Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

EXAS

The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of October ~~28, 2019,~~26, 2020, the registrant had ~~129,832,089~~150,424,035 shares of common stock outstanding.

EXACT SCIENCES CORPORATION

Table of Contents

~~Part I — Financial Information~~

EXACT SCIENCES CORPORATION

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share data - unaudited)

Part I — Financial Information

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


	September 30, 2020		December 31, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	806,678	$	177,254
Marketable securities	476,324		146,401
Accounts receivable, net	206,606		130,667
Inventory	80,427		61,724
Prepaid expenses and other current assets	36,592		40,913
Total current assets	1,606,627		556,959
Long-term Assets:
Property, plant and equipment, net	456,455		455,325
Operating lease right-of-use assets	129,837		126,444
Goodwill	1,237,672		1,203,197
Intangible assets, net	871,660		1,143,550
Other long-term assets, net	52,119		20,293
Total assets	$	4,354,370	$	3,505,768
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	26,061	$	25,973
Accrued liabilities	182,945		193,329
Operating lease liabilities, current portion	10,746		7,891
Debt, current portion	1,319		834
Other current liabilities	31,761		8,467
Total current liabilities	252,832		236,494
Long-term Liabilities:
Convertible notes, net	1,554,967		803,605
Long-term debt, less current portion	22,643		24,032
Other long-term liabilities	62,821		34,911
Operating lease liabilities, less current portion	124,007		118,665
Total liabilities	2,017,270		1,217,707
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—0 shares at September 30, 2020 and December 31, 2019	0		0
Common stock, $0.01 par value Authorized—400,000,000 shares issued and outstanding—150,373,486 and 147,625,696 shares at September 30, 2020 and December 31, 2019	1,505		1,477
Additional paid-in capital	3,865,990		3,406,440
Accumulated other comprehensive income (loss)	1,084		(100)
Accumulated deficit	(1,531,479)		(1,119,756)
Total stockholders’ equity	2,337,100		2,288,061
Total liabilities and stockholders’ equity	$	4,354,370	$	3,505,768

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

Table of Contents

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,

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue	$	408,363	$	218,805	$	1,025,052	$	580,718

Operating expenses
Cost of sales (exclusive of amortization of acquired intangible assets)	95,061		52,335		254,559		146,301
Research and development	31,471		34,714		107,653		96,471
Sales and marketing	136,481		86,196		423,092		265,325
General and administrative	115,589		80,538		336,265		208,067
Amortization of acquired intangible assets	23,430		748		70,199		2,256
Intangible asset impairment charge	209,666		0		209,666		0
Total operating expenses	611,698		254,531		1,401,434		718,420

Other operating income	0		0		23,665		0
Loss from operations	(203,335)		(35,726)		(352,717)		(137,702)

Other income (expense)
Investment income, net	2,523		9,093		5,532		23,417
Interest expense	(23,582)		(13,209)		(71,647)		(47,911)
Total other income (expense)	(21,059)		(4,116)		(66,115)		(24,494)

Net loss before tax	(224,394)		(39,842)		(418,832)		(162,196)

Income tax benefit (expense)	4,510		(683)		7,109		230

Net loss	$	(219,884)	$	(40,525)	$	(411,723)	$	(161,966)

Net loss per share—basic and diluted	$	(1.46)	$	(0.31)	$	(2.76)	$	(1.26)

Weighted average common shares outstanding—basic and diluted	150,155		129,567		149,346		128,344

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

Table of Contents

EXACT SCIENCES CORPORATION

Condensed Consolidated Statements of Comprehensive Loss

(Amounts in thousands - unaudited)

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)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		2019		2020		2019
Net loss	$	(219,884)	$	(40,525)	$	(411,723)	$	(161,966)
Other comprehensive loss, before tax:
Unrealized gain on available-for-sale investments	(405)		(2,697)		1,159		1,431
Foreign currency adjustment	0		0		25		0
Comprehensive loss, before tax	(220,289)		(43,222)		(410,539)		(160,535)
Income tax expense related to items of other comprehensive loss	0		643		0		(341)
Comprehensive loss, net of tax	$	(220,289)	$	(42,579)	$	(410,539)	$	(160,876)

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

Table of Contents

EXACT SCIENCES ~~CORP~~~~ORATION~~

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, 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

Common Stock Additional
Paid-In
Capital Other
Comprehensive
Income (Loss) Accumulated
Deficit Total
Stockholders’
Equity
Number of
Shares
$0.01
Par Value
Balance, January 1, 2020 147,625,696 $ 1,477 $ 3,406,440 $ (100) $ (1,119,756) $ 2,288,061
Equity component of convertible notes, net of tax and issuance costs — — 346,641 — — 346,641
Settlement of convertible notes, net of tax — — (64,199) — — (64,199)
Exercise of common stock options 160,286 2 4,298 — — 4,300
Issuance of common stock to fund the Company’s 2019 401(k) match 136,559 1 12,006 — — 12,007
Compensation expense related to issuance of stock options and restricted stock awards 1,141,376 11 29,549 — — 29,560
Issuance of common stock for business combinations 382,947 4 28,593 — — 28,597
Net loss — — — — (105,697) (105,697)
Accumulated other comprehensive loss — — — (1,617) — (1,617)
Balance, March 31, 2020 149,446,864 $ 1,495 $ 3,763,328 $ (1,717) $ (1,225,453) $ 2,537,653
Exercise of common stock options 208,434 2 6,636 — — 6,638
Compensation expense related to issuance of stock options and restricted stock awards 157,579 2 40,037 — — 40,039
Purchase of employee stock purchase plan shares 167,921 2 9,797 — — 9,799
Net loss — — — — (86,142) (86,142)
Accumulated other comprehensive income — — — 3,206 — 3,206
Balance, June 30, 2020 149,980,798 $ 1,501 $ 3,819,798 $ 1,489 $ (1,311,595) $ 2,511,193
Exercise of common stock options 140,145 1 4,469 — — 4,470
Compensation expense related to issuance of stock options and restricted stock awards 249,197 2 41,474 — — 41,476
Issuance of common stock for business combinations 3,346 1 249 — — 250
Net loss — — — — (219,884) (219,884)
Accumulated other comprehensive loss — — — (405) — (405)
Balance, September 30, 2020 150,373,486 $ 1,505 $ 3,865,990 $ 1,084 $ (1,531,479) $ 2,337,100

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

Table of Contents

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

Common Stock Additional Paid-In Capital Other
Comprehensive
Income (Loss) Accumulated
Deficit Total
Stockholders’
Equity
Number of
Shares
$0.01
Par Value
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 tax and issuance costs — — 268,390 — — 268,390
Shares issued to settle convertible notes 2,158,991 22 182,413 — — 182,435
Settlement of convertible notes — — (300,768) — — (300,768)
Exercise of common stock options 235,278 2 3,648 — — 3,650
Issuance of common stock to fund the Company’s 2018 401(k) match 86,532 1 7,408 — — 7,409
Compensation expense related to issuance of stock options and restricted stock awards 3,410,481 35 16,131 — — 16,166
Net loss — — — — (82,939) (82,939)
Accumulated other comprehensive income — — — 1,656 — 1,656
Balance, March 31, 2019 129,083,822 $ 1,292 $ 1,894,116 $ 234 $ (1,118,702) $ 776,940
Equity component of convertible notes, net of issuance costs — — (22) — — (22)
Exercise of common stock options 78,793 1 1,347 — — 1,348
Compensation expense related to issuance of stock options and restricted stock awards 104,845 1 20,142 — — 20,143
Purchase of employee stock purchase plan shares 93,588 1 4,136 — — 4,137
Net loss — — — — (38,502) (38,502)
Accumulated other comprehensive income — — — 1,488 — 1,488
Balance, June 30, 2019 129,361,048 $ 1,295 $ 1,919,719 $ 1,722 $ (1,157,204) $ 765,532
Settlement of convertible notes 26 — 1 — — 1
Exercise of common stock options 178,628 2 1,389 — — 1,391
Compensation expense related to issuance of stock options and restricted stock awards 278,180 2 24,346 — — 24,348
Purchase of employee stock purchase plan shares 3 — — — — 0
Stock issuance costs — — (409) — — (409)
Net loss — — — — (40,525) (40,525)
Accumulated other comprehensive loss — — — (2,054) — (2,054)
Balance, September 30, 2019 129,817,885 $ 1,299 $ 1,945,046 $ (332) $ (1,197,729) $ 748,284

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,
	2020		2019
Cash flows from operating activities:
Net loss	$	(411,723)	$	(161,966)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	53,345		21,920
Loss on disposal of property, plant and equipment	930		880
Unrealized gain on equity investments	(1,183)		0
Deferred tax benefit	(7,976)		(341)
Stock-based compensation	111,075		60,657
Loss on settlement of convertible notes	7,954		10,558
Amortization of convertible note debt discount and issuance costs	55,222		30,778
Amortization of deferred financing costs and other liabilities	(3,614)		(2,421)
Amortization of premium on short-term investments	1,040		(6,229)
Amortization of acquired intangible assets	70,199		2,256
Intangible asset impairment charge	209,666		0
Non-cash lease expense	11,041		2,681
Changes in assets and liabilities:
Accounts receivable, net	(73,642)		(36,871)
Inventory, net	(18,472)		(14,525)
Operating lease liabilities	(6,135)		(2,628)
Accounts payable and accrued liabilities	(7,608)		16,279
Other assets and liabilities	34,959		(7,382)
Net cash provided by (used in) operating activities	25,078		(86,354)
Cash flows from investing activities:
Purchases of marketable securities	(890,012)		(604,129)
Maturities and sales of marketable securities	559,907		1,449,330
Purchases of property, plant and equipment	(47,782)		(130,970)
Business combination, net of cash acquired	(6,658)		0
Investments in privately held companies	(10,610)		0
Other investing activities	(244)		(530)
Net cash provided by (used in) investing activities	(395,399)		713,701
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net	1,125,547		729,477
Proceeds from exercise of common stock options	15,408		6,389
Proceeds in connection with the Company’s employee stock purchase plan	9,799		4,137
Payments on settlement of convertible notes	(150,054)		(493,356)
Other financing activities	(938)		(90)
Net cash provided by financing activities	999,762		246,557
Net increase in cash, cash equivalents and restricted cash	629,441		873,904
Cash, cash equivalents and restricted cash, beginning of period	177,528		160,430
Cash, cash equivalents and restricted cash, end of period	$	806,969	$	1,034,334

Table of Contents

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

EXACT SCIENCES CORPORATION

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands - unaudited)

Nine Months Ended September 30,
2020 2019
Supplemental disclosure of non-cash investing and financing activities
Property, plant and equipment acquired but not paid $ 7,209 $ 16,933
Unrealized gain on available-for-sale investments, before tax $ 1,159 $ 1,431
Issuance of 136,559 and 86,535 shares of common stock to fund the Company’s 401(k) matching contribution for 2019 and 2018, respectively $ 12,007 $ 7,409
Issuance of 2,159,017 shares of common stock upon settlement of convertible notes $ 0 $ 182,435
Retirement of equity component of convertible notes settled $ (64,199) $ (300,768)
Issuance of 386,293 shares for business combination $ 28,847 $ 0
Supplemental disclosure of cash flow information:
Interest paid $ 9,239 $ 4,944

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~~SUMMARY OF ~~PRESENTATION~~

~~Organization~~

SIGNIFICANT ACCOUNTING POLICIES

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

tests to patients throughout the world.

Basis of Presentation

and Principles of Consolidation

The accompanying condensed consolidated financial statements, which include the accounts of Exact Sciences Corporation and those of its wholly owned subsidiaries and variable interest entities, are unaudited and have been prepared on a basis substantially consistent with the Company’s audited financial statements and notes as of and for the year ended December 31, ~~2018~~2019 included in the Company’s Annual Report on Form 10-K (the ~~“2018~~“2019 Form 10-K”). All intercompany transactions and balances have been eliminated upon consolidation. These condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair ~~presentation~~statement of its financial position, operating results and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2019 has been derived from audited financial statements, but does not contain all of the ~~results of operations have been included.~~footnote disclosures from the 2019 Form 10-K. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. The statements should be read in conjunction with the audited financial statements and related notes included in the ~~2018~~2019 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~~

The accompanying condensed consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries 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 the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. ~~Actual~~Critical accounting policies are those that affect the Company’s financial statements materially and involve difficult, subjective or complex judgments by management, and actual results could differ from those estimates.

These estimates include revenue recognition, valuation of convertible notes, valuation of intangible assets and goodwill, and accounting for income taxes among others. The Company’s critical accounting policies and estimates are explained further in the notes to the condensed consolidated financial statements in this Quarterly Report and the 2019 Form 10-K.

The spread of the coronavirus (“COVID-19”) has affected many segments of the global economy, including the cancer screening and diagnostics industry. The COVID-19 outbreak, which the World Health Organization has classified as a pandemic, has prompted governments and regulatory bodies throughout the world to enact broad precautionary measures, including “stay-at-home” orders, restrictions on the performance of “non-essential” services, public gatherings and travel. Health systems, including key markets where the Company operates, have been, or may be, overwhelmed with high volumes of patients suffering from COVID-19. Even in areas where “stay-at-home” restrictions have been lifted and the number of cases of COVID-19 has declined, many individuals remain cautious about resuming activities such as preventive-care medical visits. Medical practices continue to be cautious about allowing individuals, such as sales representatives, into their offices. Many individuals continue to work from home rather from an office setting. The Company cannot forecast when the COVID-19 pandemic will end or the extent to which practices that have emerged during the pandemic will continue once it subsides.

Table of Contents

EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions including interest rates, employment rates and health insurance coverage, the speed of the anticipated recovery, access to capital markets, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of September 30, 2020 and through the date of the filing of this Quarterly Report on Form 10-Q. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, equity investments, software, and the carrying value of the goodwill and other long-lived assets. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods.

Despite the Company’s efforts, the ultimate impact of COVID-19 depends on factors beyond the Company’s knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, the Company is unable to estimate the extent to which COVID-19 will negatively impact its financial results or liquidity.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

In April 2020, the Company received $23.7 million from the United States Department of Health and Human Services (“HHS”) as a distribution from the Public Health and Social Services Emergency Fund provided for in the CARES Act. The fund payments are grants, not loans, and HHS will not require repayment provided the funds are utilized to offset expenses incurred to address COVID-19 or to replace lost revenues. The Company accepted the terms and conditions of the grant in May 2020 and recognized the entire $23.7 million during the nine months ended September 30, 2020, due to lost revenue attributable to COVID-19, which is reflected in other operating income in the condensed consolidated statement of operations. The Company cannot predict the extent to which it might receive any additional funds to be paid out under the Provider Relief Fund, and to what extent the financial impact of receiving such funds might offset the broad implications of the COVID-19 pandemic, which include increases in the Company’s costs and lost revenues.

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.~~

~~Table of Contents~~

~~Investments~~

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~~Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value. The unrealized gains and losses, net of tax, on the Company’s debt securities are reported in other comprehensive ~~income~~income. Marketable equity securities are measured at fair value and the unrealized gains and losses, net of tax, ~~on the Company’s equity securities~~ are ~~reported~~recognized in other income (expense) in the condensed consolidated ~~statement~~statements of operations. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity computed under the straight-line method. Such amortization is included in investment ~~income.~~income, net. Realized gains and losses and declines in value ~~judged to be other-than-temporary~~as a result of credit losses on available-for-sale securities are included in the condensed consolidated statements of operations as investment ~~income.~~income, net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in the condensed consolidated statements of operations as investment ~~income.~~

income, net.

~~At September 30, 2019 and December~~

~~31, 2018, the Company’s marketable securities were comprised~~Table of ~~fixed income investments, and all were deemed available-for-sale. The objectives of the Company’s investment strategy are~~Contents

EXACT SCIENCES CORPORATION

Notes to ~~provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives.~~ Condensed Consolidated Financial Statements

(Unaudited)

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 and realized gains, net of insignificant realized losses, are included in investment income. Realized gains, net of insignificant realized losses, were $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, 2019 and 2018, respectively.

The Company periodically ~~reviews investments~~evaluates its available-for-sale debt securities in unrealized loss positions ~~for other-than-temporary impairments.~~to determine whether any impairment is a result of a credit loss or other factors. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, ~~collateralized support, the length of time and~~ significance of a security’s loss position, ~~the Company’s intent not~~adverse conditions specifically related to ~~sell~~ the security, and ~~whether it~~the payment structure of the security.

Allowance for Doubtful Accounts

The Company estimates an allowance for doubtful accounts against accounts receivable using historical collection trends, aging of accounts, current and future implications surrounding the ability to collect such as economic conditions, and regulatory changes. The allowance for doubtful accounts is ~~more likely~~evaluated on a regular basis and adjusted when trends, significant events or other substantive evidence indicate that expected collections will be less than applicable accrual rates. At September 30, 2020 and December 31, 2019, the allowance for doubtful accounts recorded was not ~~that~~material to the ~~Company will have to sell the security before recovery of its cost basis.~~Company’s condensed consolidated balance sheets. For the three and nine months ended September 30, 2020 and 2019, ~~0 investments were identified~~there was an immaterial amount of bad debt expense written off against the allowance and charged to operating expense.

Inventory

Direct and indirect manufacturing costs incurred during process validation with ~~other-than-temporary declines~~probable future economic benefit are capitalized. Validation costs incurred for other research and development activities, which are not permitted to be sold, have been expensed to research and development in ~~value.~~

the Company’s condensed consolidated statements of operations.

~~Table of Contents~~

~~Available-for-sale securities at September 30, 2019~~Inventory 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

~~(1)~~

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

~~Available-for-sale securities at December 31, 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

~~(1)~~

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


(In thousands)	September 30, 2020		December 31, 2019
Raw materials	$	33,842	$	24,958
Semi-finished and finished goods	46,585		36,766
Total inventory	$	80,427	$	61,724

Table of Contents

~~Changes in Accumulated Other Comprehensive Income (Loss)~~

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

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, 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)

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

Affected Line Item in the

Nine Months Ended September 30,

Details about AOCI Components (In thousands)

Statements of Operations

2019

2018

Change in value of available-for-sale investments

Sales and maturities of available-for-sale investments

Investment income

$
616

$
215

Total reclassifications

$
616

$
215

EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~Table of Contents~~

Property, Plant and Equipment

Property, plant 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~~Additions and improvements are capitalized, including direct and indirect costs incurred to validate equipment and bring it to working conditions. Revalidation costs, including maintenance and repairs are expensed when ~~incurred; additions and improvements are capitalized. The estimated useful lives of 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
incurred.

~~(1)~~

~~Not depreciated.~~

~~(2)~~

~~Lesser of remaining lease term, building life, or useful life.~~

~~(3)~~

~~Not depreciated until placed into service.~~

~~Depreciation expense for the nine months ended September 30, 2019 and 2018 was $21.8 million and $14.3 million, respectively.~~

At September 30, 2019, the Company had $119.2 million of assets under construction which consisted of $22.8 million related to laboratory equipment, $94.7 million related to leasehold and building improvements, and $1.7 million related to computer equipment and computer software projects. Depreciation will begin on these assets once they are placed into service. The Company expects to incur an additional $11.4 million to complete the laboratory equipment, $48.9 million to complete the building projects, and $0.2 million to complete the computer equipment and computer software projects. These projects are expected to be completed throughout 2019, 2020 and 2021. The Company evaluates its property, plant and equipment, for impairment when material events and changes in circumstances indicate that the carrying value may not be recoverable. There were 0 material impairment losses for the periods ended September 30, 2019 and December 31, 2018.

Software ~~Capitalization Policy~~

~~Software development costs~~Development Costs

Costs related to internal use software, including hosting arrangements, are incurred in 3 ~~stages of development:~~stages: the preliminary project stage, the application development stage, and the post-implementation stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Costs incurred during the application development stage that meet the criteria for capitalization are capitalized and amortized, when the software is ready for its intended use, using the straight-line basis over the estimated useful life of the ~~software.~~

software, or the duration of the hosting agreement.

The Company determines whether its investments in privately held companies are debt or equity based on their characteristics, in accordance with the applicable accounting guidance for such investments. The Company also evaluates the investee to determine if the entity is a variable interest entity (“VIE”) and, if so, whether the Company is the primary beneficiary of the VIE, in order to determine whether consolidation of the VIE is required. If consolidation is not required and the Company does not have voting control of the entity, the investment is evaluated to determine if the equity method of accounting should be applied. The equity method applies to investments in common stock or in substance common stock where the Company exercises significant influence over the investee.

~~Table~~Investments in privately held companies determined to be equity securities are accounted for as non-marketable securities. The Company adjusts the carrying value of ~~Contents~~

its non-marketable equity securities for changes from observable transactions for identical or similar investments of the same issuer, less impairment. All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in investment income, net in the condensed consolidated statements of operations.

~~Patent Costs, Intangible Assets and Goodwill~~

Investments in privately held companies determined to be debt securities are accounted for as available-for-sale or held-to-maturity securities, in accordance with the applicable accounting guidance for such investments.

~~Patent costs, Intangible~~

Derivative Financial Instruments

The Company hedges a portion of its foreign currency exposures related to outstanding monetary assets and ~~Goodwill consisted~~liabilities using foreign currency forward contracts. The foreign currency forward contracts are included in prepaid expenses and other current assets or in accrued liabilities in the condensed consolidated balance sheets, depending on the contracts’ net position. These contracts are not designated as hedges, and as a result, changes in their fair value are recorded in other income (expense) in the condensed consolidated statements of operations. There were 0 gains or losses recorded for the ~~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 net-book-value~~three and ~~estimated remaining life of the Company’s finite-lived intangible assets as of~~nine months ended 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

2020 and 2019. As of September 30, 2020 and December 31, 2019, the Company had open foreign currency forward contracts with notional amounts of $18.2 million and $17.9 million, respectively. The Company's foreign exchange derivative instruments are classified as Level 2 within the fair value hierarchy as they are valued using inputs that are observable in the market or can be derived principally from or corroborated by observable market data. The fair value of the foreign currency forward contracts was 0 at September 30, 2020 and December 31, 2019.

Table of Contents

EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Intangible Assets

Purchased intangible assets are recorded at fair value. The Company uses a discounted cash flow model to value intangible assets. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, risk, the cost of capital, terminal values and market participants.

