Document and Entity Information - USD ($)	12 Months Ended
Document and Entity Information - USD ($)	Dec. 31, 2018	Feb. 20, 2019	Jun. 29, 2018
Document and Entity Information
Entity Registrant Name	EXACT SCIENCES CORP
Entity Central Index Key	0001124140
Document Type	10-K
Document Period End Date	Dec. 31, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Public Float			$ 7,176,273,883
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Ex Transition Period	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		125,760,907
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	FY

Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Current Assets:
Cash and cash equivalents	$ 160,430	$ 77,491
Marketable securities	963,752	347,224
Accounts receivable, net	44,239	26,419
Inventory, net	39,148	26,027
Prepaid expenses and other current assets	20,498	10,055
Total current assets	1,228,067	487,216
Long-term Assets:
Property, plant and equipment, net	245,259	79,986
Goodwill and intangibles, net	46,281	24,205
Other long-term assets, net	4,415	7,153
Total assets	1,524,022	598,560
Current Liabilities:
Accounts payable	28,141	16,135
Accrued liabilities	100,644	49,126
Accrued interest	4,593
Debt, current portion	8	182
Other short-term liabilities	3,204	2,681
Total current liabilities	136,590	68,124
Convertible notes, net	664,749
Long-term debt, less current portion	24,073	4,269
Other long-term liabilities	9,475	5,749
Lease incentive obligation, less current portion	8,194
Total liabilities	843,081	78,142
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value Authorized—5,000,000 shares issued and outstanding—no shares at December 31, 2018 and December 31, 2017
Common stock, $0.01 par value Authorized—200,000,000 shares issued and outstanding—123,192,540 and 120,497,426 shares at December 31, 2018 and December 31, 2017	1,232	1,205
Additional paid-in capital	1,716,894	1,380,577
Accumulated other comprehensive loss	(1,422)	(750)
Accumulated deficit	(1,035,763)	(860,614)
Total stockholders' equity	680,941	520,418
Total liabilities and stockholders’ equity	$ 1,524,022	$ 598,560

Consolidated Balance Sheets (Parenthetical) - $ / shares	Dec. 31, 2018	Dec. 31, 2017
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	123,192,540	120,497,426
Common stock, outstanding shares	123,192,540	120,497,426

Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Consolidated Statements of Operations
Revenue	$ 454,462	$ 265,989	$ 99,376
Cost of sales	117,982	79,196	45,195
Gross margin	336,480	186,793	54,181
Operating expenses:
Research and development	68,210	42,139	33,473
General and administrative	178,293	109,040	76,898
Sales and marketing	249,448	153,924	112,826
Total operating expenses	495,951	305,103	223,197
Loss from operations	(159,471)	(118,310)	(169,016)
Other income (expense)
Investment income	21,203	3,932	2,018
Interest expense	(36,789)	(206)	(213)
Total other income (expense)	(15,586)	3,726	1,805
Net loss before tax	(175,057)	(114,584)	(167,211)
Income tax benefit (expense)	(92)	187
Net loss	$ (175,149)	$ (114,397)	$ (167,211)
Net loss per share-basic and diluted (in dollars per share)	$ (1.43)	$ (0.99)	$ (1.63)
Weighted average common shares outstanding-basic and diluted (in shares)	122,207	115,684	102,335

Consolidated Statements of Comprehensive Loss - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Consolidated Statements of Comprehensive Loss
Net loss	$ (175,149)	$ (114,397)	$ (167,211)
Other comprehensive loss, net of tax:
Unrealized gain (loss) on available-for-sale investments	(708)	(475)	230
Foreign currency translation gain (loss)	36	143	(215)
Comprehensive loss	$ (175,821)	$ (114,729)	$ (167,196)

- Definition

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

+ References + Details

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, 2015	$ 967	$ 904,932	$ (433)	$ (578,610)	$ 326,856
Balance (in shares) at Dec. 31, 2015	96,674,786
Increase (Decrease) in Stockholders' Equity
Issuance of common stock, net of issuance costs of $7.4 and $7.3 million for 2017, and 2016, respectively	$ 98	144,144			144,242
Issuance of common stock, net of issuance costs (in shares)	9,775,000
Exercise of common stock options	$ 23	3,388			3,411
Exercise of common stock options (in shares)	2,254,384
Issuance of common stock to fund the Company's 401(k) match	$ 3	2,148			2,151
Issuance of common stock to fund the Company's 401(k) match (in shares)	341,507
Compensation expense related to issuance of stock options and restricted stock awards	$ 8	23,724			23,732
Compensation expense related to issuance of stock options and restricted stock awards (in shares)	833,627
Purchase of employee stock purchase plan shares	$ 3	2,096			2,099
Purchase of employee stock purchase plan shares (in shares)	356,823
Net loss				(167,211)	(167,211)
Accumulated other comprehensive income (loss)			15		15
Balance at Dec. 31, 2016	$ 1,102	1,080,432	(418)	(745,821)	335,295
Balance (in shares) at Dec. 31, 2016	110,236,127
Increase (Decrease) in Stockholders' Equity
Issuance of common stock, net of issuance costs of $7.4 and $7.3 million for 2017, and 2016, respectively	$ 74	253,314			253,388
Issuance of common stock, net of issuance costs (in shares)	7,450,000
Exercise of common stock options	$ 11	5,092			5,103
Exercise of common stock options (in shares)	1,067,047
Issuance of common stock to fund the Company's 401(k) match	$ 2	3,006			3,008
Issuance of common stock to fund the Company's 401(k) match (in shares)	158,717
Compensation expense related to issuance of stock options and restricted stock awards	$ 12	35,500			35,512
Compensation expense related to issuance of stock options and restricted stock awards (in shares)	1,162,112
Purchase of employee stock purchase plan shares	$ 4	2,837			2,841
Purchase of employee stock purchase plan shares (in shares)	423,423
Net loss				(114,397)	(114,397)
Accumulated other comprehensive income (loss)			(332)		(332)
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				120,497,426
Increase (Decrease) in Stockholders' Equity
Cumulative-effect adjustment - ASU 2016-09 adoption \| ASU 2016-09		396		(396)
Equity component of convertible debt, net of issuance costs		260,246			$ 260,246
Exercise of common stock options	$ 10	6,626			6,636
Exercise of common stock options (in shares)	1,033,012
Issuance of common stock to fund the Company's 401(k) match	$ 1	4,302			4,303
Issuance of common stock to fund the Company's 401(k) match (in shares)	86,882
Compensation expense related to issuance of stock options and restricted stock awards	$ 13	60,251			60,264
Compensation expense related to issuance of stock options and restricted stock awards (in shares)	1,228,611
Purchase of employee stock purchase plan shares	$ 3	4,892			4,895
Purchase of employee stock purchase plan shares (in shares)	346,609
Net loss				(175,149)	(175,149)
Accumulated other comprehensive income (loss)			(672)		(672)
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

Consolidated Statements of Stockholders’ Equity (Parenthetical) - USD ($) $ in Millions	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Consolidated Statements of Stockholders’ Equity
Issuance of common stock, issuance costs	$ 7.4	$ 7.3

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Cash flows from operating activities:
Net loss	$ (175,149)	$ (114,397)	$ (167,211)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment	20,482	14,500	11,309
Loss on disposal of property and equipment	353	954	151
Loss on preferred stock investment	765
Deferred tax benefit		(115)
Stock-based compensation	60,264	35,512	23,732
Amortization of debt discount	26,291
Amortization of debt issuance costs	2,273
Amortization of other liabilities	(2,500)	(1,674)	(1,013)
Amortization of deferred financing costs	106	54	52
Amortization of premium on short-term investments	(3,901)	65	463
Amortization of intangible assets	2,602	1,055	200
Proceeds from refundable tax credits			800
Changes in assets and liabilities, net of effects of acquisition:
Accrued interest	4,593
Accounts receivable, net	(17,292)	(17,529)	(3,593)
Inventory, net	(12,729)	(19,194)	(156)
Prepaid expenses and other current assets	(9,076)	(995)	761
Accounts payable	11,332	15,383	(2,598)
Accrued liabilities	21,744	15,154	7,349
Other short-term liabilities	172	119
Lease incentive obligation	345	(616)	(312)
Net cash used in operating activities	(69,325)	(71,724)	(130,066)
Cash flows from investing activities:
Purchases of marketable securities	(1,192,506)	(357,051)	(189,989)
Maturities of marketable securities	579,171	271,466	193,321
Purchases of property and equipment	(150,093)	(48,480)	(14,851)
Business acquisition, net of cash acquired	(17,908)	(2,980)
Investment in privately-held company		(3,000)
Purchases of intangible assets		(20,690)
Internally developed software	(578)	(70)
Net cash used in investing activities	(781,914)	(160,805)	(11,519)
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net	896,430
Proceeds from financing obligation	6,762
Proceeds from exercise of common stock options	6,636	5,103	3,411
Proceeds from sale of common stock, net of issuance costs		253,388	144,242
Proceeds in connection with the Company's employee stock purchase plan	4,895	2,841	2,099
Payments of deferred financing costs	(24)	(202)
Proceeds from construction loan	24,260
Payments on mortgage payable	(4,678)	(174)	(166)
Payments on capital lease	(139)
Net cash provided by financing activities	934,142	260,956	149,586
Effects of exchange rate changes on cash and cash equivalents	36	143	(215)
Net increase in cash and cash equivalents	82,939	28,570	7,786
Cash and cash equivalents, beginning of period	77,491	48,921	41,135
Cash and cash equivalents, end of period	160,430	77,491	48,921
Supplemental disclosure of non-cash investing and financing activities:
Property and equipment acquired but not paid	33,452	8,818	655
Property acquired under build-to-suit lease	2,092
Unrealized loss on available-for-sale investments	(708)	(475)	230
Issuance of 86,882, 158,717 and 341,507 shares of common stock to fund the Company’s 401(k) matching contribution for 2017, 2016 and 2015, respectively	4,303	3,008	2,151
Business acquisition contingent consideration liability	3,060
Interest paid	$ 4,638	$ 201	$ 209

Consolidated Statements of Cash Flows (Parenthetical) - shares shares in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Consolidated Statements of Cash Flows
Issuance of shares of common stock to fund the Company's 401(k) matching contribution	86,882	158,717	341,507

ORGANIZATION	12 Months Ended
ORGANIZATION	Dec. 31, 2018
ORGANIZATION
ORGANIZATION	(1) 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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2018

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company’s wholly‑owned subsidiaries and variable interest entities. See Note 12 for the discussion of financing arrangements involving certain entities that are variable interest entities that are included in the Company’s 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 accounting principles generally accepted in the United States (“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 a 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 December 31, 2018 and 2017.

Marketable Securities

Management determines the appropriate classification of debt securities at the time of purchase and re‑evaluates such designation as of each balance sheet date. Debt securities carried at amortized cost are classified as held‑to‑maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable equity securities and debt securities not classified as held‑to‑maturity are classified as available‑for‑sale. Available‑for‑sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. 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 December 31, 2018 and 2017, 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. Realized gains were $0.4 million, $23,000, and $24,000, net of insignificant realized losses, for the years ended December 31, 2018, 2017, and 2016, respectively and are included in investment income.

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 year ended December 31, 2018, no investments were identified with other-than-temporary declines in value.

