied variability is due to several factors, such as the amount of contractual ~~and other~~ adjustments, ~~when amounts that will ultimately be collected can be reasonably estimated. Contractual and other adjustments represent~~any patient co-payments, deductibles or adherence incentives, the ~~difference between the list price (the billing rate) and the estimated aggregate reimbursement rate from~~existence of secondary 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.claim denials.

The estimates of amounts that will ultimately be collected requires significant judgment by management, and our judgements will continue to evolve as we gain payment experience with payers and patients. Historically, in the absence of the ability to reasonably

We estimate the amount of variable consideration using the expected value method, which represents the sum of probability-weighted amounts in a range of possible consideration amounts. When estimating the amount of variable consideration, the company considers several factors, such as historical collections experience, patient insurance eligibility and payer reimbursement contracts.

We limit the amount of variable consideration included in the transaction price to the unconstrained portion of such consideration. In other words, we recognize revenue up to the amount of variable consideration that is not subject to a significant reversal until additional information is obtained or the uncertainty associated with the additional payments or refunds is subsequently resolved. Differences between original estimates and subsequent revisions, including final settlements, represent changes in the estimate of variable consideration and are included in the period in which such revisions are made. Revenue recognized from changes in transaction prices was $1.2 million and $2.4 million for the three months ended September 30, 2019 and 2018, respectively. Revenue recognized from changes in transaction prices was $4.6 million and $14.2 million for the nine months ended September 30, 2019 and 2018, respectively.

We monitor our estimates of transaction price to depict conditions that exist at each reporting date. If we subsequently determine that we will ~~ultimately be collected~~collect more consideration than we originally estimated for ~~our services,~~a contract with a patient, we will account for the change as an increase in the estimate of the transaction price (i.e., an upward revenue ~~was~~adjustment) in the period identified. Similarly, if we subsequently determine that the amount we expect to collect from a patient is less than we originally estimated, we will generally account for the change as a decrease in the estimate of the transaction price (i.e., a downward revenue adjustment), provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized.

When we do not have significant historical experience or that experience has limited predictive value, the constraint over estimates of variable consideration may result in no revenue being recognized upon delivery of a patient’s Cologuard test result to the ordering physician, with recognition generally occurring at the date of cash receipt. ~~Effective during~~

Allocate transaction price

The transaction price is allocated to the ~~first quarter~~single performance obligation contained in a contract with a patient.

Point in time recognition

Our single performance obligation is satisfied at a point in time, and that point in time is defined as the date a patient’s successful test result is delivered to the patient’s ordering physician. We consider this date to be the time at which the patient obtains control of ~~2017, we determined that we had~~ the ~~ability to reasonably estimate~~promised Cologuard test service.

Table of Contents

Disaggregation of Revenue

The following table presents our revenues disaggregated by revenue source for the ~~amount that will ultimately be collected from all payers, including the impact~~three and nine months ended September 30, 2019 and 2018, respectively:


	Three Months Ended September 30,
(In thousands)	2019		2018
Medicare Parts B & C	$	108,617	$	65,870
Commercial		99,352		48,624
Other		10,836		3,797
Total	$	218,805	$	118,291


	Nine Months Ended September 30,
(In thousands)	2019		2018
Medicare Parts B & C	$	295,103	$	178,052
Commercial		261,521		123,045
Other		24,094		10,384
Total	$	580,718	$	311,481

Contract Balances

The timing of ~~patient cost-share collections. Accordingly, we now recognize~~revenue recognition, billings and cash collections results in billed accounts receivable and deferred revenue on the condensed consolidated balance sheets. Generally, billing occurs subsequent to delivery of a patient’s test result to the ordering physician, resulting in an ~~accrual basis~~account receivable. However, we sometimes receive advance payment from a patient, particularly a self-pay patient, before a Cologuard test result is completed, resulting in deferred revenue. The deferred revenue balance is relieved upon delivery of the applicable patient’s test result to the ordering physician. Changes in accounts receivable and deferred revenue were not materially impacted by any other factors.

Deferred revenue balances are reported in other short-term liabilities on our condensed consolidated balance sheets and were $0.7 million and $0.5 million as of September 30, 2019 and December 31, 2018, respectively.

Revenue recognized for ~~all billed claims.~~the three months ended September 30, 2019 and 2018, which was included in the deferred revenue balance at the beginning of each period was $0.2 million and $0.1 million, respectively. Revenue recognized for the nine months ended September 30, 2019 and 2018, which was included in the deferred revenue balance at the beginning of each period, was $0.5 million and $0.1 million, respectively.