Patent costs are capitalized as incurred, only if the Company determines that there is some probable future economic benefit derived from the transaction. A capitalized patent is amortized over its estimated useful life, beginning when such patent is approved. Capitalized patent costs are expensed upon disapproval, upon a decision by the Company to no longer pursue the patent or when the related intellectual property is either sold or deemed to be no longer of value to the Company. The Company determined that all patent costs incurred during the three and nine months ended September 30, 2020 and 2019 should be expensed and not capitalized as the future ~~amortization expense~~economic benefit derived from the patent costs incurred cannot be determined.

Acquired In-process Research and Development (IPR&D)

Acquired IPR&D represents the fair value assigned to research and development assets that have not reached technological feasibility. The value assigned to acquired IPR&D is determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting revenues from the projects and discounting the net cash flows to present value. The revenues and cost projections used to value acquired IPR&D are, as applicable, reduced based on the probability of success. IPR&D projects acquired in a business combination that are not complete are capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the related R&D efforts. Upon successful completion of the project, the capitalized amount is amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. There are often major risks and uncertainties associated with IPR&D projects as we are required to obtain regulatory approvals in order to be able to market the ~~Company’s~~resulting products. Such approvals require completing clinical trials that demonstrate the products effectiveness. Consequently, the eventual realized value of the IPR&D project may vary from its fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods.

Capitalized IPR&D projects are tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company considers various factors for potential impairment, including the current legal and regulatory environment, current and future strategic initiatives and the competitive landscape. Adverse clinical trial results, significant delays in obtaining marketing approval, the inability to bring a product to market and the introduction or advancement of competitors' products could result in partial or full impairment of the related intangible assets.

Goodwill

The Company evaluates goodwill for possible impairment in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350 on an annual basis during the fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Qualitative factors considered in this assessment include industry and market conditions, overall financial performance, and other relevant events and factors affecting the Company's business. Based on the qualitative assessment, if it is determined that the fair value of goodwill is more likely than not to be less than its carrying amount, the fair value of a reporting unit will be calculated and compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value.

Table of Contents

EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Impairment of Long-Lived Assets

The Company evaluates the fair value of long-lived assets, which include property, plant and equipment, finite-lived intangible assets, ~~for each of the five succeeding fiscal years is as follows:~~

(In thousands)

2019

$
829
2020

3,312
2021

3,210
2022

3,025
2023

2,953
Thereafter

13,553

$
26,882

~~The Company evaluates identifiable intangibles~~and investments in privately held companies, for impairment whenever events or changes in circumstances indicate that the carrying ~~amount~~amounts of ~~an asset~~the assets may not be fully recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. ~~There were 0~~Refer to Note 5 for discussion of the impairment ~~losses for periods ended September 30, 2019 and December 31, 2018.~~

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 than the transactions discussed below, the Company determined that all patent costs incurred~~charges recorded during the 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 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 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.

2020.

~~Table of Contents~~

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. (“Sampleminded”). As a result of the 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, three years for customer relationships, and five years for non-compete agreements. For the three months ended September 30, 2019 and 2018, the Company recorded amortization expense of $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 in 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, 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.

~~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 evaluates goodwill impairment on an annual basis, or more frequently should an event or change in circumstance occur that indicates the carrying amount is in excess of the fair value. There were 0 impairment losses for the 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 is the same because all outstanding common stock equivalents have been excluded, as they are anti-dilutive as a result of the Company’s losses.

~~Table of Contents~~

~~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

~~Revenue Recognition~~

The Company’s revenue is primarily generated by screening services using its Cologuard test, and the service is completed upon delivery of a patient’s test result to the ordering physician. The Company 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 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 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 from its Cologuard test in accordance with that core principle, and key aspects considered by the Company include the following:

~~Contracts~~

The Company’s customer is the 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 Centers for Medicare and Medicaid Services (“CMS”), are established with payers. Accordingly, the Company 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.~~

~~Table of Contents~~

~~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 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.

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.~~

~~Table of Contents~~

~~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 of September 30, 2019 and December 31, 2018, respectively.

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.

~~Table of Contents~~

~~Inventory~~

Inventory is stated at the lower of cost or net realizable value. The Company determines the cost of inventory using the first-in, first out method (“FIFO”). The Company estimates the recoverability of inventory by reference to internal estimates of future demands and product life cycles, including expiration. The Company periodically analyzes its inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated net realizable value and records a charge to cost of sales for such inventory, as appropriate. In addition, the 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 in the Company’s condensed consolidated statements of operations.

~~Inventory consisted of the following:~~

September 30,

December 31,
(In thousands)

2019

2018
Raw materials

$
19,009

$
12,761
Semi-finished and finished goods

34,664

26,387
Total inventory

$
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 income (loss) in 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.

~~(3) MAYO LICENSE AGREEMENT~~

~~Overview~~

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

~~Table of Contents~~

Pursuant to the Company’s agreement with Mayo, the Company is required to pay Mayo a low-single-digit royalty on the Company’s net sales of products using the licensed Mayo intellectual property, with minimum annual royalty fees of $25,000 each year through 2033, the year the last patent expires. The January 2016 amendment to the Mayo license agreement established various low-single-digit royalty rates on net sales of current and future products and clarified how net sales will be calculated. As part of the 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, the rate remains a low-single-digit percentage of net sales.

In addition to royalties, the Company is required to pay Mayo cash of $0.2 million, $0.8 million and $2.0 million upon each product using the licensed Mayo intellectual property reaching $5.0 million, $20.0 million and $50.0 million in cumulative net sales, respectively.

As part of the February 2015 amendment and restatement of the license agreement, the Company agreed to pay Mayo an additional $5.0 million, payable in 5 annual installments, through 2019. The Company paid Mayo the annual installment of $1.0 million in the first quarter of each of 2015, 2016, 2018, and 2019. The Company paid Mayo the 2017 installment in December 2016. The Company records the $1.0 million installments to prepaid expenses and other current assets and amortizes each installment over a twelve-month period commencing on February 1 of each year. For the three and nine months ended September 30, 2019 and 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 for research and development efforts. As part of the Company’s research collaboration with Mayo, the Company incurred charges of $1.0 million and $3.6 million for the three and nine months ended September 30, 2019. The Company made payments of $1.4 million and $4.3 million for the three and nine months ended September 30, 2019. The Company recorded an estimated liability of $1.2 million for research and development efforts as of September 30, 2019. The Company incurred charges of $0.7 million and $3.4 million for the three and nine months ended September 30, 2018. The Company made payments of $0.9 million and $3.5 million for the three and nine months ended September 30, 2018. The Company recorded an estimated liability of $1.7 million for research and development efforts as of September 30, 2018.

~~(4) PFIZER PROMOTION AGREEMENT~~

In 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.

~~Table of Contents~~

~~(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 $24.3 million and $60.7 million in stock-based compensation expense during the three and nine months ended September 30, 2019. The Company recorded $16.5 million and $44.6 million in stock-based compensation expense during the three and nine months ended September 30, 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~~ – Measurements

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

~~Expected Term~~ – Expected life of an option award is the average length of time over which the Company expects employees will exercise their 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.

~~Table of Contents~~

~~Forfeitures~~ ~~- The Company records the effects of actual forfeitures at the time they occur.~~

~~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

~~(1)~~

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

~~(2)~~

~~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, 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

~~(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 $90.37 ~~market price of the Company’s common stock at September 30, 2019. The total intrinsic value of options exercised during the nine months ended September 30, 2019 and 2018 was~~ ~~$41.7 million and $40.1 million, respectively.~~

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

~~Table of Contents~~

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

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

~~(6) FAIR VALUE MEASUREMENTS~~

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

Convertible Notes

The Company accounts for convertible notes 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 the Company’s nonconvertible debt borrowing rate. The Company determines the carrying amount of the liability component of the convertible notes by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities. Determining the fair value of the debt component requires the use of accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the debt component, and the associated non-cash interest expense.

Leases

The Company acts as lessee in its lease agreements, which include operating leases for corporate offices, laboratory space, warehouse space, vehicles and certain laboratory and office equipment, and finance leases for certain equipment and vehicles.

The Company determines whether an arrangement is, or contains, a lease at inception. At the beginning of fiscal year 2019, the company adopted ASC Topic 842. The Company records the present value of lease payments as right-of-use (“ROU”) assets and lease liabilities on the condensed consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments based on the present value of lease payments over the lease term. Classification of lease liabilities as either current or non-current is based on the expected timing of payments due under the Company’s obligations.

As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term and at an amount equal to the lease payments in a similar economic environment. In order to determine the appropriate incremental borrowing rates, the Company has used a number of factors including the credit rating, and the lease term. 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.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The ROU asset also consists of any lease incentives received. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. “Reasonably certain” is assessed internally based on economic, industry, company, strategic and contractual factors. The leases have remaining lease terms of 1 year to 15 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. Operating lease expense and amortization of finance lease ROU assets are recognized on a straight-line basis over the lease term as an operating expense. Finance lease interest expense is recorded as interest expense on the Company’s condensed consolidated statements of operations.

The Company accounts for leases acquired in business combinations by measuring the lease liability at the present value of the remaining lease payments as if the acquired lease were a new lease for the Company. This measurement includes recognition of a lease intangible for any below-market terms present in the leases acquired. The below-market lease intangible is included in the ROU asset on the condensed consolidated balance sheets and are amortized over the remaining lease term. The Company has not acquired any leases with above-market terms.

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.

Net Loss Per Share

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)	2020	2019
Shares issuable in connection with acquisitions	157	0
Shares issuable upon exercise of stock options	2,429	2,199
Shares issuable upon the release of restricted stock awards	4,654	3,902
Shares issuable upon conversion of convertible notes	20,309	12,197
	27,549	18,298

Accounting for Stock-Based Compensation

The Company requires all share-based payments to employees, including grants of employee stock options, restricted stock, restricted stock units and shares purchased under an employee stock purchase plan (if certain parameters are not met), to be recognized in the financial statements based on their grant date fair values. Forfeitures of any share-based awards are recognized as they occur.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Revenue Recognition

Revenues are recognized when the satisfaction of the performance obligation occurs, in an amount that reflects the consideration the Company expects to collect in exchange for those services. To determine revenue recognition for the arrangements that the Company determines are within the scope of FASB ASC Topic 606, Revenue from Contracts with Customers, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 2 for further discussion.

Foreign Currency Transactions

Prior to 2019, the Company’s international subsidiaries’ functional currency was the local currency and assets and liabilities were translated into U.S. dollars at the period-end exchange rate or historical rates, as appropriate. Condensed consolidated statements of operations were translated at average exchange rates for the period, and the cumulative translation adjustments resulting from changes in exchange rates were included in the Company’s condensed consolidated balance sheet as a component of additional paid-in capital. In 2019 and 2020, the Company’s international subsidiaries use the U.S. dollar as the functional currency, resulting in the Company not being subject to gains and losses from foreign currency translation of the subsidiary financial statements. The Company recognizes gains and losses from foreign currency transactions in the condensed consolidated statements of operations. Net foreign currency transaction gains or losses were not material to the condensed consolidated statements of operations for the periods presented.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation in the condensed consolidated financial statements and accompanying notes to the condensed consolidated financial statements including the amortization of acquired intangible assets, which is now presented as a separate line item on the Company's condensed consolidated statements of operations and was previously included in cost of sales, research and development, and general and administrative expenses. Due to these reclassifications, the Company is no longer presenting gross margin on the Company's condensed consolidated statements of operations.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated guidance requires companies to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. The updates also require available-for-sale debt security credit losses to be recognized as allowances rather than a reduction in amortized cost. The guidance was adopted by the Company on January 1, 2020. The requirements of the ASU did not result in the recognition of a material allowance for current expected credit losses, as the Company’s analysis of collectability looks at historical experience as well as current and future implications surrounding the ability to collect. Adoption of the updated guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments –Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The updated guidance provides clarity regarding measurement of securities without readily determinable fair values. The guidance was adopted on January 1, 2020 and did not have a material impact on the Company's condensed consolidated financial statements.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In August 2018, the FASB issued ASU 2018-15, Intangibles –Goodwill and Other –Internal-Use Software (Subtopic 350-40). The update provided guidance for evaluating the accounting for fees paid by a customer in a cloud computing arrangement that is a service contract. The guidance was adopted on a prospective basis, beginning on January 1, 2020 and it did not have a material impact on the Company's condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820); Disclosure Framework -Changes to the Disclosure Requirements for Fair Value Measurement. The guidance provided an update to the disclosure requirements for fair value measurements under the scope of ASC 820. The updates were adopted on January 1, 2020 and did not have a material impact on the Company’s condensed consolidated financial statements.

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808). The update provided additional guidance regarding the interaction between Topic 808 on Collaborative Arrangements and Topic 606 on Revenue Recognition. The guidance was adopted on January 1, 2020 and did not have a material impact on the Company's condensed consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The update simplifies the accounting for income taxes through removing exceptions related to certain intraperiod allocations and deferred tax liabilities; clarifying guidance primarily related to evaluating the step-up tax basis for goodwill in a business combination; and reflecting enacted changes in tax laws or rates in the annual effective tax rate. The amended guidance is effective for interim and annual periods in 2021, however early adoption is permitted. The guidance was early adopted on January 1, 2020 and did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The updated guidance provides optional expedients for applying the requirements of certain topics in the codification for contracts that are modified because of reference rate reform. In addition to the optional expedients, the update includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The updated guidance is effective for all entities as of March 12, 2020 and through December 31, 2022. The Company adopted the guidance upon issuance on March 12, 2020. There was no impact on the Company's condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2020, The Financial Accounting Standards Board issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible debt instruments by removing the beneficial conversion and cash conversion separation models for convertible instruments. Under the update, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives or that do not result in substantial premiums accounted for as paid-in capital. The update also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the computation of diluted EPS. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

(2) REVENUE

The Company’s revenue is primarily generated by its laboratory testing services utilizing its Cologuard, Oncotype DX, and COVID-19 tests. The services are completed upon release of a patient’s test result to the ordering healthcare provider.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

The core principle of ASC 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 collect in exchange for those goods or services. The Company recognizes revenues from its products in accordance with that core principle, and key aspects considered by the Company include the following:

Contracts

The Company’s customer is primarily the patient, but the Company does not enter into a formal reimbursement contract with a patient. The Company establishes a contract with a patient in accordance with other customary business practices which is the point in time an order is received from a provider and a patient specimen has been returned to the laboratory for testing. Payment terms are a function of a patient’s existing insurance benefits, including the impact of coverage decisions with Center for Medicare & Medicaid Services (“CMS”) and applicable reimbursement contracts established between the Company and payers. However, when an order is received for a patient with no active insurance or insurance that does not cover the Company’s testing services, the Company requires payment from the patient prior to the commencement of the Company’s performance obligations. The Company’s consideration can be deemed variable or fixed depending on the structure of specific payer contracts, and the Company considers collection of such consideration to be probable to the extent that it is unconstrained.

Under the Company’s Laboratory Service Agreements (“LSA”) and Laboratory Reference Agreements (“LRA”) the Company contracts with a direct bill payer who is the customer for an agreed upon amount of laboratory testing services for a specified amount of time at a fixed reimbursement rate, and certain of the Company’s LSAs obligate the customer to pay for testing services prior to result.

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 release of a patient’s test result to the ordering healthcare provider. Or, in the context of some of the Company’s LSAs, the satisfaction of the performance obligation occurs when a specimen sample is not returned to the laboratory for processing before the end of the allotted testing window. The Company elects the practical expedient related to the disclosure of unsatisfied performance obligations, as the duration of time between providing testing supplies, the receipt of a specimen sample, and the release of a test result to the ordering healthcare provider is far less than one year.

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 to be collected from a contract with a customer may include fixed amounts, variable amounts, or both.

Fixed consideration is derived from the Company’s LSA, LRA, and direct bill payer contracts that exist between the Company and the direct bill payers who assume the downstream patient billing. The contracted reimbursement rate is deemed to be fixed as the Company expects to fully collect all amounts billed under these relationships. Variable consideration is primarily derived from third party and patient billing and can result 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.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 $0.5 million and $1.2 million for the three months ended September 30, 2020 and 2019, respectively. Revenue recognized from changes in transaction prices was $9.1 million and $4.6 million for the nine months ended September 30, 2020 and 2019, respectively.

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 release of the performance obligations associated with the Company’s tests, 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 customer.

Point in time recognition

The Company’s single performance obligation is satisfied at a point in time. That point in time is defined as the date the Company releases a result to the ordering healthcare provider, or, in the context of some of the Company’s LSAs, that point in time could be the date the allotted testing window ends if a specimen sample is not returned to the laboratory for processing. The point in time in which revenue is recognized by the Company signifies fulfillment of the performance obligation to the patient or direct bill payer.

Disaggregation of Revenue

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


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Screening
Medicare Parts B & C	$	98,847	$	108,617	$	256,589	$	295,103
Commercial	106,002		99,352		280,451		261,521
Other	9,774		10,836		28,367		24,094
Total Screening	214,623		218,805		565,407		580,718
Precision Oncology
Medicare Parts B & C	$	33,945	$	0	$	114,973	$	0
Commercial	37,402		0		137,212		0
International	16,243		0		56,227		0
Other	3,989		0		14,493		0
Total Precision Oncology	91,579		0		322,905		0
COVID-19 Testing	$	102,161	$	0	$	136,740	$	0
Total	$	408,363	$	218,805	$	1,025,052	$	580,718

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Screening revenue primarily includes laboratory service revenue from Cologuard while Precision Oncology revenue primarily includes laboratory service revenue from global Oncotype DX products.

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 the release of a patient’s test result to the ordering healthcare provider, resulting in an account receivable. However, the Company sometimes receives advance payment from a patient or a direct bill payer before a test result is completed, resulting in deferred revenue. The deferred revenue recorded is recognized as revenue at the point in time results are released to the patient’s healthcare provider. Or, in the context of some of the Company’s LSAs, the satisfaction of the performance obligation occurs when a specimen sample is not returned to the laboratory for processing before the end of the allotted testing window.

Deferred revenue balances are reported in other current liabilities in the Company’s condensed consolidated balance sheets and were $22.4 million and $0.6 million as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, $21.8 million of the Company’s deferred revenue balance is a result of the billing terms pursuant to the existing COVID-19 LSAs with customers.

Revenue recognized for the three months ended September 30, 2020 and 2019, which was included in the deferred revenue balance at the beginning of each period was $5,000 and $0.2 million, respectively. Revenue recognized for the nine months ended September 30, 2020 and 2019, which was included in the deferred revenue balance at the beginning of each period was $0.2 million and $0.5 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. adherence 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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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(3) MARKETABLE SECURITIES

The following table sets forth the Company’s cash, cash equivalents, restricted cash, and marketable securities at September 30, 2020 and December 31, 2019:


(In thousands)	September 30, 2020		December 31, 2019
Cash, cash equivalents, and restricted cash
Cash and money market	$	456,701	$	146,932
Cash equivalents	349,977		30,322
Restricted cash (1)	291		274
Total cash, cash equivalents, and restricted cash	806,969		177,528
Marketable securities
Available-for-sale debt securities	474,906		144,685
Equity securities	1,418		1,716
Total marketable securities	476,324		146,401
Total cash and cash equivalents, restricted cash and marketable securities	$	1,283,293	$	323,929

______________

(1)Restricted cash is included in other long-term assets on the condensed consolidated balance sheets. There was no restricted cash at September 30, 2019.

Available-for-sale debt securities at September 30, 2020 consisted of the following:


(In thousands)	Amortized Cost		Gains in Accumulated Other Comprehensive Income (Loss)		Losses in Accumulated Other Comprehensive Income (Loss)		Estimated Fair Value
Cash equivalents
U.S. government agency securities	$	349,975	$	2	$	0	$	349,977
Total cash equivalents	349,975		2		0		349,977
Marketable securities
Corporate bonds	191,651		970		0		192,621
U.S. government agency securities	257,102		60		0		257,162
Certificates of deposit	10,000		1		0		10,001
Asset backed securities	15,071		51		0		15,122
Total marketable securities	473,824		1,082		0		474,906
Total available-for-sale securities	$	823,799	$	1,084	$	0	$	824,883

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Available-for-sale debt securities at December 31, 2019 consisted of the following:


(In thousands)	Amortized Cost		Gains in Accumulated Other Comprehensive Income (Loss)		Losses in Accumulated Other Comprehensive Income (Loss)		Estimated Fair Value
Cash equivalents
U.S. government agency securities	$	30,320	$	2	$	0	$	30,322
Total cash equivalents	30,320		2		0		30,322
Marketable securities
U.S. government agency securities	140,745		10		(73)		140,682
Corporate bonds	4,017		0		(14)		4,003
Total marketable securities	144,762		10		(87)		144,685
Total available-for-sale securities	$	175,082	$	12	$	(87)	$	175,007

The following table summarizes contractual underlying maturities of the Company’s available-for-sale debt securities at September 30, 2020:


	Due one year or less						Due after one year through four years
(In thousands)	Cost		Fair Value		Cost		Fair Value
Cash equivalents
U.S. government agency securities	$	349,975	$	349,977	$	—	$	—
Total cash equivalents	349,975		349,977		—		—
Marketable securities
U.S. government agency securities	249,943		249,949		7,159		7,213
Corporate bonds	148,903		149,409		42,748		43,212
Certificates of deposit	10,000		10,001		0		0
Asset backed securities	0		0		15,071		15,122
Total marketable securities	408,846		409,359		64,978		65,547
Total	$	758,821	$	759,336	$	64,978	$	65,547

The following table summarizes the gross unrealized losses and fair values of available-for-sale debt securities in an unrealized loss position as of September 30, 2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:


	Less than one year						One year or greater						Total
(In thousands)	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss (1)
Cash equivalents
U.S. government agency securities	$	49,996	$	0	$	0	$	0	$	49,996	$	0
Total cash equivalents	49,996		0		0		0		49,996		0
Marketable securities
U.S. government agency securities	24,994		0		0		0		24,994		0
Total marketable securities	24,994		0		0		0		24,994		0
Total available-for-sale securities	$	74,990	$	0	$	0	$	0	$	74,990	$	0

______________

(1)Available-for-sale debt securities in an unrealized loss position are insignificant as of September 30, 2020.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company evaluates investments, including investments in privately-held companies, that are in an unrealized loss position for impairment as a result of credit loss. It was determined that no credit losses exist as of September 30, 2020 and December 31, 2019 because the change in market value for those securities in an unrealized loss position has resulted from fluctuating interest rates rather than a deterioration of the credit worthiness of the issuers. The Company recorded a realized gain on available-for-sale debt securities of $1,000 and $3.1 million for the three months ended September 30, 2020 and 2019, respectively, net of insignificant realized losses. The Company recorded a realized gain on available-for-sale debt securities of $0.1 million and $3.3 million for the nine months ended September 30, 2020 and 2019, respectively, net of insignificant realized losses.

