The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and the
related notes thereto included elsewhere in this Annual Report on Form 10-K. We
have omitted discussion of 2018 results where it would be redundant to the
discussion previously included in Management's Discussion and Analysis of
Financial Condition and Results of Operations on Form 10-K for the year ended
December 31, 2019, which has been filed with the SEC.
Overview
Exact 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, with the goal of
bringing new innovative cancer tests to patients throughout the world.
Acquisitions
On January 4, 2021, we completed the acquisition ("Thrive Merger") of Thrive
Earlier Detection Corporation, which merged Thrive with and into one of our
wholly-owned subsidiaries. Thrive is a healthcare company dedicated to
incorporating earlier cancer detection into routine medical care. We intend to
combine Thrive's early-stage screening test, CancerSEEK, with our scientific
platform, clinical organization and commercial infrastructure to establish us as
a leading competitor in blood-based, multi-cancer screening. Under the terms of
the Thrive Merger, we agreed to pay the Thrive owners total consideration of up
to $2.15 billion, of which $1.70 billion was payable at closing, comprised of
35% in cash and 65% of our common stock. An additional $450.0 million would be
payable in cash based upon the achievement of certain milestones related to the
development and commercialization of a blood-based, multi-cancer screening test.
On October 26, 2020, we completed the acquisition of Base Genomics Limited, an
epigenetics company working to set a new standard in DNA methylation analysis to
detect cancer in its earliest stages. As part of the combination, we acquired
all of the outstanding equity interest of the company for an aggregate purchase
price of $416.5 million in cash.
On March 3, 2020, we completed the acquisition of Paradigm Diagnostics, Inc. and
Viomics, Inc., two related companies, in transactions that are deemed to be a
single business combination under Accounting Standards Codification ("ASC") 805.
The acquired entities provide comprehensive genomic-based profiling tests that
assist in the diagnosis and therapy recommendations for late-stage cancer. As
part of the acquisition, we acquired all of the outstanding equity interests of
the companies for an aggregate purchase price of $40.4 million, which consists
of $32.2 million payable in shares of our common stock and $8.2 million which
was settled through a cash payment. Of the $32.2 million to be settled through
the issuance of common stock, $28.8 million was issued as of December 31, 2020,
and the remaining $3.4 million, which was withheld and may become payable as
additional merger consideration, is included in other current liabilities in the
consolidated balance sheet as of December 31, 2020.
COVID-19 Testing Business
In late March 2020, we began providing COVID-19 testing. We have partnered with
various customers, including the State of Wisconsin Department of Health, to
administer testing. Customers are responsible for employing trained personnel to
collect specimens. Specimens are sent to our laboratory in Madison,
Wisconsin,where we allocated space to run the assay in our laboratories and
provide test results to ordering providers. We also manufacture and assemble our
COVID-19 test kits at our manufacturing facilities in Madison, Wisconsin. In
light of the uncertainty surrounding the COVID-19 pandemic, we intend to
periodically reassess our COVID-19 testing business.
2021 Priorities
Our top priorities for 2021 are to (1) get more people tested, (2) advance new
solutions, and (3) enhance our customer experience.
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Get More People Tested
We are committed to delivering critical answers to patients by getting more
people tested with our Cologuard and Oncotype tests. We will also continue to
provide COVID-19 testing to support our employees, the states where they live,
and to improve the country's testing capacity.
Advance New Solutions
In 2021, we are focused on advancing new solutions for screening and guiding
treatment decisions for cancer. We'll do this by investing in ongoing and
additional clinical trials to support our product development efforts in
enhancing existing products and bringing new products to patients and providers.

We are seeking opportunities to improve upon our Cologuard test's performance
characteristics. In October 2019, we and Mayo presented at the American College
of Gastroenterology's 2019 Annual Scientific Meeting findings from a
blinded-case control study showing enhanced colorectal cancer and advanced
adenoma detection using newly discovered methylation biomarkers. In October
2020, we acquired Base Genomics, whose methylation analysis technologies promise
to build upon other contemplated enhancements to our Cologuard test. To
establish the performance of an enhanced multi-target stool DNA test, we expect
to enroll more than 10,000 patients 40 years of age and older in our
multi-center, prospective BLUE-C study. The timing of any such enhancements to
our Cologuard test is unknown and would be subject to FDA approval. We are also
working to develop a blood-based screening test for colorectal cancer.

