The following discussion of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial
statements and the related notes thereto included elsewhere in this Quarterly
Report on Form 10-Q and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the year ended
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Table of Contents OverviewExact Sciences Corporation (together with its subsidiaries, "Exact," "we," "us," "our" or the "Company") is a leading global cancer diagnostics company. We have developed some of the most impactful brands in cancer diagnostics, and we are currently working on the development of additional tests for other types of cancer, with the goal of bringing new innovative cancer tests to patients throughout the world. Our Cologuard Test Colorectal cancer is the second leading cause of cancer deaths inthe United States ("U.S.") and the leading cause of cancer deaths in theU.S. among non-smokers. In 2020 in theU.S. there are projected to be approximately 148,000 new cases of colorectal cancer and 53,000 deaths from colorectal cancer. It is widely accepted that colorectal cancer is among the most preventable, yet least prevented cancers. Our Cologuard test is a non-invasive stool-based DNA ("sDNA") screening test that utilizes a multi-target approach to detect DNA and hemoglobin biomarkers associated with colorectal cancer and pre-cancer. Upon approval by theU.S. Food and Drug Administration ("FDA") inAugust 2014 , Cologuard became the first and only FDA-approved sDNA non-invasive colorectal cancer screening test. Cologuard is now indicated for average risk adults 45 years of age and older. Our original premarket approval submission to the FDA for Cologuard included the results of our pivotal DeeP-C clinical trial that had over 10,000 patients enrolled at 90 sites in theU.S. andCanada . The results of our DeeP-C clinical trial for Cologuard were published in theNew England Journal of Medicine inApril 2014 . The peer-reviewed study, "Multi-target Stool DNA Testing for Colorectal-Cancer Screening," highlighted the performance of Cologuard in the trial population: •Cancer Sensitivity: 92% •Stage I and II Cancer Sensitivity: 94% •High-Grade Dysplasia Sensitivity: 69% •Specificity: 87% Our Oncotype DX Tests With our Oncotype IQ Genomic Intelligence Platform we are applying our world-class scientific and commercial expertise and infrastructure to lead the translation of clinical and genomic data into clinically actionable results for treatment planning throughout the cancer patient's journey, from diagnosis to treatment selection and monitoring. Our Oncotype IQ Genomic Intelligence Platform is currently comprised of our flagship line of Oncotype DX gene expression tests for breast, prostate and colon cancer, as well as Oncotype DX AR-V7 Nucleus Detect® test, a liquid-based test for advanced stage prostate cancer. We believe our Oncotype DX tests provide information that has the following benefits: •Improved Quality of Treatment Decisions. We believe our approach to genomic-based cancer analysis improves the quality of cancer treatment decisions by providing an individualized analysis of each patient's tumor that is correlated to clinical outcome, rather than solely using subjective, anatomic and qualitative factors to determine treatments. Our Oncotype DX tests for breast cancer, Ductal Carcinoma in Situ ("DCIS"), prostate cancer, and colon cancer have been analytically and clinically validated in multiple published studies. The Recurrence Score® results from our tests have been demonstrated to classify patients into recurrence risk categories different than classifications based primarily on clinical and pathologic features. Additionally, multiple decision impact studies conducted worldwide consistently show that the Recurrence Score result changes treatment decisions in more than 30% of patients. As a result, we believe our tests enable patients and healthcare providers to make more informed decisions about the risks and benefits of various treatments, and consequently design an individualized treatment plan. 46
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Table of Contents •Improved Health Economics of Cancer Care. We believe that improving the quality of treatment decisions can result in significant economic benefits. The results of a number of clinical studies have demonstrated that by using the Oncotype DX Breast Recurrence Score® test, physicians and patients can better evaluate treatment options, such as whether a patient will or will not benefit from chemotherapy. Patients are benefited when (1) those who aren't likely to benefit from chemotherapy avoid it and the associated chemotoxicities and (2) those who are likely to benefit from chemotherapy receive it resulting in reduced incidence of distant recurrences. These better