The Company recorded a gain of $33,000 and a loss of $0.3 million from its equity securities for the three and nine months ended September 30, 2020 as compared to 0 gain or loss for the three and nine months ended September 30, 2019.

The gains and losses recorded are included in investment income, net in the Company’s condensed consolidated statements of operations.

(4) PROPERTY, PLANT AND EQUIPMENT

The estimated useful lives of property, plant and equipment are as follows:


(In thousands)	Estimated Useful Life	September 30, 2020		December 31, 2019
Property, plant and equipment
Land	n/a	$	4,466	$	4,466
Leasehold and building improvements	(1)	113,153		80,352
Land improvements	15 years	3,222		1,766
Buildings	30 - 40 years	200,141		112,815
Computer equipment and computer software	3 years	78,350		65,323
Laboratory equipment	3 - 10 years	136,462		104,008
Furniture and fixtures	3 - 10 years	23,950		14,539
Assets under construction	n/a	26,472		149,687
Property, plant and equipment, at cost		586,216		532,956
Accumulated depreciation		(129,761)		(77,631)
Property, plant and equipment, net		$	456,455	$	455,325

______________

(1)Lesser of remaining lease term, building life, or estimated useful life.

Depreciation expense for the three months ended September 30, 2020 and 2019 was $19.5 million and $8.4 million, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was $52.9 million and $21.8 million, respectively.

At September 30, 2020, the Company had $26.5 million of assets under construction which consisted of $9.7 million in laboratory equipment, $8.4 million of building and leasehold improvements, $7.9 million in capitalized costs related to software projects, and $0.5 million related to furniture and fixtures. Depreciation will begin on these assets once they are placed into service. The Company expects to incur an additional $2.0 million to complete the laboratory equipment, $13.3 million to complete the building projects and leasehold improvements, $3.6 million to complete the software projects, and minimal costs to complete the furniture and fixtures. These projects are expected to be completed throughout 2020 and 2021.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(5) INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

The following table summarizes the net-book-value and estimated remaining life of the Company’s intangible assets as of September 30, 2020:


(In thousands)	Weighted Average Remaining Life (Years)	Cost		Accumulated Amortization		Net Balance at September 30, 2020
Finite-lived intangible assets
Trade name	15.2	$	100,700	$	(5,683)	$	95,017
Customer relationships	13.1	2,700		(359)		2,341
Patents	4.0	10,441		(5,089)		5,352
Acquired developed technology	9.2	814,171		(73,022)		741,149
Supply agreements	6.8	30,000		(3,538)		26,462
Internally developed technology	2.4	1,883		(750)		1,133
Total finite-lived intangible assets		959,895		(88,441)		871,454
Internally developed technology in process	n/a	206		—		206
Total intangible assets		$	960,101	$	(88,441)	$	871,660

The following table summarizes the net-book-value and estimated remaining life of the Company’s intangible assets as of December 31, 2019:


(In thousands)	Weighted Average Remaining Life (Years)	Cost		Accumulated Amortization		Net Balance at December 31, 2019
Finite-lived intangible assets
Trade name	15.9	$	100,700	$	(961)	$	99,739
Customer relationships	13.6	2,700		(224)		2,476
Patents	8.8	22,690		(5,974)		16,716
Acquired developed technology	9.9	806,371		(12,345)		794,026
Supply agreements	7.5	30,000		(571)		29,429
Internally developed technology	2.5	1,229		(336)		893
Total finite-lived intangible assets		963,690		(20,411)		943,279
In-process research and development	n/a	200,000		—		200,000
Internally developed technology in process	n/a	271		—		271
Total intangible assets		$	1,163,961	$	(20,411)	$	1,143,550

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of September 30, 2020, the estimated future amortization expense associated with the Company’s finite-lived intangible assets for each of the five succeeding fiscal years is as follows:


(In thousands)
2020	$	23,357
2021	93,322
2022	93,116
2023	92,812
2024	92,421
Thereafter	476,426
	$	871,454

The Company’s acquired intangible assets are being amortized on a straight-line basis over the estimated useful life. The amortization expense recorded from these intangible assets is reported in amortization of acquired intangible assets on the condensed consolidated statements of operations.

During the third quarter of 2020, the Company began discussions with Biocartis regarding the termination of its agreements with Biocartis related to the development of an in vitro diagnostic (“IVD”) version of the Oncotype DX Breast Recurrence Score test. As a result, and in connection with the preparation of the financial statements, the Company recorded a non-cash, pre-tax impairment loss of $200.0 million related to the in-process research and development intangible asset that was initially recorded as part of the combination with Genomic Health. The impairment is recorded in intangible asset impairment charge in the condensed consolidated statement of operations for the three and nine months ended September 30, 2020. See Note 7 for additional information on Biocartis.

During the third quarter of 2020, the Company abandoned certain research and development assets acquired through an asset purchase agreement with Armune Biosciences, Inc. in 2017. These assets were expected to complement the Company’s product pipeline and were expected to have alternative future uses at the time of acquisition; however, due to changes in strategic priorities and efforts during the third quarter of 2020, these assets are no longer expected to be utilized to advance the Company’s product pipeline. As a result, and in connection with the preparation of the financial statements, the Company wrote-off the gross cost basis of the intangible asset of $12.2 million and accumulated amortization of $2.5 million as of September 30, 2020. This write-off resulted in a non-cash, pre-tax impairment loss of $9.7 million, which is recorded in intangible asset impairment charge in the condensed consolidated statement of operations for the three and nine months ended September 30, 2020.

There were 0 impairment losses for the three and nine months ended September 30, 2019.

Goodwill

As a result of the acquisition of Paradigm Diagnostics, Inc. (“Paradigm”) and Viomics, Inc. (“Viomics”) in March 2020, the Company recognized goodwill of $30.4 million, which includes an immaterial post-acquisition adjustment to goodwill in the second quarter of 2020. Refer to the Company’s 2019 10-K for further discussion on goodwill recorded from previous business combinations.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company evaluates goodwill for possible impairment in accordance with ASC 350 on an annual basis during the fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Qualitative factors considered in this assessment include industry and market conditions, overall financial performance, and other relevant events and factors affecting the Company's business. Based on the qualitative assessment, if it is determined that the fair value of goodwill is more likely than not to be less than its carrying amount, the fair value of a reporting unit will be calculated and compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value. Due to the impact of COVID-19 on the Company’s operations, the Company performed a qualitative assessment of goodwill to determine if an event indicating impairment was present. No such indicators were identified as of September 30, 2020. There were 0 impairment losses for the periods ended September 30, 2020 and September 30, 2019. During the nine months ended September 30, 2020, the Company recognized a measurement period adjustment to goodwill of $4.0 million related to an increase in Genomic Health’s pre-acquisition deferred tax liability due to finalization of certain income-tax related items.

The change in the carrying amount of goodwill for the periods ended September 30, 2020 and December 31, 2019 is as follows:


(In thousands)
Balance, January 1, 2019	$	17,279
Genomic Health acquisition	1,185,918
Balance, December 31, 2019	1,203,197
Paradigm & Viomics acquisition	30,431
Genomic Health acquisition adjustment	4,044
Balance, September 30, 2020	$	1,237,672

(6) FAIR VALUE MEASUREMENTS

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

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

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

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

The following table presents the Company’s fair value measurements as of September 30, 2020 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)


(In thousands)	Fair Value at September 30, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash, cash equivalents, and restricted cash
Cash and money market	$	456,701	$	456,701	$	0	$	0
U.S. government agency securities	349,977		0		349,977		0
Restricted cash	291		291		0		0
Marketable securities
Corporate bonds	192,621		0		192,621		0
U.S. government agency securities	257,162		0		257,162		0
Certificates of deposit	10,001		0		10,001		0
Asset backed securities	15,122		0		15,122		0
Equity Securities	1,418		1,418		0		0
Liabilities
Contingent consideration	(2,638)		0		0		(2,638)
Total	$	1,280,655	$	458,410	$	824,883	$	(2,638)


~~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.

The following table presents the Company’s fair value measurements as of December 31, 2019 along with the level within the fair value hierarchy in which the fair value measurements in their entirety fall.

~~Fixed-income~~


(In thousands)	Fair Value at December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents
Cash and money market	$	146,932	$	146,932	$	0	$	0
U.S. government agency securities	30,322		0		30,322		0
Restricted cash	274		274		0		0
Marketable securities
U.S. government agency securities	140,682		0		140,682		0
Corporate bonds	4,003		0		4,003		0
Equity securities	1,716		1,716		0		0
Liabilities
Contingent consideration	(2,879)		0		0		(2,879)
Total	$	321,050	$	148,922	$	175,007	$	(2,879)

There have been no changes in valuation techniques or transfers between fair value measurement levels during the periods ended September 30, 2020 and December 31, 2019. The fair value of Level 2 instruments classified as cash equivalents and marketable debt securities are valued using a third-party pricing ~~agency. The~~agency where 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~~The Company’s marketable equity security investment in Biocartis is classified as a Level 1 instrument. See Note 7 for additional information on Biocartis.

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EXACT SCIENCES CORPORATION

Notes to ~~period.~~Condensed Consolidated Financial Statements

(Unaudited)

Contingent Consideration

In connection with the Biomatrica Acquisition, a contingent earn-out liability was created to account for an additional $20.0 million in contingent consideration that could be earned based upon certain revenue milestones being met. The ~~estimated~~following table provides a roll-forward of the fair values of the contingent consideration, which includes Level 3 measurements:


(In thousands)	Contingent consideration
Balance, January 1, 2020	$	(2,879)
Changes in fair value	0
Gains (losses) recognized in earnings	0
Payments	241
Balance, September 30, 2020	$	(2,638)

As of September 30, 2020, the fair value of the contingent earn-out liability is classified as a component of other long-term liabilities in the Company’s ~~long-term debt represents a Level 2 measurement. When determining the estimated~~condensed consolidated balance sheet.

This fair value ~~of the Company’s long-term debt, the Company used market-based risk measurements, such as credit risk. The fair value~~measurement of contingent consideration related to the Biomatrica ~~Acquisition~~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~~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~~earn-out itself, the related projections, and the overall business.

Non-Marketable Equity Investment

The ~~contingent earn-out liability~~Company has non-marketable equity investments which are initially recorded at the estimated fair value based on observable transactions. The Company has concluded it is not a primary beneficiary with regards to these investments and does not have the ability to exercise significant influence over the investees and thus has not consolidated the investees pursuant to the requirements of ASC 810, Consolidation. The Company will continue to assess its investments and future commitments to the investees and to the extent its relationship with the investees change and whether such change may require consolidation of the investees in future periods. The Company remeasures the fair value only when an observable transaction occurs during the period that would suggest a change in the carrying value of the investment. As of September 30, 2020 and December 31, 2019, the Company had non-marketable equity investments of $23.9 million and $11.8 million, respectively, which are classified as a component of other long-term ~~liabilities~~assets 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.

~~Table of Contents~~

~~The following table presents the Company’s fair value measurements as~~sheets. As of September 30, ~~2019 along with~~2020, 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)

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~~balance primarily consists of the Company’s ~~fair value measurements as~~preferred stock investments in 18,258,838 shares of Epic Sciences and 5,025,764 shares of Thrive Earlier Detection Corp. (“Thrive”) of $10.8 million and $12.5 million, respectively. As of December 31, ~~2018 along with~~2019, 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.

~~Table of Contents~~

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

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)

~~The following table summarizes contractual underlying maturities~~balance consists of the Company’s ~~available-for-sale~~preferred stock investments atin Epic Sciences and Thrive Earlier Detection Corp. (“Thrive”) of $10.8 million and $1.0 million, respectively.

The Company purchased 4.0 million shares of Series B Preferred Stock of Thrive for $10.0 million in July 2020. The Company previously held a $1.0 million investment in the Series A Preferred Stock of Thrive, which does not have a readily determinable fair value and therefore, the Company elected the measurement alternative. The rights and obligations of the Series B Preferred Stock are generally the same as the Series A Preferred Stock previously held indicating that the transactions are identical or similar investments. As a result, the Company recorded an unrealized gain of $1.5 million during the three months ended September 30, ~~2019:~~

2020 in investment income, net on the Company’s condensed consolidated statement of operations to revalue the Company’s initial investment to the value of the Series B Preferred Stock, which was the most recent observable transaction.

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

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

There have been no other observable transactions during the three and nine months ended September 30, 2020 and 2019.

Fair Value of Long-Term Debt and Convertible ~~Notes~~

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, 2020						December 31, 2019
(In thousands)	Carrying Amount (1)		Fair Value		Carrying Amount (1)		Fair Value
2028 Convertible notes (2)	$	796,463	$	1,251,085	$	0	$	0
2027 Convertible notes (2)	506,294		881,631		483,909		843,741
2025 Convertible notes (2)	252,210		494,627		319,696		592,482
Construction loan (3)	23,962		23,962		24,866		24,866

______________

(1)The carrying amounts presented are net of debt discounts and debt issuance costs (see Note 12 and Note 15 of the condensed consolidated financial statements for further information).

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

(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. A portion of the 2025 convertible notes were settled in 2020 resulting in a decrease in the liability.

(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. The change in the fair value was due to payments made on the loan resulting in a decrease in the liability.

(7) LICENSE AND COLLABORATION AGREEMENTS

~~(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).~~

The Company licenses certain technologies that are, or may be, incorporated into its technology under several license agreements, as well as the rights to commercialize certain diagnostic tests through collaboration agreements. Generally, the license agreements require the Company to pay royalties based on net revenues received using the technologies and may require minimum royalty amounts or maintenance fees.

Mayo

In June 2009 the Company entered into a license agreement with Mayo Foundation for Medical Education and Research (“Mayo”). The Company’s license agreement with Mayo was most recently amended in September 2020. Under the license agreement, Mayo granted the Company an exclusive, worldwide license to certain Mayo patents and patent applications, as well as a non-exclusive, worldwide license with regard to certain Mayo know-how. The scope of the license covers any screening, surveillance or diagnostic test or tool for use in connection with any type of cancer, pre-cancer, disease or condition.

The licensed Mayo patents and patent applications contain both method and composition claims that relate to sample processing, analytical testing and data analysis associated with nucleic acid screening for cancers and other diseases. The jurisdictions covered by these patents and patent applications include the U.S., Australia, Canada, the European Union, China, Japan and Korea. Under the license agreement, the Company assumed the obligation and expense of prosecuting and maintaining the licensed Mayo patents and is obligated to make commercially reasonable efforts to bring to market products using the licensed Mayo intellectual property.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Pursuant to the Company’s agreement with Mayo, the Company is required to pay Mayo a low-single-digit royalty on the Company’s net sales of current and future products using the licensed Mayo intellectual property each year during the term of the Mayo agreement.

As part of the most recent amendment, the Company agreed to pay Mayo an additional $6.3 million, payable in five annual installments through 2024. The Company paid Mayo the first annual installment of $1.3 million in the third quarter of 2020 and will make all subsequent annual payments in the first quarter of the year beginning in January 2021.

The license agreement will remain in effect, unless earlier terminated by the parties in accordance with the agreement, until the last of the licensed patents expires in 2037 (or later, if certain licensed patent applications are issued). However, if the Company is still using the licensed Mayo know-how or certain Mayo-provided biological specimens or their derivatives on such expiration date, the term shall continue until the earlier of the date the Company stops using such know-how and materials and the date that is five years after the last licensed patent expires. The license agreement contains customary termination provisions and permits Mayo to terminate the license agreement if the Company sues Mayo or its affiliates, other than any such suit claiming an uncured material breach by Mayo of the license agreement.

In addition to granting the Company a license to the covered Mayo intellectual property, Mayo provides the Company with product development and research and development assistance pursuant to the license agreement and other collaborative arrangements. In September 2020, Mayo also agreed to make available certain personnel to provide such assistance through January 2025. In connection with this collaboration, the Company incurred charges of $0.9 million and $1.0 million for the three months ended September 30, 2020 and 2019, respectively. The Company incurred charges of $2.8 million and $3.6 million for the nine months ended September 30, 2020 and 2019, respectively. The charges incurred in connection with this collaboration are recorded in research and development expenses in the Company’s condensed consolidated statements of operations.

Epic Sciences

In June 2016, Genomic Health (now a wholly-owned subsidiary of the Company) entered into a collaboration agreement with Epic Sciences, which was superseded and replaced in March 2019 by a license agreement and laboratory services agreement with Epic Sciences, under which Genomic Health was granted exclusive distribution rights to commercialize Epic Sciences’ AR-V7 Nucleus Detect test in the United States, which is marketed as Oncotype DX AR-V7 Nucleus Detect. The Company has primary responsibility, in accordance with applicable laws and regulations, for marketing and promoting the test, order fulfillment, billing and collections of receivables, claims appeals, customer support, and providing and maintaining order management systems for the test. Epic Sciences is responsible for performing all tests, performing studies including analytic and clinical validation studies, and seeking Medicare coverage and a Medicare payment rate from the CMS for the test. The license and laboratory service agreement has a term of ten years from June 2016, unless terminated earlier under certain circumstances. The Oncotype DX AR-V7 Nucleus Detect test became commercially available in February 2018. The Company recognizes revenues for the test performed under this arrangement and Epic Sciences receives a fee per test performed that represents the fair market value for the testing services they perform.

Biocartis N.V.

In September 2017, Genomic Health entered into an exclusive license and development agreement with Biocartis, a molecular diagnostics company based in Belgium, to develop and commercialize an IVD version of the Oncotype DX Breast Recurrence Score test on the Biocartis Idylla platform. Under the terms of the license and development agreement, the Company has an exclusive, worldwide, royalty-bearing license to develop and commercialize an IVD version of the Oncotype DX Breast Recurrence Score test on the Biocartis Idylla platform, and an option to expand the collaboration to include additional tests in oncology and urology. The Company has primary responsibility for developing, validating and obtaining regulatory authorizations and registrations for IVD Oncotype DX tests to be performed on the Idylla platform. The Company is also responsible for manufacturing and commercialization activities with respect to such tests.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Pursuant to the license and development agreement, Genomic Health recorded a one-time upfront license and option fee of $3.2 million. In December 2017, Genomic Health purchased 270,000 ordinary shares of Biocartis, a public company listed on the Euronext exchange, for a total cost of $4.0 million. This investment was subject to a lock-up agreement that expired in December 2018. The investment has been recognized at fair value, which the Company estimated to be $1.4 million and $1.7 million as of September 30, 2020 and December 31, 2019, respectively, and is included in marketable securities on the Company's condensed consolidated balance sheets.

Under a November 2018 addendum to the license and development agreement, the Company exercised its option to expand the collaboration to include tests in urology and obtained a right of first refusal to add a test for the non-invasive detection of prostate cancer in a pre-biopsy setting.

Additional terms of the license and development agreement and the addendum include the Company’s obligation to pay Biocartis (i) an aggregate of €2.5 million in cash upon achievement of certain milestones, (ii) €2.0 million for the expansion of the collaboration to include additional tests in oncology, and (iii) certain royalties based primarily on the future sales volumes of the Company’s tests performed on the Idylla platform.

The Company is currently in discussions with Biocartis to terminate the agreements. The outcome of these discussions is not determinable at this time. Refer to Note 5 for further information regarding Biocartis.

(8) PFIZER PROMOTION AGREEMENT

In August 2018, the Company entered into a Promotion Agreement (the “Original Promotion Agreement”) with Pfizer Inc. (“Pfizer”), which was amended and restated in October 2020 (the “Restated Promotion Agreement”). The Restated Promotion Agreement extends the relationship between the Company and Pfizer and restructures the manner in which the Company compensates Pfizer for promotion of Cologuard through a service fee, and provision of certain other sales and marketing services related to Cologuard. The Restated Promotion Agreement also includes additional fixed and performance-related fees, some of which retroactively go into effect on April 1, 2020. All payments to Pfizer are recorded in sales and marketing in the Company’s condensed consolidated statements of operations. The Company incurred charges of $15.8 million and $15.8 million for promotion, sales and marketing services performed by Pfizer on behalf of the Company during the three months ended September 30, 2020 and 2019, respectively. The Company incurred charges of $57.6 million and $49.8 million for promotion, sales and marketing services performed by Pfizer on behalf of the Company during the nine months ended September 30, 2020 and 2019, respectively. Under the Original Promotion Agreement, the service fee was calculated based on incremental gross profits over specified baselines during the term. The Company incurred charges of $16.0 million and $54.5 million for this service fee during the three and nine months ended September 30, 2019. Under the Restated Promotion Agreement, the service fee was revised to a fee-for-service model, and includes certain fixed fees and performance-related bonuses. The Company incurred charges of $18.0 million and $37.5 million for the service fee during the three and nine months ended September 30, 2020. The Company will also pay Pfizer royalties for Cologuard related revenues over specified thresholds during the last year of the term of the Restated Promotion Agreement. The term of the Restated Promotion Agreement runs through December 31, 2022.

Table of Contents

~~(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.~~

EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(9) STOCKHOLDERS’ EQUITY

Amendment to Certificate of Incorporation

In July 2020, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to its Sixth Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to increase the number of authorized shares of the Company’s common stock from 200 million to 400 million shares. The Certificate of Amendment was approved by the Company’s stockholders at the Company’s 2020 annual meeting in July 2020.

Convertible Notes Settlement Stock Issuance

In March 2019, the Company used cash of $494.1 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 convertible notes. Refer to Note 15 for further discussion of this settlement transaction.

Genomic Health Combination Stock Issuance

In November 2019, the Company completed the combination with Genomic Health in a cash and stock transaction valued at $2.5 billion. Of the $2.5 billion purchase price, $1.4 billion was settled through the issuance of 17.0 million shares of common stock. The Company incurred $0.4 million in stock issuance costs as part of the transaction. Refer to Note 16 for further discussion of the consideration transferred as part of the combination with Genomic Health.

