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FLGT Fulgent Genetics

Filed: 8 Nov 21, 7:00pm

ff

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                             

Commission File Number: 001-37894

 

FULGENT GENETICS, INC.

(exact name of registrant as specified in its charter)

 

 

Delaware

81-2621304

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

4978 Santa Anita Avenue

Temple City, CA

91780

(Address of principal executive offices)

(Zip Code)

 

(626) 350-0537

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

FLGT

 

The Nasdaq Stock Market 
(Nasdaq Global Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 1, 2021, there were 29,831,451 outstanding shares of the registrant’s common stock.

 

 

 


 

Table of Contents

 

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FULGENT GENETICS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except par value data)

(unaudited)

 

 

September 30,

 

 

December 31,

 

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

214,877

 

 

$

87,426

 

Marketable securities

 

255,102

 

 

 

211,941

 

Trade accounts receivable, net of allowance for credit losses of $6,893 and $1,898

   as of September 30, 2021 and December 31, 2020, respectively

 

120,822

 

 

 

183,857

 

Other current assets

 

32,035

 

 

 

40,392

 

Total current assets

 

622,836

 

 

 

523,616

 

Marketable securities, long-term

 

407,284

 

 

 

132,502

 

Redeemable preferred stock investment

 

20,000

 

 

 

 

Fixed assets, net

 

60,166

 

 

 

40,199

 

Acquisition-related intangible assets, net

 

36,684

 

 

 

 

Goodwill

 

48,749

 

 

 

 

Other long-term assets

 

8,949

 

 

 

4,144

 

Total assets

$

1,204,668

 

 

$

700,461

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

24,868

 

 

$

26,488

 

Income tax payable

 

17,875

 

 

 

53,319

 

Contract liabilities

 

7,879

 

 

 

26,576

 

Customer deposit

 

41,510

 

 

 

185

 

Investment margin loan

 

15,107

 

 

 

15,019

 

Other current liabilities

 

39,919

 

 

 

8,528

 

Total current liabilities

 

147,158

 

 

 

130,115

 

Notes payable

 

5,947

 

 

 

 

Unrecognized tax benefits

 

534

 

 

 

377

 

Other long-term liabilities

 

6,576

 

 

 

582

 

Total liabilities

 

160,215

 

 

 

131,074

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $0.0001 par value per share, 50,000 shares authorized, 29,829 and

   28,178 shares issued and outstanding at September 30, 2021 and December 31, 2020,

   respectively

 

3

 

 

 

3

 

Preferred stock, $0.0001 par value per share, 1,000 shares authorized, 0 shares issued

   or outstanding at September 30, 2021 and December 31, 2020

 

 

 

 

 

Additional paid-in capital

 

483,731

 

 

 

418,065

 

Accumulated other comprehensive income (loss)

 

(212

)

 

 

438

 

Retained earnings

 

553,258

 

 

 

150,881

 

Total Fulgent stockholders' equity

 

1,036,780

 

 

 

569,387

 

Noncontrolling interest

 

7,673

 

 

 

 

Total stockholders’ equity

 

1,044,453

 

 

 

569,387

 

Total liabilities and stockholders’ equity

$

1,204,668

 

 

$

700,461

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


FULGENT GENETICS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue

$

227,868

 

 

$

101,716

 

 

$

740,913

 

 

$

126,734

 

Cost of revenue

 

43,466

 

 

 

26,261

 

 

 

153,399

 

 

 

38,035

 

Gross profit

 

184,402

 

 

 

75,455

 

 

 

587,514

 

 

 

88,699

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

6,021

 

 

 

3,177

 

 

 

16,755

 

 

 

7,004

 

Selling and marketing

 

6,012

 

 

 

5,014

 

 

 

16,239

 

 

 

9,871

 

General and administrative

 

12,299

 

 

 

3,741

 

 

 

28,630

 

 

 

7,575

 

Amortization of acquisition-related intangible assets

 

797

 

 

 

 

 

 

797

 

 

 

 

Total operating expenses

 

25,129

 

 

 

11,932

 

 

 

62,421

 

 

 

24,450

 

Operating income

 

159,273

 

 

 

63,523

 

 

 

525,093

 

 

 

64,249

 

Interest and other income, net

 

496

 

 

 

421

 

 

 

1,382

 

 

 

937

 

Income before income taxes, gain (loss) on

   equity method investments and equity loss in investee

 

159,769

 

 

 

63,944

 

 

 

526,475

 

 

 

65,186

 

Provision for income taxes

 

37,545

 

 

 

14,526

 

 

 

127,647

 

 

 

13,961

 

Income before gain (loss) on equity method investments

     and equity loss in investee

 

122,224

 

 

 

49,418

 

 

 

398,828

 

 

 

51,225

 

Gain (loss) on equity-method investments

 

 

 

 

(2,591

)

 

 

3,734

 

 

 

(2,591

)

Equity loss in investee

 

 

 

 

(189

)

 

 

 

 

 

(631

)

Net income from consolidated operations

 

122,224

 

 

 

46,638

 

 

 

402,562

 

 

 

48,003

 

Net loss attributable to noncontrolling

     interests

 

298

 

 

 

 

 

 

463

 

 

 

 

Net income attributable to Fulgent

$

122,522

 

 

$

46,638

 

 

$

403,025

 

 

$

48,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to Fulgent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

4.13

 

 

$

2.11

 

 

$

13.79

 

 

$

2.20

 

Diluted

$

3.93

 

 

$

1.98

 

 

$

13.04

 

 

$

2.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

29,673

 

 

 

22,062

 

 

 

29,221

 

 

 

21,793

 

Diluted

 

31,170

 

 

 

23,539

 

 

 

30,906

 

 

 

23,135

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2


 

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income from consolidated operations

$

122,224

 

 

$

46,638

 

 

$

402,562

 

 

$

48,003

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

(114

)

 

 

18

 

 

 

(78

)

 

 

17

 

Net unrealized gain (loss) on marketable securities, net of tax

 

142

 

 

 

(460

)

 

 

(587

)

 

 

444

 

Comprehensive income from consolidated operations

 

122,252

 

 

 

46,196

 

 

 

401,897

 

 

 

48,464

 

Net loss attributable to noncontrolling interest

 

298

 

 

 

 

 

 

463

 

 

 

 

Foreign currency translation loss attributable

   to noncontrolling interest

 

25

 

 

 

 

 

 

15

 

 

 

 

Comprehensive loss attributable to noncontrolling interest

 

323

 

 

 

 

 

 

478

 

 

 

 

Comprehensive income attributable to Fulgent

$

122,575

 

 

$

46,196

 

 

$

402,375

 

 

$

48,464

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


FULGENT GENETICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

 

Fulgent Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In Capital

 

 

Accumulated

Other Comprehensive

Income (Loss)

 

 

Retained Earnings

 

 

Fulgent Stockholders' Equity

 

 

Noncontrolling Interest

 

 

Total

Equity

 

Balance at December 31, 2020

 

 

28,178

 

 

$

3

 

 

$

418,065

 

 

$

438

 

 

$

150,881

 

 

$

569,387

 

 

$

 

 

$

569,387

 

Equity-based compensation

 

 

 

 

 

 

 

 

2,962

 

 

 

 

 

 

 

 

 

2,962

 

 

 

 

 

 

2,962

 

Exercise of common stock

   options

 

 

45

 

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

44

 

 

 

 

 

 

44

 

Restricted stock awards

 

 

187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock withholding

   for employee tax

   obligations

 

 

(4

)

 

 

 

 

 

(513

)

 

 

 

 

 

 

 

 

(513

)

 

 

 

 

 

(513

)

Issuance of common stock

   at an average of $52.00 per

   share, net

 

 

583

 

 

 

 

 

 

30,297

 

 

 

 

 

 

 

 

 

30,297

 

 

 

 

 

 

30,297

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(654

)

 

 

 

 

 

(654

)

 

 

 

 

 

(654

)

Cumulative effect of

   accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(887

)

 

 

(887

)

 

 

 

 

 

(887

)

Cumulative tax effect of

   accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

239

 

 

 

239

 

 

 

 

 

 

239

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

200,691

 

 

 

200,691

 

 

 

 

 

 

200,691

 

Balance at March 31, 2021

 

 

28,989

 

 

 

3

 

 

 

450,855

 

 

 

(216

)

 

 

350,924

 

 

 

801,566

 

 

 

 

 

 

801,566

 

Equity-based compensation

 

 

 

 

 

 

 

 

3,526

 

 

 

 

 

 

 

 

 

3,526

 

 

 

 

 

 

3,526

 

Exercise of common stock

   options

 

 

4

 

 

 

 

 

 

24

 

 

 

 

 

 

 

 

 

24

 

 

 

 

 

 

24

 

Restricted stock awards

 

 

143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock withholding

   for employee tax

   obligations

 

 

(1

)

 

 

 

 

 

(39

)

 

 

 

 

 

 

 

 

(39

)

 

 

 

 

 

(39

)

Issuance of common stock

   at an average of $73.75 per

   share, net

 

 

378

 

 

 

 

 

 

27,889

 

 

 

 

 

 

 

 

 

27,889

 

 

 

 

 

 

27,889

 

Noncontrolling interest

   assumed related to

   acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,151

 

 

 

8,151

 

Other comprehensive

   gain (loss)

 

 

 

 

 

 

 

 

 

 

 

(49

)

 

 

 

 

 

 

(49

)

 

 

10

 

 

 

(39

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

79,812

 

 

 

79,812

 

 

 

(165

)

 

 

79,647

 

Balance at June 30, 2021

 

 

29,513

 

 

 

3

 

 

 

482,255

 

 

 

(265

)

 

 

430,736

 

 

 

912,729

 

 

 

7,996

 

 

 

920,725

 

Equity-based compensation

 

 

 

 

 

 

 

 

4,374

 

 

 

 

 

 

 

 

 

4,374

 

 

 

 

 

 

4,374

 

Exercise of common stock

   options

 

 

25

 

 

 

 

 

 

17

 

 

 

 

 

 

 

 

 

17

 

 

 

 

 

 

17

 

Restricted stock awards

 

 

320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock withholding

   for employee tax

   obligations

 

 

(29

)

 

 

 

 

 

(2,915

)

 

 

 

 

 

 

 

 

(2,915

)

 

 

 

 

 

(2,915

)

Other comprehensive

   gain (loss)

 

 

 

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

53

 

 

 

(25

)

 

 

28

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

122,522

 

 

 

122,522

 

 

 

(298

)

 

 

122,224

 

Balance at September 30, 2021

 

 

29,829

 

 

$

3

 

 

$

483,731

 

 

$

(212

)

 

$

553,258

 

 

$

1,036,780

 

 

$

7,673

 

 

$

1,044,453

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


 

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

 

Fulgent Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In Capital

 

 

Accumulated

Other Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Total

Equity

 

Balance at December 31, 2019

 

 

21,483

 

 

$

2

 

 

$

146,058

 

 

$

146

 

 

$

(63,429

)

 

$

82,777

 

Equity-based compensation

 

 

 

 

 

 

 

 

924

 

 

 

 

 

 

 

 

 

924

 

Exercise of common stock options

 

 

33

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

Restricted stock awards

 

 

159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock withholding

   for employee tax

   obligations

 

 

(3

)

 

 

 

 

 

(46

)

 

 

 

 

 

 

 

 

(46

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(339

)

 

 

 

 

 

(339

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,956

)

 

 

(1,956

)

Balance at March 31, 2020

 

 

21,672

 

 

 

2

 

 

 

146,948

 

 

 

(193

)

 

 

(65,385

)

 

 

81,372

 

Equity-based compensation

 

 

 

 

 

 

 

 

1,080

 

 

 

 

 

 

 

 

 

1,080

 

Exercise of common stock options

 

 

11

 

 

 

 

 

 

28

 

 

 

 

 

 

 

 

 

28

 

Restricted stock awards

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive gain

 

 

 

 

 

 

 

 

 

 

 

1,242

 

 

 

 

 

 

1,242

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,321

 

 

 

3,321

 

Balance at June 30, 2020

 

 

21,810

 

 

 

2

 

 

 

148,056

 

 

 

1,049

 

 

 

(62,064

)

 

 

87,043

 

Equity-based compensation

 

 

 

 

 

 

 

 

3,150

 

 

 

 

 

 

 

 

 

3,150

 

Exercise of common stock options

 

 

6

 

 

 

 

 

 

62

 

 

 

 

 

 

 

 

 

62

 

Restricted stock awards

 

 

183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock at an

   average of $38.50 per share, net

 

 

1,108

 

 

 

 

 

 

42,655

 

 

 

 

 

 

 

 

 

42,655

 

Issuance of common stock at an

   average of $39.24 per share, net

 

 

200

 

 

 

 

 

 

7,849

 

 

 

 

 

 

 

 

 

7,849

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(442

)

 

 

 

 

 

(442

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46,638

 

 

 

46,638

 

Balance at September 30, 2020

 

 

23,307

 

 

$

2

 

 

$

201,772

 

 

$

607

 

 

$

(15,426

)

 

$

186,955

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


FULGENT GENETICS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

Net income from consolidated operations

 

$

402,562

 

 

$

48,003

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Equity-based compensation

 

 

10,862

 

 

 

5,154

 

Depreciation and amortization

 

 

7,513

 

 

 

1,840

 

Noncash lease expense

 

 

682

 

 

 

345

 

Loss on disposal of fixed asset

 

 

779

 

 

 

352

 

Amortization of premium of marketable securities

 

 

5,490

 

 

 

327

 

Provision for credit losses

 

 

4,107

 

 

 

441

 

Deferred taxes

 

 

(6,574

)

 

 

(1,083

)

Unrecognized tax benefits

 

 

157

 

 

 

389

 

Net loss on marketable securities

 

 

595

 

 

 

 

Equity loss in investee

 

 

 

 

 

631

 

Gain (loss) on equity-method investments

 

 

(3,734

)

 

 

2,591

 

Other

 

 

(22

)

 

 

(7

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

65,003

 

 

 

(84,557

)

Other current and long-term assets

 

 

(2,086

)

 

 

(19,176

)

Accounts payable

 

 

(9,002

)

 

 

14,675

 

Accrued liabilities and other liabilities

 

 

(953

)

 

 

22,169

 

Income tax payable

 

 

(35,444

)

 

 

14,603

 

Contract liabilities

 

 

(18,697

)

 

 

 

Customer deposit

 

 

40,902

 

 

 

 

Operating and finance lease liabilities

 

 

(649

)

 

 

(325

)

Net cash provided by operating activities

 

 

461,491

 

 

 

6,372

 

Cash flow from investing activities:

 

 

 

 

 

 

 

 

Purchases of fixed assets

 

 

(17,829

)

 

 

(11,336

)

Proceeds from sale of fixed assets

 

 

22

 

 

 

8

 

Purchase of marketable securities

 

 

(523,939

)

 

 

(13,563

)

Purchase of redeemable preferred stock

 

 

(20,000

)

 

 

 

Proceeds from sale of marketable securities

 

 

155,809

 

 

 

8,072

 

Maturities of marketable securities

 

 

61,516

 

 

 

13,119

 

Acquisition of businesses, net of cash acquired

 

 

(61,868

)

 

 

 

Investment in equity-method investees

 

 

 

 

 

(3,971

)

Net cash used in investing activities

 

 

(406,289

)

 

 

(7,671

)

Cash flow from financing activities:

 

 

 

 

 

 

 

 

Proceeds from public offerings of common stock, net of issuance costs

 

 

75,626

 

 

 

42,292

 

Proceeds from noncontrolling interest

 

 

10

 

 

 

 

Proceeds from exercise of stock options

 

 

85

 

 

 

102

 

Principal paid for finance lease

 

 

(3

)

 

 

 

Common stock withholding for employee tax obligations

 

 

(3,467

)

 

 

(46

)

Net cash provided by financing activities

 

 

72,251

 

 

 

42,348

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(2

)

 

 

17

 

Net increase in cash and cash equivalents

 

 

127,451

 

 

 

41,066

 

Cash and cash equivalents at beginning of period

 

 

87,426

 

 

 

11,965

 

Cash and cash equivalents at end of period

 

$

214,877

 

 

$

53,031

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

169,540

 

 

$

28

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities in other current liabilities

 

$

20,092

 

 

$

 

Contingent consideration for business acquisition included in other current liabilities

 

$

8,500

 

 

$

 

Purchases of fixed assets in accounts payable

 

$

2,279

 

 

$

2,822

 

Operating lease right-of-use assets obtained in exchange for lease liabilities

 

$

1,706

 

 

$

393

 

Operating lease right-of-use assets reduced due to lease modification and termination

 

$

399

 

 

$

 

Public offerings proceeds included in other current assets

 

$

 

 

$

8,407

 

Public offerings costs included in accounts payable

 

$

 

 

$

374

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


FULGENT GENETICS, INC.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

 

Note 1. Overview and Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. These financial statements include the assets, liabilities, revenues and expenses of all subsidiaries and entities in which the Company has a controlling financial interest or is deemed to be the primary beneficiary. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company uses the equity method to account for its investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. All significant intercompany accounts and transactions are eliminated from the accompanying condensed consolidated financial statements.

