Document and Entity Information - shares	9 Months Ended
Document and Entity Information - shares	Sep. 30, 2019	Oct. 28, 2019
Document and Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Sep. 30, 2019
Entity File Number	001-35092
Entity Registrant Name	EXACT SCIENCES CORPORATION
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	02-0478229
Entity Address, Address Line One	441 Charmany Drive
Entity Address, City or Town	Madison
Entity Address, State or Province	WI
Entity Address, Postal Zip Code	53719
City Area Code	608
Local Phone Number	535-8815
Title of 12(b) Security	Common Stock
Trading Symbol	EXAS
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current 1	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Entity Central Index Key	0001124140
Amendment Flag	false
Entity Common Stock, Shares Outstanding		129,832,089

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
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
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-no 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

Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 2019	Dec. 31, 2018
Condensed Consolidated Balance Sheets
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, Authorized shares	5,000,000	5,000,000
Preferred stock, Issued shares	0	0
Preferred stock, outstanding shares	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, Authorized shares	200,000,000	200,000,000
Common stock, Issued shares	129,817,885	123,192,540
Common stock, outstanding shares	129,817,885	123,192,540

Condensed Consolidated Statements of Operations - USD ($) shares in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Condensed Consolidated Statements of Operations
Revenue	$ 218,805,000	$ 118,291,000	$ 580,718,000	$ 311,481,000
Cost of sales	52,759,000	30,020,000	147,574,000	79,822,000
Gross margin	166,046,000	88,271,000	433,144,000	231,659,000
Operating expenses:
Research and development	34,945,000	17,631,000	97,164,000	47,278,000
General and administrative	80,565,000	46,729,000	208,329,000	121,861,000
Sales and marketing	86,196,000	64,836,000	265,325,000	172,675,000
Total operating expenses	201,706,000	129,196,000	570,818,000	341,814,000
Loss from operations	(35,660,000)	(40,925,000)	(137,674,000)	(110,155,000)
Other income (expense)
Investment income	9,093,000	6,292,000	23,417,000	14,882,000
Interest expense	(13,209,000)	(10,704,000)	(47,911,000)	(25,817,000)
Total other expense	(4,116,000)	(4,412,000)	(24,494,000)	(10,935,000)
Net loss before tax	(39,776,000)	(45,337,000)	(162,168,000)	(121,090,000)
Income tax benefit (expense)	(683,000)	(27,000)	230,000	(85,000)
Net loss	$ (40,459,000)	$ (45,364,000)	$ (161,938,000)	$ (121,175,000)
Net loss per share-basic and diluted (in dollars per share)	$ (0.31)	$ (0.37)	$ (1.26)	$ (0.99)
Weighted average common shares outstanding-basic and diluted (in shares)	129,567	122,671	128,344	121,946

Condensed Consolidated Statements of Comprehensive Loss - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Condensed Consolidated Statements of Comprehensive Loss
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)

- Definition

The portion of profit or loss for the period, net of income taxes, which is attributable to the parent.