Paradigm and Viomics Acquisition Stock Issuance

In March 2020, the Company completed the acquisitions of Paradigm and Viomics. The purchase price for these acquisitions consisted of cash and stock valued at $40.4 million. Of the $40.4 million purchase price, $32.2 million is expected to be settled through the issuance of 0.4 million shares of common stock. Of the $32.2 million that will be settled through the issuance of common stock, $28.8 million was issued as of September 30, 2020, and the remainder was withheld and may become issuable as additional merger consideration on June 3, 2021 subject to the terms and conditions of the acquisition agreements.

Changes in Accumulated Other Comprehensive Income (Loss)

The amount recognized in accumulated other comprehensive income (loss) (“AOCI”) for the nine months ended September 30, 2020 were as follows:


(In thousands)	Foreign Currency Translation Adjustments		Unrealized Gain (Loss) on Marketable Securities		Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2019	$	(25)	$	(75)	$	(100)
Other comprehensive income (loss) before reclassifications	0		1,159		1,159
Amounts reclassified from accumulated other comprehensive loss	25		0		25
Net current period change in accumulated other comprehensive loss	25		1,159		1,184
Balance at September 30, 2020	$	0	$	1,084	$	1,084

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The amounts recognized in AOCI for the nine months ended September 30, 2019 were as follows:


(In thousands)	Foreign Currency Translation Adjustments		Unrealized Gain (Loss) on Marketable Securities		Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2018	$	(25)	$	(1,397)	$	(1,422)
Other comprehensive loss before reclassifications	0		815		815
Amounts reclassified from accumulated other comprehensive loss	0		616		616
Net current period change in accumulated other comprehensive loss, before tax	0		1,431		1,431
Income tax expense related to items of other comprehensive income	0		(341)		(341)
Balance at September 30, 2019	$	(25)	$	(307)	$	(332)

Amounts reclassified from AOCI for the nine months ended September 30, 2020 and 2019 were as follows:


	Affected Line Item in the Statements of Operations	Nine Months Ended September 30,
Details about AOCI Components (In thousands)				2020			2019
Change in value of available-for-sale investments
Sales and maturities of available-for-sale investments	Investment income, net	$	0		$	616
Foreign currency adjustment	General and administrative	25			0
Total reclassifications		$	25		$	616

(10) STOCK-BASED COMPENSATION

Stock-Based Compensation Plans

The Company maintains the 2010 Omnibus Long-Term Incentive Plan (As Amended and Restated Effective July 27, 2017), the 2019 Omnibus Long-Term Incentive Plan, the 2010 Employee Stock Purchase Plan, the 2016 Inducement Award Plan and the 2000 Stock Option and Incentive Plan (collectively, the “Stock Plans”).

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 $41.5 million and $24.3 million in stock-based compensation expense during the three months ended September 30, 2020 and 2019, respectively. The Company recorded $111.1 million and $60.7 million in stock-based compensation expense during the nine months ended September 30, 2020 and 2019, respectively.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In June 2020, the Company modified certain of the operational milestones within the outstanding performance-based equity awards, which were not deemed to have an impact on vesting and 0 incremental stock-based compensation expense was recorded for the three and nine months ended September 30, 2020. This modification impacted awards held by 36 employees.

In connection with the combination with Genomic Health, the Company accelerated the vesting of shares of previously unvested stock options and restricted stock units for employees with qualifying termination events. During the three and nine months ended September 30, 2020, the Company accelerated 0 shares and 43,480 shares of previously unvested stock options, respectively, and 9,786 shares and 38,600 shares of previously unvested restricted stock units, respectively, and recognized the additional non-cash stock-based compensation expense of $0.3 million and $4.2 million, respectively, for the accelerated awards.

As a result of workforce reductions in April 2020 due to the COVID-19 pandemic, the Company accelerated the vesting of previously unvested stock options and restricted stock units for employees that were terminated. The Company accelerated 708 shares of previously unvested stock options and 33,123 shares of previously unvested restricted stock units, and recognized the additional non-cash stock-based compensation expense of $1.8 million for the accelerated awards.

In connection with the termination in August 2020 of two former Genomic Health employees, the Company accelerated the vesting of 34,619 shares of previously unvested stock options and 6,836 shares of previously unvested restricted stock units as a result of the former employees experiencing a deemed “qualifying termination” under the terms of the merger agreement between the Company and Genomic Health. During the three months ended September 30, 2020, the Company recorded non-cash stock-based compensation of $1.6 million for the accelerated awards. The previously unvested stock options and restricted stock units were converted awards held by the former employees prior to the combination with Genomic Health in November 2019.

In addition, the former employees held awards that were granted subsequent to the combination with Genomic Health that were modified as part of severance agreements with the Company to vest upon separation from service. The former employees will continue to provide consulting services to the Company for a fixed period, but those services were determined to be non-substantive, and therefore the unvested restricted stock units, excluding certain awards that were cancelled pursuant to the severance agreements, were fully expensed in the third quarter of 2020. 36,250 shares of previously unvested restricted stock units were expensed, and the Company recognized the additional non-cash stock-based compensation expense of $2.4 million in the third quarter of 2020.

Determining Fair Value

Valuation and Recognition – The fair value of each service-based option award is estimated on the date of grant using the Black-Scholes option-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 that vest when a performance condition is achieved, the Company performs an evaluation of internal and external factors to determine the number of shares that are most likely to vest based on the probability of what performance conditions will be met. The Black-Scholes pricing model utilizes 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 on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent expected term.

Forfeitures - The Company recognizes forfeitures as they occur.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The fair value of each option is based on the assumptions in the following table:


	Three Months Ended September 30,			Nine Months Ended September 30,
	2020	2019	2020	2019
Option Plan Shares
Risk-free interest rates	(1)	(1)	0.11% - 1.47%	2.54% - 2.59%
Expected term (in years)	(1)	(1)	0.25 - 6.15	6.28
Expected volatility	(1)	(1)	44.19% - 77.51%	64.95% - 65.00%
Dividend yield	(1)	(1)	0%	0%
Weighted average fair value per share of options granted during the period	(1)	(1)	$58.57	$57.11
ESPP Shares
Risk-free interest rates	(2)	(2)	0.12% - 0.2%	2.31% - 2.44%
Expected term (in years)	(2)	(2)	0.5 - 2	0.5 - 2
Expected volatility	(2)	(2)	63.7% - 89.0%	55.0% - 58.0%
Dividend yield	(2)	(2)	0%	0%
Weighted average fair value per share of stock purchase rights granted during the period	(2)	(2)	$30.60	$35.91

______________

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

~~(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.

(2)

~~(7)~~The Company did not issue stock purchase rights under its 2010 Employee Stock Purchase Plan during the period indicated.

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, 2020 is as follows:

Options Shares Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Term(Years) Aggregate
Intrinsic
Value(1)
(Aggregate intrinsic value in thousands)
Outstanding, January 1, 2020 2,700,293 $ 34.01 6.7
Granted 309,143 97.66
Exercised (509,335) 30.34
Forfeited (71,364) 82.76
Outstanding, September 30, 2020 2,428,737 $ 41.45 6.3 $ 146,939
Exercisable, September 30, 2020 1,577,785 $ 26.96 5.4 $ 118,314

______________

(1)The total intrinsic value of options exercised during the nine months ended September 30, 2020 and 2019 was $29.0 million and $41.7 million, respectively, determined as of the date of exercise.

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EXACT SCIENCES CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of restricted stock and restricted stock unit activity under the Stock Plans during the nine months ended September 30, 2020 is as follows:
Restricted
Shares and RSUs Weighted
Average Grant
Date Fair Value
Outstanding, January 1, 2020 4,384,005 $ 63.41
Granted 2,166,913 90.94
Released (1,615,545) 48.97
Forfeited (280,899) 80.67
Outstanding, September 30, 2020 4,654,474 $ 80.10
As of September 30, 2020, there was $285.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. The Company expects to recognize that cost over a weighted average period of 2.8 years.

(11) NEW MARKET TAX CREDIT

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 1 of its Madison, Wisconsin facilities. This financing arrangement was structured with an unrelated 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 Company is required to be in compliance through December 2021 with various regulations and contractual provisions that apply to the NMTC arrangement. Noncompliance with applicable requirements could result in the Investor’s projected tax benefits not being realized and, therefore, require the Company to indemnify the Investor for any loss or recapture of NMTC related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations. The Company does not anticipate any credit recapture will be required in connection with this financing arrangement.

The Investor and its majority owned community development entity are ~~consolidated~~considered Variable Interest Entities (“VIEs”) and the Company is the primary beneficiary of the VIEs. This conclusion was reached based on the following:

•the ongoing activities of the VIEs — collecting and remitting interest and fees and NMTC compliance — were all considered in the initial design and are not expected to significantly affect performance throughout the life of the VIE;

•contractual arrangements obligate the Company to comply with NMTC rules and regulations and provide various other guarantees to the Investor and community development entity;

•the Investor lacks a material interest in the underlying economics of the project; and

•the Company is obligated to absorb losses 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 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, 2019. At September 30, 2019, the remaining balance of $0.7 million is included in 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, 2018. At December 31, 2018, the remaining balance of $1.0 million was included in 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.

~~(8) LONG-TERM DEBT~~

~~Building Purchase Mortgage~~

During June 2015, the Company entered into a $5.1 million credit agreement with a third-party financial institution to finance the purchase of a research and development building located in Madison, Wisconsin. The credit agreement was 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~~EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated 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 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.~~

Statements

(Unaudited)

(12) DEBT

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 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 of $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~~began making monthly payments towards the outstanding principal balance plus accrued interest. As of September 30, 2020 and December 31, 2019, the ~~Company has drawn~~outstanding balance was $24.1 million and $25.0 million, ~~from the Construction Loan,~~respectively, including $0.7 million of interest incurred, which is accrued for as an interest reserve and represents a portion of the ~~$25.0 million~~ loan ~~balance as of September 30, 2019.~~balance. The Company capitalized the $0.7 million of interest to the construction project. ~~As of December 31, 2018, the Company 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 liability. The debt issuance costs are being amortized over the life of the Construction Loan.

The ~~Company has agreed in the~~ Construction Loan Agreement was amended effective June 30, 2020 to ~~various~~include a financial ~~covenants including~~covenant to maintain a minimum liquidity of $250 million and remove the minimum tangible net ~~worth.~~worth covenant. As of September 30, ~~2019,~~2020, the Company is in compliance with ~~all covenants.~~

the covenant included in the amended agreement.

~~Table of 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 $4.6 million of financing in the aggregate. In return for the ~~incentives,~~loans, 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 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 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.

By the end of ~~September 30,~~ 2019, the Company ~~has~~had earned ~~$4.6 million~~ and received payment of ~~$2.6~~$4.6 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, 2020 and December 31, 2019, the Company ~~also~~ has recorded a ~~$2.9~~liability of $ $0.3 million ~~liability~~and $2.7 million, respectively, in other ~~short-term liabilities and a $0.7 million liability in other long-term~~current liabilities on the Company’s condensed consolidated balance ~~sheet,~~sheets, reflecting when the expected benefit of the financial ~~incentives~~benefits amortization will reduce future operating expenses.

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~~(9)~~

EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(13) COMMITMENTS AND CONTINGENCIES

~~The Company acts~~

Leases

Supplemental disclosure of cash flow information related to the Company’s cash and non-cash activities with its leases are as ~~lessee under all its lease agreements, which~~follows:


	Nine Months Ended September 30, 2020
(In thousands)	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	12,827	$	3,744
Operating cash flows from finance leases	125		0
Finance cash flows from finance leases	620		0
Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities (1)	13,662		20,147
Right-of-use assets obtained in exchange for new finance lease liabilities	17,420		0

______________

(1)For the nine months ended September 30, 2019, this includes ~~operating leases for corporate offices, lab space, warehouse space, vehicles and certain lab and office equipment.~~ right-of-use assets obtained from the initial adoption of ASC 842 of approximately $17.9 million.

As of September 30, 2020 and December 31, 2019, the Company’s right-of-use assets from operating leases are $129.8 million and $126.4 million, respectively, which are reported in operating lease right-of-use assets in the Company’s condensed consolidated balance sheets. As of September 30, 2020, the Company has outstanding operating lease obligations of $134.7 million, of which $10.7 million is reported in operating lease liabilities, current portion and $124.0 million is reported in operating lease liabilities, less current portion in the Company’s condensed consolidated balance sheets. As of December 31, 2019, the Company ~~is not a party to any finance leases. The leases have remaining~~had outstanding operating lease ~~terms~~obligations of ~~1 year to 6 years, some~~$126.6 million, of which ~~include options to extend~~$7.9 million is reported in operating lease liabilities, current portion and $118.7 million is reported in operating lease liabilities, less current portion in the 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.~~

Company’s condensed consolidated balance sheets. The Company calculates its incremental borrowing rates for specific lease terms, used to discount future lease payments, as a function of the U.S. Treasury rate and an indicative Moody’s rating for operating leases. The Company’s weighted average discount rate and weighted average lease term remaining on operating lease liabilities is approximately ~~7.81%~~6.83% and ~~5.80~~8.95 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.~~

~~Table of Contents~~

As of September 30, 2020 and December 31, 2019, the Company’s right-of-use assets from finance leases are ~~$19.1~~$16.9 million and $0.3 million, respectively, 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.~~

~~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, net 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.

~~Table of Contents~~

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, 2020, the Company has outstanding finance lease obligations of $16.9 million, of which $4.0 million is reported in other current liabilities and $12.9 million is reported in other long-term liabilities in the Company’s condensed consolidated balance sheets. As of December 31, 2019, the Company ~~earned $2.8~~had outstanding finance lease obligations of $0.2 million, of which $32,000 is reported in other current liabilities and $0.2 million is reported in other long-term liabilities in the ~~available tenant improvement allowance.~~Company’s condensed consolidated balance sheets. The Company ~~anticipates~~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 finance leases. The Company’s weighted average discount rate and weighted average lease term remaining on finance lease liabilities is approximately 5.87% and 3.86 years, respectively

Legal Matters

The Company is currently responding to civil investigative demands initiated by the United States Department of Justice (“DOJ”) concerning (1) Genomic Health’s compliance with the Medicare Date of Service billing regulations and (2) allegations that the Company offered or gave gift cards to patients in exchange for returning the Cologuard screening test, in violation of the Federal Anti-Kickback Statute and False Claims Act. The Company has

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

been cooperating with these inquires and has produced documents in response thereto. Adverse outcomes from these investigations could include the Company being required to pay treble damages, incur civil and criminal penalties, paying attorneys' fees, entering into a corporate integrity agreement, being excluded from participation in government healthcare programs, including Medicare and Medicaid, and other adverse actions that could materially and adversely affect the Company's business, financial condition and results of operation.

The DOJ's investigations are still in process and the scope and outcome of the investigations is not determinable at this time. Refer to the Company’s 2019 Form 10-K for additional ~~$32.2 million~~information on the Company's fair value determination of the pre-acquisition loss contingency related to the Genomic Health investigation. There can be ~~recognized at lease commencement~~no assurance that any settlement, resolution, or other outcome of these matters during any subsequent reporting period will not have a material adverse effect on the Company’s results of operations or cash flows for that period or on the ~~right-of-use asset and lease liability.~~

Company’s financial position.

~~(10)~~

(14) 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 ifon the condition that the Company expends $26.3 million in capital investments and establishes and maintains 758 full-time positions over a seven-year period. The tax credits earned are first applied against the tax liability otherwise due, and if there is no such liability present, the claim for tax credits will be reimbursed in cash to the Company. The maximum amount of the refundable tax credit to be earned for each year is fixed, and the Company earns the credits by meeting certain capital investment and job creation thresholds over the 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, ~~2019,~~2020, the Company has earned all $9.0 million of the refundable tax credits and has received payment of ~~$4.3~~$5.9 million from the WEDC. The unpaid portion is ~~$4.7~~$3.1 million, of which $1.6 million is reported in prepaid expenses and other current assets and ~~$3.1~~$1.5 million is reported in other long-term assets, reflecting when collection of the refundable tax credits is expected to occur. As of September 30, ~~2019,~~2020, the Company also has recorded a ~~$2.3 million liability in other short-term liabilities and a~~ $0.5 million liability in other ~~long-term~~current liabilities, ~~reflecting~~which reflects when the expected benefit of the tax credit amortization will reduce future operating expenses.

During the three and nine months ended September 30, 2020, the Company amortized $0.6 million and $1.7 million, respectively, of the tax credits earned as a reduction of operating expenses. During the three and nine months ended September 30, 2019, the Company amortized $0.6 million and $1.8 million, respectively, of the tax credits earned as a reduction of operating expenses. ~~During the three and nine months ended September 30, 2018, the Company amortized $0.6 million and $1.6 million, respectively, of the tax credits earned as a reduction of operating expenses.~~

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~~(11)~~EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(15) CONVERTIBLE NOTES

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, 2020		December 31, 2019
2028 Convertible notes	0.375%	5.2%	$	790,608	$	1,150,000	$	0
2027 Convertible notes	0.375%	6.3%	472,501		747,500		747,500
2025 Convertible notes	1.000%	6.0%	227,103		315,049		415,049
Total Convertible notes					2,212,549		1,162,549
Less: Debt discount (2)					(628,820)		(342,463)
Less: Debt issuance costs (3)					(28,762)		(16,481)
Net convertible debt					$	1,554,967	$	803,605

______________

(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. A portion of the 2025 Convertible Notes have been extinguished or converted. 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, 2020. The fair value of the liability component of the 2025 Notes at issuance was $654.8 million with the equity component being $267.9 million.

(2)The unamortized discount consists 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


(In thousands)	September 30, 2020		December 31, 2019
2028 Convertible notes	$	337,968	$	0
2027 Convertible notes	232,038		253,340
2025 Convertible notes	58,814		89,123
Total unamortized discount	$	628,820	$	342,463

(3)Debt issuance costs consists of the following:

~~(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.


(In thousands)	September 30, 2020		December 31, 2019
2028 Convertible notes	$	15,569	$	0
2027 Convertible notes	9,168		10,251
2025 Convertible notes	4,025		6,230
Total debt issuance costs	$	28,762	$	16,481

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Issuances and ~~Settlements~~

Settlements

In January 2018, the Company issued and sold $690.0 million in aggregate principal amount of 1.0% Convertible Notes (the “January ~~2018~~2025 Notes”) with a maturity date of January 15, ~~2025 (the “Maturity Date”).~~2025. The January ~~2018~~2025 Notes accrue interest at a fixed rate of 1.0% per year, payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The net proceeds from the issuance of the January ~~2018~~2025 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 additional $218.5 million in aggregate principal amount of 1.0% Convertible Notes (the “June ~~2018~~2025 Notes”). The June ~~2018~~2025 Notes were issued under the same indenture pursuant to which the Company previously issued the January ~~2018~~2025 Notes (the “Indenture”). The January ~~2018~~2025 Notes and the June ~~2018~~2025 Notes (collectively, the “2025 Notes”) have identical terms (including the same January 15, 2025 maturity date) and will be treated as a single series of securities. The net proceeds from the issuance of the June ~~2018~~2025 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 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”).~~2027. The 2027 Notes accrue interest at a fixed rate of 0.375% per year, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2019. The net proceeds from the issuance of the 2027 Notes were approximately $729.5 million, after deducting underwriting discounts and commissions and the offering expenses payable by the Company.

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~~$494.1 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~~$375.0 million was allocated to the liability component, $300.8 million was allocated to the equity component, and ~~$0.6~~$0.7 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~~$10.6 million, which is recorded in interest ~~income (expense)~~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.

In February 2020, the Company issued and sold $1,150.0 million in aggregate principal amount of 0.375% Convertible Notes (the “2028 Notes” and, collectively with the 2025 Notes and the 2027 Notes, the “Notes”) with a maturity date of March 1, 2028. The 2028 Notes accrue interest at a fixed rate of 0.375% per year, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2020. The net proceeds from the issuance of the 2028 Notes were approximately $1,125.6 million, after deducting underwriting discounts and commissions and the offering expenses payable by the Company.

In February 2020, the Company used $150.1 million of the proceeds from the issuance of the 2028 Notes to settle $100.0 million of the 2025 Notes, of which $85.5 million was allocated to the liability component, $64.2 million, net of a tax impact of $0.3 million, was allocated to the equity component, and $0.1 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 $8.0 million, which is recorded in interest 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.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Summary of Conversion ~~Features~~

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.~~Indentures. 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~~13.26, 8.96, and ~~8.9554~~8.21 shares of common stock per $1,000 principal amount for the 2025 Notes, 2027 Notes, and ~~2027~~2028 Notes, respectively, which is equivalent to an initial conversion price of approximately $75.43, $111.66, and ~~$111.66~~$121.84 per share of the Company’s common stock for the 2025 Notes, 2027 Notes, and ~~2027~~2028 Notes, respectively. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, holders of the Notes who convert their Notes in connection with a “make-whole fundamental change” (as defined in the Indenture), will, under certain circumstances, be entitled to an increase in the conversion rate.

~~Table of Contents~~

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

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~~$101.95 on September 30, ~~2019,~~2020, the if-converted values on our 2025 Notes exceed the principal amount by ~~$82.2~~$110.8 million and the 2027 Notes ~~fall short of~~and 2028 Notes do not exceed the principal ~~amount by $142.5 million, respectively.~~

amount.

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~~

While the Notes are currently classified ~~as current~~ on the Company’s condensed consolidated balance sheets at September 30, ~~2019, while the 2027 Notes are classified~~2020 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~~this liability 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 considered a current obligation and classified as ~~a current obligation.~~

such.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company ~~allocated the~~allocates 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.~~values. 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~~following table summarizes the ~~total~~original transaction costs at the time of ~~approximately $7.4 million related to~~issuance for each set of Notes and the ~~issuance of the June 2018 Notes~~respective allocation 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.

components:


(In thousands)	January 2025 Notes		June 2025 Notes		2027 Notes		2028 Notes
Transaction costs allocated to:
Liability component	$	13,569	$	5,052	$	11,395	$	16,811
Equity component	5,340		2,311		6,632		7,642
Total transaction costs	$	18,909	$	7,363	$	18,027	$	24,453

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.