Nature of the Business

Fulgent Genetics, Inc., together with its subsidiaries, collectively referred to as the Company, unless otherwise noted or the context otherwise requires, is a technology company offering comprehensive genetic testing providing physicians with clinically actionable diagnostic information they can use to improve the quality of patient care. The Company has developed a proprietary technology platform that allows it to offer a broad and flexible test menu and continually expand and improve its proprietary genetic reference library, while maintaining accessible pricing, high accuracy and competitive turnaround times. Combining next generation sequencing, or NGS, with its technology platform, the Company performs full-gene sequencing with deletion/duplication analysis in single-gene tests; pre-established, multi-gene, disease-specific panels; and customized panels that can be tailored to meet specific customer needs. In 2019, the Company launched its first patient-initiated product, Picture Genetics, a new line of at-home screening tests that combines the Company’s advanced NGS solutions with actionable results and genetic counseling options for individuals. Since March 2020, the Company has commercially launched several tests for the detection of SARS-CoV-2, the virus that causes the novel coronavirus, or COVID-19, including NGS and reverse transcription polymerase chain reaction – based, or RT-PCR-based, tests. The Company has received an Emergency Use Authorization, or EUA, from the United States, or U.S., Food and Drug Administration, or the FDA, for the RT-PCR-based tests for the detection of SARS-CoV-2 using upper respiratory specimens (nasal, nasopharyngeal, and oropharyngeal swabs) and for the at-home testing service through Picture Genetics. The Company’s at-home testing service for COVID-19 and RT-PCR-based test has been granted an EUA by the FDA only for the detection of nucleic acid from SARS-CoV-2, not for any other viruses or pathogens. In August 2021, the Company acquired Cytometry Specialists, Inc., or CSI, to expand the Company’s presence and capabilities in somatic molecular diagnostics and cancer testing. The Company believes its test menu offers more genes for testing than its competitors in today’s market, which enables it to provide expansive options for test customization and clinically actionable results. A cornerstone of the Company’s business is its ability to provide expansive options and flexibility for all clients’ unique testing needs.

Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s audited consolidated financial statements as of and for the fiscal year ended December 31, 2020, which are included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 8, 2021, or 2020 Annual Report, and, in the opinion of management, include all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the Company’s financial position and results of operations. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or any other period. The accompanying Condensed Consolidated Balance Sheet as of December 31, 2020 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the disclosures required by U.S. GAAP. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements included in the 2020 Annual Report, including the notes thereto.

7


Note 2. Summary of Significant Accounting Policies

See the summary of the Company’s significant accounting policies set forth in the notes to its consolidated financial statements included in the 2020 Annual Report.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, judgments and assumptions are based on historical data and experience available at the date of the accompanying condensed consolidated financial statements, as well as various other factors management believes to be reasonable under the circumstances, including but not limited to the potential impacts arising from the recent global pandemic related to COVID-19. As the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from these estimates.

On an on-going basis, management evaluates its estimates, primarily those related to: (i) revenue recognition criteria, (ii) trade accounts receivable and allowances for credit losses, (iii) the useful lives of fixed assets, (iv) estimates of tax liabilities, (v) the valuation of equity method investments, (vi) valuation of acquisition-related intangibles and goodwill, and (vii) useful lives of intangible assets and fixed assets.

Foreign Currency Translation and Foreign Currency Transactions

The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in accumulated other comprehensive income (loss) in the accompanying Condensed Consolidated Statements of Stockholders’ Equity. Losses from these translations were not significant in the three and nine months ended September 30, 2021, and gains from these translations were not significant for the three and nine months ended September 30, 2020. The Company and its subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and nonmonetary assets and liabilities at historical rates. Losses from these remeasurements were not significant in the three and nine months ended September 30, 2021 and 2020.

Leases

The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Operating and finance lease right-of-use, or ROU assets, short-term lease liabilities, and long-term lease liabilities were included in other long-term assets, other current liabilities, and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheets.

Lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, including options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company uses its incremental borrowing rate based on the information available at the commencement date, including inquiries with its bank, in determining the present value of lease payments since its leases do not provide an implicit rate. Lease ROU assets consist of initial measurement of lease liabilities, any lease payments made to lessor on or before the lease commencement date, minus any lease incentive received, and any initial direct costs incurred by the Company. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term. For finance lease, ROU assets are amortized on a straight-line basis from the commencement date to the earlier of the end of useful life of the ROU assets or the end of the lease term. Amortization of ROU assets and interest on the lease liability for finance leases are included as charges to the accompanying Condensed Consolidated Statements of Operations.

Lease ROU assets and liabilities arising from business combinations are recognized and measured at the acquisition dates as if an acquired lease were a new lease at the date of acquisition using the Company’s incremental borrowing rate unless the discount rate is implicit in the lease. The Company elects to not to recognize assets or liabilities as of the acquisition dates for leases that, on the acquisition dates, have a remaining lease term of 12 months or less. The Company also retains the acquirees’ classification of the leases if there are no modifications as part of the business combinations.

8


The Company leases and subleases out space in buildings it owns or leases to third-party tenants or subtenants under noncancelable operating leases. The Company recognizes lease payments as income over the lease terms on a straight-line basis and recognizes variable lease payments as income in the period in which the changes in facts and circumstances on which the variable lease payments are based occur. The net rental income is included in the interest and other income, net, in the accompanying Condensed Consolidated Statement of Operations.

Concentration of Customers

In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue. After aggregating customers that are under common control or are affiliates, 2 customers contributed 31% and 11% of the Company’s revenue for the three months ended September 30, 2021, respectively, and 1 customer contributed 26% of the Company’s revenue for the nine months ended September 30, 2021.  NaN customer contributed 37% and 35% of the Company’s revenue for the three and nine months ended September 30, 2020, respectively. NaN customer comprised 10% or more of total accounts receivable as of September 30, 2021 and December 31, 2020. Revenue from the U.S. government was less than 10% of total revenue for the three and nine months ended September 30, 2021 and 2020.

Revenue from Contracts with Customers

Disaggregation of Revenue

The Company classifies its customers into three payor types: (i) Insurance, (ii) Institutional, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, or (iii) Patients who pay directly, as the Company believes this best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. The following table summarizes revenue from contracts with customers by payor type for the three and nine months ended September 30, 2021 and 2020.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

(in thousands)

 

Testing Services by payor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance

$

143,276

 

 

$

66,111

 

 

$

400,354

 

 

$

66,936

 

Institutional

 

84,401

 

 

 

34,527

 

 

 

339,572

 

 

 

58,459

 

Patient

 

191

 

 

 

1,078

 

 

 

987

 

 

 

1,339

 

Total Revenue

$

227,868

 

 

$

101,716

 

 

$

740,913

 

 

$

126,734

 

 

Contract Balances

Receivables from contracts with customers—As of September 30, 2021 and December 31, 2020, receivables from contracts with customers were approximately $120.8 million and $183.9 million, respectively, and are included within trade accounts receivable on the Condensed Consolidated Balance Sheets.

Contracts assets and liabilities —As of September 30, 2021 and December 31, 2020, contract assets from contracts with customers were $206,000 and $1.4 million, respectively, associated with contract execution and certain costs to fulfill a contract, and included in other current assets in the accompanying Condensed Consolidated Balance Sheets. Contract liabilities are recorded when the Company receives payment or bills prior to completing its obligation to transfer goods or services to a customer. The Company had $7.9 million and $26.6 million of contract liabilities as of September 30, 2021 and December 31, 2020, respectively. Revenues of $5.7 million and $252,000 for the three months and $26.4 million and $254,000 for the nine months were recognized for the periods ended September 30, 2021 and 2020, respectively, related to contract liabilities at the beginning of the respective periods.

Transaction Price Allocated to Future Performance Obligations

The Company does not have material future obligations associated with testing services that extend beyond one year.

Reagents and Supplies

The Company maintains reagents and other consumables primarily used in sample collections and testing which are valued at the lower of cost or net realizable value. Cost is determined using actual costs on a first-in, first-out basis. The reagents and supplies were

9


$22.0 million and $16.5 million as of September 30, 2021 and December 31, 2020, respectively, and was included in other current assets in the accompanying Condensed Consolidated Balance Sheets.

Customer Deposit

Customer deposit in the accompanying Condensed Consolidated Balance Sheets consists primarily of payments received from customers in excess of their outstanding trade accounts receivable balances, and the excess payments will be refunded to the customers or offset against future testing receivables.

Trade Accounts Receivable and Allowance for Credit Losses

Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains an allowance for credit losses for expected uncollectible trade accounts receivable, which is recorded as an offset to trade accounts receivable and changes in allowance for credit losses are classified as a general and administrative expense in the accompanying Condensed Consolidated Statements of Operations. The Company assesses collectability by reviewing trade accounts receivable on a collective basis where similar risk characteristics exist and on an individual basis when it identifies specific customers that have deterioration in credit quality such that they may no longer share similar risk characteristics with the other receivables. In determining the amount of the allowance for credit losses, the Company uses a probability-of-default and loss given default model, which allows the ability to define a point of default and measure credit losses for receivables that have reached the point of default for purposes of calculating the allowance for credit losses. Loss given default represents the likelihood that a receivable that has reached the point of default will not be collected in full. The Company will update its probability-of-default and loss given default factors annually to incorporate the most recent historical data and adjusts the quantitative portion of the reserve through its qualitative reserve overlay. The Company looks at qualitative factors such as general economic conditions in determining expected credit losses. During the three and nine months ended September 30, 2021, the Company recorded $848,000 and $4.1 million of provision for credit losses for trade accounts receivable, respectively. The provision was not significant for the three and nine months ended September 30, 2020.

Marketable Securities

All marketable debt securities, which consist of corporate debt securities, municipal bonds, U.S. government and agency debt securities, and Yankee debt securities issued by foreign governments or entities and denominated in U.S. dollars, have been classified as “available-for-sale”, and are carried at fair value. Unrealized gains and losses, net of any related tax effects, are excluded from earnings and are included in other comprehensive income (loss) and reported as a separate component of stockholders’ equity until realized. Realized gains and losses on marketable debt securities are included in interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations. The cost of any marketable debt securities sold is based on the specific-identification method. The amortized cost of marketable debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest on marketable debt securities is included in interest and other income, net. In accordance with the Company’s investment policy, management invests to diversify credit risk and only invests in securities with high credit quality, including U.S. government securities.

The Company’s investments in marketable equity securities are measured at fair value with the related gains and losses, realized and unrealized, recognized in interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations. The cost of any marketable equity securities sold is based on the specific-identification method.

For available-for-sale debt securities, in an unrealized loss, the Company determines whether a credit loss exists. The credit loss is estimated by considering available information relevant to the collectability of the security and information about past events, current conditions, and reasonable and supportable forecasts. Any credit loss is recorded as a charge to interest and other income, net, not to exceed the amount of the unrealized loss. If the Company has an intent to sell, or if it is more likely than not that the Company will be required to sell a debt security in an unrealized loss position before recovery of its amortized cost basis, the Company will write down the security to its fair value and record the corresponding charge as a component of interest and other income, net.

Redeemable Preferred Stock Investment

The redeemable preferred stock investment of $20.0 million as of September 30, 2021 consisted of redeemable preferred stock of Laboratory for Advanced Medicine, Inc., or Helio Health, that the Company purchased in July 2021. The investment is classified as available-for-sale debt securities. The fair value of available-for-sale debt security is included in the Condensed Consolidated Statement of Balance Sheets. Any unrealized holding gains and losses will be excluded from earnings and reported in other comprehensive income (loss) until realized. Since the Company intends on holding the preferred stock, and preferred stock is not redeemable until July 2027, the investment is recorded as a long-term investment.

10


Business Combination

The Company uses the acquisition method of accounting and allocates the fair value of purchase consideration to the assets acquired and liabilities assumed from an acquiree based on their respective fair values as of the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth and margins, future changes in technology, expected cost and time to develop in-process research and development, brand awareness and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability.

Goodwill

Goodwill is not amortized but is subject to impairment tests on an annual basis, or more frequently if indicators of potential impairment exist, and goodwill is written down when it is determined to be impaired. The Company will perform an annual impairment review in the fourth quarter of each fiscal year and compare the fair value of the reporting unit in which the goodwill resides to its carrying value.

Recent Accounting Pronouncements

The Company evaluates all Accounting Standards Updates, or ASUs, issued by the Financial Accounting Standards Board, or FASB, for consideration of their applicability. ASUs not included in the Company’s disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

ASU 2016-13

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. ASU 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard was effective for annual reporting periods beginning after December 15, 2019, including interim periods within those reporting periods for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application of the amendments is permitted. The Company adopted ASU 2016-13 using the modified retrospective approach as of January 1, 2021. The cumulative effect upon adoption was $887,000 to the retained earnings in the accompanying Condensed Consolidated Statements of Stockholders’ Equity and trade accounts receivable, net, in the accompanying Condensed Consolidated Balance Sheets. The cumulative tax effect was $239,000 to retained earnings in the accompanying Condensed Consolidated Statements of Stockholders’ Equity and deferred tax assets included in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets. There was no impact related to available-for-sale debt securities.

11


ASU 2019-12

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), or ASU 2019-12, which is intended to reduce the complexity of accounting standards while maintaining or enhancing the helpfulness of information provided to financial statement users.  The amendment in this ASU simplifies the accounting for income taxes by removing some exceptions including the incremental approach for intraperiod tax allocation, the requirement to recognize a deferred tax liability for equity method investments, the ability not to recognize a deferred tax liability for a foreign subsidiary, and the general methodology for calculating income taxes in an interim period. Other changes include requiring entities to recognize franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, evaluate tax basis step-up in goodwill obtained in a transaction that is not a business combination, and reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date, making minor codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method, and specifying that an entity is not required to allocate the consolidated current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. For public business entities, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 with early adoption permitted. The Company adopted ASU 2019-12 in the first quarter of 2021, and the adoption had no material impact to the Company’s condensed consolidated financial statements.

 

Note 3. Equity and Debt Securities

The Company’s equity and debt securities consisted of the following:

 

 

September 30, 2021

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

(in thousands)

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bond funds

$

129,343

 

 

$

 

 

$

(356

)

 

$

128,987

 

Exchange traded funds

 

35,098

 

 

 

 

 

 

(8

)

 

 

35,090

 

Total equity securities

 

164,441

 

 

 

 

 

 

(364

)

 

 

164,077

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

74,093

 

 

 

95

 

 

 

(26

)

 

 

74,162

 

Money market accounts

 

50,425

 

 

 

 

 

 

 

 

 

50,425

 

U.S. government debt securities

 

9,297

 

 

 

 

 

 

(1

)

 

 

9,296

 

Municipal bonds

 

3,955

 

 

 

 

 

 

(4

)

 

 

3,951

 

Yankee debt securities

 

3,620

 

 

 

 

 

 

(2

)

 

 

3,618

 

Less: Cash equivalents

 

(50,425

)

 

 

 

 

 

 

 

 

(50,425

)

Total debt securities due within 1 year

 

90,965

 

 

 

95

 

 

 

(33

)

 

 

91,027

 

After 1 year through 5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

284,018

 

 

 

89

 

 

 

(507

)

 

 

283,600

 

U.S. Government debt securities

 

54,854

 

 

 

4

 

 

 

(19

)

 

 

54,839

 

U.S. agency debt securities

 

39,703

 

 

 

 

 

 

(10

)

 

 

39,693

 

Municipal bonds

 

12,283

 

 

 

14

 

 

 

(16

)

 

 

12,281

 

Yankee debt securities

 

8,734

 

 

 

1

 

 

 

(23

)

 

 

8,712

 

Total debt securities due after 1 year through 5 years

 

399,592

 

 

 

108

 

 

 

(575

)

 

 

399,125

 

After 5 years through 10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

8,213

 

 

 

 

 

 

(56

)

 

 

8,157

 

Redeemable preferred stock investment

 

20,000

 

 

 

 

 

 

 

 

 

20,000

 

Total debt securities due after 5 years through 10 years

 

28,213

 

 

 

 

 

 

(56

)

 

 

28,157

 

Total available-for-sale debt securities

 

518,770

 

 

 

203

 

 

 

(664

)

 

 

518,309

 

Total equity and debt securities

$

683,211

 

 

$

203

 

 

$

(1,028

)

 

$

682,386

 

12


 

 

 

December 31, 2020

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

(in thousands)

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bond funds

$

153,269

 

 

$

67

 

 

$

(151

)

 

$

153,185

 

Exchange traded funds

 

17,614

 

 

 

 

 

 

(5

)

 

 

17,609

 

Total equity securities

 

170,883

 

 

 

67

 

 

 

(156

)

 

 

170,794

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

47,461

 

 

 

 

 

 

 

 

 

47,461

 

Corporate debt securities

 

41,061

 

 

 

101

 

 

 

(15

)

 

 

41,147

 

Less: Cash equivalents

 

(47,461

)

 

 

 

 

 

 

 

 

(47,461

)

Total debt securities due within 1 year

 

41,061

 

 

 

101

 

 

 

(15

)

 

 

41,147

 

After 1 year through 5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

124,989

 

 

 

580

 

 

 

(117

)

 

 

125,452

 

U.S. agency debt securities

 

1,000

 

 

 

2

 

 

 

 

 

 

1,002

 

Yankee debt securities

 

6,054

 

 

 

4

 

 

 

(10

)

 

 

6,048

 

Total debt securities due after 1 year through 5 years

 

132,043

 

 

 

586

 

 

 

(127

)

 

 

132,502

 

Total available-for-sale debt securities

 

173,104

 

 

 

687

 

 

 

(142

)

 

 

173,649

 

Total equity and debt securities

$

343,987

 

 

$

754

 

 

$

(298

)

 

$

344,443

 

 

Gross unrealized losses on the Company’s marketable securities were $1.0 million as of September 30, 2021. Gross unrealized losses on the Company’s marketable securities were $298,000 as of December 31, 2020. During the three and nine months ended September 30, 2021, the Company did 0t recognize credit losses.