Available‑for‑sale securities at December 31, 2018 consist of the following:


	December 31, 2018
			Gains in Accumulated		Losses in Accumulated
			Other Comprehensive		Other Comprehensive		Estimated Fair
(In thousands)	Amortized Cost		Income (Loss)		Income (Loss)		Value
Corporate bonds	$	392,973	$	33	$	(719)	$	392,287
Asset backed securities		277,537		30		(568)		276,999
U.S. government agency securities		250,606		43		(178)		250,471
Commercial paper		12,158		—		(7)		12,151
Certificates of deposit		31,875		—		(31)		31,844
Total available-for-sale securities	$	965,149	$	106	$	(1,503)	$	963,752

Available‑for‑sale securities at December 31, 2017 consist of the following:


	December 31, 2017
			Gains in Accumulated		Losses in Accumulated
			Other Comprehensive		Other Comprehensive		Estimated Fair
(In thousands)	Amortized Cost		Income (Loss)		Income (Loss)		Value
Corporate bonds	$	181,639	$	10	$	(344)	$	181,305
Asset backed securities		94,700		—		(185)		94,515
U.S. government agency securities		54,974		—		(162)		54,812
Commercial paper		9,953		—		(7)		9,946
Certificates of deposit		6,647		1		(2)		6,646
Total available-for-sale securities	$	347,913	$	11	$	(700)	$	347,224

Changes in Accumulated Other Comprehensive Income (Loss)

The amount recognized in accumulated other comprehensive income (loss) (“AOCI”) for the years ended December 31, 2018, 2017 and 2016 were as follows:


					Accumulated
	Cumulative		Unrealized		Other
	Translation		Gain (Loss)		Comprehensive
(In thousands)	Adjustment		on Securities		Income (Loss)
Balance at January 1, 2016	$	11	$	(444)	$	(433)
Other comprehensive income (loss) before reclassifications		(215)		117		(98)
Amounts reclassified from accumulated other comprehensive loss		—		113		113
Net current period change in accumulated other comprehensive income (loss)		(215)		230		15
Balance at December 31, 2016	$	(204)	$	(214)	$	(418)
Other comprehensive income (loss) before reclassifications		143		(530)		(387)
Amounts reclassified from accumulated other comprehensive loss		—		55		55
Net current period change in accumulated other comprehensive income (loss)		143		(475)		(332)
Balance at December 31, 2017	$	(61)	$	(689)	$	(750)
Other comprehensive income (loss) before reclassifications		36		(1,025)		(989)
Amounts reclassified from accumulated other comprehensive loss		—		317		317
Net current period change in accumulated other comprehensive income (loss)		36		(708)		(672)
Balance at December 31, 2018	$	(25)	$	(1,397)	$	(1,422)

Amounts reclassified from accumulated other comprehensive loss for the years ended December 31, 2018, 2017 and 2016 were as follows:


	Affected Line Item in the	Year Ended December 31,
Details about AOCI Components (In thousands)	Statements of Operations	2018		2017		2016
Change in value of available-for-sale investments
Sales and maturities of available-for-sale investments	Investment income	$	317	$	55	$	113
Total reclassifications		$	317	$	55	$	113

Allowance for Doubtful Accounts

The Company estimates an allowance for doubtful accounts against accounts receivable based on estimates of expected collections consistent with historical cash collection experience. The allowance for doubtful accounts is evaluated on a regular basis and adjusted when trends, significant events or other substantive evidence indicate that expected collections will be less than applicable accrual rates. At December 31, 2018 and 2017 there was no allowance for doubtful accounts recorded. For the years ended December 31, 2018, 2017 and 2016, there was no bad debt expense written off against the allowance and charged to operating expense.

Inventory

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

Inventory consisted of the following:


	December 31,		December 31,
(In thousands)	2018		2017
Raw materials	$	12,761	$	10,344
Semi-finished and finished goods		26,387		15,683
Total inventory	$	39,148	$	26,027

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		December 31,		December 31,
(In thousands)	Useful Life		2018		2017
Property, plant and equipment
Land		(1)	$	4,466	$	4,466
Leasehold and building improvements		(2)		38,895		17,629
Land improvements		15 years		1,530		1,419
Buildings		30 years		7,928		7,928
Computer equipment and computer software		3 years		36,969		30,148
Laboratory equipment		3 - 10 years		37,518		23,296
Furniture and fixtures		3 years		8,353		4,531
Assets under construction		(3)		167,462		28,655
Property, plant and equipment, at cost				303,121		118,072
Accumulated depreciation				(57,862)		(38,086)
Property, plant and equipment, net			$	245,259	$	79,986

(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 years ended December 31, 2018, 2017, and 2016 was $20.5 million, $14.5 million, and $11.3 million, respectively.

At December 31, 2018, the Company had $167.5 million of assets under construction which consisted of $130.8 million related to building and leasehold improvements, $5.2 million of capitalized costs related to software projects, and $31.5 million of costs related to laboratory equipment under construction. Depreciation will begin on these assets once they are placed into service. The Company expects to incur an additional $184.9 million to complete the building projects and leasehold improvements, $7.5 million of costs to complete the computer software projects, $7.2 million to complete the laboratory equipment, and minimal costs to complete the computer equipment. These projects are expected to be completed in 2019 and 2020. The Company assesses its long-lived assets, consisting primarily of property and equipment, for impairment when material events and changes in circumstances indicate that the carrying value may not be recoverable. There were no impairment losses for the years ended December 31, 2018, 2017 or 2016.

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

Goodwill and intangible assets consisted of the following:


	December 31,		December 31,
(In thousands)	2018		2017
Finite-lived intangible assets
Finite-lived intangible assets	$	33,058	$	23,726
Less: Accumulated amortization		(4,107)		(1,500)
Finite-lived intangible assets, net		28,951		22,226
Internally developed technology in process		51		—
Total finite-lived intangible assets, net		29,002		22,226
Goodwill		17,279		1,979
Goodwill and intangible assets, net	$	46,281	$	24,205

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 December 31, 2018:


			Weighted
	Net Balance at		Average
	December 31,		Remaining
(In thousands)	2018		Life (Years)
Trade name	$	689		14.8
Customer relationships		2,666		14.8
Patents		18,979		9.6
Acquired developed technology		6,086		13.8
Internally developed technology		531		2.7
Total	$	28,951

As of December 31, 2018, 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	$	3,193
2020		3,193
2021		3,092
2022		2,956
2023		2,953
Thereafter		13,564
	$	28,951

The Company reviews long-lived assets, including property and equipment and 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 the years ended December 31, 2018, 2017, and 2016.

Patent costs, which have historically consisted of related legal fees, are capitalized as incurred, only if the Company determines that there is some probable future economic benefit derived from the transaction. A capitalized patent is amortized over its estimated useful life, beginning when such patent is approved. Capitalized patent costs are expensed upon disapproval, upon a decision by the Company to no longer pursue the patent or when the related intellectual property is either sold or deemed to be no longer of value to the Company. Other than the transactions discussed below, the Company determined that all patent costs incurred during the year ended December 31, 2018, 2017 and 2016 should be expensed and not capitalized as the future economic benefit derived from the transactions 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-year 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 License Agreement was made as part of the Royalty Buy-Out agreement outlined 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 License Agreement.

As of December 31, 2018 and 2017, an intangible asset of $7.7 million and $9.0 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 intangible assets. Amortization expense for the years ended December 31, 2018, 2017, and 2016 was $1.3 million, $1.0 million, and $0.2 million, respectively.

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 portfolio of Armune assets the Company acquired is expected to complement its product pipeline. 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 consistent 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 years ended December 31, 2018 and 2017, the Company recorded amortization expense of $0.9 million and $40,000, respectively. At December 31, 2018 and 2017, the net balances of $11.3 million and $12.2 million, respectively are reported in net goodwill and intangible assets in the Company’s consolidated balance sheet.

As a result of the Sampleminded, Inc. (“Sampleminded”) acquisition discussed in Note 14, the Company recorded an intangible asset of $1.0 million which was comprised of acquired developed technology 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 acquired developed technology, three years for customer relationships, and five years for non-compete agreements. For the years ended December 31, 2018 and 2017, the Company recorded amortization expense of $0.1 million and $52,000, respectively, and the net balances of $0.8 million and $0.9 million, respectively, are reported in net goodwill and intangible assets in the Company’s consolidated balance sheet.

As a result of the Biomatrica Acquisition discussed in Note 14, 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 year ended December 31, 2018, the Company recorded amortization expense of $0.1 million and the net balance of $8.7 million is reported in net goodwill and intangible assets in the Company’s consolidated balance sheet.

In 2017, the Company recognized goodwill of $2.0 million from the acquisition of Sampleminded, Inc. During the fourth quarter of 2018, the Company recognized goodwill of $15.3 million from the acquisition of Biomatrica, Inc. Goodwill is reported in net goodwill and intangible assets in the Company’s consolidated balance sheet. The Company will evaluate goodwill impairment on an annual basis or more frequently should an event or change in circumstance occur that indicates that the carrying amount is in excess of the fair value. There were no impairment losses for the years ended December 31, 2018, 2017, and 2016. Refer to Note 14 for further discussion of the goodwill recorded.

The change in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 is as follows:


(In thousands)
Balance, December 31, 2016	$	—
Sampleminded acquisition		1,979
Balance, December 31, 2017		1,979
Biomatrica acquisition		15,300
Balance, December 31, 2018	$	17,279

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:


	December 31,
(In thousands)	2018	2017	2016
Shares issuable upon exercise of stock options	2,532	3,360	3,505
Shares issuable upon the release of restricted stock awards	6,246	6,149	5,601
Shares issuable upon conversion of convertible notes	12,044	—	—
	20,822	9,509	9,106

Accounting for Stock‑Based Compensation

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

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 it adopted on January 1, 2018, using the modified retrospective method, which it 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 national coverage determination for Cologuard, 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, 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 compliance 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 $15.0 million for the year ended December 31, 2018.

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. Since the first quarter of 2017, the Company has determined that its historical experience has sufficient predictive value, such that there are no longer any contracts for which no revenue is recognized upon delivery of a Cologuard test result to an ordering physician. Of the revenue recognized in the twelve months ended December 31, 2017, approximately $4.3 million relates to the one-time impact of certain payers meeting the Company’s revenue recognition criteria for accrual-basis revenue recognition beginning with the period ended March 31, 2017. Approximately $1.0 million of this one-time impact relates to tests completed in the prior year and for which the Company’s accrual revenue recognition criteria were not met until 2017.

Allocate transaction price

The entire 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 our revenues disaggregated by revenue source for the years ended December 31, 2018, 2017 and 2016, respectively:


	Year Ended December 31,
(In thousands)	2018		2017		2016
Medicare Parts B & C	$	254,431	$	172,255	$	81,976
Commercial		184,538		84,842		16,017
Other		15,493		8,892		1,383
Total	$	454,462	$	265,989	$	99,376

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable and deferred revenue on the 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 consolidated balance sheets and were $0.5 million and $0.2 million as of December 31, 2018 and 2017, respectively.

Revenue recognized for the years ended December 31, 2018 and 2017, which was included in the deferred revenue balance at the beginning of each period was $0.1 million and $44,000, 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 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 consolidated statements of operations.

Advertising Costs

The Company expenses the costs of media advertising at the time the advertising takes place. The Company expensed approximately $93.7 million, $58.0 million, and $38.1 million of media advertising during the years ended December 31, 2018, 2017, and 2016, respectively.

Fair Value Measurements

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

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. See Note 9 and Note 10 for further detail on the Company’s long-term debt. 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 assesses the fair value of expected contingent consideration and the corresponding liability each reporting period using the Monte Carlo Method, which is consistent with the initial measurement of the expected 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 consolidated balance sheets. There were no changes in the fair value assessed between the acquisition date and December 31, 2018. See Note 14 for further detail on the Biomatrica Acquisition.