~~Table of Contents~~

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


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Debt issuance costs amortization	$	1,123	$	658	$	3,084	$	1,989
Debt discount amortization	19,461		10,322		52,138		28,789
Loss on settlement of convertible notes	0		0		7,954		10,558
Coupon interest expense	2,567		1,739		7,065		5,585
Total interest expense on convertible notes	23,151		12,719		70,241		46,921
Other interest expense	431		490		1,406		990
Total interest expense	$	23,582	$	13,209	$	71,647	$	47,911

The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is ~~7.46 years~~7.42, 6.46, and ~~5.30~~4.30 years for the 2028 Notes, 2027 Notes, and 2025 Notes, respectively.

~~(12) ACQUISITIONS~~

(16) BUSINESS COMBINATIONS

Paradigm Diagnostics, Inc. and Viomics, Inc.

On ~~July 28,~~March 3, 2020, the Company acquired all of the outstanding capital stock of Paradigm and Viomics, two related party companies of one another headquartered in Phoenix, Arizona, in transactions that are deemed to be a single business combination in accordance with ASC 805, Business Combinations, (“the Paradigm Acquisition”). Paradigm provides comprehensive genomic-based profiling tests that assist in the diagnosis and therapy recommendations for late-stage cancer. Viomics provides a platform for identification of biomarkers.

The Company entered into this acquisition to enhance its product portfolio in cancer diagnostics and to enhance its capabilities for biomarker identification.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The acquisition date fair value of the consideration to be transferred for Paradigm and Viomics was $40.4 million which consists of $32.2 million payable in shares of the Company’s common stock and $8.2 million which was settled through a cash payment. Of the $32.2 million to be settled through the issuance of common stock, $28.8 million was issued as of September 30, 2020, and the remaining $3.4 million, which was withheld and may become payable as additional merger consideration, is included in other current liabilities in the condensed consolidated balance sheet as of September 30, 2020. The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition as follows:


(In thousands)
Net operating assets	$	5,373
Goodwill	30,431
Developed technology	7,800
Net operating liabilities	(3,203)
Total purchase price	$	40,401

The fair value of identifiable intangible assets has been determined using the income approach, which involves significant unobservable inputs (Level 3 inputs). These inputs include projected sales, margin, weighted average cost of capital and tax rate.

Developed technology represents purchased technology that had reached technological feasibility and for which development had been completed as of the acquisition date. Fair value was determined using future discounted cash flows related to the projected income stream of the developed technology for a discrete projection period. Cash flows were discounted to their present value as of the closing date. Developed technology is amortized on a straight-line basis over its estimated useful life of 15 years.

The calculation of the excess of the purchase price over the estimated fair value of the tangible net assets and intangible assets acquired was recorded to goodwill, which is primarily attributed to the assembled workforce, and expected synergies. The total goodwill related to this acquisition is not deductible for tax purposes.

The Company agreed to issue to the previous investors in Viomics equity interests with an acquisition-date fair value of up to $8.4 million in Viomics, vesting over 4 years based on certain retention arrangements. Payment is contingent upon continued employment with the Company over the four year vesting period and is recognized as stock-based compensation expense in general and administrative expense in the condensed consolidated statement of operations.

The partial year results from the operations of Paradigm and Viomics are included in the Company’s condensed consolidated financial statements and not disclosed separately due to immateriality. Pro forma disclosures have not been included due to immateriality.

Genomic Health, Inc.

On November 8, 2019, the Company acquired all of the outstanding capital stock of Genomic Health. Genomic Health, headquartered in Redwood City, California, provides genomic-based diagnostic tests that address both the overtreatment and optimal treatment of early and late stage cancer.

The Company entered into this combination to create a ~~definitive agreement~~leading global cancer diagnostics company and ~~plan~~provide a robust platform for continued growth. This combination provides the Company with a commercial presence in more than 90 countries in which the combined company expects to continue to increase adoption of ~~merger (the “Merger Agreement”) with Genomic Health, Inc. (“Genomic Health”),~~current tests, and ~~Spring Acquisition Corp., a wholly owned subsidiary~~to bring new innovative cancer tests to patients around the world.

Refer to the Company’s 2019 10-K for detailed disclosures on the combination, including the fair value of the ~~Company (“Merger Sub”). Upon~~consideration transferred, purchase price allocation, and goodwill and intangible assets identified in the ~~terms and subject~~transaction. During the period ended September 30, 2020, there were no material changes to the ~~conditions set forth in~~purchase price allocation.

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EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(17) SEGMENT INFORMATION

Management determined that the ~~Merger Agreement, Merger Sub will merge with and into Genomic Health, with Genomic Health surviving~~Company functions as a ~~wholly owned subsidiary~~single operating segment, and thus reports as a single reportable segment. This operating segment is focused on the development and global commercialization of clinical laboratory services allowing healthcare providers and patients to make individualized treatment decisions. Management assessed the discrete financial information routinely reviewed by the Company's Chief Operating Decision Maker, its President and Chief Executive Officer, to monitor the Company's operating performance and support decisions regarding allocation of resources to its operations. Performance is continuously monitored at the consolidated level to timely identify deviations from expected results.

The following table summarizes total revenue from customers by geographic region. Product revenues are attributed to countries based on ship-to location.


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
United States	$	392,120	$	218,805	$	968,825	$	580,718
Outside of United States	16,243		0		56,227		0
Total revenues	$	408,363	$	218,805	$	1,025,052	$	580,718

Long-lived assets located in countries outside 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 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 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 currently expects the Merger will be completed in November 2019, subject to the approval of Genomic Health’s stockholders and other customary closing conditions.

United States are not significant.

~~(13)~~

(18) INCOME TAXES

The Company recorded an income tax benefit of $4.5 million and an expense of $0.7 million for the three months ended September 30, 2020 and 2019, respectively. The Company recorded an income tax benefit of $7.1 million and $0.2 million for the ~~three and~~ nine months ended September 30, 2020 and 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.~~respectively. The Company’s income tax benefit recorded during the three and nine months ended September 30, 2020, is primarily related to future limitations on and expiration of certain Federal and State deferred tax assets. As a result of these limitations, the recording of a valuation allowance resulted in a deferred tax liability of approximately $21.5 million remaining as of September 30, 2020, which is included in other long-term liabilities on the Company’s condensed consolidated balance sheet. The Company’s income tax benefit recorded during the nine months ended September 30, 2019 iswas primarily related to the intraperiod tax allocation rules that ~~require~~required the Company to allocate the provision for income taxes between continuing operations and other 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 benefit will not be realized.

The Company had $14.4 million and $10.2 million of unrecognized tax benefits at September 30, 2020 and December 31, 2019, respectively. The Company does not anticipate a material change to its unrecognized tax benefits over the next 12 months that would affect its effective tax rate. Unrecognized tax benefits may change during the next 12 months for items that arise in the ordinary course of business.

Accrued interest and penalties related to unrecognized tax benefits are recognized as part of the Company’s income tax provision in its condensed consolidated statements of operations. The Company is subject to U.S. federal income tax examinations for the tax years 2001 through 2020, state income tax examinations for the tax years 2003 through 2020, and for the years 2014 through 2020 in foreign jurisdictions.

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~~(14) RELATED PARTY TRANSACTION~~

EXACT SCIENCES CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(19) SUBSEQUENT EVENTS

In ~~May 2017,~~October 2020, the Company and Pfizer entered into an Amended and Restated Cologuard Promotion Agreement (the “Restated Agreement”), which modifies, and amends and restates in its entirety, the Promotion Agreement effective August 2018. The term of the Restated Agreement runs until December 31, 2022. The Restated Agreement extends the relationship between the Company and Pfizer and restructures the manner in which the Company compensates Pfizer for promotion of Cologuard and provision of certain other sales and marketing services related to Cologuard. The Company agreed to pay Pfizer specified amounts for each instance Pfizer promotes Cologuard to a healthcare provider that is eligible to prescribe Cologuard, which includes a one-time lump sum payment for the promotion of Cologuard between April 1, 2020 and September 30, 2020. The Company also agreed to pay Pfizer certain bonuses during 2020 and 2021, certain quarterly fees in 2020 and 2021, and a one-time fee in connection with Pfizer securing certain media and advertising for Cologuard for 2022. During the last year of the term of the Restated Agreement, the Company agreed to pay Pfizer a royalty based on Cologuard revenues over a specified threshold. See Note 8 for further discussion on the Promotion Agreement with Pfizer.

On October 26, 2020, the Company acquired all of the outstanding capital stock of Base Genomics Limited, headquartered in Cambridge, England, for $410.0 million in cash, net of cash received and certain other adjustments. This acquisition was funded with cash on hand and is expected to enhance the Company’s efforts in multi-cancer and colorectal cancer screening, as well as other cancers across the continuum.

On October 26, 2020, the Company entered into a ~~professional services~~definitive agreement ~~for recruiting~~ and ~~related services~~plan of merger (the “Thrive Merger Agreement”) with ~~a firm whose principal~~Thrive Earlier Detection Corporation (“Thrive”), which contemplates that, among other things, Thrive will be merged with and into one of the Company’s wholly owned subsidiaries, with the Company’s previously existing subsidiary surviving. Thrive is a ~~non-employee director.~~healthcare company dedicated to incorporating earlier cancer detection into routine medical care. The Company ~~did not incur charges or make any payments during~~expects that combining Thrive’s early-stage screening test, CancerSEEK, with the ~~three~~Company’s scientific platform, clinical organization and ~~nine months ended September 30, 2019. The~~commercial infrastructure will establish the Company ~~incurred charges of $0.2 million and $0.3 million for~~as a leading competitor in blood-based, multi-cancer screening. Under the ~~three and nine months ended September 30, 2018. The Company made payments of $0.2 million and $0.3 million for the three and nine months ended September 30, 2018.~~

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~~(15) 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 requires recognition of right-of-use assets and lease liabilities 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. The Company adopted Update 2016-02 on January 1, 2019 using the modified retrospective method of adoption. As a resultterms of the ~~adoption, the Company recorded an opening right-of-use asset balance~~Thrive Merger Agreement, Thrive will receive total consideration of ~~$20.6 million,~~$2.2 billion, of which ~~is included~~$1.7 billion would be payable at closing, comprised of 35% in ~~other long-term assets~~cash and 65% in the Company’s ~~condensed consolidated financial statements.~~common stock. An additional $450.0 million would be payable in cash based upon the achievement of certain milestones related to the development and commercialization of a blood-based, multi-cancer screening test. The Thrive merger was approved by the Company’s board of directors and the board of directors and stockholders of Thrive. The Company ~~also recorded an opening lease liability~~currently expects the Thrive merger to close during the first quarter of ~~$20.1 million, of which $3.0 million was classified in other short-term liabilities~~2021, subject to customary closing conditions and ~~$17.1 million was classified in long-term obligations in the Company’s condensed consolidated financial statements. See Note 9 for more detail.~~

~~In June 2018, the Financial Accounting Standards Board issued ASU No. 2018-07 (Topic 718),~~ ~~Improvements to Nonemployee Share-Based Payment Accounting,~~ (“Update 2018-07”). Update 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements to Topic 718 to nonemployee awards except for certain exemptions specified in the amendment. 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 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. 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 certain areas to avoid redundant disclosures. The amendments in this update were effective upon issuance. The Company adopted this guidance 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 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 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, 2019. The Company is currently evaluating the impact of the guidance on 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 Analysi~~~~s of Financial Condition and Results of Operations~~

~~The following~~ Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations

The following discussion of ~~Exact Sciences Corporation (together with its subsidiaries, “Exact,” “we,” “us,” “our” or the “Company”)~~our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, which has been filed with the SEC (the ~~“2018~~“2019 Form 10-K”).

Forward-Looking ~~Statements~~

Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as “believe,” “expect,” “may,” “will,” “should,” “would,” “could,” “seek,” “intend,” “plan,” “goal,” “project,” “estimate,” “anticipate” or other comparable terms. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q regarding our strategies, prospects, expectations, financial condition, operations, costs, plans, objectives and the ~~proposed~~pending acquisition of ~~Genomic Health by Exact~~Thrive Earlier Detection Corporation (“Thrive”) are forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding expected future operating results, anticipated results of our sales, marketing and ~~marketing~~patient adherence efforts, expectations concerning payer reimbursement, the anticipated results of our product development efforts, the anticipated benefits of the ~~proposed~~pending acquisition of ~~Genomic Health,~~Thrive, including estimated synergies and other financial impacts, and the expected timing of completion of the transaction. Forward-looking statements are neither historical facts nor assurances of future ~~performance.~~performance or events. Instead, they are based only on current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Actual results, conditions and events may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause actual results, conditions and events to differ materially from those indicated in the forward-looking statements include, among others, the following: uncertainties associated with the coronavirus (COVID-19) pandemic, including its possible effects on our operations, including our supply chain, and the demand for our products and services; our ability to efficiently and flexibly manage our business amid uncertainties related to COVID-19; our ability to successfully and profitably market our products and services; the acceptance of our products and services by patients and healthcare providers; our ability to meet demand for our products and services; the success of our efforts to facilitate patient access to Cologuard via telehealth; the willingness of health insurance companies and other payers to cover our products and services and adequately reimburse us for such products and services; the amount and nature of competition ~~from other cancer screening and diagnostic~~for our products and services; the effects of the adoption, modification or repeal of any law, rule, order, interpretation or policy relating to the healthcare system, including without limitation as a result of any judicial, executive or legislative action; the effects of changes in pricing, coverage and reimbursement for our products and services, including without limitation as a result of the Protecting Access to Medicare Act of 2014; recommendations, guidelines and quality metrics issued by various organizations such as the U.S. Preventive Services Task Force, the American Society of Clinical Oncology, the American Cancer Society, and the National Committee for Quality Assurance regarding cancer screening or our products and services; our ability to successfully develop new products and ~~services;~~services and assess potential market opportunities; our ability to effectively enter into and utilize strategic partnerships, such as through our Restated Promotion Agreement with Pfizer, Inc., and acquisitions; our success establishing and maintaining collaborative, licensing and supplier arrangements; our ability, and the ability of Thrive and Base Genomics Limited (“Base”), to maintain regulatory approvals and comply with applicable regulations; our ability to manage an international business and our expectations regarding our international expansion and opportunities; the potential effects of foreign currency exchange rate fluctuations and our efforts to hedge such effects; the possibility that the anticipated benefits from our business acquisitions (including the pending acquisition of Thrive and recent acquisition of Base) cannot be realized in full or at all or may take longer to realize than expected; the possibility that costs or difficulties related to the integration of acquired businesses’ (including Thrive’s and Base’s) operations will be greater than expected and the possibility of disruptions to our business during integration efforts and strain on management time and resources; the outcome of any litigation, government investigations, enforcement actions or other legal proceedings; the ability of ~~Exact~~the

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Company and ~~Genomic Health~~Thrive to receive the ~~approval of Genomic Health’s stockholders~~required the required regulatory approvals for the ~~proposed~~pending 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~~the Company and ~~Genomic Health~~Thrive to terminate the merger agreement; possible negative effects of the announcement or the consummation of the ~~transaction~~pending acquisition of Thrive or recent acquisition of Base on the market price of our common stock and/or on our ~~business,~~and/or Thrive’s or Base’s respective businesses, financial ~~condition,~~conditions, 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~~pending acquisition of ~~Genomic Health;~~Thrive or the recent acquisition of Base; risks associated with potential 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~~Thrive, Base 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~~Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of the ~~2018~~2019 Form 10-K and subsequently filed Quarterly Reports on Form 10-Q. ~~There can be no assurance that~~You are further cautioned not to place undue reliance upon any such forward-looking statements, which speak only as of the ~~proposed acquisition of Genomic Health will in fact be consummated in~~date made. Except as otherwise required by the ~~manner described or at all. We~~federal securities laws, we undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Overview

Exact Sciences Corporation (together with its subsidiaries, “Exact,” “we,” “us,” “our” or the “Company”) is a leading global cancer diagnostics company. We ~~are a molecular diagnostics company focused on the early detection and prevention of~~have developed some of the ~~deadliest forms of cancer. We have developed an accurate, non-invasive, patient-friendly screening test called Cologuard® for the early detection of colorectal~~most impactful brands in cancer ~~and pre-cancer,~~diagnostics, and we are currently working on the development of additional tests for other types of cancer, with the goal of ~~becoming a leader in~~bringing new innovative cancer ~~screening and diagnostics.~~

~~On July 28, 2019, we entered into a definitive agreement and plan of merger (the “Merger Agreement”) with Genomic Health, Inc. (“Genomic Health”), under which we agreed~~tests 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. Followingpatients throughout 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.

world.

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 2020 in the U.S. there are ~~approximately:~~

●

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

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~~51,000 deaths from colorectal cancer~~

projected to be approximately 148,000 new cases of colorectal cancer and 53,000 deaths from colorectal cancer. 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. 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’s (“ACS”) colorectal cancer screening guidelines. Internal studies have 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 71 percent and 14 percent, 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 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 2014,~~Upon approval by the U.S. Food and Drug Administration (“FDA”) ~~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,~~August 2014, 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~~premarket approval 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:

•Cancer Sensitivity: 92%

•Stage I and II Cancer Sensitivity: 94%

•High-Grade Dysplasia Sensitivity: 69%

•Specificity: 87%

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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%~~

~~We believe~~

Our Oncotype DX Tests

With our Oncotype IQ Genomic Intelligence Platform we are applying our world-class scientific and commercial expertise and infrastructure to lead the ~~competitive advantages~~translation of ~~sDNA screening provide a significant market opportunity. There are 106 million people in~~clinical and genomic data into clinically actionable results for treatment planning throughout the ~~U.S. between the ages of 45~~cancer patient's journey, from diagnosis to treatment selection and 85 who are at average risk for colorectal cancer. At a three-year screening interval and an average revenue per test of $500 this represents a potential $18 billion market for Cologuard, of which our current sharemonitoring. Our Oncotype IQ Genomic Intelligence Platform is ~~approximately 5.2 percent.~~

~~Our Clinical Laboratory and Manufacturing Facilities~~

~~As part~~currently comprised of our ~~commercialization strategy, we established~~flagship line of Oncotype DX gene expression tests for breast, prostate and colon cancer, as well as Oncotype DX AR-V7 Nucleus Detect® test, a state-of-the-art, highly automated lab facility that is certified pursuant to federal Clinical Laboratory Improvement Amendments requirements to process Cologuard tests and provide patient results. Our initial clinical lab operation is housed in a 55,000 square foot facility in Madison, Wisconsin. At this lab, we currently have the capacity to process approximately three million tests per year.

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

~~We currently manufacture our Cologuard~~liquid-based 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 in the process of building an additional manufacturing facility for which we expect to receive FDA approval for commercial production in 2020. We are committed to 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 our Cologuard test from third-party suppliers and manufacturers.

advanced stage prostate cancer.

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~~How~~ We ~~Recognize Revenue~~believe our Oncotype DX tests provide information that has the following benefits:

•

Improved Quality of Treatment Decisions.

We believe our approach to genomic-based cancer analysis improves the quality of cancer treatment decisions by providing an individualized analysis of each patient’s tumor that is correlated to clinical outcome, rather than solely using subjective, anatomic and qualitative factors to determine treatments. Our Oncotype DX tests for breast cancer, Ductal Carcinoma in Situ (“DCIS”), prostate cancer, and colon cancer have been analytically and clinically validated in multiple published studies. The Recurrence Score® results from our tests have been demonstrated to classify patients into recurrence risk categories different than classifications based primarily on clinical and pathologic features. Additionally, multiple decision impact studies conducted worldwide consistently show that the Recurrence Score result changes treatment decisions in more than 30% of patients. As a result, we believe our tests enable patients and healthcare providers to make more informed decisions about the risks and benefits of various treatments, and consequently design an individualized treatment plan.

•Improved Health Economics of Cancer Care. We ~~recognize revenue on~~believe that improving the ~~delivery~~quality of ~~a test~~treatment decisions can result ~~to an ordering physician for tests performed.~~in significant economic benefits. The ~~amount recognized is based on our estimate~~results of what we will ultimately collect at the time delivery is complete. The amount of revenue we recognize 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, 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, 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 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, because we were unable to reasonably estimate the amount that would ultimately be collected from 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 for all billed 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 $481 and $470 through September 30, 2019 and 2018, respectively. This cumulative average Cologuard reimbursement rate will change over time due to a number of ~~factors,~~clinical studies have demonstrated that by using the Oncotype DX Breast Recurrence Score® test, physicians and patients can better evaluate treatment options, such as ~~medical coverage decisions by payers, changes~~whether a patient will or will not benefit from chemotherapy. Patients are benefited when (1) those who aren’t likely to benefit from chemotherapy avoid it and the associated chemotoxicities and (2) those who are likely to benefit from chemotherapy receive it resulting in reduced incidence of distant recurrences. These better clinical outcomes increase survival rates and also save the ~~payer mix,~~patient as well as the ~~effects~~healthcare system significant costs.

International Business Background and Products

Prior to our combination with Genomic Health, we did not have international revenue. We now commercialize our Oncotype DX tests internationally through employees in Canada, Japan and six European countries, as well as through exclusive distribution agreements. We have provided our Oncotype DX tests in more than 90 countries outside of ~~contracts signed with payers, non-renewal~~the United States. We do not offer Cologuard or ~~termination~~COVID-19 testing outside of ~~payer contracts, changes~~the U.S.

Inclusion of our products in ~~allowed amounts by payers,~~guidelines and quality measures will be critical to 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 reimbursementinternational success. The Oncotype DX breast cancer test 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~~recognized in some cases longer, to collect from some payers and patients. Thus, the average reimbursement per test at September 30, 2019 and 2018, respectively, represents the total cash collected through such dates for tests performed during the twelve-month periods ended March 31, 2019 and March 31, 2018, respectively, dividedinternational guidelines issued by the ~~number of tests performed during those same periods.~~

~~2019 Priorities~~

~~Our top priorities~~St. Gallen International Breast Cancer Expert Panel and European Society for ~~2019 are to (1) power~~Medical Oncology and has been included in certain guidelines and recommendations in England, Germany and Japan. We have obtained coverage for 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~~invasive breast cancer test outside of the ~~Promotion Agreement, Pfizer~~U.S., including coverage for certain patients in Canada, France, Spain, Germany, Italy, Ireland, Israel, Saudi Arabia, Switzerland, and the United Kingdom. We expect that broadening coverage and reimbursement for our Oncotype DX tests outside of the United States will take years.