The Company’s securities of $421.2 million are used as collateral for an outstanding margin account borrowing. As of September 30, 2021, the Company had an outstanding borrowing of $15.1 million under its margin account. Margin account borrowings were used for the purchase of real property located in El Monte, California in 2020.

Note 4. Fair Value Measurements

The authoritative guidance on fair value measurements establishes a framework with respect to measuring assets and liabilities at fair value on a recurring basis and non-recurring basis. Under the framework, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as of the measurement date. The framework also establishes a three-tier hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability and are developed based on the best information available in the circumstances. The hierarchy consists of the following three levels:

Level 1:

Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2:

Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3:

Inputs are unobservable inputs for the asset or liability.

 

13


 

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis, based on the three-tier fair value hierarchy:

 

 

September 30, 2021

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(in thousands)

 

Equity securities, debt securities and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bond funds

$

128,987

 

 

$

128,987

 

 

$

0

 

 

$

0

 

Exchange traded funds

 

35,090

 

 

 

35,090

 

 

 

0

 

 

 

0

 

Corporate debt securities

 

357,762

 

 

 

0

 

 

 

357,762

 

 

 

0

 

U.S. government debt securities

 

64,135

 

 

 

 

 

 

64,135

 

 

 

 

U.S. agency debt securities

 

39,693

 

 

 

0

 

 

 

39,693

 

 

 

0

 

Municipal bonds

 

24,389

 

 

 

0

 

 

 

24,389

 

 

 

0

 

Yankee debt securities

 

12,330

 

 

 

0

 

 

 

12,330

 

 

 

0

 

Redeemable preferred stock investment

 

20,000

 

 

 

0

 

 

 

0

 

 

 

20,000

 

Money market accounts

 

50,425

 

 

 

50,425

 

 

 

0

 

 

 

0

 

Total equity securities, debt securities and cash equivalents

$

732,811

 

 

$

214,502

 

 

$

498,309

 

 

$

20,000

 

 

 

December 31, 2020

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(in thousands)

 

Equity securities, debt securities and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bond funds

$

153,185

 

 

$

153,185

 

 

$

0

 

 

$

0

 

Exchange traded funds

 

17,609

 

 

 

17,609

 

 

 

0

 

 

 

0

 

Corporate debt securities

 

166,599

 

 

 

0

 

 

 

166,599

 

 

 

0

 

Yankee debt securities

 

6,048

 

 

 

0

 

 

 

6,048

 

 

 

0

 

U.S. agency debt securities

 

1,002

 

 

 

0

 

 

 

1,002

 

 

 

0

 

Money market accounts

 

47,461

 

 

 

47,461

 

 

 

0

 

 

 

0

 

Total equity securities, debt securities and cash equivalents

$

391,904

 

 

$

218,255

 

 

$

173,649

 

 

$

0

 

 

The Company’s Level 1 assets include bond funds, exchange traded funds, and money market instruments and are valued based upon observable market prices. Level 2 assets consist of U.S. government and U.S. agency debt securities, municipal bonds, corporate debt securities and Yankee debt securities. Level 2 securities are valued based upon observable inputs that include reported trades, broker/dealer quotes, bids and offers. As of September 30, 2021, the Company had $20.0 million of redeemable preferred stock of Helio Health that was measured using unobservable (Level 3) inputs. The quantitative unobservable inputs for the redeemable preferred stock investment are not developed by the Company. The fair value is based on the most recent transaction price in July 2021, and there has not been any significant activity at Helio Health since July 2021, including any new funding rounds, that would result in a material change in the value.

There were 0 transfers between fair value measurement levels during the three and nine months ended September 30, 2021.

 

14


 

Note 5. Fixed Assets

Major classes of fixed assets consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

Useful Lives

2021

 

 

2020

 

 

 

(in thousands)

 

Medical lab equipment

2 to 12 Years

$

33,956

 

 

$

20,849

 

Building

39 Years

 

6,731

 

 

 

6,731

 

Aircraft

7 Years

 

6,503

 

 

 

6,503

 

Computer hardware

1-5 Years

 

5,187

 

 

 

3,699

 

Leasehold improvements

Shorter of lease term or estimated useful life

 

3,987

 

 

 

1,580

 

Computer software

1 to 5 Years

 

1,501

 

 

 

541

 

Furniture and fixtures

2 to 10 Years

 

1,074

 

 

 

454

 

Automobile

2 to 7 Years

 

803

 

 

 

53

 

Building improvements

6 months to 5 Years

 

707

 

 

 

707

 

Land improvements

5 to 15 Years

 

403

 

 

 

403

 

General equipment

3 to 5 Years

 

44

 

 

 

44

 

Land

 

 

7,500

 

 

 

7,500

 

Assets not yet placed in service

 

 

8,912

 

 

 

2,055

 

Total

 

 

77,308

 

 

 

51,119

 

Less: Accumulated depreciation

 

 

(17,142

)

 

 

(10,920

)

Fixed assets, net

 

$

60,166

 

 

$

40,199

 

 

Depreciation expense on fixed assets totaled $2.5 million and $722,000 for the three months and $6.7 million and $1.8 million for the nine months ended September 30, 2021 and 2020, respectively.

Note 6. Other Significant Balance Sheet Accounts

Other current assets consisted of the following:

 

 

September 30,

 

 

December 31,

 

 

2021

 

 

2020

 

 

(in thousands)

 

Reagents and supplies

$

21,950

 

 

$

16,491

 

Prepaid expenses

 

5,348

 

 

 

3,682

 

Marketable securities interest receivable

 

2,724

 

 

 

1,016

 

Other receivable

 

1,807

 

 

 

17,810

 

Contract assets

 

206

 

 

 

1,379

 

Prepaid income taxes

 

 

 

 

14

 

Total

$

32,035

 

 

$

40,392

 

 

Reagents and supplies include reagents and consumables used for COVID-19 testing and genetics testing and collection kits for COVID-19 testing. Other receivable as of December 31, 2020 primarily consists of proceeds to be received from public offerings of the Company’s common stock, which were all collected during the nine months ended September 30, 2021.

15


Other current liabilities consisted of the following:

 

 

September 30,

 

 

December 31,

 

 

2021

 

 

2020

 

 

(in thousands)

 

Payable to a broker

$

20,092

 

 

$

 

Contingent consideration

 

8,500

 

 

 

 

Payroll liabilities

 

8,380

 

 

 

5,314

 

Operating lease liabilities, short term

 

1,830

 

 

 

267

 

Due to related parties

 

634

 

 

 

409

 

Sales tax payable and other

 

467

 

 

 

2,538

 

Finance lease liabilities, short term

 

16

 

 

 

 

Total

$

39,919

 

 

$

8,528

 

The payable to a broker of $20.1 million was for marketable securities purchased before the period-end that did not settle until after period-end, and contingent consideration of $8.5 million was related to the acquisition of CSI (see Note 14).

Note 7. Reporting Segment and Geographic Information

The Company views its operations and manages its business in 1 reporting segment. Long-lived assets were primarily located in the United States as of September 30, 2021 and December 31, 2020 with an insignificant amount located in China and Canada. Revenue by region during the three and nine months ended September 30, 2021 and 2020 were as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

223,685

 

 

$

100,223

 

 

$

731,084

 

 

$

122,000

 

Foreign

 

4,183

 

 

 

1,493

 

 

 

9,829

 

 

 

4,734

 

Total

$

227,868

 

 

$

101,716

 

 

$

740,913

 

 

$

126,734

 

 

Note 8. Debt, Commitments and Contingencies

 

Debt

As of September 30, 2021, the Company had an outstanding borrowing of $15.1 million under its margin account with the custodian of the Company’s marketable debt security investment account, Pershing Advisor Solutions, LLC, a BNY Mellon Company. Margin account borrowings were used for the purchase of real property located in El Monte, California in 2020. The securities in the brokerage account were used as collateral for the margin loan. The custodian can issue a margin call at any time. The interest rate on the margin loan was the effective federal funds rate, or EFFR, plus a spread, and the EFFR and/or the spread can be changed by BNY Mellon at any time. The interest was 1% at the time of withdrawal of $15.0 million from the margin account, and the interest rate at September 30, 2021 was less than 1.0%. The Company did not make any other withdrawals from the margin account, and the outstanding balance of $15.1 million is included in the accompanying Condensed Consolidated Balance Sheets. The related interest expenses for the three and nine months ended September 30, 2021 were $30,000 and $88,000, respectively. There were 0 related interest expenses for the three and nine months ended September 30, 2020.

Notes payable as of September 30, 2021 consisted of $5.9 million of notes payable to Xilong Scientific Co., Ltd., or Xilong Scientific, by Fujian Fujun Gene Biotech Co., Ltd., or FF Gene Biotech, as defined in Note 14, Business Combination. The loan is payable on December 31, 2022 and interest rate on the loan is 4.97%. The related interest expenses for the three and nine months ended September 30, 2021 were $74,000.

Operating Leases

See Note 9, Leases, for further information.

16


Purchase Obligations

As of September 30, 2021, the Company had non-cancelable purchase obligations of $13.8 million, of which, $10.4 million for reagents and other supplies, $3.0 million for medical lab equipment, and $373,000 for medical lab furniture are payable within twelve months.

Contingencies

From time to time, the Company may be subject to legal proceedings and claims arising in the ordinary course of business. In the opinion of management, the outcome of these matters would not have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows.

Note 9. Leases

 

Lessee

The Company is party as a lessee to various non-cancelable operating leases with varying terms through March 2028 primarily for laboratory and office space and equipment. The Company has options to renew some of these leases after their expirations. On a lease-by-lease basis, the Company considers such options, which may be elected at the Company’s sole discretion, in determining the lease term. The Company also has a finance lease acquired in the acquisition of CSI for lab equipment through July 2024, and the Company retains CSI’s classification of its leases. The Company does not have any leases with variable lease payments. The Company’s operating lease agreements do not contain any residual value guarantees, material restrictive covenants, bargain purchase options or asset retirement obligations.

The Company’s headquarters are located in Temple City, California, which is comprised of various corporate offices and a laboratory certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, accredited by the College of American Pathologists, or CAP, and licensed by the State of California Department of Public Health. Other CLIA-certified laboratories are located in Houston, Texas and Alpharetta, Georgia. Additional offices are located in Atlanta, Georgia and are used for certain report generation functions.

In February 2021, the Company extended the lease for its headquarters located in Temple City, California, to January 31, 2023. In March 2021, the Company entered into a new lease for its 12,000 square foot CLIA-certified laboratory in Houston, Texas, and the lease will expire in November 2023.

The operating and finance lease right-of-use asset, short-term lease liabilities, and long-term lease liabilities as of September 30, 2021 and December 31, 2020 were as follows:

 

September 30,

 

 

December 31,

 

 

2021

 

 

2020

 

 

(in thousands)

 

Operating lease ROU asset, net

$

7,502

 

 

$

828

 

Operating lease liabilities, short term

$

1,830

 

 

$

267

 

Operating lease liabilities, long term

$

5,713

 

 

$

568

 

Finance lease ROU asset, net

$

47

 

 

$

 

Finance lease liabilities, short term

$

16

 

 

$

 

Finance lease liabilities, long term

$

31

 

 

$

 

The following was operating and finance lease expense:

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

(in thousands)

 

Operating lease cost

$

429

 

 

$

167

 

 

$

730

 

 

$

468

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of ROU assets

 

3

 

 

 

 

 

 

3

 

 

 

 

Interest on lease liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term lease cost

 

53

 

 

 

56

 

 

 

245

 

 

 

59

 

Total lease cost

$

485

 

 

$

223

 

 

$

978

 

 

$

527

 

17


 

 

Supplemental information related to operating leases and finance lease was the following:

 

 

September 30, 2021

 

Weighted average remaining lease term - operating leases

5.13 years

 

Weighted average discount rate - operating leases

 

3.15

%

Weighted average remaining lease term -finance lease

2.83 years

 

Weighted average discount rate - finance lease

 

3.12

%

 

The following is a maturity analysis of operating and finance lease liabilities using undiscounted cash flows on an annual basis with renewal periods included:

 

 

Operating Leases

 

 

Finance Lease

 

 

(in thousands)

 

Year Ending December 31,

 

 

 

 

 

 

 

2021 (remaining 3 months)

$

523

 

 

$

5

 

2022

 

2,001

 

 

 

17

 

2023

 

1,541

 

 

 

17

 

2024

 

1,120

 

 

 

10

 

2025

 

1,044

 

 

 

 

2026

 

883

 

 

 

 

Thereafter

 

1,080

 

 

 

 

Total lease payments

 

8,192

 

 

 

49

 

Less imputed interest

 

(649

)

 

 

(2

)

Total

$

7,543

 

 

$

47

 

 

 

Lessor

The Company leases out space in buildings it owns to third-party tenants under noncancelable operating leases and has leased out such space since the Company purchased such buildings in October 2020. The Company also subleases out some space in a lease acquired as part of the acquisition of CSI. As of September 30, 2021, the remaining lease terms left range from 14 months to 47 months including renewal options and may include rent escalation clauses. Lease income primarily represents fixed lease payments from tenants recognized on a straight-line basis over the application lease term. Variable lease income represents tenant payments for real estate taxes, insurance and maintenance.

The lease income was $79,000 and $321,000 for the three and nine months ended September 30, 2021, respectively, which was included in interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations. Total lease income was as follows:

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

(in thousands)

 

Lease income

$

78

 

 

$

 

 

$

315

 

 

$

 

Variable lease income

 

1

 

 

 

 

 

 

6

 

 

 

 

Total lease income

$

79

 

 

$

 

 

$

321

 

 

$

 

18


 

 

Future fixed lease payments from tenants for all noncancelable operating leases as of September 30, 2021 are as follows:

 

 

Lease Payments

 

 

from Tenants

 

 

(in thousands)

 

Year Ending December 31,

 

 

 

2021 (remaining 3 months)

$

87

 

2022

 

356

 

2023

 

266

 

2024

 

238

 

2025

 

120

 

Total

$

1,067

 

 

Note 10. Equity-Based Compensation

The Company has included equity-based compensation expense as part of cost of revenue and operating expenses in the accompanying Condensed Consolidated Statements of Operations as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

(in thousands)

 

Cost of revenue

$

962

 

 

$

428

 

 

$

2,328

 

 

$

929

 

Research and development

 

1,757

 

 

 

887

 

 

 

4,461

 

 

 

1,563

 

Selling and marketing

 

693

 

 

 

1,184

 

 

 

1,739

 

 

 

1,577

 

General and administrative

 

962

 

 

 

651

 

 

 

2,334

 

 

 

1,085

 

Total

$

4,374

 

 

$

3,150

 

 

$

10,862

 

 

$

5,154

 

 

Note 11. Provision for Income Taxes

The effective tax rate used for interim periods is the estimated annual effective consolidated tax rate, based on the current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur. The annual effective tax rate is based upon several significant estimates and judgments, including the estimated annual pre-tax income of the Company in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year. In addition, the Company’s tax expense can be impacted by changes in tax rates or laws and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The Company recorded consolidated provision for income taxes of $37.5 million and $127.6 million for the three and nine months ended September 30, 2021, respectively, compared with $14.5 million and $14.0 million for the three and nine months ended September 30, 2020, respectively. The Company’s effective tax rates were 23% and 24% for the three and nine months ended September 30, 2021, respectively, compared with 23% and 21% for the three and nine months ended September 30, 2020, respectively. The change in the effective tax rate for the nine-month period of 2021, relative to 2020, was primarily attributable to a significant increase in the Company’s pre-tax income in 2021, partially offset by increased windfall tax deductions related to stock-based compensation.

The Company is not currently under examination by any major income tax jurisdiction. During 2021, the statutes of limitations will lapse on the Company's 2017 federal tax year and certain 2016 and 2017 state tax years. The Company does not believe the federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the interim financial statements for the three and nine months ended September 30, 2021 and 2020.