Practical Expedients

We do not adjust the transaction price for the effects of a significant financing component, as at contract inception, we expect the collection cycle to be one year or less.

We expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses on our condensed consolidated statements of operations.

We incur certain other costs that are incurred regardless of whether a contract is obtained. Such costs are primarily related to legal services and patient communications (e.g. compliance reminder letters). These costs are expensed as incurred and recorded within general and administrative expenses on our condensed consolidated statements of operations.

Table of Contents

Inventory.Inventory is stated at the lower of cost or market value (net realizable value). We determine the cost of inventory using the first-in, first out method (“FIFO”). We estimate the recoverability of inventory by reference to internal estimates of future demands and product life cycles, including expiration. We periodically analyze our inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated ~~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.~~development on our condensed consolidated statements of operations.

~~Table of Contents~~

Stock-Based Compensation. In accordance with GAAP, all stock-based payments, including grants of employee stock options, restricted stock 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 in 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~~ - We record 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 service-based awards for each restricted stock award and restricted stock unit is determined on the date of grant using the closing stock price on that day. The fair value of market measure-based share-based compensation plans are calculated using a Monte Carlo simulation pricing model. The fair value of each option award is estimated on the date of grant using the Black Scholes option pricing model based on the assumptions noted above and as further described in Note 45 in the Notes to Consolidated Financial Statements.

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 ~~condensed consolidated financial statements.~~

nonconvertible debt borrowing rate. In January 2018 and June 2018, we issued the 2025 Notes of $690.0 million and $218.5 million, in aggregate principal amount of 1.0% Convertible Notes with a maturity date of January 15, 2025. In March 2019 we issued the 2027 Notes of $747.5 million in aggregate principal amount of 0.375% Convertible Notes with a maturity date of March 15, 2027. In March 2019, we settled approximately $493.4 million in outstanding 2025

~~Recent Accounting Pronouncements~~

~~In May 2014,~~Notes. We determined 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~~carrying amount of ~~revenue to which it expects to be entitled for~~ the ~~transfer~~liability component of ~~promised goods or services to customers. Additional disclosures will also be required to enable users to understand~~ the ~~nature, amount, timing~~Notes by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and ~~uncertainty~~volatilities. Determining the fair value of ~~revenue and cash flows arising from contracts with customers. The New Revenue Standard will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits~~the debt component requires the use of ~~either~~accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the ~~retrospective or modified retrospective method upon adoption. Adoption~~determination of the ~~New Revenue Standard is required by~~debt component, and the ~~first quarter of~~associated non-cash interest expense.

For the January 2018 ~~and~~offering, 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 prior and future reporting periods. We do not expect material changesallocated $194.9 million 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~~equity component of the ~~New Revenue Standard, our preliminary analysis supports~~convertible debt instrument. That equity component is treated as a discount on the ~~use~~liability component of the ~~practical expedient when recognizing expense~~Notes, which is amortized over the seven-year term of the 2025 Notes using the effective interest rate method. For the June 2018 offering, we allocated $73.0 million to the equity component of the convertible debt instrument. That equity component, less the $14.2 million premium, is treated as a discount on the liability component of the 2025 Notes, which is amortized over the remaining six-and-a-half-year term of the Notes using the effective interest rate method. For the March 2019 offering, we allocated $275.0 million to the equity component of the convertible debt instrument. That equity component is treated as a discount on the liability component of the Notes, which is amortized over the eight-year term of the 2027 Notes using the effective interest rate method. In addition, debt issuance costs 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~~Notes were $18.8 million, $7.4 million, and $18.0 million for the January 2018, June 2018, and March 2019 offerings, respectively. We allocated the costs to ~~obtain contracts have been immaterial to date. Accordingly, we do not expect any material changes~~the liability and equity components of the Notes based on their relative values. The debt issuance costs allocated to the ~~timing of when we recognize expenses related to contract acquisition costs. We will continue our evaluation~~liability component are being amortized over the life of the ~~New Revenue Standard through~~Notes as additional non-cash interest expense. The transaction costs allocated to the ~~date~~equity component are netted with the equity component of ~~adoption.~~the convertible debt instrument in stockholders’ equity.

