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, with the goal of bringing new innovative cancer tests to patients throughout the world. Acquisitions OnJanuary 5, 2021 , we completed the acquisition ("Thrive Merger") ofThrive Earlier Detection Corporation ("Thrive"). Thrive is a healthcare company dedicated to developing a blood-based, multi-cancer screening test. We intend to combine Thrive's expertise with our scientific capabilities, clinical organization and commercial infrastructure to establish us as a leading competitor in blood-based, multi-cancer screening. OnJanuary 11, 2021 , we acquired a worldwide exclusive license to the proprietary Targeted Digital Sequencing ("TARDIS") technology fromThe Translational Genomics Research Institute ("TGen"), an affiliate of City of Hope. We intend to use the TARDIS technology to develop a test to detect small amounts of tumor DNA that may remain in patients' blood after they have undergone initial treatment, known as minimal residual disease ("MRD"). OnApril 14, 2021 , we completed the acquisition of all of the outstanding equity interests ofAshion Analytics, LLC ("Ashion"; such transaction the "Ashion Acquisition") fromPMed Management, LLC ("PMed"), which is a subsidiary of TGen. Ashion is a Clinical Laboratory Improvement Amendments ("CLIA") certified andCollege of American Pathologists ("CAP") accredited sequencing lab based inPhoenix, Arizona and developed GEMExTra®, one of the most comprehensive genomic cancer tests available, and provides access to the whole exome, matched germline, and transcriptome sequencing capabilities. OnMay 3, 2021 , we acquired approximately 90% of the outstanding capital stock ofPFS Genomics Inc. ("PFS"; such transaction, the "PFS Acquisition"), pursuant to a share purchase agreement. PFS is a healthcare company focused on personalizing treatment for breast cancer patients to improve outcomes and reduce unnecessary treatment. We expect this acquisition to expand our ability to help guide early stage breast cancer treatment through individualized radiotherapy treatment decisions. Our Cologuard Test Colorectal cancer is the second leading cause of cancer deaths inthe United States and the leading cause of cancer deaths inthe United States among non-smokers. In 2020 inthe United States 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 , our Cologuard test became the first and only FDA-approved sDNA non-invasive colorectal cancer screening test. Our Cologuard test is now indicated for average risk adults 45 years of age and older. Our Oncotype IQ 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. InOctober 2020 , we announced the introduction of the Oncotype MAPTM Pan-Cancer Tissue test, which is a rapid, comprehensive tumor profiling panel that aids therapy selection for patients with advanced, metastatic, refractory, or recurrent cancer. 39
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Table of Contents International Business Background and Products We commercialize our Oncotype IQ tests internationally through employees inCanada ,Japan and six European countries, as well as through exclusive distribution agreements. We have provided our Oncotype IQ tests in more than 90 countries outside ofthe United States . We do not offer our Cologuard test or COVID-19 testing outside ofthe United States . Inclusion of our products in guidelines and quality measures will be critical to our international success.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. We expect to advance liquid biopsy through biomarker discovery and validation in tissue, blood, or other fluids and to leverage recent business development activities to accelerate our leadership in earlier cancer detection and treatment guidance. We are pursuing the following opportunities: •Colon Cancer Screening. We are seeking opportunities to improve upon our Cologuard test'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. 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. •Multi-Cancer Screening Test Development. We are currently seeking to develop a blood-based, multi-cancer screening test. InJanuary 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 intend to combine Thrive's expertise with our scientific capabilities, clinical organization and commercial infrastructure to establish us as a leading competitor in blood-based, multi-cancer screening. •Hepatocellular Carcinoma ("HCC")Test Development . We are currently developing 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 provide a patient-friendly test that performs better than the current guideline-recommended testing options. InNovember 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. We currently expect to offer our test to select offices in the second quarter of 2021. •Minimal Residual Disease ("MRD")Test Development . InJanuary 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. •Development Studies for Oncotype DX Products. We may also conduct or fund clinical studies that could support additional opportunities for our Oncotype DX products. For example, we are exploring clinical studies to expand the use of genomic testing to address additional populations, including higher-risk patients. We may also use a number of other technologies across various development programs and product implementations. 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. Research and development, which includes our clinical study programs, accounts for a material portion of our operating expenses. As we seek to enhance our current product portfolio and expand our product pipeline by developing additional cancer screening and diagnostic tests, we expect that our research and development expenditures will continue to increase. 40