19


Note 12. Income per Share

The following table presents the calculation of basic and diluted income per share for the three and nine months ended September 30, 2021 and 2020:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

(in thousands, except per share data)

 

Net income attributable to Fulgent

$

122,522

 

 

$

46,638

 

 

$

403,025

 

 

$

48,003

 

Weighted-average common shares—outstanding, basic

 

29,673

 

 

 

22,062

 

 

 

29,221

 

 

 

21,793

 

Weighted-average common shares—outstanding, diluted

 

31,170

 

 

 

23,539

 

 

 

30,906

 

 

 

23,135

 

Net income per common share, basic

$

4.13

 

 

$

2.11

 

 

$

13.79

 

 

$

2.20

 

Net income per common share, diluted

$

3.93

 

 

$

1.98

 

 

$

13.04

 

 

$

2.07

 

The following securities have been excluded from the calculation of diluted income per share because their effect would have been anti-dilutive:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

(in thousands)

 

Options

 

5

 

 

 

 

 

 

5

 

 

 

10

 

Restricted Stock Units

 

241

 

 

 

5

 

 

 

129

 

 

 

167

 

 

The anti-dilutive shares described above were calculated using the treasury stock method.

Note 13. Related Parties

Linda Marsh, who is a member of the Company’s board of directors, is currently the Senior Executive Vice President of AHMC Healthcare Inc., or AHMC. The Company performs genetic testing and other testing services, on an arms-length basis, for AHMC, and the Company recognized $762,000 and $2.6 million in revenue in the three and nine months ended September 30, 2021, respectively. The Company recognized $1.3 million in revenue in the three and nine months ended September 30, 2020. As of September 30, 2021 and December 31, 2020, $724,000 and $1.8 million was owed to the Company by AHMC, which is included in trade accounts receivable, net, in the accompanying Condensed Consolidated Balance Sheets, in connection with this relationship.

The Company and Fulgent Pharma LLC, the Company’s former subsidiary, are party to shared services arrangements where research and development, administrative services and office space and equipment are provided between the companies, on an arms-length basis. Ming Hsieh is the Manager and a member of Fulgent Pharma LLC. During the three and nine months ended September 30, 2021, the cost of research development services rendered by Fulgent Pharma LLC for the Company was $74,000 and $279,000, respectively. The cost of research development services rendered by Fulgent Pharma LLC for the Company was 0t significant during the three and nine months ended September 30, 2020. Amounts for services performed by the Company for Fulgent Pharma LLC were 0t significant during the three and nine months ended September 30, 2021 and 2020. As of September 30, 2021, and December 31, 2020, $634,000 and $409,000, respectively, were owed to Fulgent Pharma LLC by the Company, which are included in due to related parties as a component in other current liabilities in the accompanying Condensed Consolidated Balance Sheets, in connection with these relationships.

The Chief Executive Officer and Chairman of the Company’s board of directors, Ming Hsieh, is the owner of PTJ Associates Inc., or PTJ. PTJ provides flight services to the Company on an arms-length basis. During the three and nine months ended September 30, 2021, the company incurred $65,000 and $142,000, respectively, in expenses for flights between California and Texas to transport employees and supplies. As of September 30, 2021, nothing was owed to PTJ by the Company. As of December 31, 2020, $94,000 was owed to PTJ by the Company, which is included in accounts payable in the accompanying Condensed Consolidated Balance Sheets.

Note 14. Business Combinations

The Company believes that the acquisitions of businesses enhance its existing businesses by either expanding its geographic range and customer base or expanding its existing product lines. The Company incurred $2.2 million and $2.8 million acquisition related costs for the three and nine months ended September 30, 2021, respectively, which was included in general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

20


FF Gene Biotech

In April 2017, the Company acquired a 30% equity interest in FF Gene Biotech, a newly formed a joint venture with Xilong Scientific, and Fuzhou Jinqiang Investment Partnership (LP), or FJIP. The joint venture was formed under the laws of China to offer genetic testing services to customers in China.

In May 2021, the Company entered into a restructuring agreement with Xilong Scientific and FJIP, resulting in the Company indirectly acquiring a 72% controlling financial interest in FF Gene Biotech. As a result of the acquisition of FF Gene Biotech, or the FF Gene Biotech Acquisition, the Company seeks to be more strategically aligned with its geographic expansion strategy. It also expects to reduce costs through economies of scale.

The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on estimated fair values. As additional information becomes available, such as the finalization of the estimated fair value of tax-related items, the Company may further update the preliminary purchase price allocation during the remainder of the measurement period (up to one year from the FF Gene Biotech Acquisition date). The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the FF Gene Biotech Acquisition date, as well as the fair value of the noncontrolling interest at the FF Gene Biotech Acquisition date.

 

Amounts

 

 

(in thousands)

 

Considerations

 

 

 

Cash

$

18,974

 

Fair value of the Company’s 30% equity interest held before the business combination

 

3,734

 

 

$

22,708

 

Recognized amounts of identifiable assets acquired and liabilities assumed

 

 

 

Financial assets

$

3,181

 

Reagents and supplies

 

1,288

 

Fixed assets

 

3,874

 

Other tangible assets

 

944

 

Identifiable intangible assets

 

6,958

 

Other current liabilities

 

(2,585

)

Notes payable

 

(5,893

)

Recognized amounts of identifiable assets acquired and liabilities assumed, net

 

7,767

 

Noncontrolling interest

 

(8,141

)

Goodwill

 

23,082

 

Total

$

22,708

 

The fair value of the noncontrolling interest, or NCI, in FF Gene Biotech, a private entity, $8.1 million, was estimated by applying the income approach and market approach. The fair value measurement was based on significant inputs that are not observable in the market and thus represents a fair value categorized within Level 3 of the three-tier fair value hierarchy. The NCI represents a minority interest of 28% in the post-restructuring FF Gene Biotech. Since the NCI is the result of the restructuring, the implied value was utilized to value the NCI based on the 42% effective investment. After determining the implied value, a discount for lack of marketability was applied to the 28% interest representing lack of marketability related to the holding period to monetize the NCI in a future initial public offering, or IPO, or sale, and marketability related to market participant acquisition premiums implied in the value of the $19.0 million purchase price for a 42% interest. The resultant total discount applied was 35%, which is supported both by the put option analyses related to the potential holding period, and a 10% discount owed to a market participant acquisition premium.

The Company recognized a gain of $3.7 million as a result of remeasuring to fair value its 30% equity interest held before the FF Gene Biotech Acquisition. The fair value of the preexisting equity interest was determined based on the characteristics before consummating the FF Gene Biotech Acquisition and estimated by applying income approach and utilized the discounted cash flow method. The Company did not apply the market approach based on its characteristics before consummating the restructuring. The gain on the equity method investment is included in the Company’s Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021.

The goodwill of $23.1 million arising from the FF Gene Biotech Acquisition is attributed to the expected synergies and other benefits that will be potentially generated from the combination of the Company and FF Gene Biotech. The goodwill recognized is not deductible for tax purposes.

21


The identified intangible assets acquired in the FF Gene Biotech Acquisition consisted of a $5.7 million royalty-free technology with an estimated amortization life of 10 years and $1.2 million customer relationships with an estimated amortization life of 5 years. The value of these assets was based upon the preliminary fair values as of the closing date of the FF Gene Biotech Acquisition.

The Company concluded FF Gene Biotech is a variable interest entity as FF Gene Biotech lacks sufficient capital to operate independently. The Company concluded that it alone has the power to direct the most significant activities of FF Gene Biotech and therefore is the primary beneficiary of the entity post the FF Gene Biotech Acquisition. Judgment regarding the level of influence over FF Gene Biotech includes consideration of key factors such as the Company's ownership interest, representation on the board of directors or other management body and participation in policy-making decisions. Post the FF Gene Biotech Acquisition, the financial results for FF Gene Biotech are included in the Company’s condensed financial statements. Prior to the FF Gene Biotech Acquisition, the financial results for FF Gene Biotech were not significant for pro forma financial information.

CSI Acquisition

In August 2021 the Company acquired 100% of the outstanding equity of CSI, a multi-site reference laboratory business in the United States. This acquisition of CSI, or the CSI Acquisition, expands the Company’s national reference laboratory presence in the United States.

The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on estimated fair values. As additional information becomes available, the Company may further update the preliminary purchase price allocation during the remainder of the measurement period (up to one year from the CSI Acquisition date). The following tables summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the CSI Acquisition date:

 

Amounts

 

 

(in thousands)

 

Considerations

 

 

 

Cash

$

43,359

 

Contingent consideration

 

8,500

 

 

$

51,859

 

Recognized amounts of identifiable assets acquired and liabilities assumed

 

 

 

Debt-free net working capital

$

4,270

 

Fixed assets

 

6,855

 

ROU assets - operating

 

4,988

 

ROU assets - finance

 

49

 

Other assets

 

160

 

Identifiable intangible assets

 

30,540

 

Deferred tax liability

 

(9,629

)

Operating lease liabilities

 

(4,988

)

Finance lease liabilities

 

(49

)

Other liabilities

 

(6,069

)

Recognized amounts of identifiable assets acquired and liabilities assumed, net

 

26,127

 

Goodwill

 

25,732

 

Total

$

51,859

 

The CSI Acquisition includes a contingent consideration arrangement that requires additional consideration to be paid by the Company based on CSI’s achievement of a minimum level of earnings, for the year ending December 31, 2021, as described in the acquisition agreement.  The range of undiscounted amounts the Company may be required to pay under the contingent consideration agreement is between 0 and $10.0 million.  The fair value of the contingent consideration recognized on the CSI Acquisition date of $8.5 million was estimated by applying the income approach using discounted cash flows. Given the short-term nature of the contingent consideration the most significant assumption is the probability weighted cash flow.

The goodwill of $25.7 million arising from the CSI Acquisition is attributed to the expected synergies, assembled workforce, other benefits that will be potentially generated from the combination and deferred tax. The goodwill recognized is not deductible for tax purposes.

The identified intangible assets acquired in the CSI Acquisition consisted of $27.6 million customer relationships with an estimated amortization life of 12 years, $1.9 million laboratory information system platform with an estimated amortization life of 5 years, and $1.1 million trade name with an estimated amortization life of 10 years.

22


Revenue and operating income or loss from both acquisitions since the respective 2021 acquisition dates are included in the accompanying Condensed Consolidated Statements of Operations as follows, in thousands:

 

Net Sales

 

 

Operating Income (loss)

 

FF Gene Biotech

$

4,556

 

 

$

(1,612

)

CSI

 

7,101

 

 

 

659

 

Total

$

11,657

 

 

$

(953

)

 

Note 15. Equity Distribution Agreement

In November 2020, the Company entered into an Equity Distribution Agreement, or the November 2020 Equity Distribution Agreement, with Piper Sandler & Co. (f/k/a Piper Jaffray & Co.), or Piper, Oppenheimer & Co. Inc., and BTIG LLC, as sales agents, pursuant to which the Company may offer and sell, from time to time through Piper, shares of its common stock having an aggregate offering price of up to $175.0 million. Piper may receive a commission of up to 3% of the gross proceeds received by the Company for sales pursuant to the November 2020 Equity Distribution Agreement. The Company did 0t sell any shares of its common stock during the three months ended September 30, 2021 pursuant to the November 2020 Equity Distribution Agreement. During the nine months ended September 30, 2021, the Company sold approximately 961,000 shares of its common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $60.56.

Note 16. Goodwill and Acquisition-Related Intangibles

Summaries of goodwill and acquisitions-related intangibles balances as of September 30, 2021 and December 30, 2020 were as follows:

 

 

 

September 30,

 

 

December 31,

 

 

Weighted-Average Amortization Period

2021

 

 

2020

 

 

 

(in thousands)

 

Goodwill

 

$

48,749

 

 

$

 

 

 

 

 

 

 

 

 

 

Royalty-free technology

10 Years

$

5,706

 

 

$

 

Less: accumulated amortization

 

 

(238

)

 

 

 

Royalty-free technology, net

 

 

5,468

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

12 Years

 

28,824

 

 

 

 

Less: accumulated amortization

 

 

(480

)

 

 

 

Customer relationships, net

 

 

28,344

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade name

10 Years

 

1,090

 

 

 

 

Less: accumulated amortization

 

 

(19

)

 

 

 

Trade name, net

 

 

1,071

 

 

 

 

 

 

 

 

 

 

 

 

 

Laboratory information system platform

5 Years

 

1,860

 

 

 

 

Less: accumulated amortization

 

 

(59

)

 

 

 

Laboratory information system platform, net

 

 

1,801

 

 

 

 

Total acquisition-related intangibles, net

 

$

36,684

 

 

$

 

 

23


 

During the nine months ended September 30, 2021, the Company recorded $23.1 million of goodwill and $7.0 million of intangibles attributable to the FF Gene Biotech Acquisition. See Note 14, Business Combinations, to the Company's condensed consolidated financial statements.

During the three months ended September 30, 2021, the Company recorded $25.7 million of goodwill and $30.5 million of intangibles attributable to the CSI Acquisition. See Note 14, Business Combinations, to the Company's condensed consolidated financial statements.

Based on the carrying value of acquisition-related intangibles recorded as of September 30, 2021, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for acquisition-related intangibles is expected to be as follows:

 

 

Amounts

 

 

(in thousands)

 

2021 (remaining 3 months)

$

910

 

2022

 

3,597

 

2023

 

3,597

 

2024

 

3,597

 

2025

 

3,597

 

2026

 

3,278

 

Thereafter

 

18,108

 

Total

$

36,684

 

 

24


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included in this report. Additionally, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K promulgated by the Securities and Exchange Commission in preparing this discussion and analysis, we presume that readers have access to and have read the discussion and analysis of our financial condition and results of operations included in our annual report on Form 10-K for our fiscal year ended December 31, 2020 filed with the SEC on March 8, 2021, or the 2020 Annual Report. As used in this discussion and analysis and elsewhere in this report, unless the context otherwise requires, the terms “Fulgent,” the “Company,” “we,” “us” and “our” refer to Fulgent Genetics, Inc. and its consolidated subsidiaries.

Forward-Looking Statements

The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are statements other than historical facts and relate to future events or circumstances or our future performance, and they are based on our current assumptions, expectations and beliefs concerning future developments and their potential effect on our business. The forward-looking statements in this discussion and analysis include statements about, among other things, our future financial and operating performance, our future cash flows and liquidity and our growth strategies, as well as anticipated trends in our business and industry. These forward-looking statements are subject to a number of risks and uncertainties, including, among others, those described under “Item 1A. Risk Factors” in Part II of this report. Moreover, we operate in a competitive and rapidly evolving industry and new risks emerge from time to time. It is not possible for us to predict all of the risks we may face, nor can we assess the impact of all factors on our business or the extent to which any factor or combination of factors could cause actual results to differ from our expectations. In light of these risks and uncertainties, the forward-looking events and circumstances described in this discussion and analysis may not occur, and actual results could differ materially and adversely from those described in or implied by any forward-looking statements we make. Although we have based our forward-looking statements on assumptions and expectations we believe are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. As a result, forward-looking statements should not be relied on or viewed as predictions of future events, and this discussion and analysis should be read with the understanding that actual future results, levels of activity, performance and achievements may be materially different than our current expectations. The forward-looking statements in this discussion and analysis speak only as of the date of this report, and except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

Overview

We are a technology company offering large-scale COVID-19 testing services and comprehensive genetic testing to provide physicians with clinically actionable diagnostic information they can use to improve the quality of patient care. We have developed a proprietary technology platform that allows us to offer a broad and flexible test menu and continually expand and improve our proprietary genetic reference library, while maintaining accessible pricing, high accuracy and competitive turnaround times. Combining NGS with our technology platform, we perform full-gene sequencing with deletion/duplication analysis in single-gene tests; pre-established, multi-gene, disease-specific panels; and customized panels that can be tailored to meet specific customer needs. We believe our test menu offers more genes for testing than our competitors in today’s market, which enables us to provide expansive options for test customization and clinically actionable results.

Our technology platform, which integrates sophisticated data comparison and suppression algorithms, adaptive learning software, in comparison to our competitors advanced genetic diagnostics tools and integrated laboratory processes, allows us to offer a test menu with expansive genetic coverage. We believe the comprehensive data output and high detection rates of our tests, both made possible by this expansive genetic coverage, provide physicians with information they can readily incorporate into treatment decisions for their patients, which we refer to as clinical actionability. In addition, our technology platform facilitates our ability to perform customized genetic tests using our expansive library of genes, and we believe this flexibility increases the utility of the genetic data we produce. Further, our technology platform provides us with operating efficiencies that help lower our internal costs, which allows us to offer our tests at accessible price points. As a result, our efforts to build and continually enhance our technology platform allow us to deliver comprehensive, adaptable, clinically actionable and affordable genetic analysis while maintaining a low cost per billable test, enabling us to efficiently meet the needs of our growing base of customers.