clinical outcomes increase survival rates and also save the patient as well as the healthcare system significant costs. International Business Background and Products Prior to our combination withGenomic Health , we did not have international revenue. We now commercialize our Oncotype DX tests internationally through employees inCanada ,Japan and six European countries, as well as through exclusive distribution agreements. We have provided our Oncotype DX tests in more than 90 countries outside ofthe United States . We do not offer Cologuard outside of theU.S. Inclusion of our products in guidelines and quality measures will be critical to our international success. The Oncotype DX breast cancer test is recognized in international guidelines issued by theSt. Gallen International Breast Cancer Expert Panel andEuropean Society for Medical Oncology and has been included in certain guidelines and recommendations inEngland ,Germany andJapan . We have obtained coverage for our invasive breast cancer test outside of theU.S. , including coverage for certain patients inCanada ,France ,Spain ,Germany ,Italy ,Ireland ,Israel ,Saudi Arabia ,Switzerland , and theUnited Kingdom . We expect that broadening coverage and reimbursement for our Oncotype DX tests outside ofthe United States will take years.Pipeline Research and Development Our research and development efforts are focused on developing new products and enhancing existing products to address new cancer areas and expand the clinical utility and addressable patient populations for our existing tests. These development efforts may lead to a variety of possible new products, including risk assessment, screening and prevention, early disease diagnosis, adjuvant and/or neoadjuvant disease treatment, metastatic disease treatment selection and patient monitoring. Through our collaboration withMayo Foundation for Medical Education and Research , we have successfully performed validation studies on multiple types of cancer using tissue, blood and other samples. We are currently focusing our research and development efforts on building a pipeline of potential future products and services with a focus on improving Cologuard's performance characteristics and on developing blood or other fluid-based ("liquid biopsy") tests. We expect to advance liquid biopsy through biomarker discovery and validation in tissue, blood, or other fluids. We are pursuing the following opportunities: •Colon Cancer Screening. We are seeking opportunities to improve upon Cologuard's performance characteristics. InOctober 2019 , we and Mayo presented at theAmerican College of Gastroenterology's 2019 Annual Scientific Meeting findings from a blinded-case control study showing enhanced colorectal cancer and advanced adenoma detection using newly discovered methylation biomarkers and hemoglobin. To establish the performance of the novel multi-target stool DNA test, we recently launched the BLUE-C study, a multi-center, prospective study. We expect to enroll more than 10,000 patients 40 years of age and older in the BLUE-C study. The timing of any such enhancements to Cologuard is unknown and would be subject to FDA approval. We are also working to develop a blood-based screening test for colorectal cancer. 47
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Table of Contents •Hepatocellular Carcinoma ("HCC")Test Development . We are currently seeking to develop a blood-based biomarker test to serve as an alternative to ultrasound and alpha-fetoprotein ("AFP") for use in HCC testing. HCC is the most common type of liver cancer. Our goal is to develop a patient-friendly test that performs better than the current standard of care. InNovember 2019 , we released the results of a 443-patient study which demonstrated 80% sensitivity at 90% specificity with a novel combination of six blood-based biomarkers for HCC. The study also showed 71% sensitivity for early stage HCC at 90% specificity. The study compared performance to the AFP test, which demonstrated 45% sensitivity at 90% specificity for early stage HCC. •In Vitro Device ("IVD") Version of Oncotype DX Breast Cancer Test. We believe IVD versions of our Oncotype DX products that can be performed locally may open up additional international opportunities. We are currently developing an IVD version of the Oncotype DX Breast Recurrence Score test and may explore additional IVD versions of our Oncotype DX tests. •Development Studies for Oncotype DX Products. We may also conduct or fund clinical studies that could support additional opportunities for our products. For example, we may explore clinical studies to expand the use of genomic testing to address additional populations, including higher-risk patients. Acquisitions InMarch 2020 , we completed the acquisition of all of the outstanding