The accompanying condensed consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries and variable interest entities. See Note 7 for the discussion of financing arrangements involving certain entities that are variable interest entities that are included in the Company’s condensed consolidated financial statements. All significant intercompany transactions and balances have been eliminated in consolidation.

References to “Exact”, “we”, “us”, “our”, or the “Company” refer to Exact Sciences Corporation and its wholly owned subsidiaries.

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

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

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Debt securities carried at amortized cost are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity computed under the straight-line method. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.

At June 30, 2019 and December 31, 2018, the Company’s marketable securities were comprised of fixed income investments, and all were deemed available-for-sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives. The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Investments in which the Company has the ability and intent, if necessary, to liquidate, in order to support its current operations (including those with a contractual term greater than one year from the date of purchase), are classified as current. All of the Company’s investments are considered current. Realized gains were $0.3 million and $0.1 million, net of insignificant realized losses, for the six months ended June 30, 2019 and 2018, respectively, and are included in investment income.

The Company periodically reviews investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, the Company’s intent not to sell the security, and whether it is more likely than not that the Company will have to sell the security before recovery of its cost basis. For the six months ended June 30, 2019, no investments were identified with other-than-temporary declines in value.

(1)	Gains and losses in accumulated other comprehensive income (loss) are reported before tax impact.

Available-for-sale securities at December 31, 2018 consisted of the following:


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

(1)	Gains and losses in accumulated other comprehensive income (loss) are reported before tax impact.

Changes in Accumulated Other Comprehensive Income (Loss)

The amount recognized in accumulated other comprehensive income (loss) (“AOCI”) for the six months ended June 30, 2019 were as follows:



	Foreign		Unrealized		Accumulated
	Currency		Gain (Loss)		Other
	Translation		on Marketable		Comprehensive
(In thousands)	Adjustments		Securities		Income (Loss)
Balance at December 31, 2018	$	(25)	$	(1,397)	$	(1,422)
Other comprehensive income (loss) before reclassifications		38		3,784		3,822
Amounts reclassified from accumulated other comprehensive loss		—		344		344
Net current period change in accumulated other comprehensive loss, before tax		38		4,128		4,166
Income tax expense related to items of other comprehensive income		—		(984)		(984)
Balance at June 30, 2019	$	13	$	1,747	$	1,760

The amounts recognized in AOCI for the six months ended June 30, 2018 were as follows:


					Accumulated
	Cumulative		Unrealized		Other
	Translation		Gain (Loss)		Comprehensive
(In thousands)	Adjustment		on Securities		Income (Loss)
Balance at December 31, 2017	$	(61)	$	(689)	$	(750)
Other comprehensive loss before reclassifications		2		(1,244)		(1,242)
Amounts reclassified from accumulated other comprehensive loss		—		114		114
Net current period change in accumulated other comprehensive loss		2		(1,130)		(1,128)
Balance at June 30, 2018	$	(59)	$	(1,819)	$	(1,878)

Amounts reclassified from AOCI for the six months ended June 30, 2019 and 2018 were as follows:


	Affected Line Item in the	Six Months Ended June 30,
Details about AOCI Components (In thousands)	Statements of Operations	2019		2018
Change in value of available-for-sale investments
Sales and maturities of available-for-sale investments	Investment income	$	344	$	114
Total reclassifications		$	344	$	114

Property, Plant and Equipment

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


	Estimated		June 30,		December 31,
(In thousands)	Useful Life		2019		2018
Property, plant and equipment
Land		(1)	$	4,466	$	4,466
Leasehold and building improvements		(2)		59,796		38,895
Land improvements		15 years		1,766		1,530
Buildings		30 years		18,086		7,928
Computer equipment and computer software		3 years		38,225		36,969
Laboratory equipment		3 - 10 years		66,347		37,518
Furniture and fixtures		3 years		11,267		8,353
Assets under construction		(3)		206,120		167,462
Property, plant and equipment, at cost				406,073		303,121
Accumulated depreciation				(70,574)		(57,862)
Property, plant and equipment, net			$	335,499	$	245,259

(1)	Not depreciated.

(2)	Lesser of remaining lease term, building life, or useful life.

(3)	Not depreciated until placed into service.

Depreciation expense for the six months ended June 30, 2019 and 2018 was $13.4 million and $8.8 million, respectively.