25


Since March 2020, we have offered several tests for the detection of SARS-CoV-2, the virus that causes COVID-19, including NGS and RT-PCR-based tests. To date, we have processed orders for our COVID-19 tests from a variety of customers, including governmental bodies, municipalities, and large corporations. In 2020, we established and operated COVID-19 testing sites for certain municipal customers, including the County of Los Angeles and the New York City public school system. We also offer at-home COVID-19 testing services through our Picture Genetics platform to both individuals and large organizations, including the New York City Test and Trace program.

In May 2021, we entered into a restructuring agreement with Xilong Scientific and FJIP, resulting in the Company indirectly acquiring a controlling financial interest in FF Gene Biotech. FF Gene Biotech was founded to bring our NGS capabilities to the Chinese genetic testing market. This joint venture has enabled us to have an operational presence on the ground in China as we seek to capitalize on the large and growing genetic testing opportunity in that country. As a result of the acquisition, we seek to be more strategically aligned with its geographic expansion strategy. It also expects to reduce costs through economies of scale.

In August 2021, we acquired CSI, a Georgia corporation, to expand our presence and capabilities in somatic molecular diagnostics and cancer testing. We plan to leverage our established technology platform, NGS expertise, lab operations, and sales infrastructure in conjunction with CSI’s extensive cancer testing menu to establish a differentiated foothold in oncologic testing in the United States. Through our acquisition of CSI, we have added the following types of testing services to our test menu:

 

Flow Cytometry – a sophisticated cell analysis technique providing diagnosis, prognosis, and monitoring of malignancies with a relatively small sample size. It provides the ability to identify emerging abnormalities and perform rare event analysis of patient-specific aberrant immunophenotypes, or cells expressing abnormal proteins unique to a specific patient.

 

Fluorescence In-Situ Hybridization, or FISH – a laboratory technique for detecting and locating a specific DNA sequence on a chromosome, FISH probe panels and individual probes are able to precisely isolate and identify genetic alterations in solid tumor and hematological neoplasms, or abnormal cells located in the blood and blood forming tissues, such as bone marrow and lymphatic tissue. FISH cancer testing is a diagnostic tool that can detect and confirm chromosome abnormalities such as deletions, duplications, translocations and other numerical or structural aberrations to diagnose and help predict the best therapeutic approach for cancer patients.

 

Immunohistochemistry, or IHC – an imaging technique used to visualize antigens in cells. IHC antibodies and histochemical stains are used to detect the presence, relative quantity, and localization of specific proteins to aid in determining differentiation in abnormal cells with similar structures. In addition to other applications, IHC is used to provide prognostic or therapeutic information.

 

Cytogenetics - analyzes the entire chromosome set for numerical and structural abnormalities such as chromosome additions, deletions and translocations. Identification of each abnormality may aid diagnosis and treatment decisions for cancer patients.

 

Molecular Testing - includes both hematopoietic and solid tumor molecular assays for qualitative and quantitative analysis. Advanced single gene testing, targeted profile molecular assays, and broad-spectrum tumor testing yield clinically actionable data for precise diagnosis and appropriate therapy selection.

We offer tests at competitive prices, averaging approximately $99 per billable test delivered in the nine months ended September 30, 2021, and at a lower cost to us than many of our competitors, averaging approximately $20 per billable test delivered in the nine months ended September 30, 2021. Our volume has grown rapidly since our commercial launch, with 2.2 million and 7.5 million billable tests delivered in the three and nine months ended September 30, 2021, respectively, compared to 1.0 million and 1.2 million billable tests delivered in the three and nine months ended September 30, 2020, respectively. As of September 30, 2021, an aggregate of approximately 12.0 million billable tests have been delivered to over 1,700 customers since launching our first commercial genetic tests in 2013. We have experienced compound quarterly growth of 94% in the number of billable tests delivered in our last eight completed fiscal quarters. We recorded revenue and net income of $227.9 million and $122.5 million, respectively, in the three months ended September 30, 2021, compared to revenue and net income of $101.7 million and $46.6 million, respectively, in the three months ended September 30, 2020. We recorded revenue and net income of $740.9 million and $403.0 million, respectively, in the nine months ended September 30, 2021, compared to revenue and net income of $126.7 million and $48.0 million, respectively, in the nine months ended September 30, 2020. We achieved profitability in the first half of 2017, the second and third quarters of 2019, the second, third and fourth quarters of 2020, and the first three quarters of 2021, but we have recorded losses in all other periods since our inception.

26


COVID-19 Considerations

The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, patients, communities and business operations, as well as the U.S. economy and financial markets. We are closely monitoring the impact of COVID-19 on all aspects of our business, including its impact on our customers, suppliers, third-party service providers, and our employees. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, circumstances regarding the emergence and prevalence of COVID-19 variants, the success of vaccination campaigns (both in the United States and internationally), the actions taken to contain COVID-19 or treat it and related impacts on local, regional, national and international markets and supply chains.

During the nine months ended September 30, 2021, and for the entirety of the COVID-19 pandemic to this point, we continued to operate as an essential business in response to COVID-19. In the three and nine months ended September 30, 2021, the COVID-19 pandemic has not had a negative impact on our consolidated operating results. Rather, we have recognized significant revenue growth in connection with sales of our COVID-19 tests. Our ability to continue to operate as currently planned, including our ability to continue to offer our COVID‑19 tests with competitive results and turn-around times without any significant negative operational impact from the COVID-19 pandemic will depend in part on our, and any of our third‑party service providers’ and suppliers’ ability to protect our respective employees and supply chains. We have endeavored to follow the recommended actions of government and health authorities to protect our employees. We intend to continue to adhere to our employee safety measures to ensure that any disruptions to our operations remain minimal during the pandemic. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our, or our third-party service providers’ and suppliers’, workforce and/or supply chain.

The COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of September 30, 2021. We have not incurred any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic as of September 30, 2021.

For additional information on risk factors related to the COVID-19 pandemic or other risks that could impact our results, please refer to “Item 1A. Risk Factors” in Part II of this Form 10-Q.

Business Risks and Uncertainties and Other Factors Affecting Our Performance

Our business and prospects are exposed to numerous risks and uncertainties. For more information, see “Item 1A. Risk Factors” in Part II of this report. In addition, our performance in any period is affected by a number of other factors. See the description of some of the material factors affecting our performance in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2020 Annual Report.

 

27


 

Results of Operations

The table below summarizes our results of operations for the periods indicated. For a financial overview relating to our results of operations, including general descriptions of the make-up of material line items of our statement of operations data, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2020 Annual Report.

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

$

 

 

%

 

 

September 30,

 

 

$

 

 

%

 

 

2021

 

 

2020

 

 

Change

 

 

Change

 

 

2021

 

 

2020

 

 

Change

 

 

Change

 

Statement of Operations Data:

(dollars and billable tests in thousands, except per billable test data)

 

Revenue

$

227,868

 

 

$

101,716

 

 

$

126,152

 

 

 

124

%

 

$

740,913

 

 

$

126,734

 

 

$

614,179

 

 

 

485

%

Cost of revenue

 

43,466

 

 

 

26,261

 

 

 

17,205

 

 

 

66

%

 

 

153,399

 

 

 

38,035

 

 

 

115,364

 

 

 

303

%

Gross profit

 

184,402

 

 

 

75,455

 

 

 

108,947

 

 

 

144

%

 

 

587,514

 

 

 

88,699

 

 

 

498,815

 

 

 

562

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

6,021

 

 

 

3,177

 

 

 

2,844

 

 

 

90

%

 

 

16,755

 

 

 

7,004

 

 

 

9,751

 

 

 

139

%

Selling and marketing

 

6,012

 

 

 

5,014

 

 

 

998

 

 

 

20

%

 

 

16,239

 

 

 

9,871

 

 

 

6,368

 

 

 

65

%

General and administrative

 

12,299

 

 

 

3,741

 

 

 

8,558

 

 

 

229

%

 

 

28,630

 

 

 

7,575

 

 

 

21,055

 

 

 

278

%

Amortization of acquisition-related intangible assets

 

797

 

 

 

 

 

 

797

 

 

*

 

 

 

797

 

 

 

 

 

 

797

 

 

*

 

Total operating expenses

 

25,129

 

 

 

11,932

 

 

 

13,197

 

 

 

111

%

 

 

62,421

 

 

 

24,450

 

 

 

37,971

 

 

 

155

%

Operating income

 

159,273

 

 

 

63,523

 

 

 

95,750

 

 

 

151

%

 

 

525,093

 

 

 

64,249

 

 

 

460,844

 

 

 

717

%

Interest and other income, net

 

496

 

 

 

421

 

 

 

75

 

 

 

18

%

 

 

1,382

 

 

 

937

 

 

 

445

 

 

 

47

%

Income before income taxes, gain

   (loss) on equity method investments

   and equity loss in investee

 

159,769

 

 

 

63,944

 

 

 

95,825

 

 

 

150

%

 

 

526,475

 

 

 

65,186

 

 

 

461,289

 

 

 

708

%

Provision for income taxes

 

37,545

 

 

 

14,526

 

 

 

23,019

 

 

 

158

%

 

 

127,647

 

 

 

13,961

 

 

 

113,686

 

 

 

814

%

Income before gain (loss) on

   equity method investments

   and equity loss in investee

 

122,224

 

 

 

49,418

 

 

 

72,806

 

 

 

147

%

 

 

398,828

 

 

 

51,225

 

 

 

347,603

 

 

 

679

%

Gain (loss) on equity-method

   investments

 

 

 

 

(2,591

)

 

 

2,591

 

 

 

100

%

 

 

3,734

 

 

 

(2,591

)

 

 

6,325

 

 

 

244

%

Equity loss in investee

 

 

 

 

(189

)

 

 

189

 

 

 

100

%

 

 

 

 

 

(631

)

 

 

631

 

 

 

100

%

Net income from consolidated

      operations

 

122,224

 

 

 

46,638

 

 

 

75,586

 

 

 

162

%

 

 

402,562

 

 

 

48,003

 

 

 

354,559

 

 

 

739

%

Net loss attributable to noncontrolling

      interests

 

298

 

 

 

 

 

 

298

 

 

*

 

 

 

463

 

 

 

 

 

 

463

 

 

*

 

Net income attributable to Fulgent

$

122,522

 

 

$

46,638

 

 

$

75,884

 

 

 

163

%

 

$

403,025

 

 

$

48,003

 

 

$

355,022

 

 

 

740

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Billable tests delivered(1)

 

2,177

 

 

 

1,035

 

 

 

1,142

 

 

 

110

%

 

 

7,510

 

 

 

1,229

 

 

 

6,281

 

 

 

511

%

Average price per billable test

      delivered(2)

$

105

 

 

$

98

 

 

$

7

 

 

 

7

%

 

$

99

 

 

$

103

 

 

$

(4

)

 

 

(4

%)

Cost per billable test delivered(3)

$

20

 

 

$

25

 

 

$

(5

)

 

 

(20

%)

 

$

20

 

 

$

31

 

 

$

(11

)

 

 

(35

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Percentage not meaningful.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

We determine the number of billable tests delivered in a period by counting the number of tests which are delivered to our customers and for which we bill our customers and recognize some amount of revenue in the period.

(2)

We calculate the average price per billable test delivered by dividing the amount of revenue we recognized from the billable tests delivered in a period by the number of billable tests delivered in the same period.

(3)

We calculate cost per billable test delivered by dividing our cost of revenue in a period by the number of billable tests delivered in the same period.

28


Revenue

Revenue increased $126.2 million, or 124%, from $101.7 million in the three months ended September 30, 2020 to $227.9 million in the three months ended September 30, 2021, and increased $614.2 million, or 485%, from $126.7 million in the nine months ended September 30, 2020 to $740.9 million in the nine months ended September 30, 2021. The increases in revenue between periods were primarily due to increases in the number of billable tests delivered, primarily related to the increased orders for our COVID-19 tests.

The average price of the billable tests we delivered increased from $98 in the three months ended September 30, 2020 to $105 in the three months ended September 30, 2021, and decreased from $103 in the nine months ended September 30, 2020 to $99 in the nine months ended September 30, 2021. The increase in the three-month period was primarily due to the mix of tests delivered in the periods. The decrease in the nine-month period was due to (i) lower price-points for the mix of tests we delivered, including COVID-19 tests launched in 2020, (ii) the mix of customers ordering tests in these periods, who may order tests at different rates depending on the arrangements we have negotiated with them, and (iii) our reduction of prices for certain of our tests due to general price degradation for genetic tests and other competitive factors during the nine months ended September 30, 2021.

Revenue from non-U.S. sources increased $2.7 million, or 180%, from $1.5 million in the three months ended September 30, 2020 to $4.2 million in the three months ended September 30, 2021, and increased $5.1 million, or 108%, from $4.7 million in the nine months ended September 30, 2020 to $9.8 million in the nine months ended September 30, 2021. The increases in revenue from non-U.S. sources between periods were primarily due to increased sales of our traditional genetic testing services to customers in China through FF Gene Biotech.

The number of billable tests we delivered increased 1.1 million, from 1.0 million in the three months ended September 30, 2020 to 2.2 million in the three months ended September 30, 2021, and increased 6.3 million, from 1.2 million in the nine months ended September 30, 2020 to 7.5 million in the nine months ended September 30, 2021. The increases were primarily attributable to the expansion of our test menu, including our COVID-19 tests launched in 2020, and increases in sales to certain of our existing and new customers.

After aggregating customers that are under common control or are affiliates, two customers contributed 31% and 11% of the Company’s revenue for the three months ended September 30, 2021, respectively, and one customer contributed 26% of the Company’s revenue for the nine months ended September 30, 2021. One customer contributed 37% and 35% of the Company’s revenue for the three and nine months ended September 30, 2020, respectively.

Cost of Revenue

Cost of revenue increased $17.2 million, or 66%, from $26.3 million in the three months ended September 30, 2020 to $43.5 million in the three months ended September 30, 2021. The increase was primarily due to increases of $4.5 million in consulting and outside labor costs related to increased outside labor for production, $4.0 million in personnel costs including equity-based compensation expense related to increased headcount and market price of the Company’s stock, $3.0 million in reagent and supply expenses related to increased billable tests delivered, $2.0 million in shipping and handling expense related to delivery of collection kits for of COVID-19 tests, $1.7 million in software expense related to usage of COVID-19 testing software, and $1.6 million in depreciation expenses related to medical lab equipment purchased.

Cost of revenue increased $115.4 million, or 303%, from $38.0 million in the nine months ended September 30, 2020 to $153.4 million in the nine months ended September 30, 2021. The increase was primarily due to increases of $45.8 million in reagent and supply expenses related to increased billable tests delivered, $29.2 million in consulting and outside labor costs related to increased outside labor for production, $13.1 million in personnel costs including equity-based compensation expense related to increased headcount and market price of the Company’s stock, $10.9 million in shipping and handling expense related to delivery of collection kits for of COVID-19 tests, $7.9 million in software expense related to usage of COVID-19 testing software, $4.5 million in depreciation expenses related to medical lab equipment purchased, and $2.1 million in facilities primarily related to certain modifications made to our mini vans used for our COVID-19 business.

Cost per billable test delivered decreased $5, or 20%, from $25 in the three months ended September 30, 2020 to $20 in the three months ended September 30, 2021, cost per billable test delivered decreased $11, or 35%, from $31 in the nine months ended September 30, 2020 to $20 in the nine months ended September 30, 2021. The increase in the number of billable tests we delivered was greater than the increase in our cost of revenue due to economies of scale related to the increased number of billable tests for the period. The greater increase in the number of billable tests we delivered was primarily attributable to new customers and our expanded test menu, including COVID-19 tests in 2020. Our cost per billable test decreased in part due to our efforts to leverage our technology, such as engineered chemistry and competitive analytics powered by artificial intelligence and machine learning.

29


Our gross profit increased $108.9 million, from $75.5 million in the three months ended September 30, 2020 to $184.4 million in the three months ended September 30, 2021, and increased $498.8 million, from $88.7 million in the nine months ended September 30, 2020 to $587.5 million in the nine months ended September 30, 2021. Our gross profit as a percentage of revenue, or gross margin, increased from 74.2% to 80.9% between three months ended September 30, 2020 and 2021, and increased from 70.0% to 79.3% between nine months ended September 30, 2020 and 2021, due in part to the increase in revenue and the decrease in our cost per billable test described above.

Research and Development

Research and development expenses increased $2.8 million, or 90%, from $3.2 million in the three months ended September 30, 2020 to $6.0 million in the three months ended September 30, 2021. The increase was primarily due to increases of $2.0 million in personnel costs including equity-based compensation expense related to increased headcount and market price of the Company’s stock and $630,000 in reagent and supply expenses related to increased reagent usage for COVID-19 research.

Research and development expenses increased $9.8 million, or 139%, from $7.0 million in the nine months ended September 30, 2020 to $16.8 million in the nine months ended September 30, 2021. The increase was primarily due to increases of $6.3 million in personnel costs including equity-based compensation expense related to increased headcount and market price of the Company’s stock, $1.9 million in reagent and supply expenses related to increased reagent usage for COVID-19 research, and $510,000 in consulting and outside labor costs for increased outside labor used.