We are currently seeking to develop a blood-based, multi-cancer screening test.
In January 2021, we completed the acquisition of Thrive, a healthcare company
dedicated to developing a blood-based, multi-cancer screening test. An early
version of Thrive's test has achieved promising results in a 10,000-patient,
prospective, interventional study detecting 10 different types of cancer,
including seven with no current recommended screening guidelines, with very few
false positives. We are exploring opportunities to incorporate Exact's and Base
Genomics' methylation technologies into Thrive's test in order to enhance the
test's accuracy and accelerate the widespread adoption of this potentially
life-saving advancement.
We are currently seeking to develop a blood-based biomarker test to serve as an
alternative to ultrasound and the AFP test for use in HCC testing. HCC is the
most common type of liver cancer. Our goal is to develop a patient-friendly test
that performs better than the current standard of care. In November 2019, we
released the results of a 450-patient study which demonstrated 80% overall
sensitivity for HCC 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 January 2021 we acquired an exclusive license to the TGen proprietary TARDIS
technology. We are currently seeking to utilize this compelling and technically
distinct approach to develop a test to detect small amounts of tumor DNA that
may remain in patients' blood after they have undergone initial treatment. In a
study published in Science Translational Medicine, TARDIS demonstrated high
accuracy in assessing molecular response and residual disease during neoadjuvant
therapy to treat breast cancer. TARDIS achieved up to 100-fold improvement
beyond the current limit of circulating tumor DNA detection. We intend to expand
our precision oncology business to become a leader in minimal residual disease
testing, which will leverage our existing foundation to deliver better solutions
to patients navigating cancer. Additionally, we may also use a number of other
technologies across our various development programs and to implement our
products. While early-stage cancer continues to be our main focus, we believe we
also have an opportunity to expand our business further along the patient's
cancer journey, both through our research and development process and strategic
collaborations.