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.


			Fair Value Measurement at December 31, 2018 Using:
			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	$	86,375	$	86,375	$	—	$	—
U.S. government agency securities		49,985		—		49,985		—
Commercial paper		24,070		—		24,070		—
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	$	86,375	$	1,037,807	$	(3,060)

The following table presents the Company’s fair value measurements as of December 31, 2017 along with the level within the fair value hierarchy in which the fair value measurements, in their entirety, fall.


			Fair Value Measurement at December 31, 2017 Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
(In thousands)	December 31, 2017		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents
Cash and money market	$	61,297	$	61,297	$	—	$	—
Commercial paper		10,995		—		10,995		—
Certificates of deposit		1,499		—		1,499		—
U.S. government agency securities		3,700		—		3,700		—
Available-for-sale
Marketable securities
Corporate bonds		181,305		—		181,305		—
Asset backed securities		94,515		—		94,515		—
U.S. government agency securities		54,812		—		54,812		—
Commercial paper		9,946		—		9,946		—
Certificates of deposit		6,646		—		6,646		—
Total	$	424,715	$	61,297	$	363,418	$	—

The Company monitors investments for other-than-temporary impairment. It was determined that unrealized gains and losses at December 31, 2018 and 2017 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 December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:


		December 31, 2018
		Less than 12 months			12 months or greater				Total
(In thousands)		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Marketable securities
Corporate bonds	$	340,287	$	(638)	$	35,773	$	(81)	$	376,060	$	(719)
U.S. government agency securities		201,036		(178)		—		—		201,036		(178)
Asset backed securities		243,846		(501)		18,335		(67)		262,181		(568)
Certificates of deposit		31,843		(31)		—		—		31,843		(31)
Commercial paper		12,151		(7)		—		—		12,151		(7)
Total	$	829,163	$	(1,355)	$	54,108	$	(148)	$	883,271	$	(1,503)

The following table summarizes the gross unrealized losses and fair value of investments in an unrealized loss position as of December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:


		December 31, 2017
		Less than 12 months			12 months or greater				Total
(In thousands)		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Marketable Securities
Corporate bonds	$	158,790	$	(340)	$	4,715	$	(4)	$	163,505	$	(344)
Asset backed securities		85,906		(179)		8,609		(6)		94,515		(185)
U.S. government agency securities		24,878		(90)		29,934		(72)		54,812		(162)
Commercial paper		19,944		(7)		—		—		19,944		(7)
Certificates of deposit		2,997		(2)		—		—		2,997		(2)
Total	$	292,515	$	(618)	$	43,258	$	(82)	$	335,773	$	(700)

The following table summarizes contractual underlying maturities of the Company’s available‑for‑sale investments at December 31, 2018:


		Due one year or less			Due after one year through four years
(In thousands)		Cost		Fair Value		Cost		Fair Value
Marketable securities
Corporate bonds	$	282,910	$	282,437	$	110,062	$	109,850
U.S. government agency securities		201,116		200,961		49,491		49,510
Asset backed securities		70,859		70,681		206,678		206,318
Certificates of deposit		25,485		25,471		6,390		6,373
Commercial paper		12,158		12,151		—		—
Total	$	592,528	$	591,701	$	372,621	$	372,051

Concentration of Credit Risk

In accordance with GAAP, the Company is required to disclose any significant off‑balance‑sheet risk and credit risk concentration. The Company has no significant off‑balance‑sheet risk, such as foreign exchange contracts or other hedging arrangements. Financial instruments that subject the Company to credit risk consist of cash, cash equivalents and marketable securities. As of December 31, 2018, the Company had cash and cash equivalents deposited in financial institutions in which the balances exceed the federal government agency insured limit of $250,000 by approximately $43.6 million. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk.

Through December 31, 2018, the Company’s revenues have been primarily derived from the sale of Cologuard. The following is a breakdown of revenue and accounts receivable from major payers:


	% Revenue for the years ended December 31,						% Accounts Receivable at December 31,
Major Payer	2018		2017		2016		2018		2017		2016
Centers for Medicare and Medicaid Services		36%		44%		60%		32%		39%		63%
UnitedHealthCare		13%		11%		(1)		10%		10%		(1)

(1)

Payer was less than 10 percent of revenue for the year.

As the number of payers reimbursing for Cologuard increases, the percentage of revenue derived from major payers will continue to change as a percentage of revenue and accounts receivable.

Tax Positions

A valuation allowance to reduce the deferred tax assets is reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has incurred significant losses since its inception and due to the uncertainty of the amount and timing of future taxable income, the Company has determined that a $209.9 million and $214.3 million valuation allowance at December 31, 2018 and 2017 is necessary to reduce the tax assets to the amount that is more likely than not to be realized. The change in valuation allowance as of December 31, 2018 and 2017 was a decrease of $4.4 million and $45.8 million, respectively. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

Subsequent Events

The Company evaluates events that occur through the filing date and discloses those events or transactions that provide additional evidence with respect to conditions that existed at the date of the balance sheet. In addition, the financial statements are adjusted for any changes in estimates resulting from the use of such evidence.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company adopted this guidance on January 1, 2018. See Note 2 for additional discussion.

In January 2016, the Financial Accounting Standards Board issued ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“Update 2016-01”). Update 2016-01 modifies how entities will have to measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, “Fair Value Measurements,” and as such these investments may be measured at cost. Update 2016-01 will be effective for the Company’s fiscal year beginning January 1, 2018, and subsequent interim periods. Update 2016-01 was further amended in February 2018 by ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, (“Update 2018-03”). Update 2018-03 clarifies certain aspects of the guidance issued in Update 2016-01. Public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018. The Company adopted Update 2016-01 on January 1, 2018, and it did not have an impact on its consolidated financial statements.

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, Leases (Topic 842) (“Update 2016-02”), to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The most noteworthy change in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. The standard requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company will adopt the standard on January 1, 2019 with initial application on the effective date as permitted under ASU No. 2018-11. The Company will recognize and measure leases existing at the initial application date of January 1, 2019 through a cumulative-effect adjustment recorded at the beginning of fiscal year 2019. The Company intends to elect the package of practical expedients and accordingly, the Company will not reassess the lease classification or whether expired or existing contracts contain leases under the new definition of a lease. Additionally, we will elect not to separate the lease components from the non-lease components for all classes of underlying assets. The Company’s ability to adopt the new standards depends on system readiness, including software procured from a third-party provider. The Company remains on schedule and have implemented key system functionality to enable preparation of financial statements in accordance with the new standard.

The Company anticipates this standard will have a material impact on its consolidated balance sheets; however, the Company does not expect adoption to have a material impact on its consolidated statements of operations. The Company expects the most significant impact to be the recognition of ROU assets and lease liabilities for operating leases. Adoption of the standard is expected to result in the recognition of ROU assets of approximately $17.0 million to $18.0 million and lease liabilities of $19.5 million to $20.5 million as of December 31, 2018. The Company is not party to any capital lease agreements as of December 31, 2018.

Based on the Company’s analysis, the sale-lease back transaction detailed within Note 9, the buyer-lessor has not obtained control of the underlying asset as the present value of the lease payments is substantially all of the fair value of the underlying asset. As such, the underlying asset and related financing obligation will continue to be included in the Company’s consolidated balance sheets upon adoption.

At December 31, 2018, the Company included $7.3 million as an asset under construction, including $2.1 million that is funded by the landlord, with a corresponding financing obligation related to a build-to-suit construction project. See Note 9 to the Company’s consolidated financial statements for further information. Based on the Company’s analysis, upon adoption of Topic 842, the Company does not control the asset under construction and as such, the asset and corresponding financing obligation will be de-recognized at adoption of ASC 842 on January 1, 2019.

In August 2016, the Financial Accounting Standards Board issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, (“Update 2016-15”). Current GAAP either is unclear or does not include specific guidance on the eight cash flow classification issues included in the amendments in Update 2016-15. The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice. The Company adopted this guidance on January 1, 2018, and it did not have an impact on its consolidated statements of cash flows.

In October 2016, the Financial Accounting Standards Board issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, (“Update 2016-16”). This amendment improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The Company adopted this guidance on January 1, 2018, and it did not have an impact on its consolidated financial statements.

In November 2016, the Financial Accounting Standards Board issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, (“Update 2016-18”). Update 2016-18 provides guidance on the classification of restricted cash in the statement of cash flows. The Company adopted this guidance on January 1, 2018, and it did not have an impact on its consolidated financial statements, as we do not have restricted cash.

In May 2017, the Financial Accounting Standards Board issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, (“Update 2017-09”). Update 2017-09 provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The Company adopted this guidance on January 1, 2018, and it did not have an impact on its consolidated financial statements.

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 of 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. Early adoption is permitted, but no earlier than an entity’s adoption of Topic 606. The Company will adopt this guidance on January 1, 2019, and it does not anticipate it will have an impact on its 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 will adopt this guidance on January 1, 2019, and it does not anticipate it will have an impact on its consolidated financial statements.

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 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 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 consolidated financial statements.

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. Consolidated statements of operations amounts are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheet as a component of accumulated other comprehensive loss in total Exact Sciences Corporation’s shareholders’ equity. Transaction gains and losses are included in the consolidated statements of operations.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation in the consolidated financial statements and accompanying notes to the consolidated financial statements.

MAYO LICENSE AGREEMENT	12 Months Ended
MAYO LICENSE AGREEMENT	Dec. 31, 2018
MAYO LICENSE AGREEMENT
MAYO LICENSE AGREEMENT	(3) MAYO LICENSE AGREEMENT 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 December 2018. 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. The licensed Mayo patents and patent applications contain both method and composition claims that relate to markers, sample processing, analytical testing and data analysis associated with nucleic screening for cancers and other diseases. The jurisdictions covered by these patents and patent applications include the U.S., Australia, Canada, the European Union, China, Japan and Korea. In addition to granting the Company a license to the covered Mayo intellectual property, Mayo agreed to make available personnel to provide the Company product development and research and development assistance. Under the license agreement, the Company assumed the obligation and expense of prosecuting and maintaining the licensed Mayo patents and is obligated to make commercially reasonable efforts to bring to market products using the licensed Mayo intellectual property. Mayo has agreed to make available personnel through January 2020 to provide the Company product development and research and development assistance. Pursuant to the Company’s agreement with Mayo, the Company is required to pay Mayo a low single digit royalty on the Company’s net sales of products using the licensed Mayo intellectual property, with minimum annual royalty fees of $25,000 each year through 2033, the year the last patent expires. The January 2016 amendment to the Mayo license agreement established various low-single-digit royalty rates on net sales of current and future products and clarified how net sales will be calculated. As part of the amendment, the royalty rate on the Company’s net sales of Cologuard increased and, if in the future, improvements are made to the Cologuard product, the royalty rate may further increase, but, pursuant to the terms of the January 2016 and October 2017 amendment, the rate remains a low-single-digit percentage of net sales. In addition to royalties, the Company is required 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 through 2018. In addition, the Company is paying Mayo for research and development efforts. As part of the Company’s research collaboration with Mayo, the Company has incurred charges of $4.5 million and has made payments of $4.4 million for the year ended December 31, 2018. The Company has recorded an estimated liability in the amount of $1.9 million for research and development efforts as of December 31, 2018. The Company incurred charges of $3.8 million and made payments of $2.9 million for the year ended December 31, 2017. The Company recorded an estimated liability in the amount of $1.8 million for research and development efforts at December 31, 2017. The Company incurred charges of $3.6 million and made payments of $3.9 million for the year ended December 31, 2016. The Mayo license agreement required, among other things, a $0.5 million milestone payment upon FDA approval of the Company’s Cologuard test. The Company received this FDA approval, and paid the milestone payment, in August 2014. Pursuant to the license agreement, the Company granted Mayo two common stock purchase warrants with an exercise price of $1.90 per share covering 1,000,000 and 250,000 shares of common stock, respectively. The warrant covering 1,000,000 shares was fully exercised as of September 2011. The warrant covering 250,000 shares was exercised at various dates in 2013 and 2014 and became fully exercised as of June 2014. The license agreement will remain in effect, unless earlier terminated by the parties in accordance with the agreement, until the last of the licensed patents expires in 2033 (or later, if certain licensed patent applications are issued). However, if the Company is still using the licensed Mayo know‑how or certain Mayo‑provided biological specimens or their derivatives on such expiration date, the term shall continue until the earlier of the date the Company stops using such know‑how and materials and the date that is five years after the last licensed patent expires. The license agreement contains customary termination provisions and permits Mayo to terminate the license agreement if the Company sues Mayo or its affiliates, other than any such suit claiming an uncured material breach by Mayo of the license agreement.