equity interests ofParadigm Diagnostics, Inc. ("Paradigm") andViomics, Inc. ("Viomics"), two privately held companies based inPhoenix, Arizona . Paradigm provides comprehensive genomic-based profiling tests that assist in the diagnosis and therapy recommendations for late-stage cancer. Viomics provides a platform for identification of biomarkers. Coronavirus ("COVID-19") Pandemic The spread of COVID-19 has affected many segments of the global economy, including the cancer screening and diagnostics industry. The COVID-19 outbreak, which theWorld Health Organization has classified as a pandemic, has prompted governments and regulatory bodies throughout the world to issue "stay-at-home" or similar orders, and enact restrictions on the performance of "non-essential" services, public gatherings and travel. Health systems, including in key markets where we operate, have been, or may be, overwhelmed with high volumes of patients suffering from COVID-19. The pandemic and related precautionary measures began to materially disrupt our business inMarch 2020 and may continue to disrupt our business for an unknown period of time. As a result, we anticipate significant impact to our 2020 operating results, including our revenues and margins, among other measures. Beginning inMarch 2020 , we undertook temporary precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily requiring most employees to work remotely, suspending field-based, face-to-face interactions by our sales force, pausing all non-essential travel worldwide for our employees, and limiting employee attendance at industry events and in-person work-related meetings, to the extent those events and meetings are continuing. We may take additional measures, any of which could negatively affect our business. We are also providing COVID-19 testing. We have received a letter from theU.S. Food and Drug Administration (FDA) granting us Emergency Use Authorization for a nasal-swab based test for the detection of SARS-CoV-2, the virus that causes COVID-19. Due to social distancing, stay-at-home orders, and other actions taken in response to COVID-19, there has been a significant and widespread decline in standard wellness visits and preventive services. That decline has negatively impacted Cologuard test orders in our Screening business, notwithstanding the availability of alternative ordering channels such as telehealth. Additionally, patients have been completing tests at a lower rate. Cologuard test orders declined 63 percent year-over-year during the first 20 days ofApril 2020 . We saw a slight recovery in the last 10 days ofApril 2020 , with orders declining 47 percent year-over-year. We expect that Cologuard orders and revenues will be negatively impacted in the second quarter of 2020 and beyond. 48
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Table of Contents After delivering strong results in the first quarter, the Precision Oncology business is also starting to see weakening underlying conditions because of COVID-19, more notably in theU.S. prostate business and in certain international geographies. We expect the widespread decrease in preventive services, such as mammograms and prostate cancer screenings, to negatively impact Precision Oncology test volumes in the coming months due to the typical lag between cancer screening and genomic test ordering. Despite our efforts, the ultimate impact of COVID-19 depends on factors beyond our knowledge or control, including the duration and severity of the outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects. 2020 Priorities As a result of COVID-19 and its impact to our business, we have re-prioritized our goals for 2020 with a focus on serving patients who continue to need the healthcare services we provide while aligning our cost structure with the anticipated lower sales volumes and revenues. Our top priorities for 2020 are (1) get people tested, (2) take care of our customers, and (3) preserve financial strength. Get People Tested Business continuity plans are in place at all of our sites to help sustain operations and ensure continuity of services for patients during this unprecedented time. Despite the COVID-19 pandemic, many people still need to be screened for colorectal cancer, and treated for breast, colon, and prostate cancers. Our lab facilities presently remain operational so that we can continue to process results of our Cologuard and Oncotype DX tests. We are also providing COVID-19 testing after the FDA granted us Emergency Use Authorization for a nasal-swab based test for the detection of COVID-19. Take Care of our Customers Due to social distancing, stay-at-home orders, and other actions taken in response to COVID-19, there has been a significant and widespread decline in standard wellness visits and preventive services. We have