We may also conduct or fund clinical studies that could support additional
opportunities for our Oncotype IQ products. For example, we are exploring
clinical studies to expand the use of genomic testing to address additional
populations, including higher-risk patients.
Enhance Our Customer Experience
Another priority for 2021 is to enhance our customer service. We plan to improve
customer communications and outreach to make doing business with Exact Sciences
easier than ever. Our goal is to become the cancer diagnostic provider of choice
for physicians and patients.
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Results of Operations
The spread of COVID-19 has affected many segments of the global economy,
including the cancer screening and diagnostics industry. The COVID-19 outbreak,
which the World Health Organization has classified as a pandemic, has prompted
governments and regulatory bodies throughout the world to enact broad
precautionary measures, including "stay at home" orders, restrictions on the
performance of "non-essential" services, public gatherings and travel. Health
systems, including in key markets where we operate, have been, or may be,
overwhelmed with high volumes of patients suffering from COVID-19. The
territories in which we market, sell, distribute and perform our tests are
attempting to address the COVID-19 pandemic in varying ways, including
stay-at-home orders, temporarily closing businesses, restricting gatherings,
restricting travel, and mandating social distancing and face coverings. Certain
jurisdictions have begun re-opening only to return to restrictions due to
increases in new COVID-19 cases. Even in the absence of legal restrictions,
businesses and individuals may voluntarily continue to limit in-person
interactions and practice social distancing, and such behaviors may continue
beyond the formal end of the pandemic. The level and nature of the disruption
caused by COVID-19 is unpredictable, may be cyclical and long-lasting and may
vary from location to location.
The pandemic and related precautionary measures began to materially disrupt our
business in March 2020 and may continue to disrupt our business for an unknown
period of time. As a result, the pandemic had a significant impact on our 2020
operating results, including our revenues, margins, and cash utilization, among
other measures.
As a result of COVID-19 and its impact to our business, we re-prioritized our
goals for 2020 with a focus on serving patients who continued 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 were
to (1) get people tested using our Cologuard, Oncotype IQ, and COVID-19 tests,
(2) take care of our customers by taking steps to limit exposure to COVID-19
based on recommendations from government and health agencies, and (3) preserve
financial strength by taking proactive measures to achieve cost savings.
Due to social distancing, stay-at-home orders, and other actions taken in
response to COVID-19, in 2020 there was a significant and widespread decline in
standard wellness visits and preventive services. We took steps to limit
exposure to COVID-19 based on recommendations from government and health
agencies, including limiting field-based, face-to-face interactions by our sales
force. The sales team that was not engaged in face-to-face interactions served
healthcare providers via telephone and online technologies until it was safe to
return to the field and practices allowed representatives back in their offices.
Our commercial partner for our Cologuard test, Pfizer, took similar precautions,
including suspending face-to-face interactions between sales representatives and
healthcare providers. The decline in field-based, face-to-face interactions with
health care providers negatively impacted Cologuard test orders during the
second quarter of 2020 in our Screening business, notwithstanding the
availability of alternative ordering channels such as telehealth. Starting in
the third quarter, orders began to recover to pre-pandemic levels and continued
to recover during the fourth quarter. Our Precision Oncology business started to
see weakening underlying conditions in April 2020 because of COVID-19, more
notably in the U.S. prostate business and in certain international geographies.
The widespread decrease in preventive services, including mammograms and
prostate cancer screenings, negatively impacted Precision Oncology test volumes
beginning in May 2020 and continuing throughout the third quarter of 2020 due to
the typical lag between cancer screening and genomic test ordering. We began to
see orders recovering during the fourth quarter of 2020 to near pre-pandemic
levels. As a result of the pandemic, we began providing COVID-19 testing in
March 2020, the revenue from which has partially offset the pandemic's impact on
our Screening and Precision Oncology testing revenue.
During 2020, business continuity plans were 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 needed to
be screened for colorectal cancer, and treated for breast, colon, and prostate
cancers. Our lab facilities remained operational so that we could continue to
process results of our Cologuard, Oncotype IQ and COVID-19 tests.