PFIZER PROMOTION AGREEMENT	12 Months Ended
PFIZER PROMOTION AGREEMENT	Dec. 31, 2018
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, a service fee based on incremental gross profits over specified baselines and royalties for Cologuard related revenues for a specified period after the expiration or termination of the Promotion Agreement. These costs are recorded in sales and marketing in the consolidated statements of operations. The initial term of the Promotion Agreement runs through December 31, 2021. The Company incurred charges of $5.8 million and made payments of $5.3 million for promotion, sales and marketing services performed by Pfizer on behalf of the Company in 2018. The Company recorded a liability of $0.5 million for promotion, sales and marketing services performed by Pfizer on behalf of the Company in accrued liabilities in the Company’s consolidated balance sheet as of December 31, 2018. The Company recorded a liability of $4.8 million for the promotion fee earned by Pfizer as of December 31, 2018 in accrued liabilities in the Company’s consolidated balance sheet.

ISSUANCES OF EQUITY	12 Months Ended
ISSUANCES OF EQUITY	Dec. 31, 2018
ISSUANCE OF EQUITY
ISSUANCES OF EQUITY	(5) ISSUANCES OF EQUITY Underwritten Public Offerings In August 2016 the Company completed an underwritten public offering of 9.8 million shares of common stock at a price of $15.50 per share to the public. The Company received approximately $144.2 million of net proceeds from the offering after deducting $7.3 million for the underwriting discount and commissions and other stock issuance costs paid by the Company. In June 2017, the Company completed an underwritten public offering of 7.0 million shares of common stock at a price of $35.00 per share to the public. On June 26, 2017, the underwriters partially exercised their over-allotment option in connection with the offering and purchased an additional 450,000 shares of common stock at $35.00 per share to the public. The Company received, in the aggregate, approximately $253.4 million of net proceeds from the offering, after deducting $7.3 million for the underwriting discount and commissions and other stock issuance costs paid by the Company.

STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2018

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

(6) STOCK‑BASED COMPENSATION

Stock‑Based Compensation Plans

The Company maintains the 2010 Omnibus Long‑Term Incentive Plan (As Amended and Restated Effective July 27, 2017), the 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”).

2000 Stock Option and Incentive Plan. The Company adopted the 2000 Stock Option and Incentive Plan (the “2000 Option Plan”) on October 17, 2000. The 2000 Option Plan expired October 17, 2010 and after such date no further awards could be granted under the plan. Under the terms of the 2000 Option Plan, the Company was authorized to grant incentive stock options, as defined under the Internal Revenue Code, non‑qualified options, restricted stock awards and other stock awards to employees, officers, directors, consultants and advisors. Options granted under the 2000 Option Plan expire ten years from the date of grant. Grants made from the 2000 Option Plan generally vest over a period of three to four years.

The 2000 Option Plan was administered by the compensation committee of the Company’s board of directors, which selected the individuals to whom equity‑based awards would be granted and determined the option exercise price and other terms of each award, subject to the provisions of the 2000 Option Plan. The 2000 Option Plan provides that upon an acquisition of the Company, all options to purchase common stock will accelerate by a period of one year. In addition, upon the termination of an employee without cause or for good reason prior to the first anniversary of the completion of the acquisition, all options then outstanding under the 2000 Option Plan held by that employee will immediately become exercisable. At December 31, 2018, options to purchase 7,055 shares were outstanding under the 2000 Option Plan. There were no shares of restricted stock outstanding under the 2000 Option Plan.

2010 Omnibus Long‑Term Incentive Plan. The Company adopted the 2010 Omnibus Long‑Term Incentive Plan (the “2010 Stock Plan”) on July 16, 2010. The 2010 Stock Plan will expire on July 16, 2020 and after such date no further awards may be granted under the plan. Under the terms of the 2010 Stock Plan, the Company is authorized to grant incentive stock options, as defined under the Internal Revenue Code, non‑qualified options, restricted stock awards and other stock awards to employees, officers, directors, consultants and advisors. Options granted under the 2010 Stock Plan expire ten years from the date of grant. Grants made from the 2010 Stock Plan generally vest over a period of three to four years.

The 2010 Stock Plan is administered by the compensation committee of the Company’s board of directors, which selects the individuals to whom equity‑based awards will be granted and determines the option exercise price and other terms of each award, subject to the provisions of the 2010 Stock Plan. The 2010 Stock Plan provides that upon an acquisition of the Company, all equity will accelerate by a period of one year. In addition, upon the termination of an employee without cause or for good reason prior to the first anniversary of the completion of the acquisition, all equity awards then outstanding under the 2010 Stock Plan held by that employee will immediately vest. At December 31, 2018, options to purchase 2,524,506 shares were outstanding under the 2010 Stock Plan and 5,789,721 shares of restricted stock and restricted stock units were outstanding. At December 31, 2018, there were 9,071,346 shares available for future grant under the 2010 Stock Plan.

2015 Inducement Award Plan. The Company adopted the 2015 Inducement Award Plan (the “2015 Inducement Plan”) on February 9, 2015. The 2015 Inducement Plan expired on July 27, 2015 and after such date no further awards could be granted under the plan. Under the terms of the 2015 Inducement Plan, the Company was authorized to grant incentive stock options, as defined under the Internal Revenue Code, non-qualified options, restricted stock awards and other stock awards to employees who were not previously an employee of the Company or any of its Subsidiaries. Options granted under the 2015 Inducement Plan expire ten years from the date of grant. Grants made from the 2015 Inducement Plan generally vest over a period of three to four years.

The 2015 Inducement Plan is administered by the compensation committee of the Company’s board of directors, which selects the individuals to whom equity-based awards would be granted and determines the option exercise price and other terms of each award, subject to the provisions of the 2015 Inducement Plan. The 2015 Inducement Plan provides that upon an acquisition of the Company, all equity will accelerate by a period of one year. In addition, upon termination of an employee without cause or for good reason prior to the first anniversary of the completion of the acquisition, all equity awards then outstanding under the 2015 Inducement Plan held by that employee will immediately vest. At December 31, 2018, there were 38,572 shares of restricted stock and restricted stock units outstanding under the 2015 Inducement Award Plan. At December 31, 2018, there were no shares available for future grant under the 2015 Inducement Plan.

2016 Inducement Award Plan. The Company adopted the 2016 Inducement Award Plan (the “2016 Inducement Plan”) on January 25, 2016. The 2016 Inducement Plan expired on July 27, 2017, and after such date no further awards could be granted under the plan. Under the terms of the 2016 Inducement Plan, the Company was authorized to grant incentive stock options, as defined under the Internal Revenue Code, non-qualified options, restricted stock awards and other stock awards to employees who were not previously an employee of the Company or any of its Subsidiaries. Options granted under the 2016 Inducement Plan expire ten years from the date of grant. Grants made from the 2016 Inducement Plan generally vest over a period of three to four years.

The 2016 Inducement Plan is administered by the compensation committee of the Company’s board of directors, which selected the individuals to whom equity-based awards would be granted and determines the option exercise price and other terms of each award, subject to the provisions of the 2016 Inducement Plan. The 2016 Inducement Plan provides that upon an acquisition of the Company, all equity will accelerate by a period of one year. In addition, upon termination of an employee without cause or for good reason prior to the first anniversary of the completion of the acquisition, all equity awards then outstanding under the 2016 Inducement Plan held by that employee will immediately vest. At December 31, 2018, there were 417,881 shares of restricted stock and restricted stock units outstanding under the 2016 Inducement Award Plan. At December 31, 2018, there were no shares available for future grant under the 2016 Inducement Plan.

2010 Employee Stock Purchase Plan. The 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) was adopted by the Company on July 16, 2010. The 2010 Purchase Plan provides participating employees the right to purchase shares of common stock at a discount through a series of offering periods. The 2010 Purchase Plan will expire on October 31, 2020. On July 24, 2014, the Company’s stockholders approved an amendment to the 2010 Employee Stock Purchase Plan to increase the number of shares available for purchase thereunder by 500,000 shares. On July 28, 2016 the Company’s stockholders approved an amendment to the 2010 Employee Stock Purchase Plan to increase the number of shares available for purchase thereunder by 2,000,000 shares. At December 31, 2018, there were 1,236,537 shares of common stock available for purchase by participating employees under the 2010 Purchase Plan.

The compensation committee of the Company’s board of directors administers the 2010 Purchase Plan. Generally, all employees whose customary employment is more than 20 hours per week and more than five months in any calendar year are eligible to participate in the 2010 Purchase Plan. Participating employees authorize an amount, between 1 percent and 15 percent of the employee’s compensation, to be deducted from the employee’s pay during the offering period. On the last day of the offering period, the employee is deemed to have exercised the employee’s option to purchase shares of Company common stock, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the 2010 Purchase Plan, the option exercise price is an amount equal to 85 percent of the fair market value, as defined under the 2010 Purchase Plan, and no employee can purchase more than $25,000 of Company common stock under the 2010 Purchase Plan in any calendar year. Rights granted under the 2010 Purchase Plan terminate upon an employee’s voluntary withdrawal from the 2010 Purchase Plan at any time or upon termination of employment. At December 31, 2018, there were 1,563,463 cumulative shares issued under the 2010 Purchase Plan, and 346,609 shares were issued in the year ended December 31, 2018, as follows:


		Weighted Average
Offering period ended	Number of Shares	price per Share
April 30, 2018	285,013	$	9.32
October 31, 2018	61,596	$	36.35

Stock‑Based Compensation Expense

The Company recorded approximately $60.3 million, $35.5 million, and $23.7 million in stock‑based compensation expense during the years ended December 31, 2018, 2017, and 2016, respectively, in connection with the amortization of restricted stock and restricted stock unit awards, stock purchase rights granted under the Company’s employee stock purchase plan and stock options granted to employees, non‑employee consultants and non‑employee directors. Non‑cash stock‑based compensation expense by expense category for the years ended December 31, 2018, 2017, and 2016 are as follows:


	December 31,
(In thousands)	2018		2017		2016
Cost of sales	$	3,531	$	1,783	$	1,064
Research and development		10,189		6,836		4,014
General and administrative		34,181		20,221		14,597
Sales and marketing		12,363		6,672		4,057
Total stock-based compensation	$	60,264	$	35,512	$	23,732

In connection with the November 2016 retirement of the Company’s former Chief Financial Officer, the Company modified the vesting of 118,341 shares of his previously unvested restricted stock units whereby such restricted stock units vested on January 1, 2017. He forfeited all other unvested restricted stock units and stock option awards. In the fourth quarter of 2016, the Company recorded $1.5 million of non-cash stock-based compensation expense for the modified award.