At June 30, 2019, the Company had $206.1 million of assets under construction which consisted of $25.9 million related to laboratory equipment, $166.4 million related to leasehold and building improvements, and $13.8 million related to computer equipment and computer software projects. Depreciation will begin on these assets once they are placed into service. The Company expects to incur an additional $8.3 million to complete the laboratory equipment, $96.5 million to complete the building projects, and $3.3 million to complete the computer equipment and computer software projects. These projects are expected to be completed throughout 2019, 2020 and 2021. The Company assesses its long-lived assets, consisting primarily of property, plant and equipment, for impairment when material events and changes in circumstances indicate that the carrying value may not be recoverable. There were no impairment losses for the periods ended June 30, 2019 and December 31, 2018.

Software Capitalization Policy

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

Patent Costs, Intangible Assets and Goodwill

Goodwill and Intangible assets consisted of the following:


	June 30,		December 31,
(In thousands)	2019		2018
Finite-lived intangible assets
Finite-lived intangible assets	$	33,171	$	33,058
Less: Accumulated amortization		(5,722)		(4,107)
Finite-lived intangible assets, net		27,449		28,951
Internally developed technology in process		318		51
Total finite-lived intangible assets, net		27,767		29,002
Goodwill		17,279		17,279
Goodwill and intangible assets, net	$	45,046	$	46,281

Finite-Lived Intangible Assets

The following table summarizes the net-book-value and estimated remaining life of the Company’s finite-lived intangible assets as of June 30, 2019:


			Weighted
	Net Balance at		Average
	June 30,		Remaining
(In thousands)	2019		Life (Years)
Trade name	$	665		14.3
Customer relationships		2,566		14.3
Patents		17,846		9.2
Acquired developed technology		5,836		13.3
Internally developed technology		536		2.4
Total	$	27,449

As of June 30, 2019, the estimated future amortization expense associated with the Company’s finite-lived intangible assets for each of the five succeeding fiscal years is as follows:


(In thousands)
2019	$	1,614
2020		3,231
2021		3,129
2022		2,967
2023		2,953
Thereafter		13,555
	$	27,449

The Company reviews long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no impairment losses for periods ended June 30, 2019 and December 31, 2018.

Patent costs, which have historically consisted of related legal fees, are capitalized as incurred, only if the Company determines that there is some probable future economic benefit derived from the patent costs incurred. A capitalized patent is amortized over its estimated useful life, beginning when such patent is approved. Capitalized patent costs are expensed upon disapproval, upon a decision by the Company to no longer pursue the patent or when the related

intellectual property is either sold or deemed to be no longer of value to the Company. Other than the transactions discussed below, the Company determined that all patent costs incurred during the six months ended June 30, 2019 and 2018 should be expensed and not capitalized as the future economic benefit derived from the patent costs incurred cannot be determined.

Under a technology license and royalty agreement entered into with MDx Health (“MDx”), dated July 26, 2010 (as subsequently amended, the “MDx License Agreement”), the Company was required to pay MDx milestone-based royalties on sales of products or services covered by the licensed intellectual property. Once the achievement of a milestone occurred or was considered probable, an intangible asset and corresponding liability was reported in goodwill and intangible assets and accrued liabilities, respectively. The liability was relieved once the milestone was achieved and payment made. The intangible asset is being amortized over the estimated ten-years useful life of the licensed intellectual property through 2024, and such amortization is reported in cost of sales. Payment for all remaining milestones under the MDx License Agreement was made as part of the Royalty Buy-Out Agreement described below.

Effective April 2017, the Company and MDx entered into a royalty buy-out agreement (“Royalty Buy-Out Agreement”), which terminated the MDx License Agreement. Pursuant to the Royalty Buy-Out Agreement, the Company paid MDx a one-time fee of $8.0 million in exchange for an assignment of certain patents covered by the MDx License Agreement and the elimination of all ongoing royalties and other payments by the Company to MDx under the MDx License Agreement. Also included in the Royalty Buy-Out Agreement is a mutual release of liabilities, which includes all amounts previously accrued under the MDx License Agreement. Concurrently with entering into the Royalty Buy-Out Agreement, the Company entered into a patent purchase agreement (“Patent Purchase Agreement”) with MDx under which it paid MDx an additional $7.0 million in exchange for the assignment of certain other patent rights that were not covered by the MDx License Agreement. The total $15.0 million paid by the Company pursuant to the Royalty Buy-Out Agreement and Patent Purchase Agreement, net of liabilities relieved of $6.6 million, was recorded as an intangible asset and is being amortized over the estimated remaining useful life of the licensed intellectual property through 2024, and such amortization is reported in cost of sales. The $6.6 million of liabilities relieved were related to historical milestones and accrued royalties under the MDx License Agreement.