+ References + Details

Condensed Consolidated Statements of Stockholders Equity - USD ($) $ in Thousands	Common Stock	Additional Paid In Capital	Accumulated Other Comprehensive Income (Loss)	Accumulated Deficit	Total
Balance at Dec. 31, 2017	$ 1,205	$ 1,380,577	$ (750)	$ (860,614)	$ 520,418
Balance (in shares) at Dec. 31, 2017	120,497,426
Increase (Decrease) in Stockholders' Equity
Equity component of convertible notes, net of issuance costs		189,456			189,456
Exercise of common stock options	$ 4	1,387			1,391
Exercise of common stock options (in shares)	420,129
Issuance of common stock to fund the Company's 401(k) match	$ 1	4,299			4,300
Issuance of common stock to fund the Company's 401(k) match (in shares)	86,828
Compensation expense related to issuance of stock options and restricted stock awards	$ 9	12,454			12,463
Compensation expense related to issuance of stock options and restricted stock awards (in shares)	862,376
Net loss				(39,424)	(39,424)
Accumulated other comprehensive loss			(1,586)		(1,586)
Balance at Mar. 31, 2018	$ 1,219	1,588,173	(2,336)	(900,038)	687,018
Balance (in shares) at Mar. 31, 2018	121,866,759
Balance at Dec. 31, 2017	$ 1,205	1,380,577	(750)	(860,614)	520,418
Balance (in shares) at Dec. 31, 2017	120,497,426
Increase (Decrease) in Stockholders' Equity
Net loss					(121,175)
Accumulated other comprehensive loss					(656)
Balance at Sep. 30, 2018	$ 1,229	1,698,695	(1,406)	(981,789)	716,729
Balance (in shares) at Sep. 30, 2018	122,889,854
Balance at Mar. 31, 2018	$ 1,219	1,588,173	(2,336)	(900,038)	687,018
Balance (in shares) at Mar. 31, 2018	121,866,759
Increase (Decrease) in Stockholders' Equity
Equity component of convertible notes, net of issuance costs		70,788			70,788
Exercise of common stock options	$ 3	4,250			4,253
Exercise of common stock options (in shares)	365,566
Issuance of common stock to fund the Company's 401(k) match		3			3
Issuance of common stock to fund the Company's 401(k) match (in shares)	54
Compensation expense related to issuance of stock options and restricted stock awards	$ 1	15,592			15,593
Compensation expense related to issuance of stock options and restricted stock awards (in shares)	87,322
Purchase of employee stock purchase plan shares	$ 3	2,659			2,662
Purchase of employee stock purchase plan shares (in shares)	285,013
Net loss				(36,387)	(36,387)
Accumulated other comprehensive loss			458		458
Balance at Jun. 30, 2018	$ 1,226	1,681,465	(1,878)	(936,425)	744,388
Balance (in shares) at Jun. 30, 2018	122,604,714
Increase (Decrease) in Stockholders' Equity
Exercise of common stock options	$ 1	734			735
Exercise of common stock options (in shares)	62,366
Compensation expense related to issuance of stock options and restricted stock awards	$ 2	16,496			16,498
Compensation expense related to issuance of stock options and restricted stock awards (in shares)	222,774
Net loss				(45,364)	(45,364)
Accumulated other comprehensive loss			472		472
Balance at Sep. 30, 2018	$ 1,229	1,698,695	(1,406)	(981,789)	716,729
Balance (in shares) at Sep. 30, 2018	122,889,854
Balance at Dec. 31, 2018	$ 1,232	1,716,894	(1,422)	(1,035,763)	$ 680,941
Balance (in shares) at Dec. 31, 2018	123,192,540				123,192,540
Increase (Decrease) in Stockholders' Equity
Equity component of convertible notes, net of issuance costs		268,390			$ 268,390
Shares issued to settle convertible notes	$ 22	182,413			182,435
Shares issued to settle convertible notes (in shares)	2,158,991
Settlement of convertible notes		(300,768)			(300,768)
Exercise of common stock options	$ 2	3,648			3,650
Exercise of common stock options (in shares)	235,278
Issuance of common stock to fund the Company's 401(k) match	$ 1	7,408			7,409
Issuance of common stock to fund the Company's 401(k) match (in shares)	86,532
Compensation expense related to issuance of stock options and restricted stock awards	$ 35	16,131			16,166
Compensation expense related to issuance of stock options and restricted stock awards (in shares)	3,410,481
Net loss				(83,059)	(83,059)
Accumulated other comprehensive loss			1,776		1,776
Balance at Mar. 31, 2019	$ 1,292	1,894,116	354	(1,118,822)	776,940
Balance (in shares) at Mar. 31, 2019	129,083,822
Balance at Dec. 31, 2018	$ 1,232	1,716,894	(1,422)	(1,035,763)	$ 680,941
Balance (in shares) at Dec. 31, 2018	123,192,540				123,192,540
Increase (Decrease) in Stockholders' Equity
Shares issued to settle convertible notes					$ 182,436
Shares issued to settle convertible notes (in shares)					2,159,017
Stock issuance costs					$ (409)
Net loss					(161,938)
Balance at Sep. 30, 2019	$ 1,299	1,945,046	(360)	(1,197,701)	$ 748,284
Balance (in shares) at Sep. 30, 2019	129,817,885				129,817,885
Balance at Mar. 31, 2019	$ 1,292	1,894,116	354	(1,118,822)	$ 776,940
Balance (in shares) at Mar. 31, 2019	129,083,822
Increase (Decrease) in Stockholders' Equity
Equity component of convertible notes, net of issuance costs		(22)			(22)
Exercise of common stock options	$ 1	1,347			1,348
Exercise of common stock options (in shares)	78,793
Compensation expense related to issuance of stock options and restricted stock awards	$ 1	20,142			20,143
Compensation expense related to issuance of stock options and restricted stock awards (in shares)	104,845
Purchase of employee stock purchase plan shares	$ 1	4,136			4,137
Purchase of employee stock purchase plan shares (in shares)	93,588
Net loss				(38,420)	(38,420)
Accumulated other comprehensive loss			1,406		1,406
Balance at Jun. 30, 2019	$ 1,295	1,919,719	1,760	(1,157,242)	765,532
Balance (in shares) at Jun. 30, 2019	129,361,048
Increase (Decrease) in Stockholders' Equity
Settlement of convertible notes		1			1
Settlement of convertible notes (in shares)	26
Exercise of common stock options	$ 2	1,389			1,391
Exercise of common stock options (in shares)	178,628
Compensation expense related to issuance of stock options and restricted stock awards	$ 2	24,346			24,348
Compensation expense related to issuance of stock options and restricted stock awards (in shares)	278,180
Purchase of employee stock purchase plan shares (in shares)	3
Stock issuance costs		(409)			(409)
Net loss				(40,459)	(40,459)
Accumulated other comprehensive loss			(2,120)		(2,120)
Balance at Sep. 30, 2019	$ 1,299	$ 1,945,046	$ (360)	$ (1,197,701)	$ 748,284
Balance (in shares) at Sep. 30, 2019	129,817,885				129,817,885

Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 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

Condensed Consolidated Statements of Cash Flows (Parenthetical) - shares	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Condensed Consolidated Statements of Cash Flows
Issuance of shares of common stock to fund the Company's 401(k) matching contribution	86,532	86,882
Issuance of common stock upon convertible notes settlement (in shares)	2,159,017

ORGANIZATION AND BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2019

ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION AND BASIS OF PRESENTATION

(1) ORGANIZATION AND BASIS OF PRESENTATION

Organization

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

Basis of Presentation

The accompanying condensed consolidated financial statements, which include the accounts of Exact Sciences Corporation and those of its wholly owned subsidiaries 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 included in the Company’s Annual Report on Form 10-K (the “2018 Form 10-K”). These condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the results of operations have been included. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. The statements should be read in conjunction with the audited financial statements and related notes included in the 2018 Form 10-K. Management has evaluated subsequent events for disclosure or recognition in the accompanying financial statements up to the filing of this report.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2019

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Cash and Cash Equivalents

The Company considers cash on hand, demand deposits in bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. The Company had no restricted cash at September 30, 2019 or December 31, 2018.

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 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 and the unrealized gains and losses, net of tax, on the Company’s equity securities are reported in the condensed consolidated statement of operations. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity computed under the straight-line method. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.

At September 30, 2019 and December 31, 2018, the Company’s marketable securities were comprised of fixed income investments, and all were deemed available-for-sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives. The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Investments in which the Company has the ability and intent, if necessary, to liquidate, in order to support its current operations (including those with a contractual term greater than one year from the date of purchase), are classified as current. All of the Company’s investments are considered current 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 in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, the Company’s intent not to sell the security, and whether it is more likely than not that the Company will have to sell the security before recovery of its cost basis. For the nine months ended September 30, 2019, no investments were identified with other-than-temporary declines in value.

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


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

(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.

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

Property, Plant and Equipment

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


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

(1)	Not depreciated.

(2)	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 no material impairment losses for the periods ended September 30, 2019 and December 31, 2018.