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 vest 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 to December 31, 2018. During the year ended December 31, 2018, the Company recorded $3.9 million of non-cash stock-based compensation expense for the modified awards.

Determining Fair Value

Valuation and Recognition—The fair value of each option award is estimated on the date of grant using the Black‑Scholes option‑pricing model. The fair value of each market measure-based award is estimated on the date of grant using a Monte Carlo simulation pricing model. The fair value of service-based awards for each restricted stock unit award is determined on the date of grant using the closing stock price on that day. The estimated fair value of these awards is recognized to expense using the straight‑line method over the vesting period. For awards issued to non-employees, the measurement date is the date when the performance is complete or when the award vests, whichever is earliest. Accordingly, non-employee awards are re-measured at each reporting period until the final measurement date. The fair value of the award is recognized as stock-based compensation expense over the requisite service period, generally the vesting period. The Black-Scholes and Monte Carlo pricing models utilize the following assumptions:

Expected Term—Expected life of an option award is the average length of time over which the Company expects employees will exercise their options, which is based on historical experience with similar grants. Expected life of a market measure-based award is based on the applicable performance period.

Expected Volatility—Expected volatility is based on the Company’s historical stock volatility data over the expected term of the awards.

Risk‑Free Interest Rate—The Company bases the risk‑free interest rate used in the Black‑Scholes and Monte Carlo valuation models on the implied yield currently available on U.S. Treasury zero‑coupon issues with an equivalent expected term.

Forfeitures—Effective January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“Update 2016-09”). With the adoption of Update 2016-09, forfeiture estimates are no longer required, and the effects of actual forfeitures are recorded at the time they occur. The impact on the consolidated balance sheet was a cumulative-effect adjustment of $0.4 million, increasing opening accumulated deficit and additional paid-in capital.

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


	Year Ended
	December 31,
	2018	2017	2016
Option Plan Shares
Risk-free interest rates	2.73% - 2.79%	2.1% - 2.2%	1.5% - 1.7%
Expected term (in years)	5.45 - 6.44	6.51 - 6.59	6.25 - 6.74
Expected volatility	61.8% - 66.2%	62.1% - 62.9%	58.9% - 59.4%
Dividend yield	0 %	0 %	0 %
Weighted average fair value per share of options granted during the period	$ 24.55	$ 25.23	$ 3.17
Market Measure-Based Shares
Risk-free interest rates	(1)	(1)	0.8% - 0.9%
Expected term (in years)	(1)	(1)	2.43 - 2.84
Expected volatility	(1)	(1)	68.3% - 79.6%
Dividend yield	(1)	(1)	0 %
Weighted average fair value per share of stock purchase rights granted during the period	(1)	(1)	$ 3.77
ESPP Shares
Risk-free interest rates	2.1% - 2.8%	1% - 1.6%	0.4% - 0.8%
Expected term (in years)	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0
Expected volatility	51.7% - 65.4%	45% - 85.5%	70.1% - 92.7%
Dividend yield	0 %	0 %	0 %
Weighted average fair value per share of stock purchase rights granted during the period	$ 20.47	$ 17.87	$ 3.30

(1)

The Company did not issue market measure-based shares 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 years ended December 31, 2018, 2017 and 2016 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, 2016	4,936,594	$	4.80	4.5
Granted	883,889		5.48
Exercised	(2,255,959)		1.52
Forfeited	(59,043)		9.75
Outstanding, December 31, 2016	3,505,481	$	7.00	5.5
Granted	953,097		21.97
Exercised	(1,067,120)		4.78
Forfeited	(30,997)		13.90
Outstanding, December 31, 2017	3,360,461	$	11.89	6.4
Granted	343,566		44.37
Exercised	(1,033,012)		6.42
Forfeited	(139,454)		24.07
Outstanding, December 31, 2018	2,531,561	$	17.86	6.6	$	114,524
Exercisable, December 31, 2018	1,147,872	$	12.10	5.2	$	58,536

(1)

The aggregate intrinsic value of options outstanding at December 31, 2018 is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s common stock for the 2,531,561 options that had exercise prices that were lower than the $63.10 market price of our common stock at December 31, 2018. The aggregate intrinsic value of options exercisable at December 31, 2018 is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s common stock for the 1,147,872 options that had exercise prices that were lower than the $63.10 market price of our common stock at December 31, 2018. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $53.0 million, $47.0 million, and $30.5 million, respectively, determined as of the date of exercise.

A summary of restricted stock and restricted stock unit activity under the Stock Plans during the years ended December 31, 2018, 2017 and 2016 is as follows:


		Weighted
	Restricted	Average Grant
	Shares	Date Fair Value
Outstanding, January 1, 2016	3,444,694	$	14.19
Granted	3,960,583		6.90
Released	(796,168)		16.95
Forfeited	(1,007,793)		9.57
Outstanding, December 31, 2016	5,601,316	$	9.19
Granted	2,035,679		33.04
Released	(1,132,265)		14.24
Forfeited	(355,952)		19.68
Outstanding, December 31, 2017	6,148,778	$	15.76
Granted	1,686,385		50.49
Released	(1,277,727)		21.66
Forfeited	(311,262)		24.39
Outstanding, December 31, 2018	6,246,174	$	23.16

As of December 31, 2018, there was approximately $120.8 million of total unrecognized compensation cost related to non‑vested share‑based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in forfeitures. The Company expects to recognize that cost over a weighted average period of 2.8 years.

The Company received approximately $6.6 million, $5.1 million, and $3.4 million from stock option exercises during the years ended December 31, 2018, 2017 and 2016, respectively. During the years ended December 31, 2018, 2017 and 2016, 346,609, 423,423, and 356,823 shares of common stock, respectively, were issued under the Company’s 2010 Purchase Plan, resulting in proceeds to the Company of $4.9 million, $2.8 million, and $2.1 million, respectively.

The following table summarizes information relating to currently outstanding and exercisable stock options as of December 31, 2018:


	Outstanding				Exercisable
		Weighted
		Average	Weighted			Weighted
		Remaining	Average			Average
	Number of	Contractual	Exercise		Number of	Exercise
Exercise Price	Options	Life (Years)	Price		Options	Price
$0.00 - $10.00	973,527	5.4	$	6.16	604,168	$	6.57
$10.01 - $15.00	228,032	4.5		12.28	228,032		12.28
$15.01 - $20.00	18,477	5.6		16.52	18,477		16.52
$20.01 - $25.00	980,551	7.5		22.03	281,220		22.45
$25.01 - $30.00	12,608	6.1		26.98	12,608		26.98
$30.01 - $40.00	—	—		—	—		—
$40.01 - $45.00	308,266	8.9		44.37	—		—
$45.01- $49.33	10,100	8.8		49.33	3,367		49.33
	2,531,561	6.6	$	17.86	1,147,872	$	12.10

Shares Reserved for Issuance

The Company has reserved shares of its authorized common stock for issuance pursuant to its employee stock purchase and stock option plans, including all outstanding stock option grants noted above at December 31, 2018, as follows:


Shares reserved for issuance
2010 Stock Plan		9,071,346
2010 Purchase Plan		1,236,537
		10,307,883

COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2018

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

(7) COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases a 35,000 square foot manufacturing and office facility in Madison, Wisconsin. This lease has been in effect since 2010. During September 2018, the Company entered into an amended lease agreement. The amended agreement extended the initial term of the lease and is subject to periodic rent escalation adjustments. The Company has two options to extend the term of the lease for one year each. The lease is in effect until February 2025 and is subject to periodic rent escalation adjustments.

The Company leases a 55,000 square foot facility which houses its commercial lab operations in Madison, Wisconsin. This lease has been in effect since 2013. The lease has been amended numerous times with the most recent amendment taking place in March 2018. The amended agreement extended the initial term of the lease and is subject to periodic rent escalation adjustments. The Company has two options to extend the term of the lease for five years each. As part of the lease agreements, the landlord agreed to pay for a portion of leasehold improvements constructed. These payments are recorded as a lease incentive obligation and are amortized over the remaining term of the lease as a reduction of rent expense. The lease is in effect until November 2027 and is subject to periodic rent escalation adjustments. As of December 31, 2018 and 2017, the lease incentive obligation was $0.1 million and $0.7 million, respectively.

The Company leases a 45,000 square foot facility in Madison, Wisconsin for administration purposes. This lease has been in effect since 2014. The lease has been amended several times with the most recent amendment taking place in June 2018. The amended agreement extended the initial term of the lease and is subject to periodic rent escalation adjustments. The Company has six options to extend the lease for up to three months each. The Company has already exercised three of those options. The lease is in effect until June 2020 and is subject to periodic rent escalation adjustments.

The Company leases a 66,000 square foot warehouse facility in Madison, Wisconsin. The lease has been in effect since 2015. The lease has been amended several times with the most recent amendment taking place in October 2017. The amended agreement increased the square footage of leased space and the landlord agreed to pay for a portion of leasehold improvements constructed. The lease is effective until May 2025 and is subject to periodic rent escalation adjustments. The lease includes an option to extend the lease to November 2027. As of December 31, 2018, the lease incentive obligation was $0.9 million.

The Company leases a 26,000 square foot facility which houses a portion of its sales operations in Middleton, Wisconsin. This lease has been in effect since February 2018. The lease is effective until March 2020 and is subject to periodic rent escalation adjustments.

The Company leases a 48,000 square foot facility in Madison, Wisconsin for research and development purposes. The lease has been in effect since September 2018. The lease is effective until March 2035 and is subject to periodic rent escalation adjustments. See Note 9 for further detail regarding this leased facility.

The Company leases a 5,000 square foot office facility in Salt Lake City, Utah. This lease was acquired as part of the Company’s acquisition of Sampleminded. The lease is effective until February 2022 and is subject to periodic rent escalation adjustments.

The Company leases a 10,000 square foot facility in San Diego, California. This lease was acquired as part of the Company’s acquisition of Biomatrica. The lease has been in effect since November 2017. The lease is effective until November 2024 and is subject to periodic rent escalation adjustments. As part of the lease agreement, the landlord agreed to pay for a portion of leasehold improvements constructed. These payments are recorded as a lease incentive obligation and are amortized over the remaining term of the lease as a reduction of rent expense. As of December 31, 2018, the lease incentive obligation was $0.6 million.

There is currently a building being constructed in Madison, Wisconsin which will serve as the Company’s corporate headquarters. The building is expected to be completed in 2020, at which point the Company will begin leasing it from the landlord with an expected initial term from March 2020 to February 2035. The lease is subject to periodic rent escalation adjustments. See Note 9 for further detail regarding this lease and the Company’s accounting considerations under build-to-suit lease accounting.

Future minimum payments under operating leases as of December 31, 2018 are as follows. Amounts included in the table are in thousands.


Year Ending December 31,
2019	$	3,861
2020		5,135
2021		4,995
2022		5,027
2023		5,146
Thereafter		44,286
Total lease obligations	$	68,450

Rent expense included in the accompanying consolidated statements of operations was approximately $3.6 million, $2.6 million, and $2.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.

License Agreements

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

Mayo. See Note 3 for information related to the Mayo license agreement.