Goodwill. In 2018, we recognized goodwill of $15.3 million from the acquisition of Biomatrica. We evaluate goodwill impairment on an annual basis or more frequently should an event or change in circumstance occur that indicates that the carrying amount is in excess of the fair value. There were no impairment losses for the nine months ended September 30, 2019 or 2018. Refer to Note 2 for further discussion of the goodwill recorded.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, Leases (Topic 842)and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01, (“collectively, “Update 2016-02”). Update ~~2016-02”) which~~2016-02 requires recognition of ~~lease~~right-of-use assets and lease liabilities ~~by lessees for~~on the balance sheet, including those leases classified as operating leases under previous GAAP. Update 2016-02 provides an option of recognizing a cumulative-effect adjustment to the opening balance of retained earnings upon adoption. 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~~We adopted Update 2016-02 on January 1, 2019 using the ~~beginning~~modified retrospective method of adoption. As a result of the ~~earliest period presented using a modified retrospective approach. Early~~ adoption, we recorded an opening right-of-use asset balance of $20.6 million, which is ~~permitted. We are currently evaluating the effects that the adoption of Update 2016-02 will have on~~included in other long-term assets in our condensed consolidated financial statements. We ~~anticipate that the new guidance will impact~~also recorded an opening lease liability of $20.1 million, of which $3.0 million was classified in other short-term liabilities and $17.1 million was classified in long-term obligations in our condensed consolidated financial ~~statements, as we have several leases.~~statements. See Note 9 for more detail.

In July 2018, the Financial Accounting Standards Board issued ASU 2018-09, Codification Improvements, ("Update ~~2016-15”~~2018-09"). ~~Current GAAP either is~~Update 2018-09 provided various minor codification updates and improvements to address comments that the FASB had received regarding unclear or ~~does not include specific~~vague accounting guidance. We adopted this guidance on January 1, 2019, and it did not have an impact on our condensed consolidated financial statements.

Table of Contents

In July 2019, the ~~eight cash flow classification issues included~~Financial Accounting Standards Board issued ASU No. 2019-07, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (“Update 2019-07”). Update 2019-07 simplifies the disclosure requirements in ~~the amendments in Update 2016-15. The amendments are an improvement~~certain areas to ~~GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice.~~avoid redundant disclosures. The amendments in this update were effective upon issuance. We adopted this guidance on July 1, 2019, and it did not have an impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2018, the Financial Accounting Standards Board issued ASU 2018-13, Fair Value Measurement (Topic 820); Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, ("Update ~~2016-15 are~~2018-13"). Update 2018-13 provided an update to the disclosure requirements for fair value measurements under the scope of ASC 820. The guidance is effective for fiscal years beginning after December 15, ~~2017, and interim periods within those fiscal years.~~2019. We ~~have evaluated Update 2016-15 and we do not expect~~are currently evaluating the ~~adoption~~impact of ~~this~~the guidance ~~to have a material impact~~ on our ~~statements of cash flows.~~condensed consolidated financial statements.

In ~~October 2016,~~August 2018, the Financial Accounting Standards Board issued ASU ~~No. 2016-16,~~ ~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets~~2018-15, Intangibles – Goodwill and Other ~~Than Inventory,~~– Internal-Use Software, (“Update ~~2016-16”~~2018-15”). ~~This amendment improves~~Update 2018-15 provided guidance for evaluating 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 will havefees paid by a ~~significant impact on our consolidated financial statements.~~

~~In October 2016, 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”). The amendments~~customer in ~~Update 2016-17 change how~~ a ~~reporting entity~~cloud computing arrangement 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~~service contract. The guidance 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.

~~Table of Contents~~

~~In November 2016, the Financial Accounting Standards Board issued ASU No. 2016-18,~~ ~~Statement of Cash Flows: Restricted Cash,~~ (“Update 2016-18”). Update 2016-18 provides guidance on the classification of restricted cash in the statement of cash flows. The amendments are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The amendments in the Update 2016-18 should be adopted on a retrospective basis. 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 clarify the definition of a business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of 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~~2019. We are currently evaluating the ~~financial statements have not been issued or made available for issuance. We do not expect that adoption~~impact of ~~this amendment to have a material effect~~the guidance on our condensed consolidated financial statements.

In ~~January 2017,~~November 2018, the Financial Accounting Standards Board issued ASU ~~No. 2017-03,~~ ~~Accounting Changes and Error Corrections~~2018-18, Collaborative Arrangements (Topic 808), (“Update ~~2017-03”~~2018-18”) ~~which states that an entity should evaluate ASUs that have been issued but not yet adopted to determine~~. Update 2018-18 provided additional guidance regarding the ~~effects of those ASUs~~interaction between Topic 808 on Collaborative Arrangements and Topic 606 on Revenue Recognition. The guidance is effective for fiscal years beginning after December 15, 2019. We are currently evaluating 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~~impact 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 condensed consolidated financial statements.