As of June 30, 2019, and December 31, 2018, an intangible asset of $7.0 million and $7.7 million, respectively, related to historical milestone payments made under the MDx License Agreement and intangible assets acquired as part of the Royalty Buy-Out Agreement and Patent Purchase Agreement is reported in net goodwill and intangible assets on the Company’s condensed consolidated financial statements. Amortization expense was $0.3 million and $0.3 million for the three months ended June 30, 2019 and 2018, respectively. Amortization expense was $0.7 million and $0.7 million for the six months ended June 30, 2019 and 2018, respectively.

In December 2017, the Company entered into an asset purchase agreement (the “Armune Purchase Agreement”) with Armune BioScience, Inc. (“Armune”), pursuant to which the Company acquired intellectual property and certain other assets underlying Armune’s APIFINY®, APIFINY® PRO and APIFINY® ACTIVE SURVEILLANCE prostate cancer diagnostic tests. The Company has utilized the Armune assets in its research and development program. The total consideration was comprised of an up-front cash payment of $12.0 million and $17.5 million in contingent payment obligations that will become payable upon the Company’s achievement of development and commercial milestones using the acquired intellectual property. The satisfaction of these milestones is subject to many risks and is therefore uncertain. The Company will not record the contingent consideration until it is probable that the milestones will be met. There is no other consideration due to Armune beyond the milestone payments and the Company is not subject to future royalty obligations should a product be developed and commercialized. In connection with the Armune Purchase Agreement, Armune terminated a license agreement pursuant to which it licensed certain patent rights and know-how from the Regents of the University of Michigan (“University of Michigan”), and the Company entered into a license agreement with the University of Michigan with respect to such patent rights and know-how, as well as certain additional intellectual property rights. Pursuant to the Company’s agreement with the University of Michigan, it is required to pay the University of Michigan a low single-digit royalty on its net sales of products using the licensed intellectual property.

The Company accounted for the transaction as an asset acquisition under GAAP. The asset is comprised of a portfolio of biomarkers, related technology and know-how, which is a group of complementary assets concentrated in a single identifiable asset. The transaction costs directly related to the asset acquisition were added to the asset in accordance with GAAP. As such, the collective asset value from the acquisition resulted in an intangible asset of $12.2 million. The intellectual property asset, which includes related transaction costs, is being amortized on a straight-line basis over the period the Company expects to be benefited, which is in line with the legal life of the patents acquired. The Company capitalized these costs as there is a reasonable expectation that the assets acquired will be used in an alternative manner in the future, that is not contingent on future development subsequent to acquisition, and the Company anticipates there to be economic benefit from these alternative uses. For the three and six months ended June 30, 2019, the Company recorded amortization expense of $0.2 million and $0.5 million, respectively. For the three and six months ended June 30, 2018, the Company recorded amortization expense of $0.2 million and $0.5 million, respectively. At June 30, 2019 and December 31, 2018, the net balance of $10.8 million and $11.3 million, respectively, is reported in net goodwill and intangible assets in the Company’s condensed consolidated balance sheet.

In August 2017, the Company acquired all of the equity interests of Sampleminded, Inc. (“Sampleminded”). As a result of the acquisition, the Company recorded an intangible asset of $1.0 million, which was comprised of developed technology acquired of $0.9 million, customer relationships of $0.1 million, and non-compete agreements of $32,000. The intangible assets acquired are being amortized over the remaining useful life, which was determined to be eight years for developed technology acquired, three years for customer relationships, and five years for non-compete agreements. For the three months ended June 30, 2019 and 2018, the Company recorded amortization expense of $36,000 and $36,000, respectively. For the six months ended June 30, 2019 and 2018, the Company recorded amortization expense of $0.1 million and $0.1 million, respectively. At June 30, 2019 and December 31, 2018, the net balance of $0.7 million and $0.8 million, respectively, is reported in net intangible assets in the Company’s condensed consolidated balance sheets.

As more fully described in the 2018 Form 10-K, in October 2018, the Company completed a full acquisition of Biomatrica, Inc. (“Biomatrica”, and the “Biomatrica Acquisition”). As a result of the Biomatrica Acquisition, the Company recorded an intangible asset of $8.8 million which was comprised of acquired developed technology of $5.4 million, customer relationships of $2.7 million, and trade names of $0.7 million. The intangible assets acquired are being amortized over the remaining useful life, which was determined to be fifteen years for the acquired developed technology, fifteen years for the customer relationships, and fifteen years for the trade names. For the three and six months ended June 30, 2019, the Company recorded amortization expense of $0.1 million and $0.3 million, respectively. At June 30, 2019 and December 31, 2018, the net balance of $8.4 million and $8.7 million, respectively, is reported in net goodwill and intangible assets in the Company’s condensed consolidated balance sheets.