Hologic. In October 2009, the Company entered into a technology license agreement with Hologic, Inc. (“Hologic”). Under the license agreement, Hologic granted the Company an exclusive, worldwide license within the field of human stool based colorectal cancer and pre‑cancer detection or identification with regard to certain Hologic patents, patent applications and improvements, including Hologic’s Invader detection chemistry (the “Covered Hologic IP”). The licensed patents and patent applications contain both method and composition‑of‑matter claims. The jurisdictions covered by these patents and patent applications include the U.S., Australia, Canada, China, the European Union, Japan and Korea. The license agreement also provided the Company with non‑exclusive, worldwide licenses to the Covered Hologic IP within the field of clinical diagnostic purposes relating to colorectal cancer (including cancer diagnosis, treatment, monitoring or staging) and the field of detection or identification of colorectal cancer and pre‑cancers through means other than human stool samples. In December 2012, the Company entered into an amendment to this license agreement with Hologic pursuant to which Hologic granted the Company a non‑exclusive worldwide license to the Covered Hologic IP within the field of any disease or condition within, related to or affecting the gastrointestinal tract and/or appended mucosal surfaces. The Company received FDA approval for its Cologuard test in August 2014 and was required to make a milestone payment of $0.1 million to Hologic, which was expensed to research and development in August 2014. The Company is required to pay Hologic a low single-digit royalty on the Company’s net sales of products using the Covered Hologic IP.

MDx Health. In July 2010, the Company entered into a technology license and royalty agreement (“MDx License Agreement”) with MDx Health (formerly Oncomethylome Sciences, S.A.) (“MDx”). Under the MDx License Agreement, MDx granted the Company a royalty bearing, exclusive, worldwide license to certain patents. Under the MDx License Agreement, the Company was obligated to make commercially reasonable efforts to bring products covered by the license agreement to market. The MDx License Agreement required the Company to pay MDx a low single-digit royalty fee based on a certain percentage of the Company’s net sales of the licensed products, including a minimum royalty fee of $0.1 million on each anniversary of the agreement for the life of the contract. The Company also agreed to pay various milestone payments:

·

$0.1 million upon the first commercial sale of a licensed product after the receipt of the FDA approval, which the Company paid in 2014;

·

$0.2 million after the Company has reached net sales of $10 million of a licensed product after receipt of the FDA approval, which the Company paid in 2015;

·

$0.8 million after the Company reached cumulative net sales of $50 million, which the Company paid in 2016;

·

$1.0 million after the Company reached net sales of $50 million in a single calendar year, which the Company paid in 2016.

Effective April 2017, the Company and MDx entered into a 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 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.

Armune BioScience & the University of Michigan

In December 2017, the Company entered into the Armune Purchase Agreement with 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 portfolio of Armune assets the Company acquired is expected to complement its product pipeline. 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 ability to meet these events 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.

ACCRUED LIABILITIES

12 Months Ended

Dec. 31, 2018

ACCRUED LIABILITIES

ACCRUED LIABILITIES

(8) ACCRUED LIABILITIES

Accrued liabilities at December 31, 2018 and 2017 consisted of the following:


	December 31,
(In thousands)	2018		2017
Compensation	$	37,133	$	26,399
Assets under construction		32,021		8,797
Professional fees		19,143		5,304
Research and trial related expenses		6,245		3,466
Other		4,052		3,872
Licenses		2,050		1,288
	$	100,644	$	49,126

LONG-TERM DEBT

12 Months Ended

Dec. 31, 2018

LONG TERM DEBT

LONG-TERM DEBT

(9) 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 facility 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 facility. 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 facility and construction of the adjacent corporate headquarters facility. Under the financing method, the Company does not recognize the proceeds received from the third-party as a sale of the facility. The facility remains in property, plant and equipment on the Company’s 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 consolidated balance sheet as of December 31, 2018. A portion of the proceeds received from the sale were used to repay the mortgage on the facility, and as of December 31, 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 below.

Prior to the repayment, borrowings under the credit agreement bore interest at 4.15 percent. The Company made interest-only payments on the outstanding principal balance for the period between July 12, 2015 and September 12, 2015. The credit agreement required the Company to make, beginning on October 12, 2015 and continuing through May 12, 2019, monthly principal and interest payments of $31,000, and a final principal and interest payment of $4.4 million would have been due on the maturity date of June 12, 2019.

Additionally, the Company previously recorded $73,000 in deferred financing costs, which were recorded as a direct deduction from the mortgage liability. The issuance costs were being amortized through June 12, 2019. The Company recorded $13,000, $18,000 and $18,000 in amortization of mortgage issuance costs during the years ended December, 31, 2018, 2017, and 2016, respectively. As of December 31, 2018, the outstanding balance of the mortgage issuance costs was written down to $0 due to the sale of the facility and the payoff of the mortgage.

Revolving Loan Agreement

During December 2017 the Company entered into a revolving loan agreement (the “Revolving Loan Agreement”) with MB Financial Bank, N.A. (“MB Bank”). 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 MB Bank 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. At December 31, 2018, the Company is in compliance with all covenants.

As of December 31, 2018, 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 MB Bank (the “Construction Loan Agreement”), which provides the Company with a non-revolving construction loan (the “Construction Loan”) of $25.6 million. The Company will use 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, MB 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 MB Bank’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. Starting in December 2019, the Company will make monthly payments towards the outstanding principal balance due plus accrued interest. As of December 31, 2018, the Company has drawn $24.7 million from the Construction Loan, including $0.4 million of interest incurred, which is included in accrued interest on the Company’s consolidated financial statements. The Company capitalized the $0.4 million to the construction project.

Additionally, the Company has recorded deferred financing costs of $0.2 million related to the Construction Loan. These deferred financing costs are recorded as a reduction to long-term debt in the consolidated balance sheets. The deferred financing costs are being amortized through December 10, 2022. The Company has recorded $45,000 in amortization of deferred financing costs related to the Construction Loan for the year ended December 31, 2018. There was no amortization expense recorded for the year ended December 31, 2017.

The Company has agreed in the Construction Loan Agreement to various financial covenants including minimum liquidity and minimum tangible net worth. As of December 31, 2018, the Company is in compliance with all covenants.

The table below represents the future principal obligations as of December 31, 2018. Amounts included in the table are in thousands:


Year ending December 31,
2019	$	8
2020		96
2021		105
2022		24,051
	$	24,260

Build-to-Suit Leases

The Company evaluates whether it is the accounting owner of leased assets during the construction period when the Company is involved in the construction of the leased asset. Due to funding provided by the Company for costs related to the construction of the Company’s new Madison, WI, headquarters, as of December 31, 2018, the Company is considered, for accounting purposes only, the owner of the construction project in accordance with build-to-suit accounting. As of December 31, 2018, the Company has contributed $4.5 million towards the project. All project construction costs incurred over that amount are to be paid by the landlord, though the Company will account for those costs as assets under construction with a corresponding liability. As of December 31, 2018, the Company recorded a total of $7.3 million in construction costs related to this project, including $2.1 million funded by the landlord, which is included as a financing obligation and recorded in other long-term liabilities. An additional $0.7 million has been funded by the Company for leasehold improvements which are not considered part of the build-to-suit lease.

The construction project is expected to be completed in 2020.

CONVERTIBLE DEBT

12 Months Ended

Dec. 31, 2018

CONVERTIBLE DEBT

CONVERTIBLE DEBT

(10) CONVERTIBLE NOTES

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 “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.

Prior to July 15, 2024, the Notes are convertible only upon the occurrence of certain events and during certain periods, as set forth in the Indenture, and thereafter, until the close of business on the second scheduled trading day immediately preceding the Maturity Date. 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 July 15, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time.

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

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.

While the Notes are currently classified on the Company’s consolidated balance sheets at December 31, 2018 as long-term, the future convertibility and resulting balance sheet classification of this liability will be monitored at each quarterly reporting date and will be analyzed dependent upon market prices of the Company’s common stock during the prescribed measurement periods. In the event that the holders of the Notes have the election to convert the Notes at any time during the prescribed measurement period, the Notes would then be considered a current obligation and classified as such.

Under current accounting guidance, an entity must separately account for the liability and equity components of convertible debt instruments (such as the January 2018 Notes and June 2018 Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The liability component of the instrument was valued in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. On the January 2018 Notes, the initial carrying value of the liability component of $495.1 million was calculated using a 6.0% assumed borrowing rate. The equity component of $194.9 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the January 2018 Notes and is recorded in additional paid-in capital on the Company’s consolidated balance sheet at the issuance date. That equity component is treated as a discount on the liability component of the January 2018 Notes, which is amortized over the seven-year term of the January 2018 Notes using the effective interest rate method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. On the June 2018 Notes, the initial carrying value of the liability component of $159.7 million was calculated using a 6.0% assumed borrowing rate. The equity component of $73.0 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the June 2018 Notes and adding in the premium at which the June 2018 Notes were sold. This is recorded in additional paid-in capital on the Company’s consolidated balance sheet at the issuance date. That equity component, prior to adding in the premium, is treated as a discount on the liability component of the June 2018 Notes, which is amortized over the remaining term of six-and-a-half years of the June 2018 Notes using the effective interest rate method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.

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 $13.1 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 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.

Convertible notes, net of discounts and deferred financing costs at December 31, 2018, consisted of the following:


(In thousands)
Principal	$	908,500
Debt discount, net		(227,403)
Deferred financing costs		(16,348)
Net carrying amount	$	664,749

EMPLOYEE BENEFIT PLAN	12 Months Ended
EMPLOYEE BENEFIT PLAN	Dec. 31, 2018
EMPLOYEE BENEFIT PLAN
EMPLOYEE BENEFIT PLAN	(11) EMPLOYEE BENEFIT PLAN The Company maintains a qualified 401(k) retirement savings plan (the “401(k) Plan”) covering all employees. Under the terms of the 401(k) Plan, participants may elect to defer a portion of their compensation into the 401(k) Plan, subject to certain limitations. Company matching contributions may be made at the discretion of the Board of Directors. The Company’s Board of Directors approved 401(k) Plan matching contributions for the years ended December 31, 2018, 2017 and 2016 in the form of Company common stock equal to 100 percent up to 6 percent of the participant’s eligible compensation for that year. The Company recorded compensation expense of approximately $7.4 million, $3.0 million, and $2.2 million, respectively, in the statements of operations for the years ended December 31, 2018, 2017 and 2016 in connection with 401(k) Plan matching contributions.

NEW MARKET TAX CREDIT

12 Months Ended

Dec. 31, 2018

NEW MARKET TAX CREDIT

NEW MARKET TAX CREDIT

(12) 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. Through its participation in this program, the Company has secured low interest financing and the potential for future debt forgiveness related to the Madison, Wisconsin facility. Upon closing of this transaction, the Company provided an aggregate of approximately $5.1 million to the Investor, in the form of a loan receivable, with a term of seven years, bearing an interest rate of 2.74 percent per annum. This $5.1 million in proceeds plus $2.4 million of capital from the Investor was used to make an aggregate $7.5 million loan to a subsidiary of the Company. This financing arrangement is not secured by any assets of the Company. On December 1, 2021, the Company would receive a repayment of its approximately $5.1 million loan. The $5.1 million is eliminated in the consolidation of the financial statements. This transaction also includes a put/call feature that becomes enforceable at the end of the seven-year compliance period. The Investor may exercise its put option or the Company can exercise the call, both of which will serve to trigger forgiveness of the debt. The value attributable to the put/call is nominal. The $2.4 million was recorded in other long-term liabilities on the Company’s balance sheet. 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 recorded $0.3 million as a decrease of expenses for the years ended December 31, 2018, 2017, and 2016. At December 31, 2018, the remaining balance of $1.0 million is included in other long-term liabilities. The Company incurred approximately $0.2 million of debt issuance costs related to the above transactions, which are being amortized over the life of the agreements.