We expect to adjust our precautionary measures at our various locations based on
local recovery levels and applicable governmental regulations. For example, a
portion of the Company's and Pfizer's sales force has recommenced field-based
interactions, although access to healthcare providers remains limited and the
resumption of normal activities is expected to be gradual. Our business could be
negatively affected if we take excessive, ineffective or inadequate precautions.
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In order to minimize the adverse impacts to our business and operations due to
the COVID-19 pandemic, beginning in April 2020, we initiated proactive measures
to achieve cost savings. Actions we took included a temporary reduction of base
pay for our executive officers and other employees at or above the director
level, a reduction in the annual retainer payable to our board of directors, and
a reduction of quarterly sales commissions. We implemented a workforce
reduction, involuntary furloughs, work schedule reductions, as well as a
voluntary furlough program. Additionally, we reduced investments in marketing
and other promotional activities, paused certain clinical trial activities,
reduced travel and professional services, and delayed or terminated certain
capital projects. We also saw a reduction in certain volume based cost of goods
sold expenses consistent with the reduction in revenue. These actions
contributed to significant cost savings in 2020.
As our Screening and Precision Oncology businesses started to recover, we
adjusted the proactive cost-saving measures discussed above in order to support
the recovery as well as prepare for future growth. During the fourth quarter of
2020, we continued to plan for future growth through investing in our existing
operations and through the business combinations further discussed above.
We also ensured that we were well capitalized to meet our future goals by
raising $1.13 billion, net of issuance costs, through an underwritten public
offering of convertible notes completed in February 2020 and $861.7 million, net
of issuance costs, through a registered direct offering of our common stock
completed in October 2020. We finished the year with $1.84 billion in cash, cash
equivalents, and marketable securities.
Comparison of the years ended December 31, 2020 and 2019
Revenue. Our revenue is primarily generated by our laboratory testing services,
from our Cologuard, Oncotype IQ, and COVID-19 tests. Our Screening revenue,
which primarily includes laboratory service revenue from our Cologuard tests,
was $815.1 million and $810.1 million for the years ended December 31, 2020 and
2019, respectively. The increase was primarily due to an increase in the number
of completed Cologuard tests. Our Precision Oncology revenue, which primarily
includes laboratory service revenue from our global Oncotype products, was
$440.5 million and $66.2 million for the years ended December 31, 2020 and 2019,
respectively. The increase was primarily due to a full year of Precision
Oncology operations in 2020 after completing our combination with Genomic Health
in November 2019. For the year ended December 31, 2020, we also generated $235.8
million in revenue from our COVID-19 testing.
For the year ended December 31, 2020, our Screening and Precision Oncology
laboratory service revenue was impacted by the effects of the COVID-19 outbreak
as discussed above. In response to the pandemic, we are conducting COVID-19
testing, which has served as additional source of revenue outside our normal
Screening and Precision Oncology laboratory testing services.
Our cost structure. Our selling, general, and administrative expenses consist
primarily of non-research personnel salaries, office expenses, professional
fees, sales and marketing expenses incurred in support of our commercialization
efforts and non-cash stock-based compensation.
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 revenue and cost of sales 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.
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Cost of sales (exclusive of amortization of acquired intangible assets). Cost of
sales increased to $354.3 million for the year ended December 31, 2020 from
$216.7 million for the year ended December 31, 2019. The increase in cost of
sales is primarily due to costs incurred to support Oncotype DX products after
the completion of our combination with Genomic Health in November 2019 and costs
incurred from COVID-19 testing, which began in March 2020. We also incurred an
increase in personnel and facility and support services to support future growth
of our Cologuard test.
Amounts in millions                   2020         2019        Change
Production costs                    $ 186.3      $ 144.8      $  41.5
Personnel expenses                    103.3         42.5         60.8
Facility and support services          51.4         23.0         28.4
Stock-based compensation               12.9          5.8          7.1
Other cost of sales expenses            0.4          0.6         (0.2)
Total cost of sales expense         $ 354.3      $ 216.7      $ 137.6