Pipeline Research and Development

Our research and development efforts are focused on developing new products and enhancing existing products to address new cancer areas and expand the clinical utility and addressable patient populations for our existing tests. These development efforts may lead to a variety of possible new products, including risk assessment, screening and prevention, early disease diagnosis, adjuvant and/or neoadjuvant disease treatment, metastatic disease treatment selection and patient monitoring.

In October 2020 we announced the introduction of the Oncotype MAP™ Pan-Cancer Tissue test (“Oncotype MAP” test). The Oncotype MAP test is a rapid, comprehensive tumor profiling panel that aids therapy selection for patients with advanced, metastatic, refractory, or recurrent cancer. The Oncotype MAP test utilizes next generation sequencing and immunohistochemistry to provide in-depth insights into genomic alterations in hundreds of cancer-related genes. The Oncotype MAP test report supports clinical decision making by showing actionable biomarkers associated with more than 100 evidence-based therapies, over 45 combination therapies, and more than 650 active clinical trial associations. The identification of these biomarkers helps to inform treatment options for a breadth of solid tumor types.

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Through our collaboration with Mayo Foundation for Medical Education and Research, we have successfully performed validation studies on multiple types of cancer using tissue, blood and other samples. In September 2020, Mayo agreed to ~~promote Cologuard~~make available certain personnel to provide us product development and ~~provide certain other sales~~research 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 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, we believe that would enhance its adoption as a front-line screening test.development assistance through January 2025. We are ~~also evaluating ways that we might make Cologuard even easier for patients to use and potential opportunities to lower the 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~~currently focusing our research and development efforts on building a pipeline of potential future products and services with a focus on improving Cologuard's performance characteristics and on developing blood or other fluid-based (“liquid biopsy”) tests. We ~~will continue~~expect to advance liquid biopsy through biomarker discovery and validation in tissue, blood, or other fluids.

We are pursuing the following opportunities:

•Colon Cancer Screening. We are seeking opportunities to improve upon Cologuard’s performance characteristics. In October 2019, we and Mayo presented at the American College of Gastroenterology’s 2019 Annual Scientific Meeting findings from a blinded-case control study showing enhanced colorectal cancer and advanced adenoma detection using newly discovered methylation biomarkers and hemoglobin. To establish the performance of the novel multi-target stool DNA test in November 2019, we launched the BLUE-C study, a multi-center, prospective study. We expect to enroll more than 10,000 patients 40 years of age and older in the BLUE-C study. The timing of any such enhancements to Cologuard is unknown and would be subject to FDA approval. We are also working to develop a blood-based screening test for colorectal cancer.

•Multi-Cancer Screening Test Development. We are currently seeking to develop a blood-based multi-cancer screening test. In September 2020, we reported that together with Mayo we have identified methylation markers with a 97% average accuracy in identifying cancers in tissue and blood. We also presented results from an internal study using these markers on blood samples that demonstrated 86% sensitivity at 95% specificity when looking at six different cancers.

•Hepatocellular Carcinoma (“HCC”) Test Development. We are currently seeking to develop a blood-based biomarker test to serve as an alternative to ultrasound and alpha-fetoprotein (“AFP”) for use in HCC testing. HCC is the most common type of liver cancer. Our goal is to develop a patient-friendly test that performs better than the current standard of care. In November 2019, we released the results of a 443-patient study which demonstrated 80% sensitivity at 90% specificity with a novel combination of six blood-based biomarkers for HCC. The study also showed 71% sensitivity for early stage HCC at 90% specificity. The study compared performance to the AFP test, which demonstrated 45% sensitivity at 90% specificity for early stage HCC.

•Development Studies for Oncotype DX Products. We may also conduct or fund clinical studies that could support additional opportunities for our Oncotype DX products. For example, we are exploring clinical studies to expand the use of genomic testing to address additional populations, including higher-risk patients.

Coronavirus (“COVID-19”) Pandemic

The spread of COVID-19 has affected many segments of the global economy, including the cancer screening and diagnostics industry. The COVID-19 outbreak, which the World Health Organization has classified as a pandemic, has prompted governments and regulatory bodies throughout the world to enact broad precautionary measures, including “stay at home” orders, restrictions on the performance of “non-essential” services, public gatherings and travel. Health systems, including in key markets where we operate, have been, or may be, overwhelmed with high volumes of patients suffering from COVID-19. The territories in which we market, sell, distribute and perform our tests are attempting to address the COVID-19 pandemic in varying ways, including stay-at-home orders, temporarily closing businesses, restricting gatherings, restricting travel, and mandating social distancing and face coverings. Certain jurisdictions have begun re-opening only to return to restrictions due to increases in new COVID-19 cases. Even in the absence of legal restrictions, businesses and individuals may voluntarily continue to limit in-person interactions and practice social distancing, and such behaviors may continue beyond the formal end of the pandemic, The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical and long-lasting and may vary from location to location.

The pandemic and related precautionary measures began to materially disrupt our business in March 2020 and may continue to disrupt our business for an unknown period of time. As a result, we anticipate significant impact to our 2020 operating results, including our revenues, margins, and cash utilization, among other measures.

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Beginning in March 2020, we undertook temporary precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily requiring most employees to work remotely; suspending field-based, face-to-face interactions by our sales force; requiring on-site employees to undergo COVID-19 testing, wear personal protective equipment (including face masks or shields) and maintain social distancing; pausing all non-essential travel worldwide for our employees; and limiting employee attendance at industry events and in-person work-related meetings, to the extent those events and meetings are continuing. Our commercial partner for Cologuard, Pfizer, Inc. (“Pfizer”), took similar precautions, including suspending face-to-face interactions between sales representatives and healthcare providers.

We expect to adjust our precautionary measures at our various locations based on local recovery levels and applicable governmental regulations. For example, a portion of the Company’s and Pfizer’s sales force has recommenced field-based interactions, although access to healthcare providers remains limited and the resumption of normal activities is expected to be gradual. Our business could be negatively affected if we take excessive, ineffective or inadequate precautions.

Due to social distancing, stay-at-home orders, and other actions taken in response to COVID-19, there has been a significant and widespread decline in standard wellness visits and preventive services. That decline negatively impacted Cologuard test orders during the second quarter of 2020 in our Screening business, notwithstanding the availability of alternative ordering channels such as telehealth. During the third quarter, orders have recovered to pre-pandemic levels.

The Precision Oncology business started to see weakening underlying conditions in April 2020 because of COVID-19, more notably in the U.S. prostate business and in certain international geographies. The widespread decrease in preventive services, including mammograms and prostate cancer screenings, negatively impacted Precision Oncology test volumes beginning in May 2020 and continuing throughout the third quarter of 2020 due to the typical lag between cancer screening and genomic test ordering.

Despite our efforts, the ultimate impact of COVID-19 depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, third-party actions taken to contain its spread and mitigate its public health effects and the extent to which behavioral changes resulting from the pandemic continue even after it ends.

COVID-19 Testing Business

In late March 2020, we began providing COVID-19 testing. The U.S. Food and Drug Administration (FDA) has granted us Emergency Use Authorization to test for SARS-CoV-2, the virus that causes COVID-19, in upper respiratory samples. We have ~~identified proprietary biomarkers~~partnered with various customers, including the State of Wisconsin Department of Health, to administer testing. Customers are responsible for ~~several cancers, including liver~~employing trained personnel to collect specimens. Specimens are sent to our laboratory in Madison, Wisconsin, where we run the assay in our laboratories and provide test results to ordering providers. In light of the uncertainty surrounding the COVID-19 pandemic, we intend to periodically reassess our COVID-19 testing business.

2020 Priorities

As a result of COVID-19 and its impact to our business, we have re-prioritized our goals for 2020 with a focus on serving patients who continue to need the healthcare services we provide while aligning our cost structure with the anticipated lower sales volumes and revenues. Our top priorities for 2020 are (1) get people tested, (2) take care of our customers, and (3) preserve financial strength.

Get People Tested

Business continuity plans are in place at all of our sites to help sustain operations and ensure continuity of services for patients during this unprecedented time. Despite the COVID-19 pandemic, many people still need to be screened for colorectal cancer, and ~~pancreatic cancer. Through~~treated for breast, colon, and prostate cancers. Our lab facilities presently remain operational so that we can continue to process results of our ~~collaboration~~Cologuard, Oncotype DX and COVID-19 tests.

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Take Care of our Customers

Due to social distancing, stay-at-home orders, and other actions taken in response to COVID-19, there has been a significant and widespread decline in standard wellness visits and preventive services. We have taken steps to limit exposure to COVID-19 based on recommendations from government and health agencies, including limiting field-based, face-to-face interactions by our sales force. The sales team that is not engaged in face-to-face interactions will serve healthcare providers via telephone and online technologies until it is safe to return to the field and practices allow representatives back in their offices.

Preserve Financial Strength

In order to minimize the adverse impacts to our business and operations anticipated during 2020 due to the COVID-19 pandemic, beginning in April 2020, we initiated proactive measures to achieve cost savings. Actions we took included a temporary reduction of base pay for our executive officers and other employees, a reduction in the annual retainer payable to our board of directors, and a reduction of quarterly sales commissions. We implemented a workforce reduction, involuntary furloughs, work schedule reductions, as well as a voluntary furlough program. Additionally, we reduced investments in marketing and other promotional activities, paused certain clinical trial activities, reduced travel and professional services, and delayed or terminated certain capital projects. We also saw a reduction in certain volume based cost of goods sold expenses consistent with ~~Mayo Foundation~~the reduction in revenue. These actions have contributed to significant cost savings in 2020 during the nine months ended September 30, 2020.

Recent Events

On October 26, 2020, we entered into a definitive agreement and plan of merger (“Thrive Merger Agreement”) with Thrive, which we currently expect to be completed in the first quarter of 2021. On October 26, 2020, we acquired all of the outstanding stock of Base (“Base Merger Agreement”). Refer to Note 19 in our condensed consolidated financial statements included in this Quarterly Report 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.~~

additional information.

Results of ~~Operations~~

Operations

We have generated significant losses since inception and, as of September 30, ~~2019,~~2020, we had an accumulated deficit of approximately ~~$1.2~~$1.5 billion. We expect to continue to incur losses for the near future, and it is possible we may never achieve profitability.

As mentioned in further detail above, the COVID-19 outbreak has had an adverse impact on our operations beginning in March 2020. While we have seen recovery in our Screening and Precision Oncology businesses, the impact of the pandemic in the fourth quarter of 2020 and after is uncertain and subject to factors beyond our control.

Revenue.Our ~~consolidated~~ revenue is primarily generated by ~~performing screening~~our laboratory testing services, ~~using~~from our Cologuard, ~~test.~~Oncotype DX and COVID-19 tests. For the three months ended September 30, 2020 and 2019, ~~and 2018,~~ we ~~completed approximately 456,000 and 241,000 Cologuard tests, respectively, and~~ generated Screening revenue of ~~$218.8~~$214.6 million and ~~$118.3~~$218.8 million, respectively. For the nine months ended September 30, 2020 and 2019, ~~and 2018,~~ we ~~completed approximately 1.2~~generated Screening revenue of $565.4 million and ~~0.6~~$580.7 million, respectively. Screening includes laboratory service revenue from Cologuard ~~tests, respectively,~~ and revenue from Biomatrica products. For the three months ended September 30, 2020, we generated Precision Oncology revenue of ~~$580.7~~$91.6 million. For the nine months ended September 30, 2020, we generated Precision Oncology revenue of $322.9 million. Precision Oncology includes laboratory service revenue from global Oncotype DX and Paradigm products. For the three and nine months ended September 30, 2020, we also generated $102.2 million and ~~$311.5~~$136.7 million, ~~respectively. The increase~~respectively, in revenue from our COVID-19 testing.

For the three and nine months ended September 30, 2020, our Screening and Precision Oncology testing service revenue was ~~primarily due~~adversely impacted by the effects of the COVID-19 outbreak. In response to ~~an increase in completed Cologuard tests during~~ the ~~current period primarily due to increased selling~~pandemic, we are conducting COVID-19 testing, which has served as additional revenue outside our normal Screening and ~~marketing efforts.~~

Precision Oncology testing services.

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

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Cost of sales includes costs related to inventory production and usage, shipment of ~~test~~ collection kits and tissue samples, royalties and the cost of services to process tests and provide results to physicians. We incur expenses for tests in the period in which the activities occur, therefore, gross margin as a percentage of revenue may vary due to costs being incurred in one period that relate to revenues recognized in a later period.

healthcare providers.

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

Cost of ~~sales.~~ sales (exclusive of amortization of acquired intangible assets).Cost of sales increased to ~~$52.8~~$95.1 million for the three months ended September 30, ~~2019 compared to $30.0~~2020 from $52.3 million for the three months ended September 30, ~~2018.~~2019. Cost of sales increased to ~~$147.6~~$254.6 million for the nine months ended September 30, ~~2019 compared to $79.8~~2020 from $146.3 million for the nine months ended September 30, ~~2018.~~2019. The increase in cost of sales is primarily due to costs incurred on our Precision Oncology tests due to the ~~increase~~completion of the combination with Genomic Health in ~~completed Cologuard tests. The Company completed approximately 456,000 and 241,000 Cologuard tests for the three months ended September 30,~~November 2019 and ~~2018, respectively. The Company completed approximately 1.2 million and 0.6 million Cologuard tests for the nine months ended September 30, 2019 and 2018, respectively.~~

costs incurred from our COVID testing.


	Three Months Ended September 30,
Amounts in millions	2020		2019		Change
Production costs	$	51.4	$	36.5	$	14.9
Personnel expenses	26.8		9.4		17.4
Facility and support services	13.3		4.9		8.4
Stock-based compensation	3.5		1.4		2.1
Other cost of sales expenses	0.1		0.1		—
Total cost of sales expense	$	95.1	$	52.3	$	42.8


	Nine Months Ended September 30,
Amounts in millions	2020		2019		Change
Production costs	$	134.3	$	103.4	$	30.9
Personnel expenses	72.5		25.7		46.8
Facility and support services	38.2		13.2		25.0
Stock-based compensation	9.3		3.9		5.4
Other cost of sales expenses	0.3		0.1		0.2
Total cost of sales expense	$	254.6	$	146.3	$	108.3

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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

Research and development expenses. Research and development expenses ~~increased~~decreased to ~~$34.9~~$31.5 million for the three months ended September 30, ~~2019~~2020 compared to ~~$17.6~~$34.7 million for the three months ended September 30, ~~2018.~~2019. Research and development expenses increased to ~~$97.2~~$107.7 million for the nine months ended September 30, ~~2019~~2020 compared to ~~$47.3~~$96.5 million for the nine months ended September 30, ~~2018.~~2019. The ~~increase in~~decrease during the three months ended September 30, 2020 was primarily due to a reduction of certain direct research and development ~~expenses~~costs due to the cost saving measures and the timing of certain expenditures as a result of the COVID-19 pandemic. The increase during the nine months ended September 30, 2020 was primarily due to an increase in personnel related costs as a result of the combination with Genomic Health in November 2019, which was partially offset by a reduction in of certain direct research and development ~~expenses for our pipeline and improvements to Cologuard~~costs as ~~well as personnel costs due to increased headcount.~~

discussed above.

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,
Amounts in millions	2020		2019		Change
Personnel expenses	$	13.1	$	7.9	$	5.2
Direct research and development	7.3		16.4		(9.1)
Stock-based compensation	5.0		6.9		(1.9)
Facility and support services	5.0		1.2		3.8
Professional fees	0.6		1.8		(1.2)
Other research and development	0.5		0.5		—
Total research and development expenses	$	31.5	$	34.7	$	(3.2)

Nine Months Ended September 30,
(In millions)

2019

2018

Change
Direct research and development expenses

$
50.7

$
19.4

$
31.3
Personnel expenses

22.9

13.7

9.2
Stock-based compensation

12.9

7.9

5.0
Other research and development

6.4

4.0

2.4
Legal and professional fees

4.3

2.3

2.0
Total research and development expenses

$
97.2

$
47.3

$
49.9


	Nine Months Ended September 30,
Amounts in millions	2020		2019		Change
Personnel expenses	$	45.2	$	23.7	$	21.5
Direct research and development	32.4		51.3		(18.9)
Stock-based compensation	14.6		12.9		1.7
Facility and support services	11.1		3.3		7.8
Professional fees	2.3		3.9		(1.6)
Other research and development	2.1		1.4		0.7
Total research and development expenses	$	107.7	$	96.5	$	11.2

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General and administrative expenses. General and administrative expenses increased to ~~$80.6~~$115.6 million for the three months ended September 30, ~~2019~~2020 compared to ~~$46.7~~$80.5 million for the three months ended September 30, ~~2018.~~2019. General and administrative expenses increased to ~~$208.3~~$336.3 million for the nine months ended September 30, ~~2019~~2020 compared to ~~$121.9~~$208.1 million for the nine months ended September 30, ~~2018.~~2019. The increase in general and administrative expenses was primarily related to the operations of Genomic Health being included in our results after the completion of the combination in November 2019, and an overall increase in headcount, information technology and customer care center costs 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,
Amounts in millions	2020		2019		Change
Personnel expenses	$	53.7	$	29.2	$	24.5
Professional and legal fees	15.9		20.1		(4.2)
Stock-based compensation	21.5		11.1		10.4
Facility and support services	13.4		16.1		(2.7)
Other general and administrative	11.1		4.0		7.1
Total general and administrative expenses	$	115.6	$	80.5	$	35.1

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,
Amounts in millions	2020		2019		Change
Personnel expenses	$	159.3	$	85.9	$	73.4
Professional and legal fees	52.9		39.4		13.5
Stock-based compensation	54.8		29.6		25.2
Facility and support services	42.4		42.0		0.4
Other general and administrative	26.9		11.2		15.7
Total general and administrative expenses	$	336.3	$	208.1	$	128.2

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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

Sales and marketing expenses.Sales and marketing expenses increased to $136.5 million for the three months ended September 30, 2020 compared to $86.2 million for the three months ended September 30, ~~2019 compared~~2019. Sales and marketing expenses increased to ~~$64.8~~$423.1 million for the ~~three~~nine months ended September 30, ~~2018. Sales and marketing expenses increased~~2020 compared to $265.3 million for the nine months ended September 30, ~~2019 compared to $172.7 million for the nine months ended September 30, 2018.~~2019. The increase in sales and marketing expenses was a result of ~~hiring~~ additional sales and marketing personnel, ~~increasing our~~including the Precision Oncology team added following the completion of the Genomic Health combination in November 2019, which was partially offset by a reduction in advertising and ~~patient~~ marketing ~~efforts~~spend as a result of the COVID-19 pandemic.


	Three Months Ended September 30,
Amounts in millions	2020		2019		Change
Personnel expenses	$	67.4	$	37.7	$	29.7
Direct marketing costs and professional fees	26.9		23.0		3.9
Professional and legal fees	19.5		19.6		(0.1)
Facility and support services	10.5		0.8		9.7
Stock-based compensation	11.5		4.9		6.6
Other sales and marketing expenses	0.7		0.2		0.5
Total sales and marketing expenses	$	136.5	$	86.2	$	50.3


	Nine Months Ended September 30,
Amounts in millions	2020		2019		Change
Personnel expenses	$	209.0	$	111.0	$	98.0
Direct marketing costs and professional fees	90.0		68.9		21.1
Professional and legal fees	56.9		68.5		(11.6)
Facility and support services	33.4		2.4		31.0
Stock-based compensation	32.4		14.3		18.1
Other sales and marketing expenses	1.4		0.2		1.2
Total sales and marketing expenses	$	423.1	$	265.3	$	157.8

Amortization of acquired intangible assets. Amortization of acquired intangible assets increased to $23.4 million for ~~our Cologuard test,~~the three months ended September 30, 2020 compared to $0.7 million for the three months ended September 30, 2019. Amortization of acquired intangible assets increased to $70.2 million for the nine months ended September 30, 2020 compared to $2.3 million for the nine months ended September 30, 2019. The increase in amortization of acquired intangible assets was primarily due to the Genomic Health combination.

Intangible asset impairment charge. Intangible asset impairment charge was $209.7 million for the three and ~~expenses incurred related~~nine months ended September 30, 2020 compared to ~~our Promotion Agreement~~zero for the three and nine months ended September 30, 2019. The impairment recorded during the nine months ended September 30, 2020 primarily relates to the impairment of the in-process research and development intangible asset acquired as part of the combination with ~~Pfizer as further described~~Genomic Health.

Other operating income. Other operating income increased to $23.7 million for the nine months ended September 30, 2020 compared to zero for the nine months ended September 30, 2019. The income generated during the nine months ended September 30, 2020 represents the funding received under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) Provider Relief Fund, which was accepted from the Department of Health & Human Services in ~~Note 4~~May 2020.

Table of ~~our condensed consolidated financial statements included in this Quarterly Report.~~

Contents

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

Investment income, net. Investment income, ~~increased~~net decreased to $2.5 million for the three months ended September 30, 2020 compared to $9.1 million for the three months ended September 30, ~~2019 compared~~2019. Investment income, net decreased to ~~$6.3~~$5.5 million for the ~~three~~nine months ended September 30, ~~2018. Investment income increased~~2020 compared to $23.4 million for the nine months ended September 30, ~~2019 compared to $14.9 million for the nine months ended September 30, 2018.~~2019. The ~~increase~~decrease in investment income, net was due to a decrease in realized gains generated from the sale of marketable securities and ~~an increase~~a decrease in the average rate of return on investments due to an ~~increase~~decrease in market interest rates and a lower average balance in marketable securities for the ~~three and~~ nine months ended September 30, ~~2019~~2020 when compared to the same period in ~~2018.~~2019.