The Investor is subject to 100 percent recapture of the NMTC it receives for a period of seven years as provided in the Internal Revenue Code and applicable U.S. Treasury regulations. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Noncompliance with applicable requirements could result in the Investor’s projected tax benefits not being realized and, therefore, require the Company to indemnify the Investor for any loss or recapture of NMTC related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations. The Company does not anticipate any credit recapture will be required in connection with this financing arrangement.

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

·

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

·

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

·

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

·

the Company is obligated to absorb losses of the VIEs.

Because the Company is the primary beneficiary of the VIEs, they have been included in the consolidated financial statements. There are no other assets, liabilities or transactions in these VIEs outside of the financing transactions executed as part of the NMTC arrangement.

Also in December 2014, in connection with the NMTC transaction, the Company entered into a land purchase option agreement with the owner of certain real property (land) adjacent to certain of the Company’s current Madison, Wisconsin facilities. The option is renewable annually in exchange for a fee. If the Company exercises its land purchase option, it will pay a fixed amount for the land. That fixed amount approximates the then-current fair value of the land. If the Company decides not to exercise its option, then on December 31, 2021 (which is after the seven-year compliance period of the NMTC program), the Company must pay $1.2 million to the community development entity. As discussed below, the community development entity is a variable interest entity consolidated into the Company. The community development entity would then distribute this money to its members. The majority member of the community development entity is also the owner of the land subject to the land purchase option. The Company has recorded the obligation and the land purchase option asset for $1.2 million to reflect the Company’s assessment that it is probable that at least $1.2 million will be paid in the future based on resolution of the land purchase option. The asset is included in other long-term assets and the liability is included in other long-term liabilities on the consolidated balance sheet.

WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS	12 Months Ended
WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS	Dec. 31, 2018
WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS.
WISCONSIN ECONOMIC DEVELOPMENT TAX CREDITS	(13) 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 December 31, 2018, 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 December 31, 2018, the Company also has recorded a $2.4 million liability in other short-term liabilities and a $2.2 million liability in other long-term liabilities, reflecting when the expected benefit of the tax credit amortization will reduce future operating expenses. During the year ended December 31, 2018, the Company amortized $2.2 million of the tax credits earned as a reduction of operating expenses.

ACQUISITIONS

12 Months Ended

Dec. 31, 2018

ACQUISITIONS

ACQUISITIONS

(14) ACQUISITIONS

In August 2017, the Company acquired all of the outstanding equity of Sampleminded, the primary operations of which were customized software development for laboratory information systems and clinical information systems, for cash consideration of $3.2 million and 86,357 of the Company’s restricted stock units. Prior to the acquisition, Sampleminded provided certain consulting and software support services to the Company, and it licensed certain software to the Company. The restricted stock units were recorded by the Company as employee stock-based compensation because their vesting is contingent upon continued employment with the Company of certain former stockholders of Sampleminded. The $3.2 million of cash consideration was allocated to the estimated fair market value of the net (current or tangible) assets acquired of $0.2 million, $1.0 million in identifiable intangible assets (comprised of developed technology, customer relationships and non-compete agreements) and a residual amount of goodwill of $2.0 million. The purposes of acquisition were to invest in a technology complementary to the Company’s core business, to reduce costs by bringing certain technology and expertise in-house and to prepare for anticipated future growth.

In November 2017, the Company made a $3.0 million cash investment (the “2017 Biomatrica Investment”) in Biomatrica, Inc. (“Biomatrica”), then a privately held company specializing in the collection and preservation of biological materials. The Company made the 2017 Biomatrica Investment in connection with entering into an agreement for Biomatrica to supply certain products to the Company. Through the 2017 Biomatrica Investment, the Company acquired shares of Biomatrica’s Series E Preferred Stock representing 10 percent, of Biomatrica’s then-outstanding shares of capital stock on an as-converted basis.

The 2017 Biomatrica Investment did not constitute a variable interest entity, as the Company did not have control over the supplier’s business. Additionally, as the ownership percentage was below 20 percent, the equity method was not used to account for the investment. There were no quoted prices or observable pricing inputs available for Biomatrica’s stock. Therefore, the Company accounted for the 2017 Biomatrica Investment at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment. The carrying value of the 2017 Biomatrica Investment was $3.0 million as of December 31, 2017 and was reported in other long-term assets in the Company’s consolidated balance sheets.

In October 2018, the Company completed a full acquisition of Biomatrica. In the acquisition, the Company acquired all of the outstanding equity interests for an aggregate purchase price of $20.0 million net of cash received, debt repaid and certain other adjustments. Contingent consideration for an additional $20.0 million could be earned based upon certain revenue milestones being met. The purpose of the acquisition was to secure a key supplier for the Company’s pipeline products and expand the Company’s commercial offerings.

During 2018, the Company incurred approximately $0.6 million of acquisition-related costs associated with this transaction. These costs and expenses include fees associated with financial, legal, and accounting advisors.

The total purchase consideration for the 2018 Biomatrica Acquisition was $24.5 million consisting of a cash payment at closing of $17.9 million including $0.1 million for a post-closing working capital adjustment, contingent consideration payable in cash and having a fair value of $3.4 million, exchange of Series E Preferred stock with an acquisition date fair value of $2.2 million and the reduction of a $1 million Senior Secured Promissory Note and Security Agreement previously provided to Biomatrica and considered part of the consideration transferred. The Company’s previously held Series E Preferred stock ownership and the contingent consideration fair value were determined through a valuation using the income approach and involved significant unobservable inputs including revenue and operating margin forecasts, an applicable tax rate, a terminal growth rate and discount rate (Level 3). The valuation of the previously held investment indicated a loss on the investment of $0.8 million. The contingent consideration has been recognized in other long-term liabilities in the consolidated financial statements. The total purchase consideration was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition as follows:


(In thousands)
Net operating assets	2,168
Goodwill	15,300
Trade name	700
Customer relationships and contracts	2,700
Developed technology	5,400
Net operating liabilities	(1,754)
Total purchase price	24,514

The fair value of identifiable intangible assets has been determined using the income approach, which involves significant unobservable inputs (Level 3 inputs). These inputs include projected sales, margin, required rate of return and tax rate, as well as an estimated royalty rate in the cases of the developed technology and trade name intangibles. The developed technology and tradename intangibles are valued using a relief-from-royalty method. The customer relationships are valued using the multi-period excess earnings method.

Trade names represent the value identified associated with the Biomatrica trade name in the market. The trade name intangible is amortized on a straight-line basis over its estimated useful life of 15 years.

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

Customer relationships and contracts represent agreements with existing Biomatrica customers. Customer relationships and contracts are amortized on a straight-line basis over their estimated useful life of 15 years.

The goodwill generated from the acquisition of Biomatrica is primarily related to expected synergies. The total goodwill related to this acquisition is not deductible for tax purposes.

The initial accounting for the business combination was not complete at the time the financial statements were issued. Limitations on the use and carryforward of the net operating losses acquired from Biomatrica are being analyzed under IRS section 382.

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

INCOME TAXES

12 Months Ended

Dec. 31, 2018

INCOME TAXES

INCOME TAXES

(15) INCOME TAXES

Under financial accounting standards, deferred tax assets or liabilities are computed based on the differences between the financial statement and income tax bases of assets and liabilities using the enacted tax rates. Deferred income tax expense or benefit represents the change in the deferred tax assets or liabilities from period to period. At December 31, 2018, the Company had federal net operating loss, state net operating loss, and foreign net operating loss carryforwards of approximately $937.4 million, $403.5 million, and $7.8 million, respectively for financial reporting purposes, which may be used to offset future taxable income. The Company also had federal and state research tax credit carryforwards of $17.4 million and $7.5 million, respectively which may be used to offset future income tax liability. The federal credit carryforwards expire at various dates through 2038 and are subject to review and possible adjustment by the Internal Revenue Service. A portion of the state credit carryforwards expired in 2018 and the remainder begin to expire in 2019 through 2033 and are subject to review and possible adjustment by state tax jurisdictions. In the event of a change of ownership, the federal and state net operating loss and research and development tax credit carryforwards may be subject to annual limitations provided by the Internal Revenue Code and similar state provisions.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, the following that impacts the Company: (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) eliminating the corporate alternative minimum tax; (3) creating a new limitation on deductible interest expense; (4) limiting the deductibility of certain executive compensation; and (5) limiting certain other deductions.

The expense (benefit) for income taxes consists of:


	December 31,
(In thousands)	2018		2017		2016
Current	$	92	$	106	$	—
Deferred		—		(293)		—
Total Tax Expense (Benefit)	$	92	$	(187)	$	—

The components of the net deferred tax asset with the approximate income tax effect of each type of carryforward, credit and temporary differences are as follows:


	December 31,
(In thousands)	2018		2017
Deferred tax assets:
Operating loss carryforwards	$	226,276	$	186,963
Tax credit carryforwards		21,417		13,818
Other temporary differences		24,368		13,799
Tax assets before valuation allowance		272,061		214,580
Less - Valuation allowance		(209,868)		(214,250)
Total deferred tax assets	$	62,193	$	330
Deferred tax liabilities
Convertible notes	$	(55,698)	$	—
Amortization		(2,182)		(126)
Fixed assets		(3,966)		—
Other temporary differences		(347)		(204)
Total deferred tax liabilities		(62,193)		(330)

Net deferred taxes	$	—	$	—

A valuation allowance to reduce the deferred tax assets is reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has incurred significant losses since its inception and due to the uncertainty of the amount and timing of future taxable income, management has determined that a valuation allowance of $209.9 million and $214.3 million at December 31, 2018 and 2017, respectively, is necessary to reduce the tax assets to the amount that is more likely than not to be realized. The change in valuation allowance for December 31, 2018 and 2017 was a decrease of $4.4 million and $45.8 million, respectively, as revised for the correction of the immaterial items described below. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

The effective tax rate differs from the statutory tax rate due to the following:


	December 31,
	2018		2017		2016
U.S. Federal statutory rate	21.0	%	35.0	%	35.0
State taxes	3.4		2.4		2.4
Federal and state tax rate changes	—		(99.2)		0.5
Foreign tax rate differential	—		0.1		(0.4)
Research and development tax credits	1.9		(1.9)		0.9
Stock-based compensation expense	9.1		16.7		(0.6)
Non-deductible executive compensation	(4.9)		(10.7)		(5.1)
Other adjustments	1.1		(2.6)		(0.6)
Valuation allowance	(31.7)		60.4		(32.1)
Effective tax rate	(0.1)	%	0.2	%	0.0

During preparation of the 2018 financial statements, the Company corrected the prior year balance of deferred tax assets relating to net operating loss carryovers and other temporary differences, as well as the valuation allowance related to those assets by an equal and offsetting amount. The correction related to the application of §162(m) on the deductibility of executive compensation. At December 31, 2017, the deferred tax assets and related valuation allowance were adjusted by $19.6 million in the table above, as a result of these corrections. Additionally, non-deductible executive compensation has been added as a separate line item in the rate reconciliation, the federal and state tax rate changes were decreased by 9.8% for 2017 and the valuation allowance was decreased by 5.5% for 2016. The Company carries a full valuation allowance against net deferred tax assets, therefore these immaterial adjustments to the disclosures had no effect on the consolidated balance sheets, statements of operations and cash flows for the year ended December 31, 2018, 2017, and 2016.