Research and development expenses. Research and development expenses increased
to $554.1 million for the year ended December 31, 2020 compared to
$139.7 million for the year ended December 31, 2019. The increase in research
and development expenses was primarily due to our acquisition of Base Genomics
in October 2020, which was accounted for as an asset acquisition and resulted in
an expense of $412.6 million that is included in research and development
expenses. The acquisition is further described in Note 19 of our consolidated
financial statements included in this Annual Report on Form 10-K. In addition,
there was an increase in personnel related costs and facility and support
services as a result of our combination with Genomic Health in November 2019.
This increase was partially offset by decreased clinical trial activity,
professional fees, and other direct research and development expenses due to
measures taken in response to the COVID-19 pandemic for a portion of the year.

Amounts in millions                               2020         2019

Change


Intellectual property acquisition               $ 412.6      $     -      $

412.6


Personnel expenses                                 60.5         38.5

22.0


Direct research and development expenses           42.9         69.8

(26.9)


Stock-based compensation                           20.0         17.2

2.8


Facility and support services                      12.7          6.4

6.3


Professional fees                                   3.1          5.0

(1.9)


Other research and development expenses             2.3          2.8

(0.5)

Total research and development expenses $ 554.1 $ 139.7 $ 414.4


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General and administrative expenses. General and administrative expenses
increased to $481.7 million for the year ended December 31, 2020 compared to
$352.5 million for the year ended December 31, 2019. The increase in general and
administrative expenses was primarily related to the inclusion of a full year of
Genomic Health's operations after the completion of our combination in November
2019. As part of the combination with Genomic Health, we incurred $62.8 million
in acquisition and integration related costs during the year ended December 31,
2019. Due to the COVID-19 pandemic and the protective measures put in place in
the first half of 2020, we saw a decrease in expected spend in our personnel and
professional fees. As our business began to recover in the second half of 2020,
personnel expenses and stock-based compensation increased due to additional
headcount. We also incurred additional costs as we invested in our information
technology infrastructure and customer care center costs to support the growth
of the Company.

Amounts in millions                               2020         2019        Change
Personnel expenses                              $ 222.0      $ 136.1      $  85.9
Professional and legal fees                        86.4         77.0          9.4
Stock-based compensation                           76.0         64.2         11.8
Facility and support services                      58.3         56.5

1.8


Other general and administrative                   39.0         18.7

20.3

Total general and administrative expenses $ 481.7 $ 352.5 $ 129.2




Sales and marketing expenses. Sales and marketing expenses increased to
$589.9 million for the year ended December 31, 2020 compared to $385.2 million
for the year ended December 31, 2019. The increase in sales and marketing
expenses was primarily a result of the additional personnel, facility and
support services, and stock-based compensation costs incurred after completing
the combination with Genomic Health in November 2019. As discussed above, our
sales force and Pfizer took several steps to limit exposure to COVID-19 and many
healthcare provider offices prohibited sales representatives throughout the
year, which ultimately reduced certain professional and personnel related costs,
primarily in the second and third quarters of 2020. As our business began to
recover in the second half of 2020, we ended our involuntary furloughs and hired
additional sales and marketing personnel, and we also increased our direct
marketing spend to support the future growth of our products, which resulted in
an overall increase in spend during the year.