Selling and Marketing

Selling and marketing expenses increased $1.0 million, or 20% from $5.0 million in the three months ended September 30, 2020 to $6.0 million in the three months ended September 30, 2021. The increase was primarily due to an increase of $1.4 million in personnel costs including equity-based compensation expense related to increased commission expense and market price of the Company’s stock, and partially offset by a decrease of $581,000 in shipping and handling related to marketing supplies shipped to potential customers in 2020.

Selling and marketing expenses increased $6.4 million, or 65% from $9.9 million in the nine months ended September 30, 2020 to $16.2 million in the nine months ended September 30, 2021. The increase was primarily due to increases of $6.1 million in personnel costs including equity-based compensation expense related to increased commission expense and market price of the Company’s stock, and $1.7 million in consulting and outside labor costs for increased outside labor used, and partially offset by a decrease of $1.6 million in marketing supplies, including kits to potential customers in 2020.

General and Administrative

General and administrative expenses increased $8.6 million, or 229% from $3.7 million in the three months ended September 30, 2020 to $12.3 million in the three months ended September 30, 2021. The increase was primarily due to increases of $2.4 million in consulting costs and $545,000 in legal and professional fees primarily related to the FF Gene Biotech Acquisition and CSI Acquisition, $2.2 million in personnel costs including equity-based compensation expense related to increased headcount and market price of the Company’s stock, $1.1 million software expense and licensing related to increased number of billings, $1.0 million in bad debt expense related to additional provision for credit losses, and $603,000 in accounting fees related to financial statement and internal control audits and reviews.

General and administrative expenses increased $21.1 million, or 278% from $7.6 million in the nine months ended September 30, 2020 to $28.6 million in the nine months ended September 30, 2021. The increase was primarily due to increases of $4.8 million in personnel costs including equity-based compensation related to increased headcount and market price of the Company’s stock, $4.1 million in bad debt expense related to additional provision for credit losses, $3.8 million in software and licensing related to increased number of billings, $2.7 million in consulting costs and $1.4 million in legal and professional fees primarily related to the FF Gene Biotech Acquisition and CSI Acquisition, and $961,000 in accounting fees related to financial statement and internal control audit and reviews.

Interest and Other Income, net

Interest income was $443,000 and $424,000 in the three months ended September 30, 2021 and 2020, respectively, and $1.2 million and $999,000 in the nine months ended September 30, 2021 and 2020, respectively. This income related to interest earned on various investments in marketable securities including holding gain or loss on marketable equity securities.

Other income (expense) was not significant in the three or nine months ended September 30, 2021 and 2020, respectively. The primary components of other income (expense) were rental income net of rental expenses and foreign currency exchange gain (loss).

30


Provision for Income Taxes

Provision for income taxes were $37.5 million and $127.6 million for the three and nine months ended September 30, 2021, respectively, and $14.5 million and $14.0 million for the three and nine months ended September 30, 2020, respectively. The effective tax rate was 23% for the three months ended September 30, 2021 compared with 23% for the three months ended September 30, 2020. The effective tax rate was 24% for the nine months ended September 30, 2021 compared with 21% for the nine months ended September 30, 2020. The change in the effective tax rate for the nine-month period of 2021, relative to 2020, was primarily attributable to a significant increase in the Company’s pre-tax income in 2021, partially offset by increased windfall tax deductions related to stock-based compensation.

Gain (Loss) on Equity Method Investments

The Company recognized a gain of $3.7 million in the nine months ended September 30, 2021 related to the preexisting equity interest at FF Gene Biotech as a result of remeasuring to fair value its 30% equity interest held before the FF Gene Biotech Acquisition. The fair value of the preexisting equity interest was determined based on the characteristics before consummating the FF Gene Biotech Acquisition and estimated by applying income approach and utilized the discounted cash flow method. There was no such gain on equity method investment in the three and nine months ended September 30, 2020.

Loss in equity-method investment in the three months and nine months ended September 30, 2020 was an impairment loss of $2.6 million related to our 25% ownership interest in BostonMolecules.

Equity Loss in Investee

There was no equity loss in investee in the three and nine months ended September 30, 2021. Equity loss in investee was $189,000 and $631,000 in the three and nine months ended September 30, 2020, respectively. Equity loss in investee in 2020 related to our preexisting 30% ownership interest in FF Gene Biotech prior to the FF Gene Biotech Acquisition.

Net Loss Attributable to Noncontrolling Interest

Net loss attributable to noncontrolling interest represents net loss of FF Gene Biotech attributable to the minority shareholders, Xilong Scientific and FJIP, which was $298,000 and $463,000 in the three and nine months ended September 30, 2021, respectively.

Liquidity and Capital Resources

Liquidity and Sources of Cash

We had $214.9 million in cash and cash equivalents and $662.4 million in marketable securities, consisting of equity securities, corporate bonds, municipal bonds, and U.S. government and U.S. agency debt securities, as of September 30, 2021. We had $87.4 million in cash and cash equivalents and $344.4 million in marketable securities, consisting of equity securities and corporate bonds, as of December 31, 2020.

Initially after commencing operations in May 2012, our operations were financed primarily by our founder, Chief Executive Officer and Chairman of our board of directors, Ming Hsieh, and in more recent periods, by cash from our operations and equity financings.

Our primary uses of cash are to fund our operations as we continue to invest in and seek to grow our business. Cash used to fund operating expenses is impacted by the timing of our expense payments, as reflected in the changes in our outstanding accounts payable and accrued expenses.

On August 30, 2019, we entered into an Equity Distribution Agreement, or the 2019 Equity Distribution Agreement, with Piper, as sales agent, which was subsequently amended on August 4, 2020. Pursuant to the 2019 Equity Distribution Agreement, we offered and sold an aggregate of 104,000 shares of our common stock at a weighted-average net selling price of $9.37 per share, which resulted in $979,000 of net proceeds to the Company during the year ended December 31, 2019, and we sold an aggregate of 1.1 million shares of our common stock at a weighted-average net selling price of $38.50 per share, which resulted in $42.7 million of net proceeds to the Company during the year ended December 31, 2020. Shares sold under the 2019 Equity Distribution Agreement are offered and sold pursuant to the Company’s registration statement on Form S-3 (File No. 333-233227) filed with the SEC on August 12, 2019 and declared effective on August 23, 2019, and prospectus supplements and accompanying base prospectus filed with the SEC on August 30, 2019, May 6, 2020 and August 5, 2020.

31


On November 13, 2019, we entered into a Purchase Agreement with Piper, as representative of the several underwriters, pursuant to which we sold 2.7 million shares of our common stock at a price of $10.52 per share, with a public offering price of $11.25 per share. We received net proceeds of approximately $27.6 million, after deducting underwriting discounts and commissions and offering expenses paid or payable by us of approximately $2.4 million. The shares issued and sold in the underwritten offering were sold pursuant to the Company’s registration statement on Form S-3 (File No. 333-233227), and a prospectus supplement and accompanying base prospectus filed with the SEC on November 13, 2019.

On September 25, 2020, we entered into the September 2020 Equity Distribution Agreement, with Piper as sales agent, pursuant to which we offered and sold an aggregate of 2.8 million shares of our common stock at a weighted-average net selling price of $42.90 per share, which resulted in $122.1 million of net proceeds to the Company. Shares sold under the September 2020 Equity Distribution Agreement were offered and sold pursuant to the Company’s registration statement on Form S-3 (File No. 333-239964) filed with the SEC on July 21, 2020, as amended on August 5, 2020, and declared effective on August 12, 2020, and a prospectus supplement and accompanying base prospectus filed with the SEC on September 25, 2020.

On November 20, 2020, we entered into the November 2020 Equity Distribution Agreement, with Piper, Oppenheimer & Co. Inc., and BTIG LLC, as sales agents, pursuant to which we may offer and sell, from time to time through Piper, shares of our common stock having an aggregate offering price of up to $175.0 million. Piper may receive a commission of up to 3% of the gross proceeds received by the Company for sales pursuant to the November 2020 Equity Distribution Agreement. During the year ended December 31, 2020, we sold an aggregate of 2.0 million shares of our common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $48.70 per share, which resulted in $99.1 million of net proceeds to the Company. During the three months ended September 30, 2021, the Company did not sell any shares of its common stock pursuant to the November 2020 Equity Distribution Agreement. During the nine months ended September 30, 2021, the Company sold approximately 961,000 shares of its common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $60.56, which resulted in $58.2 million of net proceeds to the Company. Shares sold under the November 2020 Equity Distribution Agreement were offered and sold pursuant to the Company’s registration statement on Form S-3 (File No. 333-239964) filed with the SEC on July 21, 2020, as amended on August 5, 2020, and declared effective on August 12, 2020, and a prospectus supplement and accompanying base prospectus filed with the SEC on November 20, 2020.

We believe our existing cash, cash equivalent, short-term marketable securities, along with cash from operations and proceeds from our equity financings, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. Much of the losses we have incurred in certain prior periods were attributable to a variety of non-cash charges, including equity-based compensation expenses. As a result, in spite of the losses we recorded during these periods, cash provided by continuing operations has been mostly positive since 2015 and has significantly contributed to our ability to meet our liquidity needs, including paying for capital expenditures. Additionally, if our business continues to grow and we are able to achieve increased efficiencies and economies of scale in line with this growth, we expect increased revenue levels would increase our ability to rely on cash from our operations to support our business in future periods, even if our expenses also increase as a result of the growth of our business. Based on these factors, we anticipate that cash from our operations will continue to play a meaningful role in our ability to meet our liquidity requirements and pursue our business plans and strategies during the next 12 months and in the longer term.

However, our expectations regarding the cash that may be provided by our operations and our cash needs in future periods could turn out to be wrong, in which case we may require additional financing to support our operations, as we do not presently have any commitments for future capital. For instance, cash provided by our operations has in the past experienced fluctuations from period to period, which we expect may continue in the future. These fluctuations can occur because of a variety of factors, including, among others, factors relating to the ongoing COVID-19 pandemic, the amount and timing of sales of billable tests, the prices we charge for our tests due to changes in product mix, customer mix, general price degradation for tests or other factors, the rate and timing of our billing and collections cycles and the timing and amount of our commitments and other payments. Moreover, even if our liquidity expectations are correct, we may still seek to raise additional capital through securities offerings, credit facilities or other debt financings, asset sales or collaborations or licensing arrangements.

If we raise additional funds by issuing equity securities, our existing stockholders could experience substantial dilution. Additionally, any preferred stock we issue could provide for rights, preferences or privileges senior to those of our common stock, and our issuance of any additional equity securities, or the possibility of such an issuance, could cause the market price of our common stock to decline. The terms of any debt securities we issue or borrowings we incur, if available, could impose significant restrictions on our operations, such as limitations on our ability to incur additional debt or issue additional equity or other restrictions that could adversely affect our ability to conduct our business, and would result in increased fixed payment obligations. If we seek to sell assets or enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms or relinquish or license to a third party our rights to important or valuable technologies or tests we may otherwise seek to develop ourselves. Moreover, we may incur substantial costs in pursuing future capital, including investment banking, legal and accounting fees, printing and distribution expenses and other similar costs. Additional funding may not be available to us when needed, on acceptable terms or at all. For example, the COVID-19 pandemic has caused disruption and volatility in the global capital markets, which could reduce

32


our ability to access capital. If we are not able to secure funding if and when needed and on reasonable terms, we may be forced to delay, reduce the scope of or eliminate one or more sales and marketing initiatives, research and development programs or other growth plans or strategies. In addition, we may be forced to work with a partner on one or more aspects of our tests or market development programs or initiatives, which could lower the economic value to us of these tests, programs or initiatives. Any such outcome could significantly harm our business, performance and prospects.

Cash Flows

The following table summarizes our cash flows for each of the periods indicated:

 

 

Nine Months Ended September 30,

 

 

2021

 

 

2020

 

 

(in thousands)

 

Net cash provided by operating activities

$

461,491

 

 

$

6,372

 

Net cash used in investing activities

$

(406,289

)

 

$

(7,671

)

Net cash provided by financing activities

$

72,251

 

 

$

42,348

 

 

Operating Activities

Cash provided by operating activities in the nine months ended September 30, 2021 was $461.5 million. The difference between net income and cash provided by operating activities for the period was primarily due to the effects of $10.9 million in equity-based compensation expenses and $7.5 million in the depreciation and amortization. Cash provided by operating activities increased between periods primarily due to a decrease of $65.0 million in trade receivable due to timing of payments, an increase of $40.9 million in customer deposit due to payments received from customer in excess of their outstanding trade accounts receivable balances, partially offset by the negative impact of decreases of $35.4 million in income tax payable due to the estimated tax payments made during the current period, $18.7 million in contract liabilities due to the timing of payments, $9.0 million in accounts payable due to the timing of payments, and an increase of $2.1 million in other current and long-term assets related to additions in reagents and supplies.

Cash provided by operating activities in the nine months ended September 30, 2020 was $6.4 million. The difference between net income and cash provided by operating activities for the period and the increase between periods of cash provided by operating activities was primarily due to increases of $84.6 million in accounts receivable mainly due to timing of collections from customers and increased revenue and $19.2 million in other current assets related to purchases of an increased amount of reagents and supplies, $1.1 million in deferred tax related to the reduction in the valuation allowance, partially offset by increases of $22.2 million in accrued and other liabilities related to contract liabilities, $14.7 million in accounts payable due to the timing of payments, $14.6 million in income tax payable related to increased net income, and the effects of $5.2 million in equity-based compensation expenses, $2.6 million in impairment loss in equity-method investment related to BostonMolecules, $1.8 million in the depreciation of assets, and $631,000 in equity loss in investee.

Investing Activities

Cash used in investing activities in the nine months ended September 30, 2021 was $406.3 million, which primarily related to purchases of $523.9 million of marketable securities, $61.9 million related to business acquisitions, and the purchase of $17.8 million of fixed assets consisting mainly of medical laboratory equipment and building construction, partially offset by proceeds of $155.8 million related to sales of marketable securities and $61.5 million related to maturities of marketable securities.

Cash used in investing activities in the nine months ended September 30, 2020 was $7.7 million, which is primarily related to purchases of $13.6 million of marketable securities and $11.3 million of fixed assets consisting mainly of a 2008 Cessna Citation Sovereign aircraft, medical laboratory equipment, leasehold improvements, and computer hardware, $2.6 million in investment in BostonMolecules and direct costs associates with the investment, purchase of $1.4 million of equipment contributed to FF Gene, partially offset by proceeds of $13.1 million related to maturities of marketable securities and $8.1 million related to sales of marketable securities.

Financing Activities

Cash provided by financing activities in the nine months ended September 30, 2021 was $72.3 million, which primarily represents net proceeds from the November 2020 Equity Distribution Agreement.

Cash provided by financing activities in the nine months ended September 30, 2020 was $42.3 million, which primarily represents net proceeds from the 2019 Equity Distribution Agreement and the September 2020 Equity Distribution Agreement.

33


Critical Accounting Policies and Use of Estimates

This discussion and analysis is based on our condensed consolidated financial statements included in this report, which have been prepared in accordance with U.S. GAAP. The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates, judgments and assumptions and decisions that affect the reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In making these estimates and assumptions and reaching these decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including historical data and experience available at the date of the consolidated financial statements, as well as various other factors management believes to be reasonable under the circumstances, including but not limited to the potential impacts arising from the recent global pandemic related to COVID-19. As the extent and duration of the impacts from COVID-19 remain unclear, our estimates and assumptions may evolve as conditions change. Actual results could differ from our estimates. We are committed to incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in our consolidated financial statements.

Except as set forth in Note 2 (Summary of Significant Accounting Policies) to our condensed consolidated financial statements included in this report, there have been no significant changes to our critical accounting policies and estimates as described in the 2020 Annual Report.

The JOBS Act

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable to public companies that are not emerging growth companies, including an extended transition period to comply with new or revised accounting standards applicable to public companies. We have chosen to “opt out” of this extended transition period and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable. We expect to remain an emerging growth company until December 31, 2021, unless we issue more than $1.0 billion of non-convertible debt in any three-year period before that date.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

34


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2021. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2021.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control (as required by Rule 13a-15(b) under the Exchange Act) over the financial reporting during the three and nine months ended September 30, 2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting

Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of these inherent limitations, our disclosure and internal controls may not prevent or detect all instances of fraud, misstatements or other control issues. In addition, projections of any evaluation of the effectiveness of disclosure or internal controls to future periods are subject to risks, including, among others, that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.

 

35


 

PART II—OTHER INFORMATION

From time to time, we may be involved in legal proceedings arising in the ordinary course of our business. We are not presently a party, and our properties are not presently subject, to any legal proceedings that, in the opinion of management, would have a material effect on our business. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm, among other factors.

Item 1A. Risk Factors.

Summary Risk Factors

The risk factors described below are a summary of the principal risk factors associated with an investment in us. These are not the only risks we face. You should carefully consider these risk factors, together with the risk factors set forth in “Item 1A. Risk Factors” of this report and the other reports and documents filed by us with the SEC.

 

Our results of operations may fluctuate significantly from period to period and can be difficult to predict.