~~Table of Contents~~

Interest expense.Interest expense increased to $23.6 million for the three months ended September 30, 2020 compared to $13.2 million for the three months ended September 30, ~~2019 compared~~2019. Interest expense increased to ~~$10.7~~$71.6 million for the ~~three~~nine months ended September 30, ~~2018. Interest expense increased~~2020 compared to $47.9 million for the nine months ended September 30, ~~2019 compared~~2019. The increase is primarily due to ~~$25.8 million for~~ the ~~nine months ended September 30, 2018.~~issuance of additional convertible notes in February 2020, which was partially offset by lower interest rates on the convertible notes issued in February 2020. Interest expense recorded from our outstanding convertible notes totaled ~~$12.7~~$23.2 million and ~~$10.7~~$12.7 million during the three months ended September 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~Interest expense from our outstanding convertible notes totaled $36.3 million and $25.7 million during~~Of the ~~nine months ended September 30, 2019 and 2018, respectively. In addition to the $36.3 million in~~ interest expense recorded on outstanding convertible notes ~~an additional $10.6 million was recorded as a result of~~for the ~~settlement of convertible notes, as further described in Note 11 of our condensed consolidated financial statements included in this Quarterly Report. $11.0~~three months ended September 30, 2020 and 2019, $20.6 million and ~~$8.4~~$11.0 million of interest expense relates to amortization of debt discount and debt issuance costs, ~~for~~respectively. Interest expense recorded from our outstanding convertible notes totaled $62.3 million and $36.4 million during the ~~three~~nine months ended September 30, 2020 and 2019, respectively. Of the interest expense recorded on outstanding convertible notes for the nine months ended September 30, 2020 and ~~2018, respectively. $30.8~~2019, $55.2 million and ~~$20.2~~$30.8 million of interest expense relates to amortization of debt discount and debt issuance costs, ~~for~~respectively. The remaining interest expense recorded on outstanding convertible notes relates to the stated interest that is paid out in cash. In addition to the interest expense recorded on outstanding convertible notes, an additional $8.0 million and $10.6 million was recorded during the nine months ended September 30, 2020 and 2019, ~~and 2018, respectively.~~respectively, as a result of the settlement of convertible notes. The convertible notes are further described in Note 15 of our condensed consolidated financial statements included in this Quarterly Report. The remaining ~~$2.2 million and $6.5 million of~~ interest expense for the three and nine months ended September 30, 2020 and 2019, relates to the stated interest ~~that was paid in cash during the year~~ on our ~~outstanding convertible notes~~construction loan.

Income tax benefit (expense). Income tax benefit increased to $4.5 million for the three months ended September 30, 2020 compared to an expense of $0.7 million for the three months ended September 30, 2019. Income tax benefit increased to $7.1 million for the nine months ended September 30, 2020 compared to $0.2 million for the nine months ended September 30, 2019. This increase in income tax benefit is primarily due to future limitations on and ~~construction loan.~~

expiration of certain Federal and State deferred tax assets.

Liquidity and Capital ~~Resources~~

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 the Cologuard, ~~test.~~and since the completion of our Genomic Health combination, of Oncotype DX tests. As of September 30, ~~2019,~~2020, we had approximately ~~$1.0 billion~~$806.7 million in unrestricted cash and cash equivalents and approximately ~~$126.2~~$476.3 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~~

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

Net cash ~~used in~~provided by operating activities was ~~$86.3~~$25.1 million for the nine months ended September 30, ~~2019~~2020 compared to ~~$68.1~~cash use of $86.4 million for the nine months ended September 30, ~~2018.~~2019. The ~~principal use of~~increase in cash inprovided by operating activities for the nine months ended September 30, ~~2019~~2020 was primarily due to the increase in revenue and ~~2018 was~~reduction of discretionary operating expenses due to ~~fund our net loss.~~

cost saving measures as a result of the COVID-19 pandemic.

Net cash ~~provided by~~used in investing activities was $395.4 million for the nine months ended September 30, 2020 compared to cash provided of $713.7 million for the nine months ended September 30, ~~2019 compared to cash use of $772.5 million for the nine months ended September 30, 2018.~~2019. The increase in cash ~~provided by~~used in investing activities for the nine months ended September 30, ~~2019~~2020 compared to the same period in ~~2018~~2019 was primarily the result of the timing of purchases, sales, and maturities of marketable securities. Excluding the impact

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of purchases, sales, and maturities of marketable securities, net cash used in investing activities was $65.3 million for the nine months ended September 30, 2020 compared to $131.5 million for the nine months ended September 30, ~~2019 compared to $98.1 million for the nine months ended September 30, 2018.~~2019. Cash use consisted primarily of purchases of property and equipment of ~~$131.0~~$47.8 million and ~~$98.0~~$131.0 million for the nine months ended September 30, 2020 and 2019, respectively, investments in privately held companies of $10.6 million, and ~~2018, respectively.~~an acquisition of $6.7 million. There were also minimal purchases of intangible assets during the nine months ended September 30, ~~2019~~2020 and ~~2018. The increase in purchases of property and equipment during~~2019.

Net cash provided by financing activities was $999.8 million for the nine months ended September 30, ~~2019 was primarily the result of increased laboratory equipment purchases, computer equipment and computer software purchases, and assets under construction in order~~2020 compared to ~~continue to scale-up our operations for future expected growth of our Cologuard business.~~

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~~Net cash provided by financing activities was~~ $246.6 million for the nine months ended September 30, ~~2019 compared to $924.8 million for the nine months ended September 30, 2018.~~2019. During the nine months ended September 30, ~~2019,~~2020, we received net cash of ~~$729.5~~$1,125.5 million from the issuance of Convertible Notes with a maturity date of March ~~15, 2027~~1, 2028 (the ~~“2027~~“2028 Notes”), and we used ~~$493.4~~$150.1 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 cash provided by financing activities for the nine months ended September 30, ~~2018~~2019 was primarily the result of proceeds of $729.5 million from our issuance of Convertible Notes with a maturity date of March 15, 2027 (the “2027 Notes”, and, collectively with the 2025 Notes ~~in January 2018~~ and ~~June 2018.~~2028 Notes, the “Notes”), and we used $493.4 million of cash to settle a portion of the 2025 Notes. In addition, during the nine months ended September 30, ~~2019~~2020 we received proceeds of ~~$4.1 million from our employee stock purchase plan, $0.3 million from drawing on our construction loan, $6.4~~$15.4 million from the exercise of stock options and ~~made payments of $0.4~~$9.8 million ~~for~~from our employee stock ~~issuance costs.~~

purchase plan.

As described above, on ~~July 28, 2019,~~October 26, 2020, we entered into the Base Merger Agreement, under which we acquired Base in a cash transaction valued at approximately $410.0 million.

As described above, on October 26, 2020, we entered into the Thrive Merger Agreement, under which we agreed to acquire ~~Genomic Health~~Thrive in a cash and stock transaction valued at approximately ~~$2.8 billion.~~$2.2 billion, of which $1.7 billion would be payable at closing. We currently expect the merger will be completed in ~~November 2019,~~the first quarter of 2021, subject to ~~the approval of Genomic Health’s stockholders and other~~ customary closing ~~conditions.~~conditions and regulatory approvals. We anticipate that cash of approximately ~~$1.1~~$0.6 billion will be required to pay the aggregate cash portion of the merger consideration.

We expect that cash and cash equivalents and marketable securities on hand at September 30, ~~2019, combined with cash, cash equivalents, and marketable securities received as part of the Genomic Health acquisition,~~2020 will be sufficient to fund the cash portion of the purchase price to be paid in connection with the ~~Genomic Health acquisition~~Thrive and Base acquisitions as well as our current operations for at least the next twelve months, based on current operating plans. However, we may need to raise additional capital to fully fund our current strategic plan, which includes successfully commercializing Cologuard and Oncotype DX and developing a pipeline of future products. Additionally, we may enter into transactions to acquire other businesses, products, services, or technologies as part of our strategic plan. If we are unable to obtain sufficient additional funds to enable us to fund our operations through the completion of such plan, our results of operations and financial condition would be materially adversely affected, and we may be required to delay the implementation of our plan and otherwise scale back our operations. Even if we successfully raise ~~additional~~sufficient funds to complete our plan, we cannot assure that our business will ever generate sufficient cash flow from operations to become profitable.

The spread of COVID-19 and measures to prevent further spread, have significantly disrupted our business, and may continue to disrupt our business for an unknown period of time. The full impact of the outbreak is uncertain at this time and continues to evolve globally. We do not yet know the extent to which COVID-19 will negatively impact our financial results or liquidity. The outbreak has disrupted our operations, as well as the operations and behaviors of healthcare providers, patients and suppliers. Depending on how healthcare providers, patients and suppliers are adversely impacted by the pandemic, as well as the overall duration and severity of the pandemic and changes in behavior that continue even after the pandemic, our liquidity could be materially and adversely affected. Management continues to monitor and assess the evolving developments with respect to COVID-19.

A table reflecting certain of our specified contractual obligations as of December 31, ~~2018~~2019 was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operation of our ~~2018~~2019 Form ~~10-K and updated information concerning our contractual obligations under~~10-K. During the nine months ended September 30, 2020, we issued $1,150.0 million in aggregate principal amount of 0.375% Convertible Notes that will mature on March 1, 2028. The holders of the Notes ~~was included~~may convert prior to September 1, 2027 only under certain circumstances and may convert at any time after September 1, 2027. The Notes accrue interest at a fixed rate of 0.375% per year, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2020. Of 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 pricecash received upon issuance 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~~2028 Notes, approximately $150.1 million was used to repay a portion of the ~~30 consecutive trading days ending on September 30, 2019, the holders~~outstanding principal balance and accrued interest of the 2025 Notes ~~have~~held by certain Noteholders. Upon repayment of such portion of the ~~right to convert their Notes between October 1, 2019 and December 31, 2019. The~~outstanding principal balance

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of the 2025 Notes, ~~were previously classified as long-term convertible notes, net on~~there was $315.0 million in aggregate principal balance remaining under the ~~condensed consolidated balance sheet before being reclassified to convertible notes, net, current portion on the condensed consolidated balance sheet.~~2025 Notes. See Note 1115 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~~our specified contractual obligations during the nine months ended September 30, ~~2019.~~

2020.

Critical Accounting Policies and ~~Estimates~~

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.

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~~While our~~Our significant accounting policies are more fully described in Note 21 of our financial statements included in our ~~2018~~2019 Form 10-K, ~~we believe that the following~~as well as our Management’s Discussion and Analysis of Financial Condition and Results of Operations on our 2019 Form 10-K. There have not been any significant changes to our critical accounting policies and ~~judgments~~estimates during the nine months ended September 30, 2020.

Revenue Recognition. Revenues are ~~most critical to aid in fully understanding and evaluating our reported financial results.~~

~~Revenue Recognition~~

~~Revenue.~~ ~~Our revenue is primarily generated by performing screening~~recognized when control of the promised services ~~using our Cologuard test, and the service is completed upon delivery of a patient’s test result~~are transferred to the ~~ordering physician. We 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 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 606 is that we recognize revenue to depict the transfer of promised goods or services to customers~~patient’s healthcare provider, 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.

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~~Transaction price~~

~~The transaction price is the amount of consideration that~~ we expect to collect in exchange for ~~transferring promised goods~~those services. The amount of revenue we recognize 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 ~~services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes).~~per-agreement basis, using historical collections, established reimbursement rates and other adjustments. The ~~consideration~~ expected ~~from a contract with a customer may include fixed amounts, variable amounts, or both.~~

~~The consideration derived from our contracts~~amount is ~~deemed to be variable, though~~typically lower than, if applicable, the ~~variability is not explicitly stated in any contract. Rather, the implied variability is~~agreed-upon reimbursement amount due to several factors, such as the amount of ~~contractual adjustments,~~ any patient co-payments, ~~deductibles or adherence incentives,~~out-of-network payers, the existence of secondary payers and claim denials.

~~We estimate the amount of variable~~ The 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,~~derived from our contracts is fixed when 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 collect more consideration than we originally estimated for a contract with a direct bill payer who assumes the downstream patient we 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 we subsequently determine that the amount we expectbilling. Our ability to collect ~~from a patient~~ is ~~less than we originally estimated, we will generally account for~~not contingent on the ~~change as a decrease in~~customer’s ability to collect through their downstream billing efforts.

In the ~~estimate~~case of some of our laboratory service agreements (“LSAs”) with various organizations, 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,~~right to bill and collect exists prior to the ~~constraint over estimates of variable consideration may result in no revenue being recognized upon delivery~~receipt of a ~~patient’s Cologuard~~specimen and release of a test result to the ordering ~~physician, with recognition generally occurring at the date of cash receipt.~~

~~Allocate transaction price~~

~~The transaction price is allocated to the 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 athealthcare provider, which ~~the patient obtains control of the promised Cologuard test service.~~

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~~Disaggregation of Revenue~~

~~The following table presents our revenues disaggregated by revenue source for the 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 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, 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~~the release 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~~healthcare provider, the date a non-conforming specimen is received, or as of ~~September 30, 2019~~the date the customer has surpassed the window of time in which they are able to exercise their rights for testing services. We believe these points in time represent our fulfillment of our obligations to the customer.

The quality of our billing operations, most notably those activities that relate to obtaining the correct information in order to bill effectively for services provided, directly impacts the collectability of our receivables and ~~December 31, 2018, respectively.~~

~~Revenue recognized~~revenue estimates. As such, we continually assess the state of our order to cash cycle for areas of opportunity as we believe adequate operations support our ability to appropriately estimate receivables and revenue. Upon ultimate collection, the ~~three months ended September 30, 2019~~aggregate amount received from payers and ~~2018, which~~patients where reimbursement was ~~included~~estimated is compared to previous collection estimates and, if necessary, the contractual allowance is adjusted. Finally, should we later determine the judgments underlying estimated collections change, our financial results could be negatively impacted 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.

future quarters.

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

Direct and indirect manufacturing costs incurred during process validation and for other research and development activities, which are not permitted to be sold, have been expensed to research and development on our condensed consolidated statements of operations.

~~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~~ ~~- We record the effects of actual forfeitures at the time they occur.~~

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 5 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 nonconvertible debt borrowing rate. In ~~January 2018 and June 2018,~~February 2020 we issued the ~~2025~~2028 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~~$1,150.0 million in aggregate principal amount of 0.375% Convertible Notes with a maturity date of March ~~15, 2027. In March 2019,~~1, 2028. As part of that issuance, we settled approximately ~~$493.4~~$100.0 million in outstanding 2025

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Notes. We determined the carrying amount of the liability component of the 2028 Notes by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities. Determining the fair value of the debt component requires the use of accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the debt component, and the associated non-cash interest expense.

For the ~~January 2018~~February 2020 offering, we allocated ~~$194.9~~$346.6 million, ~~to the equity component~~net 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 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 milliontax, 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~~2028 Notes using the effective interest rate method. In addition, debt issuance costs related to the 2028 Notes ~~were $18.8 million, $7.4 million, and $18.0 million for the January 2018, June 2018, and March 2019 offerings, respectively.~~was $24.4 million. We allocated the costs to the liability and equity components of the 2028 Notes based on their relative values. The debt issuance costs allocated to the liability component are being amortized over the life of the 2028 Notes as additional non-cash interest expense. The transaction costs allocated to the equity component are netted with the equity component of the convertible debt instrument in stockholders’ equity.

Business Combinations.

~~Goodwill.~~ Business Combinations are accounted for under the acquisition method in accordance with ASC 805, Business Combinations. The acquisition method requires identifiable assets acquired and liabilities assumed and any non-controlling interest in the business acquired be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill. Acquisitions that do not meet the definition of a business combination under the ASC are accounted for as asset acquisitions. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets acquired and liabilities assumed on a relative fair value basis. Goodwill is not recognized in an asset acquisition with any consideration in excess of net assets acquired allocated to acquired assets on a relative fair value basis. Transaction costs are expensed in a business combination and are considered a component of the cost of the acquisition in an asset acquisition.

In ~~2018,~~March 2020, we recognized goodwill of ~~$15.3~~$30.4 million from the ~~acquisition~~acquisitions of ~~Biomatrica.~~Paradigm and Viomics. 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 25 and Note 16 of the condensed consolidated financial statements included in this Quarterly Report for further discussion of the goodwill recorded.

Impairment of Long-Lived Assets.

~~Recent Accounting Pronouncements~~

~~Recently Adopted Accounting Pronouncements~~

~~In February 2016,~~ We evaluate the ~~Financial Accounting Standards Board issued ASU No. 2016-02,~~ ~~Leases (Topic 842)~~ fair value of long-lived assets, which include property, plant 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 requires recognition of right-of-use~~equipment, intangible assets, and ~~lease liabilities on~~investments in privately held companies, for impairment whenever events or changes in circumstances indicate that 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. We adopted Update 2016-02 on January 1, 2019 using the modified retrospective method of adoption. As a resultcarrying amounts of the ~~adoption,~~assets may not be fully recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

During the third quarter, we recorded an ~~opening right-of-use~~impairment loss of $200.0 million related to the in-process research and development intangible asset ~~balance~~acquired as part of ~~$20.6~~the business combination with Genomic Health and an impairment loss of $9.7 million ~~which is included~~relating to the abandonment of certain research and development efforts using intangible assets acquired as part of an asset purchase agreement with Armune Biosciences, Inc. The determination to record these impairment charges was made in ~~other long-term assets in our~~connection with the preparation of the financial statements as of September 30, 2020. Refer to Note 5 of the condensed consolidated financial ~~statements. We also recorded an opening lease liability of $20.1 million, of which $3.0 million was classified~~statements included in ~~other short-term liabilities and $17.1 million was classified in long-term obligations in our condensed consolidated financial statements. See Note 9~~this Quarterly Report for ~~more detail.~~

~~In June 2018,~~further discussion on the ~~Financial Accounting Standards Board issued ASU No. 2018-07 (Topic 718),~~ ~~Improvements to Nonemployee Share-Based Payment Accounting,~~ (“Update 2018-07”). Update 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements to Topic 718 to nonemployee awards except for certain exemptions specified in the amendment. We adopted this guidance on January 1, 2019, and it did not have an impact on our condensed consolidated financial statements.

impairment charges recorded.

~~In 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. We adopted this guidance on January 1, 2019, and it did not have an impact on our condensed consolidated financial statements.

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~~In July 2019,~~Recent Accounting Pronouncements

See Note 1 in the Notes to Condensed Consolidated Financial Statements for the discussion of Recent 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 certain areas to 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 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, 2019. We are currently evaluating the impact of the guidance on our 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. We are currently evaluating the impact of the guidance on our condensed consolidated financial statements.

~~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. We are currently evaluating the impact of the guidance on our 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. We are currently evaluating the impact of the guidance on our condensed consolidated financial statements.

Pronouncements.

Off-Balance Sheet ~~Arrangements~~

Arrangements

As of September 30, ~~2019,~~2020, we had no off-balance sheet arrangements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate 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~~governments 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, 2020 and December 31, 2019 were classified as available-for-sale. We place our cash, cash equivalents, restricted cash, and marketable securities with high-quality financial institutions, limit the amount of credit exposure to any one institution, and have established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity.

~~The primary quantifiable market risk associated with our~~

Based on a hypothetical ten percent adverse movement in interest rates, the potential losses in future earnings, fair value of risk-sensitive financial instruments, ~~is sensitivity~~and cash flows are immaterial, although the actual effects may differ materially from the hypothetical analysis. While we believe our cash, cash equivalents, restricted cash, and marketable securities do not contain excessive risk, we cannot provide absolute assurance that, in the future, our investments will not be subject to ~~changes in interest rates. Interest rate risk represents the potential loss from~~ adverse changes in market value. In addition, we maintain significant amounts of cash, cash equivalents, restricted cash, and marketable securities at one or more financial institutions that are in excess of federally insured limits. Given the potential instability of financial institutions, we cannot provide assurance that we will not experience losses on these deposits. We do not utilize interest ~~rates. Due~~rate hedging agreements or other interest rate derivative instruments.

A hypothetical ten percent change in interest rates would not have a material adverse impact on our future operating results or cash flows. All of our significant interest-bearing liabilities bear interest at fixed rates and therefore are not subject to fluctuations in market interest rates; however, because these interest rates are fixed, we may be paying a higher interest rate, relative to market, in the future if circumstances change.

Foreign Currency Risk

Substantially all of our revenues are recognized in U.S. dollars, although a growing percentage is denominated in foreign currency as we continue to expand into markets outside of the U.S. Certain expenses related to our international activities are payable in foreign currencies. As a result, factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets will affect our financial results.

Prior to 2019, the functional currency for each of our international subsidiaries was its local currency. For 2019 our international subsidiaries use the U.S. dollar as the functional currency, resulting in us not being subject to gains and losses from foreign currency translation of the subsidiary financial statements. In September 2017, Genomic Health (now a wholly owned subsidiary) started entering into forward contracts to mitigate the impact of adverse movements in foreign exchange rates related to the ~~nature~~re-measurement of ~~the financial instruments we hold, we believe there is no material exposure to interest rate risk arising from our portfolio of financial instruments.~~

~~Our~~monetary assets and liabilities ~~are denominated in U.S. dollars. Consequently, we have not considered it necessary to use~~and hedge our foreign currency exchange rate exposure. As of September 30, 2020, we had open foreign currency forward contracts ~~or other derivative instruments~~with notional amounts of $18.2 million. Although the impact of currency fluctuations on our financial results has been immaterial in the past, there can be no guarantee that the impact of currency fluctuations related to ~~manage changes~~our international activities will not be material 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.~~

the future.

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Item 4. Controls and ~~Procedures~~

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, ~~2019,~~2020, our disclosure controls and procedures were effective. Disclosure controls and procedures enable us to record, process, summarize and report information required to be included in our Exchange Act filings within the required time period. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the periodic reports filed with the SEC is accumulated and communicated to our management, including our principal executive, financial and accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In November 2019, the ~~quarter ended~~Company acquired all of the outstanding capital stock of Genomic Health (see Note 16 to the accompanying consolidated financial statements for additional information). As of September 30, ~~2019, we completed~~2020, management is in the ~~implementation~~process of ~~an upgrade to SAP’s HANA enterprise resource planning software,~~evaluating and ~~Epic Systems’ electronic medical records software. Epic Systems’ software has been deployed in our clinical laboratory systems, including~~integrating the ~~order entry to cash application process. We have updated our~~ internal controls ~~as applicable,~~of Genomic Health into the Company’s existing operations. Other than the controls enhanced or implemented to ~~facilitate modifications to our~~integrate the Genomic Health 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 implementationsthere have ~~had an adverse effect on our internal control over financial reporting.~~

~~There were~~been no ~~other~~ changes in ~~our~~the Company’s internal controls over financial reporting during the quarter ended September 30, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, ~~our~~the Company’s internal ~~control~~controls over financial reporting.