Software Capitalization Policy

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

Patent Costs, Intangible Assets and Goodwill

Patent costs, Intangible assets, and Goodwill consisted of 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 and estimated remaining life of the Company’s finite-lived intangible assets as of 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

As of September 30, 2019, 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)
2019	$	829
2020		3,312
2021		3,210
2022		3,025
2023		2,953
Thereafter		13,553
	$	26,882

The Company evaluates identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no 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

of value to the Company. Other than the transactions discussed below, the Company determined that all patent costs incurred 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.

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 no 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.

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.

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.

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.

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.

MAYO LICENSE AGREEMENT

9 Months Ended

Sep. 30, 2019

MAYO LICENSE AGREEMENT

MAYO LICENSE AGREEMENT

(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.

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 five 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.

PFIZER PROMOTION AGREEMENT

9 Months Ended

Sep. 30, 2019

PFIZER PROMOTION AGREEMENT

PFIZER PROMOTION AGREEMENT

(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.

STOCK-BASED COMPENSATION

9 Months Ended

Sep. 30, 2019

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

(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 – 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.

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.

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

FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2019

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

(6) FAIR VALUE MEASUREMENTS

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

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


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

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

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

Fixed-income securities are valued using a third-party pricing agency. The valuation is based on observable inputs including pricing for similar assets and other observable market factors. There has been no material pricing change from period to period. The estimated fair value of the Company’s long-term debt represents a Level 2 measurement. When determining the estimated fair value of the Company’s long-term debt, the Company used market-based risk measurements, such as credit risk. The fair value of contingent consideration related to the Biomatrica Acquisition was categorized as a Level 3 liability, as the measurement amount is based primarily on significant inputs not observable in the market. The Company evaluates the fair value of expected contingent consideration and the corresponding liability each annual reporting period using the Monte Carlo Method, which is consistent with the initial measurement of the expected Biomatrica Acquisition earn-out liability. This fair value measurement is considered a Level 3 measurement because the Company estimates projections during the earn-out period utilizing various potential pay-out scenarios. Probabilities were applied to each potential scenario and the resulting values were discounted using a rate that considers weighted average cost of capital as well as a specific risk premium associated with the riskiness of the earn out itself, the related projections, and the overall business. The contingent earn-out liability is classified as a component of other long-term liabilities in the Company’s condensed consolidated balance sheet. There were no changes in the fair value assessed between the acquisition date and September 30, 2019, however, there was an earn-out payment made during that time resulting in a decrease in the liability at September 30, 2019.

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


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

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


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

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

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 of the Company’s available-for-sale investments at September 30, 2019:


		Due one year or less			Due after one year through four years
(In thousands)		Cost		Fair Value		Cost		Fair Value
Cash equivalents
U.S. government agency securities	$	539,087	$	539,102	$	—	$	—
Commercial paper		39,961		39,957		—		—
Certificates of deposit		7,000		7,000		—		—
Total cash equivalents		586,048		586,059		—		—
Marketable securities
Corporate bonds		7,670		7,670		4,000		4,003
U.S. government agency securities		40,506		40,509		49,997		50,005
Asset backed securities		—		—		1,512		1,512
Certificates of deposit		20,504		20,513		—		—
Commercial paper		1,999		1,999		—		—
Total marketable securities		70,679		70,691		55,509		55,520
Total available-for-sale securities	$	656,727	$	656,750	$	55,509	$	55,520

Fair Value of Long-Term Debt and Convertible Notes

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


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

(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).

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

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

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

NEW MARKET TAX CREDIT

9 Months Ended

Sep. 30, 2019

NEW MARKET TAX CREDIT

NEW MARKET TAX CREDIT

(7) 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 one 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 Investor and its majority owned community development entity are consolidated Variable Interest Entities (“VIEs”) and the Company is the primary beneficiary of the VIEs. Because the Company is the primary beneficiary of the VIEs, they have been included in the consolidated financial statements. There are no other assets, liabilities or transactions in these VIEs outside of the financing transactions executed as part of the NMTC arrangement. The $2.4 million was recorded in other long-term liabilities 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.

LONG-TERM DEBT

9 Months Ended

Sep. 30, 2019

LONG-TERM DEBT.

LONG-TERM DEBT

(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.