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Table of Contents COVID-19 Testing Business In lateMarch 2020 , we began providing COVID-19 testing. We have partnered with various customers, including theState of Wisconsin Department of Health Services , to administer testing. Customers are responsible for employing trained personnel to collect specimens. Specimens are sent to our laboratory inMadison, Wisconsin , where we run the assay in our laboratories and provide test results to ordering providers. In light of the uncertainty surrounding the COVID-19 pandemic, we intend to periodically reassess our COVID-19 testing business. As the pandemic abates and more people receive vaccinations, we expect declining demand for COVID-19 testing. 2021 Priorities Our top priorities for 2021 are to (1) get more people tested, (2) advance new solutions, and (3) enhance our customer experience. Get More People Tested We are committed to delivering critical answers to patients by getting more people tested with our Cologuard and Oncotype IQ tests. We will also continue to provide COVID-19 testing to support our employees and to improve the country's testing capacity. Advance New Solutions In 2021, we are focused on advancing new solutions to provide answers to patients throughout their cancer journeys. We plan to continue investing in ongoing and additional clinical trials to support our product development efforts in enhancing existing products. We also plan to bring new products to patients and providers as further discussed in thePipeline Research and Development section above. Enhance Our Customer Experience Another priority for 2021 is to enhance our customer experience. To establish long-term relationships with patients and providers, we plan to improve customer communications and create new ways to personalize their experiences. Our goal is to become the cancer diagnostic provider of choice for providers and patients. Results of Operations The spread of COVID-19 has affected many segments of the global economy, including the cancer screening and diagnostics industry. 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, the pandemic has continued to have an impact on our 2021 operating results, including our revenues, margins, and cash utilization, among other measures. Due to social distancing, stay-at-home orders, and other actions taken in response to COVID-19, there was a significant and widespread decline in standard wellness visits and preventive services beginning at the end of the first quarter of 2020. 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 decline in field-based, face-to-face interactions with health care providers negatively impacted Cologuard test orders beginning inMarch 2020 in our Screening business, notwithstanding the availability of alternative ordering channels such as telehealth. Order volumes recovered over the course of 2020 and by the first quarter of 2021 exceeded pre-pandemic levels. Our Precision Oncology business started to see weakening underlying conditions inApril 2020 because of COVID-19. The widespread decrease in preventive services, including mammograms and prostate cancer screenings, negatively impacted Precision Oncology test volumes beginning inMay 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 in the fourth quarter of 2020 to near pre-pandemic levels, and that recovery continued in the first quarter of 2021. While we have seen recovery in our Screening and Precision Oncology businesses, the impact of the pandemic is uncertain and subject to factors beyond our control. As a result of the pandemic, we have continued to provide COVID-19 testing, the revenue from which has partially offset the pandemic's impact on our Screening and Precision Oncology testing revenue. 41
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Table of Contents 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. As our Screening and Precision Oncology businesses have continued to recover throughout the first quarter of 2021, we have continued to plan for future growth through investing in our existing operations and through the acquisitions further discussed above. We have generated significant losses since inception and, as ofMarch 31, 2021 , we had an accumulated deficit of approximately$2.08 billion . We expect to continue to incur losses for the near future, and it is possible we may never achieve profitability. 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 test, was$240.3 million and$219.5 million for the three months endedMarch 31, 2021 and 2020, 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$129.4 million and$128.4 million for the three months endedMarch 31, 2021 and 2020, respectively. The increase was primarily due to an increase in the number of completed Oncotype IQ tests. For the three months endedMarch 31, 2021 , we also generated$32.3 million in revenue from our COVID-19 testing. 