 

The expansion of our COVID-19 testing business has resulted in a substantial change in our business that presents important challenges to our ability to manage our rapidly expanding business, and there can be no assurance that our recent growth due to demand for our COVID-19 tests, or that any revenue growth we may experience will continue.

 

We have a history of losses, and we may not be able to achieve or sustain profitability.

 

Our industry is subject to rapidly changing technology and new and increasing amounts of scientific data, and if we fail to keep pace with these technological advances, we may be unable to compete effectively and our business and prospects could suffer.

 

If we are not able to grow and diversify our customer base and increase demand for our tests from existing and new customers, our potential for growth could be limited.

 

Failure to comply with government laws and regulations related to submission of claims for our services could result in significant monetary damages and penalties and exclusion from the Medicare and Medicaid programs and corresponding foreign reimbursement programs.

 

We rely on a limited number of suppliers and, in some cases, a sole supplier, for certain of our laboratory substances, equipment and other materials, and any delays or difficulties securing these materials could disrupt our laboratory operations and materially harm our business.

 

Billing and collections processing for our tests is complex and time-consuming, and any delay in transmitting and collecting claims could have an adverse effect on our revenue.

 

We rely on highly skilled personnel in a broad array of disciplines, and if we are unable to hire, retain or motivate these individuals, we may not be able to maintain the quality of our tests or grow our business.

 

We may acquire businesses or assets, form joint ventures, make investments in other companies or technologies or establish other strategic relationships, any of which could harm our operating results, dilute our stockholders’ ownership or cause us to incur debt or significant expense.

 

Any changes in laws, regulations or the enforcement discretion of the FDA with respect to the marketing of diagnostic products, or violations of laws or regulations by us, could adversely affect our business, prospects, results of operations or financial condition.

 

If we fail to comply with applicable federal, state, local and foreign laboratory licensing requirements, we could lose the ability to perform our tests or experience disruptions to our business.

 

We conduct business in a heavily regulated industry. Complying with the numerous statutes and regulations pertaining to our business is expensive and time-consuming, and any failure by us, our consultants or commercial partners to comply could result in substantial penalties.

 

Changes in laws and regulations, or in their application, may adversely affect our business, financial condition and results of operations.

 

Marketing of our COVID-19 tests under the EUA from the FDA is subject to certain limitations and we are required to maintain compliance with the terms of the EUA, among other things, and the continuance of our EUA is subject to government discretion.

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We primarily rely on trade secret protection, non-disclosure agreements and invention assignment agreements to protect our proprietary information, which may not be effective.

 

Litigation or other proceedings or third-party claims of intellectual property infringement or misappropriation could require us to spend significant time and money and prevent us from selling our tests.

 

An active, liquid trading market for our common stock may not be sustained, which could make it difficult for stockholders to sell their shares of our common stock.

 

The price of our common stock may be volatile and you could lose all or part of your investment.

 

Our principal stockholders and management own a significant percentage of our capital stock and are able to exert significant control over matters subject to stockholder approval.

Investing in our common stock involves a high degree of risk. Before making any investment decision with respect to our common stock, you should carefully consider the risks described below and all of the other information included in this report and the other filings we make with the SEC. We believe the risks and uncertainties described below are the most significant we face; and the occurrence of any of these risks could harm our business, financial condition, results of operations, prospects and reputation and could cause the trading price of our common stock to decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business.

Business and Strategy Risks

Our results of operations may fluctuate significantly from period to period and can be difficult to predict.

Our results of operations have experienced fluctuations from period to period, which we expect may continue in the future. These fluctuations can occur because of a variety of factors, including, among others, the amount and timing of sales of billable tests; the prices we charge for our tests due to changes in product, customer or payor mix, general price degradation for genetic tests or other competitive factors, global health crises and pandemics which may generate demand for our tests, such as the ongoing pandemic related to COVID-19, the disease caused by the novel coronavirus since named SARS-CoV-2, the rate and timing of our billings and collections and the timing and amount of our commitments and other payments, as well as the other risk factors discussed in this report. Our results have been, and may in the future be, impacted by events that may not recur regularly, in the same amounts or at all in the future. In 2020, we developed and began offering a series of COVID-19 tests, but the pricing and margins from these tests continue to evolve. For the year ended December 31, 2020 and the nine months ended September 30, 2021, we experienced substantial revenue growth due primarily to recent sales of, and growing demand, for these COVID-19 tests. While we believe there will be a continued demand for our COVID-19 tests in the near term, the future outcome and circumstances of the COVID-19 pandemic continue to rapidly evolve and remain uncertain. There can be no assurance our COVID-19 related growth or other growth we may experience will continue. This recent growth and other fluctuations in our operating results may render period-to-period comparisons less meaningful, and investors should not rely on the results of any one period as an indicator of future performance. These fluctuations in our operating results could cause our performance in any particular period to fall below the expectations of securities analysts or investors or guidance we have provided to the public, which could negatively affect the price of our common stock. Moreover, our limited operating history may make it difficult to determine if fluctuations in our performance reflect seasonality, pandemic-related demand or other trends or if these fluctuations are the result of other factors or events.

The expansion of our COVID-19 testing business has resulted in a substantial change in our business that presents important challenges to our ability to manage our rapidly expanding business, and we anticipate that this business will eventually decrease as and if the prevalence of COVID-19 eventually decreases.

Since March 2020, we have commercially launched several COVID-19 tests for the detection of SARS-CoV-2, the virus that causes COVID-19, including NGS and RT-PCR-based tests. We have received an EUA from the FDA for RT-PCR-based tests for the detection of SARS-CoV-2 using upper respiratory specimens (nasal, nasopharyngeal, and oropharyngeal swabs) and for our at-home COVID-19 testing service through Picture Genetics. The FDA granted an EUA for our at-home testing service for COVID-19 and RT-PCR-based tests only for the detection of nucleic acid from SARS-CoV-2, not for any other viruses or pathogens. The FDA recently established additional conditions for all emergency authorizations of COVID-19 molecular, antigen, and serology tests to account for emerging mutations of the SARS-CoV-2 virus, which serve to revise our previously issued EUA.

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We are currently accepting patient samples directly to our Biosafety Level 2, certified laboratories in Temple City, California and Houston, Texas where we have the capacity to accept and process thousands of samples per day with a typical turn-around time of 24-48 hours from the time the sample is received and accepted. To date, we have processed orders for our COVID-19 tests from a variety of customers, including governmental bodies, municipalities, and large corporations. Due to the significant demand for COVID-19 testing services, our business has expanded rapidly since March 2020. This expansion has necessitated a very significant increase in our total headcount, and the volume of tests we perform on a daily basis has increased by more than 10,000% since March 2020.

In addition, while most of our genetics testing business relied upon direct payments from hospitals, medical institutions and other laboratories, the majority of our revenues from our COVID-19 testing business result from reimbursements from third party payors, including private insurance and Medicare. To meet the demand for COVID-19 testing, we have increased the number of shifts at our main laboratory in Temple City, California and established a new laboratory in Houston, Texas. This substantial increase in all of our activities has caused significant changes in our business and a dramatic increase in our revenues and operating results. Each of these developments presents new challenges for our company and management team, and we cannot provide assurance that we will continue to be able to manage those challenges effectively. Our management team has not previously managed a business through such a dramatic acceleration, and the impacts of any failures, mistakes or missed opportunities could be magnified by our current rate of growth. The continued success of this business will depend upon our ability to rapidly deliver accurate results, and any failure, or perceived failure, in meeting these objectives could cause our COVID-19 testing business to decline rapidly. In addition, there are many new entrants to this market, and these competitors may cause price declines or reduced market share for us. The increase of our business with third party payors increases the regulatory scrutiny and risks that we face. While we anticipate that demand for our COVID-19 tests will eventually decrease, we are continuing to invest in expanding our capacity to meet the increasing demand that we anticipate over the next several years. There can be no assurance that our increased investments in our COVID-19 testing capacity and capabilities will result in desirable returns, and if our operating results decline as a result of decreased demand, whether as the result of a decline in the prevalence of COVID-19 or otherwise, our stock price could decline.

We have a history of losses, and we may not be able to achieve or sustain profitability.

We have a history of losses. Although we achieved profitability in the first half of 2017, the second and third quarters of 2019, the second, third and fourth quarters of 2020, and the first, second and third quarters of 2021, we recorded losses in all other periods since our inception. We may not be able to maintain profitability in future periods. Further, our revenue levels may not grow at historical rates or at all, and we may not be able to achieve additional profitability or sustain profitability. We may incur additional losses in the future. Our prior losses have had and any future losses may also have an adverse effect on our stockholders’ equity and working capital, which could negatively impact our operations and your investment in the Company. Any failure to sustain or grow our revenue levels and achieve or maintain profitability would negatively affect our business, financial condition, results of operations and cash flows, and could cause the market price of our common stock to decline.

We are an early-stage company with a limited operating history, which could expose us to enhanced risks and increase the difficulty of evaluating our business and prospects.

We began operations in May 2012 and commercially launched our first genetic tests in 2013. As a result, we have only a limited operating history upon which you can evaluate our business and prospects. Our limited operating history makes it difficult to evaluate our current business and hinders our ability to reliably forecast our future operating results, including revenue, cash flows and movement toward sustained profitability. Our revenue levels may not continue to grow at historical rates or at all, and we may not be able to achieve or sustain profitability. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in the life sciences and technology industries, such as risks related to an evolving and unpredictable industry and business model, management of growth and the other uncertainties described in this report. If our assumptions regarding these risks and uncertainties are incorrect or these risks and uncertainties change due to fluctuations in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.

Our industry is subject to rapidly changing technology and new and increasing amounts of scientific data, and if we fail to keep pace with these technological advances, we may be unable to compete effectively and our business and prospects could suffer.

In recent years, there have been numerous advances in the ability to analyze large amounts of genomic information and the role of genetics and gene variants in disease diagnosis and treatment. Our industry has been, and we believe will continue to be, characterized by rapid technological change, increasing amounts of data, frequent introductions of new genetic tests and evolving industry standards, all of which could make our tests obsolete if we are not able to enhance our tests more quickly and more effectively than our competitors. We believe our future success will depend in part on our ability to keep pace with the evolving needs of our customers in a timely and cost-effective manner and to pursue new market opportunities that develop as a result of

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technological and scientific advances. If we are not able to keep pace with these advances and increased customer expectations that develop as a result of these advances, we may be unable to sustain or grow our business and our future operations and prospects could suffer.

Our mix of customers can fluctuate from period to period and our revenue may be concentrated among only a small number of customers, and the loss of or a reduction in sales to any of our customers could materially harm our business.

The composition and concentration of our customer base can fluctuate from period to period, and in certain prior periods, a small number of customers accounted for a significant portion of our revenue. When customers who, to our knowledge, are under common control or otherwise affiliated with each other are aggregated, two customers contributed 31% and 11% of the Company’s revenue for the three months ended September 30, 2021, respectively, and one customer contributed 26% of the Company’s revenue for the nine months ended September 30, 2021. For these customers and for customers generally, tests are purchased on a test-by-test basis and not pursuant to any long-term purchasing arrangements. As a result, any or all of our customers, including affiliated customers or customers under common control who purchase large quantities of billable tests, could decide at any time to decrease, delay or discontinue their orders from us which could adversely affect our revenue. Although we believe some of these fluctuations in customer demand may be attributable, in part, to the nature of our business. Our traditional genetic testing customers can experience significant volatility in their genetic testing demand from period to period in the ordinary course of their operations and demand for our COVID-19 tests may vary widely depending on circumstances surrounding the pandemic, including the emergence or reemergence of viral variants such as the Delta variant. These demand fluctuations, particularly for any key customers, can have a significant impact on our period-to-period performance regardless of their cause. In addition, the failure of any one of our customers or their payors to pay on a timely basis would negatively impact our results and cash flows. Our ability to maintain or increase sales to our existing customers depends on a variety of factors, including the other risk factors discussed in this report, many of which are beyond our control. Because of these and other factors, sales to any of our customers, including any key, affiliated or commonly controlled customers, may not continue in the amounts or at the rates as they have in the past, and such sales may never reach or exceed historical levels in any future period. The loss of any of our customers, or a reduction in orders or difficulties collecting payments for tests ordered by any of them, could significantly reduce our revenue and adversely affect our operating results.

If we are unable to grow and diversify our customer base and increase demand for our tests from existing and new customers, our potential for growth could be limited. We may incur cost overruns as a result of fixed price contracts which could limit profits or otherwise adversely affect our business results of operations and financial condition.

To achieve our desired revenue growth, we must increase test volume by further penetrating our existing hospital and medical institution customers, by expanding sales of our COVID-19 tests to additional governmental bodies, municipalities and large corporations in need of regular testing for large populations and by further establishing our presence in the cancer and molecular diagnostic testing markets. In addition, we must grow our customer base beyond hospitals, medical institutions and other laboratories and into additional customer groups, such as individual physicians, other practitioners and research institutions. To this end, we are making efforts to diversify our customer market, including building relationships with research institutions and other similar institutional customers, national clinical laboratories, governmental bodies, municipalities and large corporations in need of regular COVID-19 testing for large populations and various other organizations to facilitate access to physicians, practitioners and other new customer groups, including certain U.S. government agencies. These efforts could fail. Even if we successfully develop relationships with new customers in these or any other new customers groups, these relationships may not lead to improve our ability to achieve or sustain profitability.

Generally, when we establish these new customer relationships, we agree with the applicable payor, laboratory or other customer to provide certain of our tests at negotiated rates, but, subject to limited exceptions, most of these relationships do not obligate any party to order our tests at any agreed volume or frequency or at all. Further, any relationships we may develop with any government agencies are subject to unique risks associated with government contracts, including cancellation if adequate appropriations for subsequent performance periods are not made and modification or termination at the government’s convenience and without prior notice. In particular, certain of government contracts are multi-award, indefinite-delivery and indefinite-quantity, or IDIQ, task order-based contracts, which generally provide for fixed price schedules for products and services, have no pre-set delivery schedules, have very low minimum purchase requirements, are typically competed among multiple awardees and force us to carry the burden of any cost overruns. Due to their nature, fixed-priced contracts inherently have more risk than cost reimbursable contracts. If we are unable to control costs or if our initial cost estimates are incorrect, we can lose money on these contracts. In addition, some of our contracts may have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts, we may not realize their full benefits. Low earnings caused by cost overruns and cost controls would have a negative impact on our results of operations. Since the price competition to win both IDIQ and fixed-priced contracts is intense and costs of further contracts performance cannot be predicted with certainty, there can be no assurance as to the profits, if any, that the Company will realize over the term of such contracts.

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We may fail to obtain the customer growth needed to grow volumes and revenue levels as desired or anticipated or at all, which could occur for a variety of reasons, including, among others:

 

the genetic testing market generally, and particularly the market for NGS genetic tests and our COVID-19 tests, is relatively new and may not grow as predicted or may decline;

 

our efforts to improve our existing tests and develop and launch new tests may be unsuccessful;

 

we may not be able to convince additional hospitals, medical institutions and other laboratories or additional customer groups of the utility of our tests and their potential advantages over existing and new alternatives;

 

our investments in our sales and marketing functions, including our efforts to increase and restructure our sales force and re-focus and expand our marketing initiatives and strategies, may fail;

 

we may be unsuccessful in convincing customers of the benefits of our broad and customizable test menu;

 

genetic testing is expensive and many existing and potential new customers may be sensitive to pricing, particularly if we are not able to maintain low prices relative to our competitors;

 

potential new customers, particularly individual physicians and other practitioners, may not adopt our tests if coverage and adequate reimbursement are not available;

 

negative publicity or regulatory investigations into the actions of companies in our industry could raise doubts about the legitimacy of diagnostic technologies generally, and could result in scrutiny of diagnostic activities by the FDA, or other applicable government agencies; and

 

our competitors could introduce new tests that cover more genes or that provide more accurate, reliable or rapid results.

If we are unable to address these and other risks associated with growing our customer base and deepening our relationships with existing customers, we may not achieve our desired growth in billable tests and revenue, and our results of operations could be adversely impacted.

 

We face intense competition, which could intensify further in the future, and we may fail to maintain or increase our revenue levels, maintain the current prices and margins for our billable tests, or achieve or sustain profitability if we cannot compete successfully.

With the development of NGS, the clinical genetic testing market has become increasingly competitive, and as the COVID-19 pandemic continues, potentially competitive COVID-19 tests have entered and may continue to enter the market. This competition may intensify in the future. We face competition from a variety of sources, including, among others, an increasing number of companies seeking to develop and commercialize, or who have developed and commercialized, COVID-19 tests, dozens of companies focused on molecular genetic and cancer testing services, such as specialty and reference laboratories that offer traditional single-gene and multi-gene tests, and established and emerging healthcare, information technology and service companies that may develop and sell competitive products or services, which may include informatics, analysis, integrated genetic tools and services for health and wellness.