During 2018, the Company engaged in a research and development tax credit study for its historical tax credit carryovers. As a result of this study, the Company claimed an additional $5.0 million of federal and $2.2 million of state research and development credits. The credits are available to be carried forward. The study identified uncertain tax benefits of $1.9 million related to federal and state research and development tax credits. These amounts have been recorded as a reduction to our deferred tax assets. A valuation allowance was recorded against these attributes at December 31, 2017, therefore there was no impact to income tax expense as a result of recording the unrecognized tax benefits during the year ended December 31, 2018. Included in the balance of unrecognized tax benefits as of December 31, 2018 are $1.9 million of tax benefits that, if recognized, would affect the effective tax rate.

The following is a tabular reconciliation of the amounts of unrecognized tax benefits:


	December 31,
(In thousands)	2018		2017
January 1,	$	—	$	—
Increase due to current year tax positions		392		—
Increase due to prior year tax positions		1,534		—
Decrease due to prior year tax positions		—		—
Settlements		—		—
December 31,	$	1,926	$	—

As of December 31, 2018, due to the carryforward of unutilized net operating losses and research and development credits, the Company is subject to U.S. Federal income tax examinations for the tax years 1999 through 2018, and to state income tax examinations for the tax years 2003 through 2018. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2018, 2017 and 2016.

RELATED PARTY TRANSACTION	12 Months Ended
RELATED PARTY TRANSACTION	Dec. 31, 2018
RELATED PARTY TRANSACTION
RELATED PARTY TRANSACTION	(16) RELATED PARTY TRANSACTIONS 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 incurred charges of $0.3 million and made payments of $0.3 million for the year ended December 31, 2018. The Company incurred charges of $0.2 million and made payments of $0.2 million for the year ended December 31, 2017.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

12 Months Ended

Dec. 31, 2018

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table sets forth unaudited quarterly statements of operations data for each of the eight quarters ended December 31, 2018 and 2017. In the opinion of management, this information has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this Form 10‑K, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results of operations. The quarterly data should be read in conjunction with the Company’s audited consolidated financial statements and the notes to the consolidated financial statements appearing elsewhere in this Form 10‑K.


	Quarter Ended
	March 31,		June 30,		September 30,		December 31,
	(Amounts in thousands, except per share data)
2018
Revenue	$	90,296		102,894		118,291		142,981
Cost of revenue		22,914		26,888		30,020		38,160
Gross margin		67,382		76,006		88,271		104,821
Research and development		14,935		14,712		17,631		20,932
General and administrative		35,567		39,565		46,729		56,432
Sales and marketing		53,408		54,431		64,836		76,773
Loss from operations		(36,528)		(32,702)		(40,925)		(49,316)
Investment income		3,673		4,917		6,292		6,321
Interest expense		(6,510)		(8,603)		(10,704)		(10,972)
Net loss before tax		(39,365)		(36,388)		(45,337)		(53,967)
Income tax benefit (expense)		(59)		1		(27)		(7)
Net loss	$	(39,424)	$	(36,387)	$	(45,364)	$	(53,974)
Net loss per share—basic and diluted	$	(0.33)	$	(0.30)	$	(0.37)	$	(0.44)
Weighted average common shares outstanding—basic and diluted		121,016		122,129		122,671		122,981
2017
Revenue	$	48,363		57,646		72,574		87,406
Cost of revenue		16,981		17,991		20,729		23,495
Gross margin		31,382		39,655		51,845		63,911
Research and development		8,002		9,737		11,725		12,675
General and administrative		20,070		24,609		30,763		33,598
Sales and marketing		38,801		36,728		37,768		40,627
Loss from operations		(35,491)		(31,419)		(28,411)		(22,989)
Investment income		595		683		1,334		1,320
Interest expense		(50)		(54)		(51)		(51)
Net loss before tax		(34,946)		(30,790)		(27,128)		(21,720)
Income tax benefit (expense)		—		—		231		(44)
Net loss	$	(34,946)		(30,790)		(26,897)		(21,764)
Net loss per share—basic and diluted	$	(0.32)	$	(0.27)	$	(0.23)	$	(0.18)
Weighted average common shares outstanding—basic and diluted		110,582		112,847		119,215		119,950

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2018

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company’s wholly‑owned subsidiaries and variable interest entities. See Note 12 for the discussion of financing arrangements involving certain entities that are variable interest entities that are included in the Company’s 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 accounting principles generally accepted in the United States (“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 a 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 December 31, 2018 and 2017.

Marketable Securities

Management determines the appropriate classification of debt securities at the time of purchase and re‑evaluates such designation as of each balance sheet date. Debt securities carried at amortized cost are classified as held‑to‑maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable equity securities and debt securities not classified as held‑to‑maturity are classified as available‑for‑sale. Available‑for‑sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. 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 December 31, 2018 and 2017, 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. Realized gains were $0.4 million, $23,000, and $24,000, net of insignificant realized losses, for the years ended December 31, 2018, 2017, and 2016, respectively and are included in investment income.

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 year ended December 31, 2018, no investments were identified with other-than-temporary declines in value.

Available‑for‑sale securities at December 31, 2018 consist of the following:


	December 31, 2018
			Gains in Accumulated		Losses in Accumulated
			Other Comprehensive		Other Comprehensive		Estimated Fair
(In thousands)	Amortized Cost		Income (Loss)		Income (Loss)		Value
Corporate bonds	$	392,973	$	33	$	(719)	$	392,287
Asset backed securities		277,537		30		(568)		276,999
U.S. government agency securities		250,606		43		(178)		250,471
Commercial paper		12,158		—		(7)		12,151
Certificates of deposit		31,875		—		(31)		31,844
Total available-for-sale securities	$	965,149	$	106	$	(1,503)	$	963,752

Available‑for‑sale securities at December 31, 2017 consist of the following:


	December 31, 2017
			Gains in Accumulated		Losses in Accumulated
			Other Comprehensive		Other Comprehensive		Estimated Fair
(In thousands)	Amortized Cost		Income (Loss)		Income (Loss)		Value
Corporate bonds	$	181,639	$	10	$	(344)	$	181,305
Asset backed securities		94,700		—		(185)		94,515
U.S. government agency securities		54,974		—		(162)		54,812
Commercial paper		9,953		—		(7)		9,946
Certificates of deposit		6,647		1		(2)		6,646
Total available-for-sale securities	$	347,913	$	11	$	(700)	$	347,224

Changes in Accumulated Other Comprehensive Income (Loss)

The amount recognized in accumulated other comprehensive income (loss) (“AOCI”) for the years ended December 31, 2018, 2017 and 2016 were as follows:


					Accumulated
	Cumulative		Unrealized		Other
	Translation		Gain (Loss)		Comprehensive
(In thousands)	Adjustment		on Securities		Income (Loss)
Balance at January 1, 2016	$	11	$	(444)	$	(433)
Other comprehensive income (loss) before reclassifications		(215)		117		(98)
Amounts reclassified from accumulated other comprehensive loss		—		113		113
Net current period change in accumulated other comprehensive income (loss)		(215)		230		15
Balance at December 31, 2016	$	(204)	$	(214)	$	(418)
Other comprehensive income (loss) before reclassifications		143		(530)		(387)
Amounts reclassified from accumulated other comprehensive loss		—		55		55
Net current period change in accumulated other comprehensive income (loss)		143		(475)		(332)
Balance at December 31, 2017	$	(61)	$	(689)	$	(750)
Other comprehensive income (loss) before reclassifications		36		(1,025)		(989)
Amounts reclassified from accumulated other comprehensive loss		—		317		317
Net current period change in accumulated other comprehensive income (loss)		36		(708)		(672)
Balance at December 31, 2018	$	(25)	$	(1,397)	$	(1,422)

Amounts reclassified from accumulated other comprehensive loss for the years ended December 31, 2018, 2017 and 2016 were as follows:


	Affected Line Item in the	Year Ended December 31,
Details about AOCI Components (In thousands)	Statements of Operations	2018		2017		2016
Change in value of available-for-sale investments
Sales and maturities of available-for-sale investments	Investment income	$	317	$	55	$	113
Total reclassifications		$	317	$	55	$	113

Allowance for Doubtful Accounts

The Company estimates an allowance for doubtful accounts against accounts receivable based on estimates of expected collections consistent with historical cash collection experience. The allowance for doubtful accounts is evaluated on a regular basis and adjusted when trends, significant events or other substantive evidence indicate that expected collections will be less than applicable accrual rates. At December 31, 2018 and 2017 there was no allowance for doubtful accounts recorded. For the years ended December 31, 2018, 2017 and 2016, there was no bad debt expense written off against the allowance and charged to operating expense.

Inventory

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

Inventory consisted of the following:


	December 31,		December 31,
(In thousands)	2018		2017
Raw materials	$	12,761	$	10,344
Semi-finished and finished goods		26,387		15,683
Total inventory	$	39,148	$	26,027

Property, Plant and Equipment


	December 31,		December 31,
(In thousands)	2018		2017
Raw materials	$	12,761	$	10,344
Semi-finished and finished goods		26,387		15,683
Total inventory	$	39,148	$	26,027

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		December 31,		December 31,
(In thousands)	Useful Life		2018		2017
Property, plant and equipment
Land		(1)	$	4,466	$	4,466
Leasehold and building improvements		(2)		38,895		17,629
Land improvements		15 years		1,530		1,419
Buildings		30 years		7,928		7,928
Computer equipment and computer software		3 years		36,969		30,148
Laboratory equipment		3 - 10 years		37,518		23,296
Furniture and fixtures		3 years		8,353		4,531
Assets under construction		(3)		167,462		28,655
Property, plant and equipment, at cost				303,121		118,072
Accumulated depreciation				(57,862)		(38,086)
Property, plant and equipment, net			$	245,259	$	79,986

(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 years ended December 31, 2018, 2017, and 2016 was $20.5 million, $14.5 million, and $11.3 million, respectively.

At December 31, 2018, the Company had $167.5 million of assets under construction which consisted of $130.8 million related to building and leasehold improvements, $5.2 million of capitalized costs related to software projects, and $31.5 million of costs related to laboratory equipment under construction. Depreciation will begin on these assets once they are placed into service. The Company expects to incur an additional $184.9 million to complete the building projects and leasehold improvements, $7.5 million of costs to complete the computer software projects, $7.2 million to complete the laboratory equipment, and minimal costs to complete the computer equipment. These projects are expected to be completed in 2019 and 2020. The Company assesses its long-lived assets, consisting primarily of property and equipment, for impairment when material events and changes in circumstances indicate that the carrying value may not be recoverable. There were no impairment losses for the years ended December 31, 2018, 2017 or 2016.

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

Goodwill and intangible assets consisted of the following:


	December 31,		December 31,
(In thousands)	2018		2017
Finite-lived intangible assets
Finite-lived intangible assets	$	33,058	$	23,726
Less: Accumulated amortization		(4,107)		(1,500)
Finite-lived intangible assets, net		28,951		22,226
Internally developed technology in process		51		—
Total finite-lived intangible assets, net		29,002		22,226
Goodwill		17,279		1,979
Goodwill and intangible assets, net	$	46,281	$	24,205

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 December 31, 2018:


			Weighted
	Net Balance at		Average
	December 31,		Remaining
(In thousands)	2018		Life (Years)
Trade name	$	689		14.8
Customer relationships		2,666		14.8
Patents		18,979		9.6
Acquired developed technology		6,086		13.8
Internally developed technology		531		2.7
Total	$	28,951

As of December 31, 2018, 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	$	3,193
2020		3,193
2021		3,092
2022		2,956
2023		2,953
Thereafter		13,564
	$	28,951