taken steps to limit exposure to COVID-19 based on recommendations from government and health agencies, including suspending field-based, face-to-face interactions by our sales force. The sales team will serve healthcare providers via telephone and online technologies until it is safe to return to the field. Preserve Financial Strength In order to minimize the adverse impacts to our business and operations thus far and anticipated for the remainder of 2020 due to the COVID-19 pandemic, we have initiated proactive measures to achieve cost savings. Actions we have taken include the reduction of base pay for our chief executive officer to effectively zero, elimination of the Board of Directors annual cash retainer, reducing base salaries for our executive team, and reducing the quarterly sales commissions. We implemented a workforce reduction, involuntary furloughs, work schedule reductions, as well as a voluntary furlough program. Additionally, we are reducing our investments in marketing and other promotional activities, pausing certain clinical trial activities, reducing travel and professional services, and delaying or terminating certain capital projects. We also expect a reduction in certain volume based cost of goods sold expenses consistent with the reduction in revenue. We estimate that these items will contribute over$400.0 million of cost savings in 2020, with the majority in reduced operating expense. If we see a faster-than-expected recovery from COVID-19 and re-acceleration of growth, cost savings may be materially lower, as we would invest to support that growth. Results of Operations We have generated significant losses since inception and, as ofMarch 31, 2020 , we had an accumulated deficit of approximately$1.2 billion . We expect to continue to incur losses for the near future, and it is possible we may never achieve profitability. As mentioned in further detail above, we expect the recent outbreak of COVID-19 will have an adverse impact on our operations in 2020. 49
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Table of Contents Revenue. Our revenue is primarily generated by our laboratory testing services, from our Cologuard and Oncotype DX tests. For the three months endedMarch 31, 2020 and 2019, we generated Screening revenue of$219.5 million and$162.0 million , respectively. Screening includes laboratory service revenue from Cologuard and revenue from Biomatrica products. The increase in revenue was primarily due to an increase in completed Cologuard tests during the current period. For the three months endedMarch 31, 2020 , we generated Precision Oncology revenue of$128.4 million . Precision Oncology includes laboratory service revenue from global Oncotype DX and Paradigm products. For the three months endedMarch 31, 2020 , the Company's revenue was adversely impacted by the COVID-19 outbreak as further discussed above. Our cost structure. Our selling, general and administrative expenses consist primarily of non-research personnel salaries, office expenses, professional fees, sales and marketing expenses incurred in support of our commercialization efforts and non-cash stock-based compensation. Cost of sales includes costs related to inventory production and usage, shipment of collection kits and tissue samples, royalties and the cost of services to process tests and provide results to healthcare providers. We expect that gross margin for our services will continue to fluctuate and be affected by the test volume of our products, our operating efficiencies, patient adherence rates, payer mix, the levels of reimbursement, and payment patterns of payers and patients. Cost of sales (exclusive of amortization of acquired intangible assets). Cost of sales increased to$81.6 million for the three months endedMarch 31, 2020 from$42.8 million for the three months endedMarch 31, 2019 . The increase in cost of sales is primarily due to the increases in completed Cologuard tests and due to the completion of the combination withGenomic Health inNovember 2019 . Three Months Ended March 31, Amounts in millions 2020 2019 Change Production costs$ 44.1 $ 30.3 $ 13.8 Personnel expenses 22.3 8.0 14.3 Facility and support services 12.4 3.3 9.1 Stock-based compensation 2.5 1.1 1.4 Other cost of sales expenses 0.3 0.1 0.2 Total cost of sales expense$ 81.6 $ 42.8 $ 38.8
Research and development expenses. Research and development expenses increased
to
Three Months Ended March 31, Amounts in millions 2020 2019 Change Direct research and development$ 18.3 $ 18.6 $ (0.3) Personnel expenses 16.4 8.4 8.0 Stock-based compensation 3.9 2.7 1.2 Facility and support services 2.9 0.9 2.0 Professional fees 1.1 0.9 0.2 Other research and development 0.9 0.3 0.6 Total research and development expenses$ 43.5 $ 31.8 $ 11.7 50