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Part II - Other ~~Informatio~~n

Information

Item 1. Legal ~~Proceedings~~

~~Litigation Related~~Proceedings

From time to time we are a party to various legal proceedings arising in the ordinary course of our business. Legal proceedings, including litigation, government investigations and enforcement actions could result in material costs, occupy significant management resources and entail civil and criminal penalties.

We are currently responding to civil investigative demands initiated by the United States Department of Justice (“DOJ”) concerning (1) Genomic Health’s compliance with the Medicare Date of Service billing regulations and (2) allegations that we offered or gave gift cards to patients in exchange for returning the Cologuard screening test, in violation of the Federal Anti-Kickback Statute and False Claims Act. We have been cooperating with these inquires and have produced documents in response thereto. Adverse outcomes from these investigations could include our being required to pay treble damages, incur civil and criminal penalties, paying attorney’s fees, entering into a corporate integrity agreement, being excluded from participation in government healthcare programs, including Medicare and Medicaid, and other adverse actions that could materially and adversely affect our business, financial condition and results of operations.

In connection with our combination with Genomic Health, ~~Merger~~

~~As described above,~~ on ~~July 28, 2019, we entered into~~June 22, 2020, Suzanne Flannery, 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~~former stockholder of Genomic Health, filed a Verified Individual and Class Action Complaint in ~~federal courts in California and~~the Delaware ~~alleging claims relating to the merger. All~~Court of ~~these complaints name as defendants Genomic Health and the members of the Genomic Health Board of Directors and two of them, Seligman~~Chancery, captioned Flannery v. Genomic Health, Inc., et al., ~~Case~~C.A. No. ~~3:19-cv-05710 (N.D. Cal),~~2020-0492. The complaint asserts individual and ~~Rice v.~~class action claims, including: (i) a violation of 8 Del. C. § 203 by Genomic Health's former directors; (ii) conversion by Genomic Health, ~~Inc. et al., Case No. 3:19-cv-05929, Plumley v.~~Exact and Spring Acquisition Corp.; (iii) breach of fiduciary duty by Genomic Health's former directors; (iv) breach of fiduciary duty by a purported controlling group of former Genomic Health ~~Inc., et al., Case No. 1:19-cv-01719 (D. Del.) name as a defendant~~stockholders comprised of funds managed by former Genomic Health directors, Julian Baker and Felix Baker; and (v) aiding and abetting breach of fiduciary duty against Exact, ~~Sciences Corporation.~~Spring Acquisition and Goldman Sachs & Co. LLC, Genomic Health's financial advisor in the combination. The ~~complaints allege,~~complaint seeks, among other things, ~~claims under Section 14(a)~~declaratory relief, unspecified monetary damages and ~~20(a) of~~attorneys' fees and costs. All defendants intend to move to dismiss 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.

complaint.

~~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.

Item 1A. Risk ~~Factors~~

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~~2019 Form 10-K and in Part II, “Item 1A. Risk Factors” in our subsequently filed Quarterly Reports on Form 10-Q. ~~There~~Other than the factors set forth below, there have been no material changes to the risk factors described in the ~~2018~~2019 Form 10-K and in subsequently filed Quarterly Reports on Form 10-Q.

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The COVID-19 outbreak has and may further materially and adversely affect our business and financial results.

The COVID-19 outbreak, which the World Health Organization has classified as a pandemic, together with related precautionary measures, began to materially disrupt our business in March 2020 and may continue to disrupt our business for an unknown period of time. The territories in which we market, sell, distribute and perform our tests are attempting to address the COVID-19 pandemic in varying ways, including stay-at-home orders, temporarily closing businesses, restricting gatherings, restricting travel, and mandating social distancing and face coverings. Certain jurisdictions have begun re-opening only to return to restrictions due to increases in new COVID-19 cases. Even in areas where “stay-at-home” restrictions have been lifted and the number of cases of COVID-19 has declined, many individuals remain cautious about resuming activities such as preventive-care medical visits. Medical practices continue to be cautious about allowing individuals, such as sales representatives, into their offices. Many individuals continue to work from home rather from an office setting. The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical and long-lasting and may vary from location to location. As a result, we anticipate significant impact to at least our 2020 operating results, including our revenues, margins, and cash utilization, among other measures.

Beginning in March 2020, we undertook temporary precautionary measures intended to help minimize the risk of the virus to our employees, including requiring most employees to work remotely; suspending field-based, face-to-face interactions by our sales force; requiring on-site employees to undergo COVID-19 testing, wear personal protective equipment (including face masks or shields) and maintain social distancing; pausing all non-essential travel worldwide for our employees; and limiting employee attendance at industry events and in-person work-related meetings, to the extent those events and meetings are continuing. Our commercial partner for Cologuard, Pfizer, Inc. (“Pfizer”), took similar precautions, including suspending face-to-face interactions between sales representatives and healthcare providers.

The COVID-19 pandemic has materially impacted our business, and may continue to impact our business for an unknown period of time. Such impacts may include the following:

•Both our and Pfizer’s sales teams have been, and for an extended period of time may continue to be, limited in their interactions with healthcare providers, and therefore, also limited in their ability to engage in various types of healthcare provider education activities as contemplated by our and Pfizer’s Cologuard promotion agreement; while we amended and restated our promotion agreement with Pfizer to, among other things, address changes to the operational landscape resulting from the COVID-19 pandemic, our expectations regarding the duration, severity and effects of the pandemic may prove inaccurate, and we may not realize the expected benefits from this agreement;

•Healthcare providers or patients have canceled or delayed scheduling, and for an extended period of time may continue to cancel or delay scheduling, standard wellness visits and other non-emergency appointments and procedures (including mammograms and prostate cancer screenings), contributing to a decline in orders for our products or services;

•Restrictions on travel, commerce and shipping may prevent patients and pathologists from shipping samples to our clinical laboratories;

•Illnesses, quarantines, financial hardships, restrictions on travel, commerce and shipping, or other consequences of the pandemic, may disrupt our supply chain or other business relationships, and we or other parties may assert rights under force majeure clauses to excuse performance;

•We have experienced, and for an extended period of time may continue to experience, reduced volumes at our clinical laboratories and we may need to suspend operations at some or all of our clinical laboratories;

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•We have taken, and may take additional, cost cutting measures, which may hinder our efforts to commercialize our products or delay the development of future products and services. We might not realize all of the cost savings we expect to achieve as a result of those efforts;

•We and our partners have postponed or cancelled clinical studies, which may delay or prevent our launch of future products and services;

•Our workforce, much of which has been asked to work remotely in an effort to reduce the spread of COVID-19, may be infected by the virus or otherwise distracted;

•A combination of factors, including infection from the virus, supply shortfalls, and inability to obtain or maintain equipment, could adversely affect our lab capacity and our ability to meet the demand for our testing services. In March of 2020 we began offering a COVID-19 test and by devoting lab capacity and supplies to that test, we may experience capacity limitations and supply shortfalls that adversely affect our ability to provide Cologuard and other tests that may generate more revenue and higher profits; and

•We may inaccurately estimate the duration or severity of the COVID-19 pandemic, which could cause us to misalign our staffing, spending, activities and precautionary measures with market current or future market conditions.

Despite our efforts, the ultimate impact of COVID-19 depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, third-party actions taken to contain its spread and mitigate its public health effects and short- and long-term changes in the behaviors of medical professionals and patients resulting from the pandemic.

Additionally, the anticipated economic consequences of the COVID-19 pandemic have adversely impacted financial markets, resulting in high share price volatility, reduced market liquidity, and substantial declines in the market prices of the securities of many publicly traded companies. Volatile or declining markets for equities could adversely affect our ability to raise capital when needed through the sale of shares of common stock or other equity or equity-linked securities. If these market conditions persist when and if we need to raise capital, and if we are able to sell shares of our common stock under then prevailing market conditions, we might have to accept lower prices for our shares and issue a larger number of shares than might have been the case under better market conditions, resulting in significant dilution of the interests of our stockholders.

We currently offer COVID-19 testing, but there can be no assurance that we will continue to be able to successfully offer, perform or generate revenues from the test.

In late March 2020, we began providing COIVD-19 testing. The U.S. Food and Drug Administration (FDA) has granted us Emergency Use Authorization to test for SARS-CoV-2, the virus that causes COVID-19, in upper respiratory samples.

While we have entered into a limited number of contracts to provide COVID-19 testing and expect to pursue additional contracts, there can be no assurance that our efforts to offer and perform COVID-19 testing will be successful. The success of our test, our ability to continue to generate revenues from COVID-19 testing, and our ability to generate profits from COVID-19 testing will depend on a variety of factors, including:

•the level of demand for COVID-19 testing, the price we are able to charge for performing the test, and the length of time for which that demand persists;

•the availability of COVID-19 testing, from other laboratories;

•acceptance of our COVID-19 testing in the medical community;

•the emergence of other forms of COVID-19 testing (including antigen and antibody screening tests) and other sample collection methods, which healthcare providers and patients may prefer to our test;

•the period of time for which the FDA will permit us to offer COVID-19 testing under an Emergency Use Authorization;

•our ability to maintain regulatory approvals to perform and market COVID-19 testing and to respond to any changes in regulatory requirements;

•the potential for supply disruptions and our reliance on certain single-source suppliers;

•the potential for disruption in the delivery of patient samples to our laboratories;

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•the capacity of our laboratories to satisfy both COVID-19 testing and other testing demands;

•the extent to which we choose to allocate limited laboratory capacity, supplies and other resources to areas of our business other than COVID-19 testing;

•the complexity of billing for, and collecting revenue for, our test;

•healthcare provider and patient compliance with instructions for performing the nasal swab and providing samples to our laboratories;

•our ability to maintain laboratory operations during the COVID-19 pandemic and to perform the test accurately and punctually; and

•the ease of use of our ordering and reporting process.

Additionally, we have previously only offered cancer screening and diagnostic tests. The addition of COVID-19 testing may divert resources and distract management’s attention from other projects that may be more profitable or strategic. If we are unable to successfully provide COVID-19 testing while continuing to operate our existing Screening and Precision Oncology business, our results of operations, financial position and reputation may suffer.

Our business is subject to complex and evolving laws, as well as customer and patient expectations, regarding data privacy, protection and security.

The interpretation and application of consumer, health related and data protection laws in the U.S., Europe and elsewhere are often uncertain, contradictory and in flux. In order to mitigate concerns about overseas data transfers and to comply with provisions of the GDPR and its predecessor regulations, we self-certified with the Department of Commerce for compliance with the U.S.-E.U. Privacy Shield. However, on July 16, 2020, the Court of Justice of the European Union rendered its judgment in Data Protection Commissioner v. Facebook Ireland, invalidating the U.S.-E.U. Privacy Shield program. Although we expect to implement other measures to ensure compliance with the GDPR, the changing legal landscape could cause us to incur substantial costs or change our operations and compliance procedures, all of which may adversely affect our business.

If we fail to comply with the GDPR and other applicable data privacy, protection and security laws, or if we fail to satisfy customer or patient concerns regarding data handling, we could be subject to government enforcement actions, private litigation, civil or criminal penalties, reduced orders and adverse publicity.

Our failure to successfully complete or integrate acquisitions, including our recently announced acquisition of Thrive, in the expected timeframes, or to realize all or any part of the anticipated benefits of such acquisitions, may adversely affect our results of operations..

We undertake acquisition activities from time to time. In November 2019, we completed the acquisition of Genomic Health, Inc., and in March 2020, we completed the acquisitions of Paradigm Diagnostics, Inc. and Viomics, Inc. On October 27, 2020, we announced our entry into the Thrive Merger Agreement and our acquisition of Base. Certain risks may exist as a result of these and other acquisition activities, including, among others, that:

•a failure to complete the merger with Thrive, including due to the inability to receive the required regulatory approvals, the occurrence of events that may give rise to the right of one or both of us and Thrive to terminate the Thrive Merger Agreement, a ruling or judgment by a government authority enjoining or prohibiting the Thrive merger, or the failure of us or Thrive to satisfy another closing condition outside of our control, could negatively impact our stock price and our future business and financial results;

•we will incur substantial expenses, and may encounter potential unknown liabilities and unforeseen increased expenses, delays or unfavorable conditions, in connection with the closing of the Thrive merger and other business acquisitions, including our acquisition of Base, whether or not such acquisitions are completed, and the subsequent integration, reducing our cash available for operations and other uses;

•the pendency of the Thrive merger or other acquisitions could adversely affect our business and operations, including by diverting significant focus of management and other resources and limiting our ability to execute certain business strategies;

•we may be unable to successfully integrate the acquired businesses into our business;

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•we may lose key employees;
•we may encounter potential unknown liabilities and unforeseen risks associated with contracts containing consent and/or other provisions that may be triggered by the acquisitions;
•we may be unable to realize the anticipated benefits of the acquisitions or do so within the anticipated timeframe;
•our future results will suffer if we do not effectively manage our expanded operations; and
•the market price of our common stock may decline as a result of the acquisitions.
In the future, we may enter into transactions to acquire other businesses, products, services or technologies. Because we have only made a limited number of acquisitions to date, our ability to do so successfully is unproven. If we do identify suitable candidates, we may not be able to make such acquisitions on favorable terms or at all. Any acquisitions we make may not strengthen our competitive position, and these transactions may be viewed negatively by investors, healthcare providers, patients and others. In addition to the risks outlined above, we may decide to incur debt in connection with an acquisition or issue our common stock or other securities to the stockholders of the acquired company, which would reduce the percentage ownership of our existing stockholders. We cannot predict the number, timing or size of future acquisitions or the effect that any such transactions might have on our operating results.

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

In January 2020, we entered into an amendment to a services and license agreement with Mayo Foundation for Medical Education and Research (“Mayo”) relating to medical officer services provided by certain Mayo employees. As part of the agreement, in July 2020 we issued Mayo 4,984 shares of restricted stock.

We believe that the offer and sale of the securities referenced were exempt from registration under the Securities Act of 1933 (the “Securities Act”) by virtue of Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder as transactions not involving any public offering. Use of this exemption is based on the following facts:

•

~~Not applicable.~~

Neither we nor any person acting on our behalf solicited any offer to buy or sell securities by any form of general solicitation or advertising.

•At the time of the purchase, Mayo was an accredited investor, as defined in Rule 501(a) of the Securities Act.

•Mayo has had access to information regarding Exact and is knowledgeable about us and our business affairs.

Item 3. Defaults Upon Senior ~~Securities~~

Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other ~~Information~~

~~Not applicable.~~

Information

On October 23, 2020, we notified The Nasdaq Stock Market (“Nasdaq”) of an inadvertent noncompliance with Nasdaq Listing Rule 5605(c) (“Rule 5605(c)”), which prohibits members of a listed company’s audit committee from receiving, directly or indirectly, consulting fees of any amount. During the time period from July 25, 2019, to October 22, 2020, Pierre Jacquet, a member of our board of directors, served as a member of our Audit and Finance Committee. Mr. Jacquet is Vice Chairman, Global Healthcare Managing Director at L.E.K. Consulting, a global management consulting firm that we have engaged from time to time to perform strategic consulting services for the

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Company. We made payments to L.E.K. Consulting of $359,231 during the period in which Mr. Jacquet served on our Audit and Finance Committee in 2019 and $506,234 during the period in which Mr. Jacquet served on our Audit and Finance Committee in 2020. Mr. Jacquet did not provide the consulting services to the Company and did not receive any direct compensation related thereto. Once it was determined that the payments to L.E.K. Consulting were deemed indirect consulting fees to Mr. Jacquet under Rule 5605(c) by virtue of its requirement that members of a listed company’s audit committee meet the criteria for independence set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934 (the “Exchange Act”), we promptly corrected the non-compliance. Daniel Levangie, who our board of directors has determined meets the criteria for independence required by Rule 5605(c), succeeded Mr. Jacquet as a member of the Audit and Finance Committee on October 22, 2020.

The notification to Nasdaq was made in accordance with Nasdaq Rule 5625, which requires a company with common securities listed on Nasdaq to report any noncompliance of Nasdaq’s Rule 5600 Series. This report shall not constitute an admission that the inadvertent noncompliance reported herein is material.

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Item 6. ~~Exhibits~~

Exhibits

The following documents are filed as part of this Form 10-Q.

Exhibit
Number

Exhibit Description

Filed
with
This
Report

Incorporated
by Reference
herein from
Form or
Schedule

Filing
Date

SEC File /
Registration
Number

~~2.1~~

3.1

~~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

S-1 (Exhibit 3.3)

12/4/00

2000

333-48812

3.2

~~First~~ Amendment to Sixth Amended and Restated Certificate of Incorporation of the Registrant

8-K (Exhibit 3.1)

~~DEF 14A (Appendix B)~~

7/24/2020

~~6/20/14~~

001-35092

~~001-35092~~

3.3

~~Third~~Fourth Amended and Restated By-Laws of the Registrant

8-K (Exhibit 3.1)

~~10-Q (Exhibit 3.3)~~

1/31/2020

~~10/30/17~~

001-35092

~~001-35092~~

10.1*

10.1

~~Exact Sciences Corporation 2019 Omnibus Long-Term Incentive Plan~~Second Amended and Restated License Agreement, effective January 31, 2020, by and between Mayo Foundation for Medical Education and Research and the Registrant *

~~DEF 14A~~

~~(Annex A)~~

~~4/30/19~~

~~001-35092~~

~~31.1~~

10.2

Amended and Restated Cologuard Promotion Agreement by and between the Registrant and Pfizer, Inc.

8-K
(Exhibit 10.1)

10/7/2020

001-35092

31.1

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

31.2

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

32.1

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

101

The following materials from the Quarterly Report on Form 10-Q of Exact Sciences Corporation for the quarter ended September 30, ~~2019~~2020 filed on October ~~29, 2019,~~27, 2020, 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

104

The cover page from our Quarterly Report for the period ended September 30, ~~2019,~~2020, filed with the Securities and Exchange Commission on October ~~29, 2019,~~27, 2020, is formatted in Inline Extensible Business Reporting Language (“iXBRL”)

______________

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

Confidential portions of this exhibit, indicated by asterisks, have been omitted.

~~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 ~~29, 2019~~ 27, 2020			By:		/s/ Kevin T. Conroy
					Kevin T. Conroy
					President and Chief Executive Officer
(		(Principal Executive Officer)


Date: October ~~29, 2019~~ 27, 2020	By:			/s/ Jeffrey T. Elliott
					Jeffrey T. Elliott
					Chief Financial Officer
(		(Principal Financial and Accounting Officer)

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


			Page Number
			~~Number~~

	Part I - Financial Information

Item 1.		Financial Statements

		Condensed Consolidated Balance Sheets (unaudited) as of September 30, ~~2019~~2020 and December 31, ~~2018~~20 19	3

		Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019	4

		Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~20 19	5

		Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~201 9	6

		Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~201 9	8

		Notes to Condensed Consolidated Financial Statements (unaudited)	9 10

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	38 48

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	53 63

Item 4.		Controls and Procedures	53 64

		Part II - Other Information

Item 1.		Legal Proceedings	54 65

Item 1A.		Risk Factors	54 65

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	54 69

Item 3.		Defaults Upon Senior Securities	54 69

Item 4.		Mine Safety Disclosures	54 69

Item 5		Other Information	54 69

Item 6.		Exhibits	55 71

		Signatures	56 72


	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


	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


	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


	Common Stock					Additional Paid-In Capital		Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Number of Shares	$0.01 Par Value
Balance, January 1, 2020	147,625,696	$	1,477	$	3,406,440	$	(100)	$	(1,119,756)	$	2,288,061
Equity component of convertible notes, net of tax and issuance costs	—	—		346,641		—		—		346,641
Settlement of convertible notes, net of tax	—	—		(64,199)		—		—		(64,199)
Exercise of common stock options	160,286	2		4,298		—		—		4,300
Issuance of common stock to fund the Company’s 2019 401(k) match	136,559	1		12,006		—		—		12,007
Compensation expense related to issuance of stock options and restricted stock awards	1,141,376	11		29,549		—		—		29,560
Issuance of common stock for business combinations	382,947	4		28,593		—		—		28,597
Net loss	—	—		—		—		(105,697)		(105,697)
Accumulated other comprehensive loss	—	—		—		(1,617)		—		(1,617)
Balance, March 31, 2020	149,446,864	$	1,495	$	3,763,328	$	(1,717)	$	(1,225,453)	$	2,537,653
Exercise of common stock options	208,434	2		6,636		—		—		6,638
Compensation expense related to issuance of stock options and restricted stock awards	157,579	2		40,037		—		—		40,039
Purchase of employee stock purchase plan shares	167,921	2		9,797		—		—		9,799
Net loss	—	—		—		—		(86,142)		(86,142)
Accumulated other comprehensive income	—	—		—		3,206		—		3,206
Balance, June 30, 2020	149,980,798	$	1,501	$	3,819,798	$	1,489	$	(1,311,595)	$	2,511,193
Exercise of common stock options	140,145	1		4,469		—		—		4,470
Compensation expense related to issuance of stock options and restricted stock awards	249,197	2		41,474		—		—		41,476
Issuance of common stock for business combinations	3,346	1		249		—		—		250
Net loss	—	—		—		—		(219,884)		(219,884)
Accumulated other comprehensive loss	—	—		—		(405)		—		(405)
Balance, September 30, 2020	150,373,486	$	1,505	$	3,865,990	$	1,084	$	(1,531,479)	$	2,337,100


	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


	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



	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)


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


	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


			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


	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


		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


			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)


		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)


		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


Options	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term(Years)	Aggregate Intrinsic Value(1)
(Aggregate intrinsic value in thousands)
Outstanding, January 1, 2020	2,700,293	$	34.01	6.7
Granted	309,143	97.66
Exercised	(509,335)	30.34
Forfeited	(71,364)	82.76
Outstanding, September 30, 2020	2,428,737	$	41.45	6.3	$	146,939
Exercisable, September 30, 2020	1,577,785	$	26.96	5.4	$	118,314


	Restricted Shares and RSUs	Weighted Average Grant Date Fair Value
Outstanding, January 1, 2020	4,384,005	$	63.41
Granted	2,166,913	90.94
Released	(1,615,545)	48.97
Forfeited	(280,899)	80.67
Outstanding, September 30, 2020	4,654,474	$	80.10


(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


(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


(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


	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

5505 Endeavor Lane, Madison WI

~~441 Charmany Drive~~, ~~Madison~~WI

~~53719~~

(Address of principal executive offices)

(Zip Code)