Amounts in millions                        2020         2019        Change
Personnel expenses                       $ 280.3      $ 166.7      $ 113.6
Direct marketing costs                     133.8         99.9         33.9
Professional and legal fees                 77.7         87.7        (10.0)
Facility and support services               45.5          9.0         36.5
Stock-based compensation                    44.0         21.3         22.7
Other sales and marketing expenses           8.6          0.6          8.0

Total sales and marketing expenses $ 589.9 $ 385.2 $ 204.7




Amortization of acquired intangible assets. Amortization of acquired intangible
assets increased to $93.4 million for the year ended December 31, 2020 compared
to $16.0 million for the year ended December 31, 2019. This increase in
amortization of acquired intangible assets was primarily due to the Genomic
Health combination.
Intangible asset impairment charge. Intangible asset impairment charge was
$209.7 million for the year ended December 31, 2020 compared to zero for the
year ended December 31, 2019. The impairment charge recorded during the year
ended December 31, 2020 relates to the impairment charges recorded on the
in-process research and development intangible asset acquired as part of the
combination with Genomic Health of $200.0 million and the intangible asset
acquired through an asset purchase agreement with Armune Biosciences, Inc. of
$9.7 million.
Other operating income. Other operating income increased to $23.7 million for
the year ended December 31, 2020 compared to zero for the year ended
December 31, 2019. The income generated during the year ended December 31, 2020
represents the funding received under the CARES Act Provider Relief Fund, which
was accepted from the Department of Health & Human Services in May 2020.
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Investment income, net. Investment income, net decreased to $6.9 million for the
year ended December 31, 2020 compared to $26.5 million for the year ended
December 31, 2019. The decrease in investment income, net was due to a decrease
in realized gains generated from the sale of marketable securities and a
decrease in the average rate of return on investments due to a decrease in
market interest rates and a lower average balance in marketable securities for
the year ended December 31, 2020 when compared to the same period in 2019.
Interest expense. Interest expense increased to $96.0 million for the year ended
December 31, 2020 compared to $61.6 million for the year ended December 31,
2019. The increase is primarily due to the issuance of additional convertible
notes in February 2020. Interest expense recorded from our outstanding
convertible notes totaled $86.1 million and $49.6 million for the years ended
December 31, 2020 and 2019, respectively. Of the $86.1 million and $49.6 million
in interest expense recorded on outstanding convertible notes, $76.5 million and
$42.3 million of interest expense relates to amortization of debt discount and
debt issuance costs for the years ended December 31, 2020 and 2019,
respectively. The remaining interest expense recorded on outstanding convertible
notes relates to the stated interest that is paid out in cash. In addition to
the interest expense recorded on outstanding convertible notes, an additional
$8.0 million and $10.6 million was recorded during the years ended December 31,
2020 and 2019, respectively, as a result of the settlement of convertible notes.
The convertible notes are further described in Note 10 of our consolidated
financial statements included in this Annual Report on Form 10-K. The remaining
interest expense for the years ended December 31, 2020 and 2019 relates to the
stated interest on our construction loan further described in Note 9 of our
consolidated financial statements included in this Annual Report.
Income tax benefit (expense). An income tax benefit of $8.6 million was recorded
for the year ended December 31, 2020 compared to a benefit of $184.9 million for
the year ended December 31, 2019. The income tax benefit recorded during the
year ended December 31, 2019 was primarily a result of a change in deferred tax
asset valuation allowance resulting from the Genomic Health combination. The
income tax benefit of $8.6 million for the year ended December 31, 2020 was
recorded primarily as a result of 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 our Cologuard test, and since the completion of our Genomic
Health combination, of Oncotype IQ tests. As of December 31, 2020, we had
approximately $1.49 billion in unrestricted cash and cash equivalents and
approximately $348.7 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 provided by operating activities was $136.5 million for the year ended
December 31, 2020 compared to cash used in operating activities of
$111.7 million for the year ended December 31, 2019. The increase in cash
provided by operating activities for the year ended December 31, 2020 was
primarily due to the increase in cash receipts as a result of an increase in
revenue. The increase in revenue was driven by having a full year of Precision
Oncology operations in 2020 after completing our combination with Genomic Health
in November 2019. This was partially offset by an increase in cash payments made
related to an increase in inventory and other expenses necessary to process our
tests. Additionally, we saw a reduction in discretionary spend due to proactive
cost saving measures taken throughout the year as a result of the COVID-19
pandemic.
Net cash used in investing activities was $702.0 million for the year ended
December 31, 2020. We purchased $1.09 billion in marketable securities, while
$886.7 million of our marketable securities were sold or matured during the
year. We used net cash of $411.4 million in the acquisition of Base, and also
invested $64.4 million in property and equipment, and $15.9 million in strategic
investments in privately held companies. Net cash used in investing activities
was $124.4 million for the year ended December 31, 2019. We purchased
$634.1 million in marketable securities, while $1.66 billion of our marketable
securities were sold or matured during the year in order to prepare for our
combination with Genomic Health in November 2019, which resulted in using net
cash of $973.9 million. Additionally, we invested $171.8 million in property and
equipment, consisting primarily of increased laboratory equipment purchases,
computer equipment and computer software purchases, and assets under
construction in order to support our operations for future expected growth of
our business.
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Net cash provided by financing activities was $1.88 billion for the year ended
December 31, 2020. We received proceeds of $1.13 billion from the issuance of
convertible notes with a maturity date of March 1, 2028 (the "2028 Notes"), and
we used $150.1 million of cash to settle convertible notes with an original
maturity date of January 15, 2025 (the "2025 Notes"). We also received proceeds
of $861.7 million from the sale of common stock, net of issuance costs.
Additionally, we received proceeds of $27.1 million from the exercise of stock
options, $18.4 million from our employee stock purchase plan, and made payments
on the principal of our outstanding construction loan and finance leases of $3.0
million. Net cash provided by financing activities was $253.2 million for the
year ended December 31, 2019. We received proceeds of $729.5 million from the
issuance of convertible notes with a maturity date of March 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.
Additionally, we received proceeds of $8.8 million from the exercise of stock
options, and $8.4 million from our employee stock purchase plan.
As described above, on January 4, 2021, we completed the Thrive Merger in a cash
and stock transaction valued at approximately $2.15 billion, of which $1.70
billion was paid at closing including cash consideration of approximately $600
million.
We expect that cash and cash equivalents and marketable securities on hand at
December 31, 2020 will be sufficient to fund our current operations for at least
the next twelve months including the cash consideration paid as part of the
Thrive Merger in January 2021, based on current operating plans. However, we may
need to raise additional capital to fully fund our current strategic plan, which
includes successfully commercializing our Cologuard and Oncotype IQ products 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, there is no certainty that we will be successful in
generating sufficient cash flow from operations or achieving and maintaining
profitable operations in the future to enable it to meet our obligations as they
come due.
The following table sets forth certain information concerning our obligations to
make contractual future payments, such as pursuant to debt and lease agreements,
as of December 31, 2020:

