NOTES TO SPECIAL PURPOSE COMBINED FINANCIAL STATEMENTS

1. Asset Purchase Agreement, Description of Oncotype DX Prostate Score® Test, and Basis of Presentation

Asset Purchase Agreement

On August 2, 2022, Genomic Health, Inc. (“GHI”, the “Company”, or the “Seller”), a wholly owned subsidiary of Exact Sciences Corporation, entered into an asset purchase agreement with MDxHealth, SA (“MDx” or the “Buyer”) for the intellectual property and know-how related to the Company’s Oncotype DX Prostate Score® test (“GPS”). Consideration for purchased assets comprised of $ 25.0 million in cash and $5.0 million in American Depository Shares (“ADS”) payable. The asset purchase agreement requires the Buyer to pay up to an additional $70.0 million based upon future business revenue for the years ending December 31, 2023, 2024, and 2025.

Description of Oncotype DX Prostate Score® Test and Basis of Presentation

The Company’s Oncotype DX portfolio delivers actionable insights to inform prognosis and cancer treatment after a diagnosis for breast, prostate, and colon cancers. The Company’s GPS test helps men with newly diagnosed early-stage prostate cancer make the most informed treatment decision for their individual disease, including active surveillance. The prostate needle biopsy-based, multi-gene test has been clinically validated to predict aggressive cancer at the time of diagnosis, helping to identify those men who need immediate surgery or radiation therapy versus those who can confidently choose active surveillance. The result is a more precise and accurate assessment of risk, which helps more men avoid the lifelong complications associated with treatments they do not need, while directing aggressive therapy to those men who require immediate treatment.

The accompanying Special Purpose Combined Statements of Assets Acquired and Liabilities Assumed as of December 31, 2020 and 2021, and June 30, 2021 and 2022 (unaudited), and the Special Purpose Combined Statements of Revenues and Direct Expenses for the years ending December 31, 2020 and 2021, and six-month periods ending June 30, 2021 and 2022 (unaudited), (collectively, the “Special Purpose Combined Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying Special Purpose Combined Financial Statements were prepared in connection with GHI’s divestiture of GPS and were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission.

GPS has not historically been accounted for as a separate entity, subsidiary, or division of GHI. Accordingly, management is not required to evaluate whether there are conditions or events that raise substantial doubt about GPS's ability to continue as a going concern. In addition, standalone financial statements related to GPS have not previously been prepared, and GHI’s information systems were not designed to identify the assets, liabilities, or cash transactions on a product basis. Therefore, it was impractical to prepare full standalone or carve-out financial statements for GPS in accordance with the Securities and Exchange Commission's Regulation S-X. These Special Purpose Combined Financial Statements reflect the Assets Acquired and Liabilities Assumed by GHI and Statement of Revenues and Direct Expenses which includes only costs directly associated with the revenue generating activities of GPS. Indirect costs such as corporate overhead, interest and income tax were not allocated. Therefore, these Special Purpose Combined Financial Statements were not intended to be a complete presentation of financial position, results of operations, or cash flows of GPS in conformity with U.S. GAAP.

The Special Purpose Combined Financial Statements have been derived from the accounting records of GHI using historical results of operations and financial position and only present the assets acquired and liabilities assumed, and the associated revenues and direct expenses of GPS. Certain direct expenses have been allocated by GHI on a specific identification basis or, when specific identification was not practicable, using a proportional cost allocation method. GHI management considers that such allocations have been made on a reasonable basis but may not necessarily be indicative of the costs that would have been incurred if GPS had been operated on a standalone basis for the periods presented. Certain GHI expenses and income, such as corporate overhead, interest income, interest expense, and income taxes, have been excluded from the Statements of Revenues and Direct Expenses, as they were not directly associated with the revenue-producing activities of GPS, and it was not practical to isolate or allocate such indirect GHI operating costs. Corporate overhead expenses include general support functions, such as expenses associated with the executive management and various corporate departments. The accompanying Special Purpose Combined Financial statements were not necessarily indicative of the results of operations that would have occurred or may occur in the future if GPS had been an independent company. 

The financial information for the six-month period ended June 30, 2022, and 2021 was unaudited. However, in the opinion of management, such information includes all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of such financial information. The interim period financial information was not necessarily indicative of the full year results.