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. Cost of sales (exclusive of amortization of acquired intangible assets). Cost of sales increased to$110.0 million for the three months endedMarch 31, 2021 compared to$81.6 million for the three months endedMarch 31, 2020 . The increase in cost of sales is primarily due to an increase in production costs from an increase in completed Cologuard and Oncotype IQ tests and costs incurred from our COVID-19 testing including a charge of$6.0 million for a reserve of excess inventory related to our COVID-19 testing. We also incurred an increase in personnel expenses to support the increase in volume and future growth of our tests. Three Months Ended March 31, Amounts in millions 2021 2020 Change Production costs$ 60.6 $ 44.1 $ 16.5 Personnel expenses 31.0 22.3 8.7 Facility and support services 14.2 12.4 1.8 Stock-based compensation 4.1 2.5 1.6 Other cost of sales expenses 0.1 0.3 (0.2) Total cost of sales expense$ 110.0 $ 81.6 $ 28.4 42
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Table of
Three Months Ended March 31, Amounts in millions 2021 2020 Change Licensed technology acquisition$ 52.3 $ -$ 52.3 Personnel expenses 21.7 16.4 5.3 Direct research and development 19.0 18.3 0.7 Stock-based compensation 14.8 3.9 10.9 Facility and support services 6.0 2.9 3.1 Professional fees 1.0 1.1 (0.1) Other research and development 0.8 0.9 (0.1) Total research and development expenses$ 115.6 $ 43.5 $ 72.1
General and administrative expenses. General and administrative expenses
increased to
Three Months Ended March 31, Amounts in millions 2021 2020 Change Stock-based compensation$ 131.4 $ 14.5 $ 116.9 Personnel expenses 72.5 53.2 19.3 Professional and legal fees 35.3 21.8 13.5 Facility and support services 15.2 15.4 (0.2) Other general and administrative 13.3 9.1 4.2 Total general and administrative expenses$ 267.7 $ 114.0 $ 153.7
Sales and marketing expenses. Sales and marketing expenses increased to
Three Months Ended March 31, Amounts in millions 2021 2020 Change Personnel expenses$ 85.0 $ 81.0 $ 4.0 Direct marketing costs 41.4 33.4 8.0 Professional and legal fees 27.6 32.1 (4.5) Facility and support services 17.7 12.3 5.4 Stock-based compensation 13.2 8.7 4.5 Other sales and marketing expenses 1.2 0.2 1.0 Total sales and marketing expenses$ 186.1 $ 167.7 $ 18.4 43
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Table of Contents Amortization of acquired intangible assets. Amortization of acquired intangible assets decreased to$23.2 million for the three months endedMarch 31, 2021 compared to$23.3 million for the three months endedMarch 31, 2020 . The decrease in amortization of acquired intangible assets was primarily due to the write-off of certain acquired intangible assets that were deemed to be impaired in the third quarter of 2020. Investment income, net. Investment income, net increased to$31.2 million for the three months endedMarch 31, 2021 compared to$0.1 million for the three months endedMarch 31, 2020 . The increase in investment income, net was primarily due to the realized gain of$30.5 million that was recorded on our preferred stock investment in Thrive, which represented the adjustment to our historical investment to its fair value prior to our acquisition of Thrive. Our acquisition of Thrive is further described in Note 17 of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. Interest expense. Interest expense decreased to$4.6 million for the three months endedMarch 31, 2021 compared to$54.6 million for the three months endedMarch 31, 2020 . The decrease is primarily due to the loss on settlement of convertible notes of$50.8 million recorded during three months endedMarch 31, 2020 . Interest expense recorded from our outstanding convertible notes totaled$4.0 million and$2.9 million during the three months endedMarch 31, 2021 and 2020, respectively. Of the interest expense recorded on outstanding convertible notes for the three months endedMarch 31, 2021 and 2020,$1.4 million and$1.0 million of interest expense relates to amortization of debt discount and debt issuance costs, respectively. The remaining interest expense recorded on outstanding convertible notes relates to the stated interest that is paid out in cash. The convertible notes are further described in Note 9 of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. In addition, we recognized an immaterial amount of interest expense relating to stated interest expense on our construction loan for the three months endedMarch 31, 2021 and 2020. Income tax benefit. Income tax benefit increased to$242.8 million for the three months endedMarch 31, 2021 compared to$2.2 million for the three months endedMarch 31, 2020 . This increase in income tax benefit is primarily due to an income tax benefit of$239.2 million recorded during the three months endedMarch 31, 2021 , as a result of the change in the deferred tax asset valuation allowance resulting from the Thrive Merger. 