                                                                                       Payments Due by Period (5)
                                                               Less Than                                                       More Than
(In thousands)                               Total              One Year           1 - 3 Years           3 - 5 Years            5 Years
Convertible notes (1)                    $ 2,277,290          $  10,266

$ 20,532 $ 334,006 $ 1,912,486 Long-term debt obligations (2)

                24,847              1,914                22,933                     -                    -
Other liabilities (3)                         22,991              3,834                 5,422                 2,121               11,614
Purchase obligations (4)                      36,200             32,450                 2,500                 1,250                    -
Operating lease obligations                  180,519             19,881                40,902                40,595               79,141
Finance lease obligations                     20,706              5,674                11,160                 3,872                    -
Total                                    $ 2,562,553          $  74,019          $    103,449          $    381,844          $ 2,003,241

_________________________________


(1) Includes the principal amount of our senior convertible notes due in 2025,
2027, and 2028, as well as the interest payments associated with the notes. The
notes are presented in the table in line with their maturity dates, but they may
be converted earlier if certain conditions are met. The holders of the
convertible notes with a maturity date in 2025 will have the right to convert
beginning on January 1, 2021 and are classified as current on the consolidated
balance sheet as of December 31, 2020. See Note 10 in the Notes to Consolidated
Financial Statements for further information.
(2) Includes obligations associated with outstanding construction loan
agreement. See Note 9 in the Notes to Consolidated Financial Statements for
further information.
(3) Primarily includes obligations under a financing obligation. This also
includes miscellaneous unrestricted grants that were made to third parties.
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(4) Primarily includes fixed obligations under the Restated Promotion Agreement
with Pfizer, which is further discussed in Note 12 in the Notes to Consolidated
Financial Statements. This also includes payments to Mayo under our license
agreement discussed in Note 11 and a land purchase obligation agreement with the
owner of the land adjacent to one of our current Madison, Wisconsin facilities.
(5) Contingent consideration and contingent license payments are excluded from
this table as the amount and timing of such outflows cannot be reasonably
determined. See Note 7 and Note 11 in the Notes to Consolidated Financial
Statements for further information.
Net Operating Loss Carryforwards
As of December 31, 2020, we had federal, state, and foreign NOL carryforwards of
approximately $1.55 billion, $709.2 million, $4.3 million, respectively. We also
had federal and state research tax credit carryforwards of approximately $54.3
million and $34.0 million, respectively. The net operating loss and tax credit
carryforwards will expire at various dates through 2040, if not utilized. The
Internal Revenue Code and applicable state laws impose substantial restrictions
on a corporation's utilization of net operating loss and tax credit
carryforwards if an ownership change is deemed to have occurred. Additionally,
tax law limitations may result in our NOLs expiring before we have the ability
to use them. The Tax Cuts and Jobs Act (H.R. 1) of 2017 limits the deduction for
NOLs to 80 percent of current year taxable income and provides for an indefinite
carryover period for federal NOLs. Both provisions are applicable for losses
arising in tax years beginning after December 31, 2017. As of December 31, 2020,
we had $615.1 million of NOLs incurred after December 31, 2017. For these
reasons, even if we attain profitability our ability to utilize our NOLs may be
limited, potentially significantly so.
A valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before we are able to realize their
benefit, or that future deductibility is uncertain. In general, companies that
have a history of operating losses are faced with a difficult burden of proof on
their ability to generate sufficient future income in order to realize the
benefit of the deferred tax assets. We have recorded a valuation against our
deferred tax assets based on our history of losses and current uncertainty as to
timing of future taxable income. Given the future limitations on and expiration
of certain Federal and State deferred tax assets, the recording of a valuation
allowance resulted in a deferred tax liability of approximately $19.5 million
remaining at the end of 2020, which is included in other long-term liabilities
on our consolidated balance sheet. Additionally, an income tax benefit of $8.6
million was recorded primarily as a result of future limitations on and
expiration of certain Federal and State deferred tax assets.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
("GAAP"). The preparation of these financial statements requires us to make
estimates and assumptions that affect the amounts reported in our consolidated
financial statements and accompanying notes. On an ongoing basis, we evaluate
our estimates and judgments. 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.
While our significant accounting policies are more fully described in Note 1 in
the Notes to Consolidated Financial Statements, we believe that the following
accounting policies and judgments are most critical to aid in fully
understanding and evaluating our reported financial results.
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Revenue Recognition. Revenues are recognized when we release a result to the
ordering healthcare provider, in an amount that reflects the consideration we
expect to collect in exchange for those services. The amount of revenue we
recognize is based on the established billing rates less contractual and other
adjustments, which yields the constrained amount that we expect to ultimately
collect. We determine the amount we expect to ultimately collect using
historical collections, established reimbursement rates and other adjustments.
The expected amount is typically lower than, if applicable, the agreed-upon
reimbursement amount due to several factors, such as the amount of any patient
co-payments, out-of-network payers, the existence of secondary payers and claim
denials. The consideration derived from our contracts is fixed when we contract
with a direct bill payer. Our ability to collect is not contingent on the
customer's ability to collect through their downstream billing efforts.
In the case of some of our laboratory service agreements ("LSAs") with various
organizations, the right to bill and collect exists prior to the receipt of a