In ~~January 2017,~~April 2019, the Financial Accounting Standards Board issued ASU ~~No. 2017-04,~~ ~~Intangibles~~2019-04, Codification Improvements to Topic 326, Financial Instruments – ~~Goodwill~~Credit Losses, Topic 815, Derivatives and ~~Other (Topic 350): Simplifying the Test for Goodwill Impairment,~~ Hedging, and Topic 825, Financial Instruments, (“Update ~~2017-04”~~2019-04”). Update ~~2017-04 eliminates Step 2~~2019-04 provides clarity regarding measurement of ~~the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the~~securities without readily determinable 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.values. The ~~update~~guidance 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. 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 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 periodsfiscal years 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.~~2019. We are currently evaluating the impact of ~~this amendment~~the guidance on our condensed consolidated financial statements.

Off-Balance Sheet Arrangements

As of September 30, ~~2017,~~2019, we had no off-balance sheet arrangements.

3552

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may result from the change in value of financial instruments due to fluctuations in their market price. Market risk is inherent in all financial instruments. Our exposure to market risk is principally confined to our cash, cash equivalents and marketable securities. We invest our cash, cash equivalents and marketable securities in securities of the U.S. government 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, ~~2017~~2019 were classified as available-for-sale. We place our cash equivalents and marketable securities with high-quality financial institutions, limit the amount of credit exposure to any one institution and have established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity.

~~Based on a hypothetical ten percent adverse movement~~The primary quantifiable market risk associated with our financial instruments is sensitivity to changes in interest ~~rates,~~rates. Interest rate risk represents the potential ~~losses~~loss from adverse changes in ~~future earnings, fair value~~market interest rates. Due to the nature of ~~risk-sensitive~~the financial instruments we hold, we believe there is no material exposure to interest rate risk arising from our portfolio of financial instruments.

Our assets and ~~cash flows~~liabilities are ~~immaterial, although the actual effects may differ materially from the hypothetical analysis.~~denominated in U.S. dollars. Consequently, we have not considered it necessary to use foreign currency contracts or other derivative instruments to manage changes in currency rates. We do not now, nor do we plan to, use derivative financial instruments for speculative or trading purposes. However, these circumstances might change.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our principal executive officer and our principal financial officer concluded that, as of September 30, ~~2017,~~2019, 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.

~~During~~In the ~~fiscal~~ quarter ~~covered by this report, there~~ended September 30, 2019, we completed the implementation of an upgrade to SAP’s HANA enterprise resource planning software, and Epic Systems’ electronic medical records software. Epic Systems’ software has been deployed in our clinical laboratory systems, including the order entry to cash application process. We have ~~been no significant changes in~~updated our internal controls, as applicable, to facilitate modifications to our business processes and accounting procedures and will continue to evaluate the operating effectiveness of related key controls during subsequent periods. We do not believe that the SAP or Epic Systems implementations have had an adverse effect on our internal control over financial reporting.

There were no other changes in our internal controls over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - Other ~~Information~~Information

Item 1. Legal Proceedings

Litigation Related to the Genomic Health Merger

As described above, on July 28, 2019, we entered into a Merger Agreement under which we agreed to acquire Genomic Health in a cash and stock transaction valued at approximately $2.8 billion. We currently expect the merger will be completed in November 2019, subject to the approval of Genomic Health’s stockholders and other customary closing conditions.

Beginning on September 4, 2019, seven actions were filed by purported stockholders of Genomic Health in federal courts in California and Delaware alleging claims relating to the merger. All of these complaints name as defendants Genomic Health and the members of the Genomic Health Board of Directors and two of them, Seligman v. Genomic Health, Inc., et al., Case No. 3:19-cv-05710 (N.D. Cal), and Rice v. Genomic Health, Inc. et al., Case No. 3:19-cv-05929, Plumley v. Genomic Health, Inc., et al., Case No. 1:19-cv-01719 (D. Del.) name as a defendant Exact Sciences Corporation. The complaints allege, among other things, claims under Section 14(a) and 20(a) of the Securities Exchange Act of 1934 asserting that the preliminary proxy statement filed by Genomic Health in connection with the merger is materially incomplete and misleading. The complaints purport to seek to enjoin the planned special meeting of Genomic Health's stockholders unless and until the allegedly missing material information is disclosed or, in the event the merger is consummated, to recover damages from the defendants. The defendants believe the claims asserted in these civil actions are without merit.

Other Litigation

We are not currently a party to any pending 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 business from time to ~~time~~.time.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I, “Item 1A. Risk Factors” in the 2018 Form 10-K and in Part II, “Item 1A. Risk Factors” in our subsequently filed Quarterly Reports on ~~the 2016~~ Form ~~10-K.~~10-Q. There have been no material changes to the risk factors described in the ~~2016~~2018 Form ~~10-K.~~10-K and in subsequently filed Quarterly Reports on Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~Resignation of Lionel Sterling as Director; Election of Eli Casdin as Director~~.Not applicable.