2.  Summary of Significant Accounting Policies

Use of Estimates

The preparation of the Special Purpose Combined Financial Statements in accordance with U.S. GAAP required management to make estimates and assumptions that may affect the reported amounts of the assets to be acquired, liabilities to be assumed, revenues, direct expenses and related disclosures during the periods being presented. GHI management bases its estimates on historical experience and various other assumptions it believed to be reasonable. Actual results may differ from management's estimates.

Intangible Assets

Intangible assets acquired consist of the intellectual property and know-how related to the Company’s Oncotype DX Genomic Prostate Score test, which is a component of the Oncotype DX Developed Technology. The intangible assets were recorded in connection with a business combination. Goodwill related to prior business combinations was not acquired, and goodwill was not allocated in the accompanying Statement of Assets Acquired and Liabilities Assumed. The intangible asset was recorded at fair value at the time of acquisition and was amortized on a straight-line basis over its estimated useful life of 10 years.

GHI historically evaluated intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If indicators of impairment were present with respect to intangible assets used in operations and undiscounted future cash flows were not expected to be sufficient to recover an asset’s carrying amount, additional analysis has been performed as appropriate. If the fair value of the asset was less than its carrying value, an impairment loss equal to the difference between the asset’s fair value and carrying value was charged to expense during the period the impairment was identified in order to write the asset down to its estimated fair value. Indicators of impairment include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of the use of acquired assets or the strategy for overall business and significant negative industry or economic trends.

The intangible assets acquired; net of accumulated amortization consists of the following:

Amortization expense amounted to $5.9 million and $5.9 million for the years ended December 31, 2020, and 2021, respectively. Amortization expense amounted to $3.0 million and $3.0 million for the six-month periods ended June 30, 2021, and 2022 (unaudited), respectively. There were no historical impairment losses recorded. Future amortization expense for the remainder of the finite intangible assets useful lives are as follows:

Revenue Recognition

GPS recognized revenues when they released a result to the ordering healthcare provider, in an amount that reflected the consideration expected to collect in exchange for those services. The amount of revenue recognized was based on the established billing rates less contractual and other adjustments, which yielded the unconstrained amount that was expected to ultimately be collected.

The Company determined the amount expected to ultimately be collected using historical collections, established reimbursement rates, and other adjustments. Any changes in these inputs would ultimately impact the amount of revenue recognized during the period. The expected amount was 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 the Company’s contracts was fixed when the Company contracts with a direct bill payer. The Company’s ability to collect was not contingent on the customer’s ability to collect through their downstream billing efforts.

Expense Allocation

Certain costs and expenses presented in the Special Purpose Combined Financial Statements have been allocated by GHI management to GPS based on a basis of specific identification. When specific identification was not practicable, a proportional cost allocation method was used, depending on the nature of the expense. GHI management considers that such allocations have been made on a reasonable basis but may not necessarily be indicative of the costs that would have been incurred if GPS had been operated on a stand-alone basis for the fiscal years presented.

These Special Purpose Combined Financial Statements reflect a consistent application of methodology for each reporting period presented. Allocations of corporate overhead cost from GHI unrelated to the operations of GPS have been excluded from these Special Purpose Combined Financial Statements for all periods presented.

Cost of Sales

Cost of sales includes direct labor, direct materials, such as the costs related to inventory production and usage, shipment of collection kits and samples, the cost of services to process tests and provide results to healthcare providers, and production overhead. The cost of sales was recorded at the cost to acquire the product from the third-party manufacturer. GHI uses an average costing methodology to compute cost per test processing. GPS cost of sales was a function of the specific GPS tests delivered at the GHI average cost.

Research and Development

Research and development expenses directly associated with GPS primarily consist of employee compensation and related benefits and travel; outside professional services; trials and studies; and facilities charges. The Statement of Revenues and Direct Expenses includes an allocation of these expenses incurred based upon the proportion of project expenses related to GPS to total expenses incurred for the project.

Selling and Marketing

Various GHI expenses were identified as costs directly associated with revenue generating activities of GPS. Selling expenses represent direct expenses associated with wages, benefits, and miscellaneous expenses to support sales of GPS. Certain shared costs were allocated based on a percentage of revenue and others on a percentage of GPS specific marketing spend as a percentage of all marketing that was directly attributed to specific products.

3. Subsequent Events

GHI has evaluated transactions or other events for consideration as recognized subsequent events through the date these Special Purpose Combined Financial Statements were available to be issued, December 19, 2022, and it was determined that there were no items to disclose.

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