specimen and release of a test result to the ordering healthcare provider, which
results in deferred revenue. The deferred revenue balance is generally relieved
upon the release of the applicable patient's test result to the ordering
healthcare provider or as of the date the customer has surpassed the window of
time in which they are able to exercise their rights for testing services. We
believe these points in time represent our fulfillment of our obligations to the
customer.
The quality of our billing operations, most notably those activities that relate
to obtaining the correct information in order to bill effectively for services
provided, directly impacts the collectability of our receivables and revenue
estimates. As such, we continually assess the state of our order to cash cycle
for areas of opportunity as we believe adequate operations support our ability
to appropriately estimate receivables and revenue. Upon ultimate collection, the
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.
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. We
have incurred significant losses since our inception and due to the uncertainty
of the amount and timing of future taxable income, management has determined
that a valuation allowance of $157.6 million and $120.7 million at December 31,
2020 and 2019, respectively is necessary to reduce the tax assets to the amount
that is more likely than not to be realized. Due to the existence of the
valuation allowance, future changes in our unrecognized tax benefits will not
impact our effective tax rate.
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. We determined the carrying amount of the liability component of
the convertible debt instruments by using assumptions that market participants
would use in pricing a debt instrument, including market interest rates, credit
standing, yield curves, volatilities, and the expected life of the instrument.
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.
The amount allocated to the equity component is the difference between the
principal value of the instrument and the fair value of the liability component
at issuance. The equity component, less any premium, is treated as a discount on
the liability component. The debt discount is amortized to interest expense over
the contractual term of the debt instrument using the effective interest rate
method. In addition, debt issuance costs related to the debt instrument are
allocated to the liability and equity components based on their relative values.
The debt issuance costs allocated to the liability component are amortized over
the contractual term of the debt instrument 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.
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Impairment of Long-Lived Assets. We evaluate the fair value of long-lived
assets, which include property, plant and equipment, intangible assets, and
investments in privately held companies, for impairment whenever events or
changes in circumstances indicate that the carrying amounts of the assets may
not be fully recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Recent Accounting Pronouncements
See Note 1 in the Notes to Consolidated Financial Statements for the discussion
of Recent Accounting Pronouncements.
Off-Balance Sheet Arrangements
As of December 31, 2020, we had no off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market risk is principally confined to our cash, cash
equivalents and marketable securities. We invest our cash, cash equivalents, and
marketable securities in securities of the U.S. governments and its agencies and
in investment-grade, highly liquid investments consisting of commercial paper,
bank certificates of deposit, and corporate bonds, which as of December 31, 2020
and December 31, 2019 were classified as available-for-sale. We place our cash,
cash equivalents, restricted cash, and marketable securities with high-quality
financial institutions, limit the amount of credit exposure to any one
institution, and have established investment guidelines relative to
diversification and maturities designed to maintain safety and liquidity.
Based on a hypothetical ten percent adverse movement in interest rates, the
potential losses in future earnings, fair value of risk-sensitive financial
instruments, and cash flows are immaterial, although the actual effects may
differ materially from the hypothetical analysis. While we believe our cash,
cash equivalents, restricted cash, and marketable securities do not contain
excessive risk, we cannot provide absolute assurance that, in the future, our
investments will not be subject to adverse changes in market value. In addition,
we maintain significant amounts of cash, cash equivalents, restricted cash, and
marketable securities at one or more financial institutions that are in excess
of federally insured limits. Given the potential instability of financial
institutions, we cannot provide assurance that we will not experience losses on
these deposits. We do not utilize interest rate hedging agreements or other
interest rate derivative instruments.
A hypothetical ten percent change in interest rates would not have a material
adverse impact on our future operating results or cash flows. All of our
significant interest-bearing liabilities bear interest at fixed rates and
therefore are not subject to fluctuations in market interest rates; however,
because these interest rates are fixed, we may be paying a higher interest rate,
relative to market, in the future if circumstances change.
Foreign Currency Risk
Substantially all of our revenues are recognized in U.S. dollars, although a
small portion is denominated in foreign currency as we continue to expand into
markets outside of the U.S. Certain expenses related to our international
activities are payable in foreign currencies. As a result, factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets will affect our financial results.
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Prior to our acquisition of Genomic Health in November 2019, the functional
currency for each of our international subsidiaries was its local currency. For
2019 our international subsidiaries use the U.S. dollar as the functional
currency, resulting in us not being subject to gains and losses from foreign
currency translation of the subsidiary financial statements. In September 2017,
Genomic Health (now a wholly owned subsidiary) started entering into forward
contracts to mitigate the impact of adverse movements in foreign exchange rates
related to the re-measurement of monetary assets and liabilities and hedge our
foreign currency exchange rate exposure. As of December 31, 2020, we had open
foreign currency forward contracts with notional amounts of $22.4 million.
Although the impact of currency fluctuations on our financial results has been
immaterial in the past, there can be no guarantee that the impact of currency
fluctuations related to our international activities will not be material in the
future.
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