Revolving Loan Agreement

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

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

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

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

Construction Loan Agreement

During December 2017, the Company entered into a loan agreement with Fifth Third Bank (formerly MB Financial Bank, N.A.) (the “Construction Loan Agreement”), which provides the Company with a non-revolving construction loan (the “Construction Loan”) of $25.6 million. The Company is using the Construction Loan proceeds to finance the construction of an additional clinical laboratory and related facilities in Madison, Wisconsin. The Construction Loan is collateralized by the additional clinical laboratory and related facilities.

Pursuant to the Construction Loan Agreement, funds drawn will bear interest at 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 monthly payments towards the outstanding principal balance plus accrued interest. As of September 30, 2019, the Company has drawn $25.0 million from the Construction Loan, 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. 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 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.

Tax Increment Financing Loan Agreements

The Company entered into two 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, 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.

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

COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2019

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

(9) COMMITMENTS AND CONTINGENCIES

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


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

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

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

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


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

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

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

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

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


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

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

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


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

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

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

WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS

9 Months Ended

Sep. 30, 2019

WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS

WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS

(10) WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS

During the first quarter of 2015, the Company entered into an agreement with the Wisconsin Economic Development Corporation (“WEDC”) to earn $9.0 million in refundable tax credits if the Company expends $26.3 million in capital investments and establishes and maintains 758 full-time positions 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, the Company has earned $9.0 million of tax credits and has received payment of $4.3 million from the WEDC. The unpaid portion is $4.7 million, of which $1.6 million is reported in prepaid expenses and other current assets and $3.1 million is reported in other long-term assets, reflecting when collection of the refundable tax credits is expected to occur. As of September 30, 2019, 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 liabilities, reflecting when the expected benefit of the tax credit amortization will reduce future operating expenses.

During the three and nine months ended September 30, 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.

CONVERTIBLE NOTES

9 Months Ended

Sep. 30, 2019

CONVERTIBLE NOTES.

CONVERTIBLE NOTES

(11) 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, 2019		December 31, 2018
2027 Convertible notes	0.375%	6.3%	$	472,501	$	747,500	$	—
2025 Convertible notes	1.000%	6.0%		299,187		415,102		908,500
Total Convertible notes						1,162,602		908,500
Less: Debt discount (2)						(353,283)		(227,403)
Less: Debt issuance costs (3)						(17,149)		(16,348)
Net convertible debt including current maturities						792,170		664,749
Less: Current maturities (4)						(315,643)		—
Net long-term convertible debt					$	476,527	$	664,749

(1)

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

(2)	The unamortized discount consists of the following:


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

(3)	Debt issuance costs consists of the following:


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

(4)

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

Issuances and Settlements

In January 2018, the Company issued and sold $690.0 million in aggregate principal amount of 1.0% Convertible Notes (the “January 2018 Notes”) with a maturity date of January 15, 2025 (the “Maturity Date”). The January 2018 Notes accrue interest at a fixed rate of 1.0% per year, payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The net proceeds from the issuance of the January 2018 Notes were approximately $671.1 million, after deducting underwriting discounts and commissions and the offering expenses payable by the Company.

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

In March 2019, the Company issued and sold $747.5 million in aggregate principal amount of 0.375% Convertible Notes (the “2027 Notes” and, collectively with the 2025 Notes, the “Notes”) with a maturity date of March 15, 2027 (the “Maturity Date”). The 2027 Notes accrue interest at a fixed rate of 0.375% per year, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2019. The net proceeds from the issuance of the 2027 Notes were approximately $729.5 million, after deducting underwriting discounts and commissions and the offering expenses payable by the Company.

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

Summary of Conversion Features

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

It is the Company’s intent and policy to settle all conversions through combination settlement. The initial conversion rate is 13.2569 and 8.9554 shares of common stock per $1,000 principal amount for the 2025 Notes and 2027 Notes, respectively, which is equivalent to an initial conversion price of approximately $75.43 and $111.66 per share of the Company’s common stock for the 2025 Notes and 2027 Notes, respectively. The conversion rate is subject to adjustment upon the 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.