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General and administrative expenses. General and administrative expenses
increased to
Three Months Ended March 31, Amounts in millions 2020 2019 Change Personnel expenses$ 53.2 $ 30.0 $ 23.2 Professional and legal fees 21.8 9.1 12.7 Facility and support services 15.4 13.0 2.4 Stock-based compensation 14.5 8.2 6.3 Other general and administrative 9.1 3.5 5.6 Total general and administrative expenses$ 114.0 $ 63.8 $ 50.2
Sales and marketing expenses. Sales and marketing expenses increased to
Three Months Ended March 31, Amounts in millions 2020 2019 Change Personnel expenses$ 81.0 $ 36.4 $ 44.6 Direct marketing costs and professional fees 33.4 22.1 11.3 Professional and legal fees 32.1 27.4 4.7 Other sales and marketing expenses 12.5 0.8 11.7 Stock-based compensation 8.7 4.2 4.5 Total sales and marketing expenses$ 167.7 $ 90.9 $ 76.8
Amortization of acquired intangible assets. Amortization of acquired intangible
assets increased to
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Table of Contents Interest expense. Interest expense increased to$25.2 million for the three months endedMarch 31, 2020 compared to$22.0 million for the three months endedMarch 31, 2019 . The increase is primarily due to the issuance of additional convertible notes inMarch 2020 as further described in Note 15 of our condensed consolidated financial statements included in this Quarterly Report, which was partially offset by lower interest rates on the convertible notes issued inMarch 2020 . Interest expense recorded from our outstanding convertible notes totaled$16.5 million and$11.2 million during the three months endedMarch 31, 2020 and 2019, respectively. In addition to the$16.5 million in interest expense recorded on outstanding convertible notes, an additional$8.0 million and$10.6 million was recorded during the three months endedMarch 31, 2020 and 2019, respectively, as a result of the settlement of convertible notes, as further described in Note 15 of our condensed consolidated financial statements included in this Quarterly Report. Of the$16.5 million and$11.2 million in interest expense recorded on outstanding convertible notes,$14.6 million and$9.1 million of interest expense relates to amortization of debt discount and debt issuance costs for the three months endedMarch 31, 2020 and 2019, respectively. The remaining$2.6 million and$2.4 million of interest expense for the three months endedMarch 31, 2020 and 2019, respectively, relates to the stated interest that was paid in cash during the years on our outstanding convertible notes and construction loan. Income tax benefit. Income tax benefit increased to$1.7 million for the three months endedMarch 31, 2020 compared to a benefit of$0.5 million for the three months endedMarch 31, 2019 . This increase in income tax benefit is primarily due to future limitations on and expiration of certain Federal and State deferred tax assets. Liquidity and Capital Resources We have financed our operations since inception primarily through public offerings of our common stock and convertible debt and through revenue generated by the sale of the Cologuard, and since the completion of ourGenomic Health combination, of Oncotype DX tests. As ofMarch 31, 2020 , we had approximately$701.1 million in unrestricted cash and cash equivalents and approximately$530.1 million in marketable securities. The majority of our investments in marketable securities consist of fixed income investments, and all are deemed available-for-sale. The objectives of this portfolio are to provide liquidity and safety of principal while striving to achieve the highest rate of return. Our investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Net cash used in operating activities was$49.8 million for the three months endedMarch 31, 2020 compared to$74.2 million for the three months endedMarch 31, 2019 . The principal use of cash in operating activities for the three months endedMarch 31, 2020 and 2019 was to fund our net loss. Net cash used in investing activities was$405.8 million for the three months endedMarch 31, 2020 compared to$41.2 million for the three months endedMarch 31, 2019 . The increase in cash used in investing activities for the three months endedMarch 31, 2020 compared to the same period in 2019 was primarily the result of the timing of purchases, sales, and maturities of marketable securities. Excluding the impact of purchases, sales, and maturities of marketable securities, net cash used in investing activities was$19.8 million for the three months endedMarch 31, 2020 compared to$10.8 million for the three months endedMarch 31, 2019 . Cash use consisted primarily of purchases of property and equipment of$12.7 million and$10.7 million for the three months endedMarch 31, 2020 and 2019, respectively, and an acquisition