Goodwill

In 2018, the Company recognized goodwill of $15.3 million from the acquisition of Biomatrica. Goodwill is reported in net goodwill and intangible assets in the Company’s condensed consolidated balance sheet. The Company evaluates goodwill impairment on an annual basis, or more frequently should an event or change in circumstance occur that indicates the carrying amount is in excess of the fair value. There were no impairment losses for the periods ended June 30, 2019 and December 31, 2018.

Net Loss Per Share

Basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period. Basic and diluted net loss per share is the same because all outstanding common stock equivalents have been excluded, as they are anti-dilutive as a result of the Company’s losses.

The following potentially issuable common shares were not included in the computation of diluted net loss per share because they would have an anti-dilutive effect due to net losses for each period:


	June 30,
(In thousands)	2019	2018
Shares issuable upon exercise of stock options	2,387	2,918
Shares issuable upon the release of restricted stock awards	4,123	6,312
Shares issuable upon conversion of convertible notes	12,197	12,044
	18,707	21,274

Revenue Recognition

The Company’s revenue is primarily generated by screening services using its Cologuard test, and the service is completed upon delivery of a patient’s test result to the ordering physician. The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), which it adopted on January 1, 2018, using the modified retrospective method, which it elected to apply to all contracts. Application of the modified retrospective method did not impact amounts previously reported by the Company, nor did it require a cumulative effect adjustment upon adoption, as the Company’s method of recognizing revenue under ASC 606 was analogous to the method utilized immediately prior to adoption. Accordingly, there is no need for the Company to disclose the amount by which each financial statement line item was affected as a result of applying the new standard and an explanation of significant changes.

The core principle of ASC 606 is that the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company recognizes revenue from its Cologuard test in accordance with that core principle, and key aspects considered by the Company include the following:

Contracts

The Company’s customer is the patient. However, the Company does not enter into a formal reimbursement contract with a patient, as formal reimbursement contracts, including a national coverage determination for Cologuard by the Centers for Medicare and Medicaid Services (“CMS”), are established with payers. Accordingly, the Company establishes a contract with a patient in accordance with other customary business practices.

●

Approval of a contract is established via the order submitted by the patient’s physician and the return of a sample by the patient.

●

The Company is obligated to perform its laboratory services upon receipt of a sample from a patient, and the patient and/or applicable payer are obligated to reimburse the Company for services rendered based on the patient’s insurance benefits.

●

Payment terms are a function of a patient’s existing insurance benefits, including the impact of coverage decisions with CMS and applicable reimbursement contracts established between the Company and payers, unless the patient is a self-pay patient, whereby the Company requires payment from the patient prior to the Company shipping a collection kit to the patient.

●

Once the Company delivers a patient’s test result to the ordering physician the contract with a patient has commercial substance, as the Company is legally able to collect payment and bill an insurer and/or patient and depending on payer contract status or patient insurance benefit status.

●

The Company’s consideration is deemed to be variable, and the Company considers collection of such consideration to be probable to the extent that it is unconstrained.

Performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service (or a bundle of goods or services) to the customer. The Company’s contracts have a single performance obligation, which is satisfied upon rendering of services, which culminates in the delivery of a patient’s Cologuard test result to the ordering physician. The duration of time between sample receipt and delivery of a valid test result to the ordering physician is typically less than two weeks. Accordingly, the Company elects the practical expedient and therefore, the Company does not disclose the value of unsatisfied performance obligations.

Transaction price

The transaction price is the amount of consideration that the Company expects to collect in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration expected from a contract with a customer may include fixed amounts, variable amounts, or both.

The consideration derived from the Company’s contracts is deemed to be variable, though the variability is not explicitly stated in any contract. Rather, the implied variability is due to several factors, such as the amount of contractual adjustments, any patient co-payments, deductibles or patient compliance incentives, the existence of secondary payers and claim denials.

The Company estimates the amount of variable consideration using the expected value method, which represents the sum of probability-weighted amounts in a range of possible consideration amounts. When estimating the amount of variable consideration, the Company considers several factors, such as historical collections experience, patient insurance eligibility and payer reimbursement contracts.