On October 26, 2017, Lionel Sterling submitted his resignation as a member of the Board of Directors of the Company for personal reasons. Mr. Sterling did not indicate that his resignation was 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 director in accordance with the Company’s Non-Employee Director Compensation Policy (the “Director Compensation Policy”), which 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.

~~Third Amended and Restated By-laws~~

On 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.

Item 6. Exhibits

The ~~exhibits required to be~~following documents are filed as a part of this ~~report are listed in the Exhibit Index.~~Form 10-Q.


Exhibit Number	Exhibit Description	Filed with This Report	Incorporated by Reference herein from Form or Schedule	Filing Date	SEC File / Registration Number
Exhibit Number	~~Description~~
2.1	Agreement and Plan of Merger, dated as of July 28, 2019, by and among the Registrant, Spring Acquisition Corp. and Genomic Health, Inc.		8-K (Exhibit 2.1)	7/30/19	001-35092

3.1	Sixth Amended and Restated Certificate of Incorporation of the Registrant ~~(previously filed as Exhibit 3.3 to the Registrant’s Registration Statement on Form S~~‑~~1 (File No. 333~~‑~~48812), filed on October 27, 2000, and incorporated herein by reference)~~		S-1 (Exhibit 3.3)	12/4/00	333-48812

3.2	First Amendment to Sixth Amended and Restated Certificate of Incorporation of the Registrant ~~(previously filed as Appendix B to the Definitive Proxy Statement for the Company’s 2014 Annual Meeting of Stockholders, filed on June 20, 2014, and incorporated herein by reference)~~		DEF 14A (Appendix B)	6/20/14	001-35092

~~3.3+~~3.3	Third Amended and Restated By-Laws of the Registrant ~~dated October 31, 2017~~		10-Q (Exhibit 3.3)	10/30/17	001-35092

10.1+* 10.1*	Exact Sciences Corporation ~~2010~~2019 Omnibus Long-Term Incentive Plan ~~(As Amended and Restated Effective July 27, 2017)~~		DEF 14A (Annex A)	4/30/19	001-35092

10.2+*31.1	~~Non-Employee Director Compensation Policy, dated January 31, 2017 and effective July 27, 2017~~

~~31.1+~~	Certification Pursuant to Rule 13(a)-14(a) or Rule 15d-14(a) of Securities Exchange Act of 1934	X

~~31.2+~~31.2	Certification Pursuant to Rule 13(a)-14(a) or Rule 15d-14(a) of Securities Exchange Act of 1934	X

~~32.1+~~32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

~~101+~~101	~~Interactive Data Files~~The following materials from the Quarterly Report on Form 10-Q of Exact Sciences Corporation for the quarter ended September 30, 2019 filed on October 29, 2019, formatted in Inline eXtensible Business Reporting Language (“iXBRL”): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) related notes to these financial statements	X

104	The cover page from our Quarterly Report for the period ended September 30, 2019, filed with the Securities and Exchange Commission on October 29, 2019, is formatted in Inline Extensible Business Reporting Language (“iXBRL”)	X

~~+Filed herewith~~

*Indicates a management contract or any compensatory plan, contract or arrangement.

~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		EXACT SCIENCES CORPORATION

Date: October ~~30, 2017~~29, 2019	By:	/s/ Kevin T. Conroy
		Kevin T. Conroy
		President and Chief Executive Officer
		(Principal Executive Officer)


Date: October ~~30, 2017~~29, 2019	By:	/s/ Jeffrey T. Elliott
		Jeffrey T. Elliott
		Chief Financial Officer
		(Principal Financial and Accounting Officer)


		Page
		~~Page~~Number
		~~Number~~

	Part I - Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (unaudited) as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018	3


	Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018	4


	Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018	5


	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018	6

	Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018	6
		8

	Notes to Condensed Consolidated Financial Statements (unaudited)	7 9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23 38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36 53

Item 4.	Controls and Procedures	36
		53

	Part II - Other Information

Item 1.	Legal Proceedings	37 54

Item 1A.	Risk Factors	37 54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37 54

Item 3.	Defaults Upon Senior Securities	37 54

Item 4.	Mine Safety Disclosures	37 54

Item 5	Other Information	37 54

Item 6.	Exhibits	38
		55
	~~Exhibit Index~~	39

	Signatures	40 56


	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)


	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


			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	$	—


		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)


		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