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

Ranking of Convertible Notes

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

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

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

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

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

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

Interest expense includes the following:


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

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

ACQUISITIONS

9 Months Ended

Sep. 30, 2019

ACQUISITIONS

ACQUISITIONS

(12) ACQUISITIONS

On July 28, 2019, the Company entered into a definitive agreement and plan of merger (the “Merger Agreement”) with Genomic Health, Inc. (“Genomic Health”), and Spring Acquisition Corp., a wholly owned subsidiary of the Company (“Merger Sub”). Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Genomic Health, with Genomic Health surviving as a wholly owned subsidiary of the Company (the “Merger”), in a cash and stock transaction valued at approximately $2.8 billion. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, which has been unanimously approved by the boards of directors of Genomic Health and the Company, at the effective time of the Merger each share of Genomic Health common stock issued and outstanding immediately prior to the effective time of the Merger (except for certain excluded shares as otherwise provided in the Merger Agreement) will be converted into the right to receive (a) $27.50 in cash, without interest, and (b) a number of shares of Exact Sciences common stock 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.

INCOME TAXES

9 Months Ended

Sep. 30, 2019

INCOME TAXES

INCOME TAXES

(13) INCOME TAXES

The Company recorded an income tax expense of $0.7 million and income tax benefit of $0.2 million for the three and nine months ended September 30, 2019, respectively, and an income tax expense of $27,000 and $0.1 million for the three and nine months ended September 30, 2018, respectively, in continuing operations. The Company’s income tax benefit recorded during the three and nine months ended September 30, 2019, is primarily related to the intraperiod tax allocation rules that require the Company to allocate the provision for income taxes between continuing operations and other 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.

RELATED PARTY TRANSACTION

9 Months Ended

Sep. 30, 2019

RELATED PARTY TRANSACTION

RELATED PARTY TRANSACTION

(14) RELATED PARTY TRANSACTION

In May 2017, the Company entered into a professional services agreement for recruiting and related services with a firm whose principal is a non-employee director. The Company did not incur charges or make any payments during the three and nine months ended September 30, 2019. The Company incurred charges of $0.2 million and $0.3 million for 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.

RECENT ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Sep. 30, 2019

RECENT ACCOUNTING PRONOUNCEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

(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 result of the adoption, the Company recorded an opening right-of-use asset balance of $20.6 million, which is included in other long-term assets in the Company’s condensed consolidated financial statements. The Company also recorded an opening lease liability of $20.1 million, of which $3.0 million was classified in other short-term liabilities and $17.1 million was classified in long-term obligations in the Company’s condensed consolidated financial statements. 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.

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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2019

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

Use of Estimates

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

Cash and Cash Equivalents

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 no restricted cash at September 30, 2019 or December 31, 2018.

Investments

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 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 and the unrealized gains and losses, net of tax, on the Company’s equity securities are reported in the condensed consolidated statement of operations. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity computed under the straight-line method. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.

At September 30, 2019 and December 31, 2018, the Company’s marketable securities were comprised of fixed income investments, and all were deemed available-for-sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives. The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Investments in which the Company has the ability and intent, if necessary, to liquidate, in order to support its current operations (including those with a contractual term greater than one year from the date of purchase), are classified as current. All of the Company’s investments are considered current 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 in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, the Company’s intent not to sell the security, and whether it is more likely than not that the Company will have to sell the security before recovery of its cost basis. For the nine months ended September 30, 2019, no investments were identified with other-than-temporary declines in value.

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


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

(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.

Changes in Accumulated Other Comprehensive Income (Loss)

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

Property, Plant and Equipment

Property, Plant and Equipment

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


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

(1)	Not depreciated.

(2)	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 no material impairment losses for the periods ended September 30, 2019 and December 31, 2018.

Software Capitalization Policy

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

Patent Costs, Intangible Assets and Goodwill

Patent Costs, Intangible Assets and Goodwill

Patent costs, Intangible assets, and Goodwill consisted of 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 and estimated remaining life of the Company’s finite-lived intangible assets as of 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

As of September 30, 2019, 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)
2019	$	829
2020		3,312
2021		3,210
2022		3,025
2023		2,953
Thereafter		13,553
	$	26,882