The Company limits the amount of variable consideration included in the transaction price to the unconstrained portion of such consideration. In other words, the Company recognizes revenue up to the amount of variable consideration that is not subject to a significant reversal until additional information is obtained or the uncertainty associated with the additional payments or refunds is subsequently resolved. Differences between original estimates and subsequent revisions, including final settlements, represent changes in the estimate of variable consideration and are included in the period in which such revisions are made. Revenue recognized from changes in transaction prices was $1.8 million and $3.4 million for the three months ended June 30, 2019 and 2018, respectively. Revenue recognized from changes in transaction prices was $3.4 million and $11.9 million for the six months ended June 30, 2019 and 2018, respectively.

The Company monitors its estimates of transaction price to depict conditions that exist at each reporting date. If the Company subsequently determines that it will collect more consideration than it originally estimated for a contract with a patient, it will account for the change as an increase in the estimate of the transaction price (i.e., an upward revenue adjustment) in the period identified. Similarly, if the Company subsequently determines that the amount it expects to collect from a patient is less than it originally estimated, it will generally account for the change as a decrease in the estimate of the transaction price (i.e., a downward revenue adjustment), provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized.

When the Company does not have significant historical experience or that experience has limited predictive value, the constraint over estimates of variable consideration may result in no revenue being recognized upon delivery of a patient’s Cologuard test result to the ordering physician, with recognition, generally occurring at the date of cash receipt.

Allocate transaction price

The transaction price is allocated entirely to the performance obligation contained within the contract with a patient.

Point in time recognition

The Company’s single performance obligation is satisfied at a point in time, and that point in time is defined as the date a patient’s successful test result is delivered to the patient’s ordering physician. The Company considers this date to be the time at which the patient obtains control of the promised Cologuard test service.

Disaggregation of Revenue

The following table presents the Company’s revenues disaggregated by revenue source for the three and six months ended June 30, 2019 and 2018, respectively:


	Three Months Ended June 30,
(In thousands)	2019		2018
Medicare Parts B & C	$	103,569	$	59,706
Commercial		88,818		39,589
Other		7,483		3,599
Total	$	199,870	$	102,894


	Six Months Ended June 30,
(In thousands)	2019		2018
Medicare Parts B & C	$	186,486	$	112,181
Commercial		162,169		74,423
Other		13,258		6,586
Total	$	361,913	$	193,190

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable and deferred revenue on the condensed consolidated balance sheets. Generally, billing occurs subsequent to delivery of a patient’s test result to the ordering physician, resulting in an account receivable. However, the Company sometimes receives advance payment from a patient, particularly a self-pay patient, before a Cologuard test result is completed, resulting in deferred revenue. The deferred revenue balance is relieved upon delivery of the applicable patient’s test result to the ordering physician. Changes in accounts receivable and deferred revenue were not materially impacted by any other factors.

Deferred revenue balances are reported in other short-term liabilities in the Company’s condensed consolidated balance sheets and were $0.7 million and $0.5 million as of June 30, 2019 and December 31, 2018, respectively.

Revenue recognized for the three months ended June 30, 2019 and 2018, which was included in the deferred revenue balance at the beginning of each period was $0.2 million and $0.1 million, respectively. Revenue recognized for the six months ended June 30, 2019 and 2018, which was included in the deferred revenue balance at the beginning of each period was $0.3 million and $0.1 million, respectively.

Practical Expedients

The Company does not adjust the transaction price for the effects of a significant financing component, as at contract inception, the Company expects the collection cycle to be one year or less.

The Company expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses in the Company’s condensed consolidated statements of operations.

The Company incurs certain other costs that are incurred regardless of whether a contract is obtained. Such costs are primarily related to legal services and patient communications (e.g. compliance reminder letters). These costs are expensed as incurred and recorded within general and administrative expenses in the Company’s condensed consolidated statements of operations.

Inventory

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

Direct and indirect manufacturing costs incurred during process validation and for other research and development activities, which are not permitted to be sold, have been expensed to research and development in the Company’s condensed consolidated statements of operations.

Inventory consisted of the following:


	June 30,		December 31,
(In thousands)	2019		2018
Raw materials	$	15,473	$	12,761
Semi-finished and finished goods		32,308		26,387
Total inventory	$	47,781	$	39,148

Foreign Currency Translation

For the Company’s international subsidiaries, the local currency is the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at the period-end exchange rate or historical rates, as appropriate. Condensed consolidated statements of operations are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the Company’s condensed consolidated balance sheet as a component of accumulated other comprehensive loss in total Exact Sciences Corporation’s stockholders’ equity. Transaction gains and losses are included in the Company’s condensed consolidated statement of operations.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation in the Company’s condensed consolidated financial statements and accompanying notes to the Company’s condensed consolidated financial statements.