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 ourGenomic Health combination, of Oncotype IQ tests. As ofMarch 31, 2021 , we had approximately$1.10 billion in unrestricted cash and cash equivalents and approximately$274.2 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$77.2 million for the three months endedMarch 31, 2021 compared to cash use of$49.8 million for the three months endedMarch 31, 2020 . The increase in cash used in operating activities for the three months endedMarch 31, 2021 was primarily due to the increase in operating expenses incurred to prepare for future growth in our business and an increase in costs incurred to process our tests due to the increase in volume. This was partially offset by an increase in cash receipts as a result of an increase in revenue. The increase in revenue was driven by an increase in completed Cologuard, Oncotype IQ, and COVID-19 tests. This was partially offset by an increase in cash payments made related to expenses necessary to process our tests. Net cash used in investing activities was$317.5 million for the three months endedMarch 31, 2021 compared to cash use of$405.8 million for the three months endedMarch 31, 2020 . The decrease in cash used in investing activities for the three months endedMarch 31, 2021 compared to the same period in 2020 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$391.3 million for the three months endedMarch 31, 2021 compared to$19.8 million for the three months endedMarch 31, 2020 . Cash use consisted primarily of our acquisition of Thrive of$343.2 million , our TARDIS license asset acquisition of$25.0 million , purchases of property and equipment of$12.9 million , and investments in privately held companies of$10.0 million for the three months endedMarch 31, 2021 . Cash use primarily consisted of purchase of property and equipment of$13.0 million and business combinations of$6.8 million for the three months endedMarch 31, 2020 . 44
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Table of Contents Net cash provided by financing activities was$7.2 million for the three months endedMarch 31, 2021 compared to$979.5 million for the three months endedMarch 31, 2020 . The cash provided by financing activities during the three months endedMarch 31, 2021 consisted of proceeds of$8.8 million from the exercise of stock options, which was partially offset with cash outflows of$1.5 million for other financing activities. The cash provided by financing activities for the three months endedMarch 31, 2020 was primarily the result of proceeds of$1.13 billion from our issuance of Convertible Notes with a maturity date ofMarch 1, 2028 (the "2028 Notes"), and we used$150.1 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. As described above, onApril 14, 2021 , we completed the Ashion Acquisition, under which we acquired Ashion in a cash and stock transaction valued at approximately$89.4 million , which included cash consideration of$75.0 million on the closing date. OnMay 3, 2021 , we completed the PFS Acquisition, under which we acquired 90% of PFS for cash consideration of$30.6 million , which was paid at closing. We expect that cash and cash equivalents and marketable securities on hand atMarch 31, 2021 will be sufficient to fund our current operations for at least the next twelve months including the cash consideration paid as part of the Ashion Acquisition and PFS Acquisition inApril 2021 andMay 2021 , respectively, 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 test 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 us to meet our obligations as they come due. A table reflecting certain of our specified contractual obligations as ofDecember 31, 2020 was provided in the Management's Discussion and Analysis of Financial Condition and Results of Operation of our 2020 Form 10-K. There were no material changes outside the ordinary course of our business in our specified contractual obligations during the three months endedMarch 31, 2021 . 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 in theU.S. ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our condensed 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 of our financial statements included in our 2020 Form 10-K, as well as our Management's Discussion and Analysis of Financial Condition and Results of Operations on our 2020 Form 10-K, we believe that the following accounting policies and judgments are most critical to aid in fully understanding and evaluating our reported financial results. Other than the adoption of Accounting Standards Update 2020-06 fully discussed in Note 9 of our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, there have not been any significant changes to our critical accounting policies and estimates during the three months endedMarch 31, 2021 . 45
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Table of Contents 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 operations in order to identify areas of risk and opportunity that allow us 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. Business Combinations and Asset Acquisitions. Business Combinations are accounted for under the acquisition method in accordance with Accounting Standards Codification ("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. 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 Condensed Consolidated Financial Statements for the discussion of Recent Accounting Pronouncements. Off-Balance Sheet Arrangements As ofMarch 31, 2021 , we had no off-balance sheet arrangements. 46
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