of$6.8 million . There were also minimal purchases of intangible assets during the three months endedMarch 31, 2020 and 2019. Net cash provided by financing activities was$979.5 million for the three months endedMarch 31, 2020 compared to$240.1 million for the three months endedMarch 31, 2019 . During the three months endedMarch 31, 2020 , we received net cash of$1,125.5 million from the issuance of Convertible Notes with a maturity date ofMarch 1, 2028 (the "2028 Notes"), and we used$150.1 million of cash to settle Convertible Notes with an original maturity date ofJanuary 15, 2025 (the "2025 Notes"). The cash provided by financing activities for the three months endedMarch 31, 2019 was primarily the result of proceeds of$729.5 million from our issuance of Convertible Notes with a maturity date ofMarch 15, 2027 (the "2027 Notes", and, collectively with the 2025 Notes and 2028 Notes, the "Notes"), and we used$493.4 million of cash to settle a portion of the 2025 Notes. In addition, during the three months endedMarch 31, 2020 we received proceeds of$4.3 million from the exercise of stock options. 52
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Table of Contents We expect that cash and cash equivalents and marketable securities on hand atMarch 31, 2020 will be sufficient to fund our current operations for at least the next twelve months, based on current operating plans. However, we may need to raise additional capital to fully fund our current strategic plan, which includes successfully commercializing Cologuard and Oncotype DX and developing a pipeline of future products. Additionally, we may enter into transactions to acquire other businesses, products, services, or technologies as part of our strategic plan. If we are unable to obtain sufficient additional funds to enable us to fund our operations through the completion of such plan, our results of operations and financial condition would be materially adversely affected, and we may be required to delay the implementation of our plan and otherwise scale back our operations. Even if we successfully raise sufficient funds to complete our plan, we cannot assure that our business will ever generate sufficient cash flow from operations to become profitable. The spread of COVID-19 and measures to prevent further spread, have significantly disrupted our business, and may continue to disrupt our business for an unknown period of time. The full impact of the outbreak is uncertain at this time and continues to evolve globally. We do not yet know the extent to which COVID-19 will negatively impact our financial results or liquidity. The outbreak has already disrupted our operations, as well as the operations and behaviors of healthcare providers, patients and suppliers. To the extent that healthcare providers, patients and suppliers continue to be adversely impacted by the pandemic, we could see a material interruption our operations and liquidity. Management continues to monitor and assess the evolving developments with respect to COVID-19. A table reflecting certain of our specified contractual obligations as ofDecember 31, 2019 was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operation of our 2019 Form 10-K. During the three months endedMarch 31, 2020 , we issued$1,150.0 million in aggregate principal amount of 0.375% Convertible Notes that will mature onMarch 1, 2028 . The holders of the Notes may convert prior toSeptember 1, 2027 only under certain circumstances and may convert at any time afterSeptember 1, 2027 . The Notes accrue interest at a fixed rate of 0.375% per year, payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, beginning onSeptember 1, 2020 . Of the cash received upon issuance of the 2028 Notes, approximately$150.1 million was used to repay a portion of the outstanding principal balance and accrued interest of the 2025 Notes held by certain Noteholders. Upon repayment of such portion of the outstanding principal balance of the 2025 Notes, there was$315.0 million in aggregate principal balance remaining under the 2025 Notes. See Note 15 of the condensed consolidated financial statements included in this Quarterly Report for further details. With the exception of this item, there were no material changes outside the ordinary course of our business in our specified contractual obligations during the three months endedMarch 31, 2020 . Critical Accounting Policies and Estimates Management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, tax positions and stock-based compensation. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are more fully described in Note 1 of our financial statements included in our 2019 Form 10-K, as well as our Management's Discussion and Analysis of Financial Condition and Results of Operations on our 2019 Form 10-K. There have not been any significant changes to our critical accounting policies and estimates during the three months endedMarch 31, 2020 . Revenue Recognition. We recognize revenue on the release of a test result to an ordering healthcare provider for tests performed based on our estimate of the amount that we will ultimately collect at the time the release is complete. The amount of revenue we recognize is based on the established billing rates less contractual and other adjustments, which yields the constrained amount that we expect to ultimately collect. We determine the amount we expect to ultimately collect on a per-payer or per-agreement basis, using historical collections, established reimbursement rates and other adjustments. The expected amount is typically lower than, if applicable, the agreed- 53
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Table of Contents upon reimbursement amount due to several factors, such as the amount of any patient co-payments, out-of-network payers, the existence of secondary payers and claim denials. Upon ultimate collection, the aggregate amount received from payers and patients where reimbursement was estimated is compared to previous collection estimates and, if necessary, the contractual allowance is adjusted. Finally, should we later determine the judgments underlying estimated collections change, our financial results could be negatively impacted in future quarters. Convertible Notes. We account for convertible debt instruments that may be settled in cash or equity upon conversion by separating the liability and equity components of the instruments in a manner that reflects our nonconvertible debt borrowing rate. InFebruary 2020 we issued the 2028 Notes of$1,150.0 million in aggregate principal amount of 0.375% Convertible Notes with a maturity date ofMarch 1, 2028 . As part of that issuance, we settled approximately$100.0 million in outstanding 2025 Notes. We determined the carrying amount of the liability component of the 2028 Notes by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities. Determining the fair value of the debt component requires the use of accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the debt component, and the associated non-cash interest expense. For theFebruary 2020 offering, we allocated$346.6 million , net of tax, to the equity component of the convertible debt instrument. That equity component is treated as a discount on the liability component of the Notes, which is amortized over the eight-year term of the 2028 Notes using the effective interest rate method. In addition, debt issuance costs related to the 2028 Notes was$24.4 million . We allocated the costs to the liability and equity components of the 2028 Notes based on their relative values. The debt issuance costs allocated to the liability component are being amortized over the life of the 2028 Notes as additional non-cash interest expense. The transaction costs allocated to the equity component are netted with the equity component of the convertible debt instrument in stockholders' equity. Business Combinations. Business Combinations are accounted for under the acquisition method in accordance with ASC 805, Business Combinations. The acquisition method requires identifiable assets acquired and liabilities assumed and any non-controlling interest in the business acquired be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill. Acquisitions that do not meet the definition of a business combination under the ASC are accounted for as asset acquisitions. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets acquired and liabilities assumed on a relative fair value basis.Goodwill is not recognized in an asset acquisition with any consideration in excess of net assets acquired allocated to acquired assets on a relative fair value basis. Transaction costs are expensed in a business combination and are considered a component of the cost of the acquisition in an asset acquisition. InMarch 2020 , we recognized goodwill of$29.7 million from the acquisitions of Paradigm and Viomics. We evaluate goodwill impairment on an annual basis or more frequently should an event or change in circumstance occur that indicates that the carrying amount is in excess of the fair value. There were no impairment losses for the periods endedMarch 31, 2020 andDecember 31, 2019 . Refer to Note 5 and Note 16 of the condensed consolidated financial statements included in this Quarterly Report for further discussion of the goodwill recorded. Recent Accounting Pronouncements See Note 1 in the Notes to Condensed Consolidated Financial Statements for the discussion of Recent Accounting Pronouncements. Off-Balance Sheet Arrangements As ofMarch 31, 2020 , we had no off-balance sheet arrangements. 54
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