Additionally, participants in closely related markets could converge on offerings that are competitive with the type of tests we perform. Instances where potential competitors are aligned with key suppliers or are themselves suppliers could provide these potential competitors with significant advantages. Further, hospitals, research institutions, individual physicians and other practitioners, governmental bodies, municipalities and corporations may also seek to perform testing, including rapid COVID-19 testing, at their own facilities rather than use our services. In this regard, access to these on site or point-of-care testing solutions and the continued development of, and associated decreases in the cost of, equipment, reagents and other materials and databases and genetic data interpretation services may enable broader direct participation in genetic testing and analysis and drive down the use of third-party testing companies such as ours. Moreover, the biotechnology and genetic testing fields continue to undergo significant consolidation, permitting larger clinical laboratory service providers to increase cost efficiencies and service levels, resulting in more intense competition.

Many of our existing and potential future competitors have longer operating histories, larger customer bases, more expansive brand recognition and deeper market penetration, substantially greater financial, technological and research and development resources and selling and marketing capabilities, and considerably more experience dealing with third-party payors. As a result, they may be able to respond more quickly to changes in customer requirements or preferences, develop faster, better and more expansive advancements for their technologies and tests, create and implement more successful strategies for the promotion and sale of their tests, obtain more favorable results from third-party payors regarding coverage and reimbursement for their offerings, adopt more aggressive pricing and/or price reduction policies for their tests, secure supplies from vendors on more favorable terms or devote substantially more resources to infrastructure and systems development. We may not be able to compete effectively against these organizations.

Additionally, increased competition and cost-saving initiatives on the part of government entities and other third-party payors could result in downward pressure on the price for our testing services and genetic analysis and interpretation generally, which could

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harm our revenue levels and sales volume and our ability to gain market share. This downward pricing pressure could intensify in future periods, and we may not be able to maintain acceptable margins on our sales if we are forced to reduce prices for our tests to try to remain competitive, especially if we are also experiencing increasing expenses as we make efforts to grow our business or otherwise meet customer demands. The occurrence of these risks could materially harm our ability to achieve or sustain profitability. In addition, competitors may be acquired by, receive investments from or enter into other commercial relationships with larger, well-established and well-financed companies. Further, companies or governments that effectively control access to testing through umbrella contracts or regional preferences could promote our competitors or prevent us from performing certain tests in certain territories. If we are unable to compete successfully against current and future competitors for these or any other reasons, we may be unable to increase market acceptance and sales volume of our tests, which could prevent us from maintaining or increasing our revenue levels or achieving or sustaining profitability or could otherwise negatively affect our performance.

Our level of commercial success depends in part on our ability to generate and grow sales with our sales and marketing team, strategies and partnerships, and we may be unsuccessful in these efforts.

We may not be able to market or sell our existing tests or any tests we may develop in the future in order to drive demand sufficiently to support our desired growth. We currently sell our tests through a small internal sales force and a number of contractors who serve as independent sales representatives. Although we have made efforts to enhance and improve our internal sales department, it remains significantly smaller than many of our competitors’ sales teams. We have historically relied significantly on organic growth and word-of-mouth among our customers to generate interest in our tests, but our ability to rely on this type of interest in future periods is uncertain.

We believe our ability to maintain and grow sales volume in the future will depend in large part on our ability to further develop our sales team and create and implement effective sales and marketing strategies. We have been focused on these objectives and have taken steps to pursue them in recent periods, including hiring new key members and restructuring the organization of our sales and marketing team, re-focusing our sales and marketing initiatives and strategies and increasing the overall scope of our marketing activities. These efforts have required and will continue to involve significant time and expense. Moreover, these efforts may be unsuccessful. For instance, we may not be able to attract and hire the qualified personnel we need to grow or otherwise improve our sales and marketing team as quickly or as successfully as we would like for various reasons, including intense competition in our industry for qualified personnel and our relative lack of experience selling and marketing our tests. Even if we are able to further develop our sales and marketing team and strategy, we may not be successful in growing our customer base or increasing order volumes from our existing customers. Further, our reliance on independent sales representatives subjects us to risks, as we have very little control over their activities and they are generally free to market and sell other, potentially competing, products. As a result, these independent sales representatives could devote insufficient time or resources to marketing and selling our tests, could market them in an ineffective manner or could otherwise be unsuccessful in selling adequate or expected quantities of our tests.

In addition, our future sales levels will depend in large part on the effectiveness of our sales and marketing strategies, including our ability to expand our brand awareness by providing education about the benefits and full scale of our offering to the medical community in general and to our targeted geographic and customer markets. We also intend to continue to pursue targeted marketing initiatives, including working with medical professional societies to promote awareness of the benefits of our tests and genetic testing in general, pursuing or supporting scientific studies of our tests and publication of results in medical or scientific journals and making presentations at medical, scientific or industry conferences and trade shows. We may not be successful in implementing these initiatives or other marketing strategies we may develop and pursue. If we are unable to drive sufficient revenue using our sales and marketing strategies to support our planned growth, our business and results of operations would be negatively affected.

Our sales and marketing strategies also include a continued focus on growing our international sales and customer base, which we plan to pursue through our direct sales team, a number of independent contractor sales representatives, and, if opportunities arise, by engaging distributors or establishing other types of arrangements, such as joint ventures or other relationships, to manage or assist with sales, logistics, education or customer support in certain territories. To this end, we worked with Xi Long USA, Inc. to form a joint venture in the second quarter of 2017, which we refer to as FF Gene Biotech, to offer genetic testing to customers in China. We acquired additional ownership in FF Gene Biotech in May 2021 to obtain a controlling interest. Although FF Gene Biotech has enabled us to have an operational presence on the ground in China to capitalize on the large and growing genetic testing opportunity in the country and we believe FF Gene Biotech could result in expanded long-term opportunities to address the genetic testing market in Asia, these expectations could turn out to be wrong and we may never realize the benefits we anticipate from FF Gene Biotech. While it may become necessary to identify, qualify and engage other commercial partners or distributors with local industry experience and knowledge in order to effectively market and sell our tests outside the United States, we have established some relationships to cover any non-U.S. territories including FF Gene Biotech in China and other distribution relationships. As a result, we may not be successful in finding, attracting and retaining qualified distributors or other commercial partners or we may not be able to enter into arrangements covering desired territories on favorable terms. In addition, sales practices utilized by distributors or other commercial partners that are locally acceptable may not comply with sales practices or standards required under U.S. laws that apply to us, which could subject us

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to additional compliance risks. If our sales and marketing efforts outside the United States are not successful, we may not achieve significant acceptance for our tests in international markets, which could materially and adversely impact our business operations.

We will need to invest in and expand our infrastructure and hire additional skilled personnel in order to support our desired growth, and our failure to effectively manage any future growth could jeopardize our business.

To continue to increase the volume of tests we offer and deliver, we must make substantial investments in our infrastructure, including our testing capacity, laboratory capacity, information systems, enterprise software systems, customer service, billing and collections systems and processes and internal quality assurance programs. We will also need to invest in our workforce by hiring additional skilled personnel, including biostatisticians, geneticists, software engineers, laboratory directors and specialists, sales and marketing experts and other scientific, technical and managerial personnel to market, process, interpret and validate the quality of results of our genetic tests and otherwise manage our operations. For example, before we deliver a report for any of our tests, including our COVID-19 tests, the results summarized in the report must be reviewed and approved by a licensed and qualified laboratory director. We may need to hire additional licensed laboratory directors in the future to further scale our business. If we fail to hire additional qualified personnel when needed or otherwise develop our infrastructure sufficiently in advance of demand or if we fail to generate demand commensurate with our level of investment in our infrastructure, our business, prospects, financial condition and results of operations could be adversely affected. We are expanding our existing laboratory space and we may acquire new laboratory space, which would involve significant costs and attention from our management.

The time and resources required to implement new systems, to add and train new skilled personnel and to expand or acquire new laboratory space as needed are uncertain. Any future growth we may experience could create a strain on our organizational, administrative and operational infrastructure, including laboratory operations, quality control, customer service, sales and marketing and management. We may not be able to maintain the quality of or expected turnaround times for our tests or satisfy customer demand if and when it grows. Our ability to effectively manage any growth we experience will also require us to continue to improve our laboratory and other operational, financial and management systems and controls and our reporting processes and procedures, which may involve significant time and costs and which we may not be able to do successfully.

Our ability to achieve or sustain profitability depends on our collection of payment for the tests we deliver, which we may not be able to do successfully.

Since starting our genetic testing business, we have historically focused primarily on providing our tests to hospitals, medical institutions and other laboratories, our traditional genetic testing customer base. Our customer base for our COVID-19 tests is principally comprised of governmental bodies, municipalities, and large corporations who pay us directly or through third-party payors for our COVID-19 tests. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was enacted, and it provides for reimbursement to healthcare providers for COVID-19 tests provided to uninsured individuals, subject to continued available funding. In recent months, this reimbursement has accounted for a significant portion of our revenue. Should reimbursement under the CARES Act for COVID-19 testing cease to be available for any reason, our ability to collect payment would be adversely affected. Further, healthcare policy changes that influence the way healthcare is financed or other changes in the market that impact payment rates by institutional or non-institutional customers could also affect our collection rates. If we are unable to convince hospitals, medical institutions and other laboratories of the value and benefit provided by our tests, these customers may slow, or stop altogether, their purchases of our tests. Moreover, our ability to collect payment for our tests in a timely manner or at all from our healthcare provider customers may decline to the extent we expand our business into new healthcare provider customer groups, including individual physicians and other practitioners, from which collection rates are often significantly lower than hospitals, medical institutions and other laboratories and which involve substantial additional risks that are discussed in these risk factors below. Our collection risks also include the potential for default or bankruptcy by the party responsible for payment and other risks associated with payment collection generally. Any inability to maintain our past payment collection levels could cause our revenue and ability to achieve profitability to decline and adversely affect our business, prospects and financial condition.

If third-party payors do not provide coverage and adequate reimbursement for our tests, our potential for growth could be limited.

Coverage and reimbursement by third-party payors, including managed care organizations, private health insurers and government healthcare programs, such as Medicare and Medicaid, for the types of genetic tests we perform can be limited and uncertain. Although our existing customer base consists primarily of hospitals, medical institutions, municipalities, governmental bodies, large corporations and other laboratories from which we typically receive direct payment for ordered tests, including our COVID-19 tests, we believe our potential for future growth is dependent on our ability to attract new customer groups, including individual physicians and other practitioners. Our healthcare provider customers, including laboratories may not order our tests unless third-party payors cover and provide adequate reimbursement for a substantial portion of the price of the tests. If we are not able to obtain coverage and an acceptable level of reimbursement for our tests from third-party payors, there would typically be a greater co-

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insurance, deductible or co-payment requirement from the patient for whom the test is ordered or the patient may be forced to pay the entire cost of the test out-of-pocket, which could dissuade practitioners from ordering our tests and, if ordered, could result in a delay in or decreased likelihood of collecting payment, whether from patients or from third-party payors. We believe our ability to increase the number of tests we sell to our healthcare provider customers and any corresponding revenue will depend in part on our ability to achieve and maintain broad coverage and reimbursement for our tests from third-party payors.

Coverage and reimbursement by a third-party payor may depend on a number of factors, including a payor’s determination that a test is appropriate, medically necessary and cost-effective. Each payor makes its own decision as to whether to establish a policy or enter into a contract to cover our tests and the amount it will reimburse for each test, and any determination by a payor regarding coverage and amount of reimbursement for our tests would likely be made on an indication-by-indication basis. Even if a test has been approved for reimbursement for any particular indication or in any particular jurisdiction, there is no guarantee this test will remain approved for reimbursement or that any similar or additional tests will be approved for reimbursement in the future. Moreover, there can be no assurance that any new tests we launch will be reimbursed at all or at rates comparable to the rates of any previously reimbursed tests. In addition, the coding procedure used by all third-party payors with respect to establishing payment rates for various procedures, including our tests, is complex, does not currently adapt well to the genetic tests we perform and may not enable coverage and adequate reimbursement rates for our tests. If physicians fail to provide appropriate diagnosis codes for tests that they order, we may not be reimbursed for our tests. Additionally, if we are not able to obtain sufficient clinical information in support of our tests, third-party payors could designate our tests as experimental or investigational and decline to cover and reimburse our tests because of this designation. As a result of these factors, obtaining approvals from third-party payors to cover our tests and establishing adequate reimbursement levels is an unpredictable, challenging, time-consuming and costly process, and we may never be successful.

To date, we have contracted directly with national health insurance companies to become an in-network provider and enrolled as a supplier in the Medicare program and some state Medicaid programs, and we have also received payment for our tests from other third-party payors as an out-of-network provider. Although becoming an in-network provider or enrolling as a supplier means that we have agreed with these payors to provide certain of our tests at negotiated or set fee schedule rates, it does not obligate any physicians or other practitioners to order our tests or guarantee that we will receive reimbursement for our tests from these or any other payors at adequate levels. As a result, these payor relationships, any other similar relationships we may establish in the future, or any additional payments we may receive from other payors as an out-of-network provider, may not amount to acceptable levels of reimbursement for our tests or meaningful or any increases in our physician customer base or the number of billable tests we sell to physicians. We expect to focus on increasing coverage and reimbursement for our current tests and any future tests we may develop, but we cannot predict whether, under what circumstances, or at what payment levels payors will cover and reimburse us for our tests. Further, even if we are successful, we believe it could take several years to achieve coverage and adequate contracted reimbursement with third-party payors. If we fail to establish and maintain broad coverage and reimbursement for our tests, our ability to maintain or grow our test volume, customer base, collectability rates and revenue levels could be limited and our future prospects and our business could suffer.

Failure to comply with government laws and regulations related to submission of claims for our services could result in significant monetary damages and penalties and exclusion from the Medicare and Medicaid programs and corresponding foreign reimbursement programs.

We are subject to laws and regulations governing the submission of claims for payment for our services, such as those relating to: coverage of our services under Medicare, Medicaid and other state, federal and foreign health care programs; the amounts that we may bill for our services; and the party to which we must submit claims. Our failure to comply with applicable laws and regulations could result in our inability to receive payment for our services or in attempts by state and federal health care programs, such as Medicare and Medicaid, to recover payments already made. Submission of claims in violation of these laws and regulations can result in recoupment of payments already received, substantial civil monetary penalties, and exclusion from state and federal health care programs, and can subject us to liability under the federal False Claims Act and similar laws. The failure to report and return an overpayment to the Medicare or Medicaid program within 60 days of identifying its existence can give rise to liability under the False Claims Act. Further, a government agency could attempt to hold us liable for causing the improper submission of claims by another entity for services that we performed if we were found to have knowingly participated in the arrangement at issue.

We may not be successful in developing and marketing new tests, which could negatively impact our performance and prospects.

We believe our future success will depend in part on our ability to continue to expand our test offerings and develop and sell new tests and on our ability to expand our presence in new and existing markets, including our presence in the molecular diagnostic and cancer testing markets. We may not be successful in launching or marketing any new tests we may develop or in expanding into any new or existing markets, and, even if we are successful, the demand for our tests could decrease or may not continue to increase at historical rates due to sales of any new tests. Our pipeline of new tests is in various stages of development and will be time-consuming and costly to fully develop and introduce, as development and marketing of new tests requires us to conduct research and development activities regarding the new tests and to further scale our laboratory processes and infrastructure to be able to analyze increasing

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amounts of more diverse data. Further, we may be unable to discover or develop and launch new tests for a variety of reasons, including failure of any proposed test to perform as expected, lack of validation or reference data for the test or failure to demonstrate the utility of the test. Further, any new test we are able to discover and develop may not be launched in a timely manner, meet applicable regulatory standards, successfully compete with other technologies and available tests, avoid infringing the proprietary rights of others, achieve coverage and adequate reimbursement from third-party payors, be capable of performance at commercial levels and at reasonable costs, be successfully marketed or achieve sufficient market acceptance for us to recoup our time and capital investment in the development of the test. Any failure to successfully develop, market and sell new tests could negatively impact our ability to attract and retain customers and our revenue and prospects

We are exposed to additional business, regulatory, political, operational, financial and economic risks related to our international operations.

Our existing customer base includes international customers from a variety of geographic markets. In addition, we have established FF Gene Biotech to offer genetic testing to customers in China. As part of our strategy, we aim to increase our volume of direct sales to international customers in a variety of markets by conducting targeted marketing outreach activities and, if opportunities arise, engaging distributors or establishing other types of arrangements, such as joint ventures or other relationships. However, we may never be successful in achieving these objectives, and even if we are successful, these strategies may not result in meaningful or any increases in our customer base, test volumes or revenue.

Doing business internationally involves a number of risks, including, among others:

 

 

compliance with the laws and regulations of multiple jurisdictions, which may be conflicting or subject to increasing stringency or other changes, including privacy regulations, tax laws, employment laws, healthcare regulatory requirements and other related approvals, including permitting and licensing requirements;

 

logistics associated with the shipment of blood or other tissue specimens, including infrastructure conditions, transportation delays and the impact of U.S. and local laws and regulations, such as export and import restrictions, tariffs or other charges and other trade barriers, all of which involve increased risk related to the trade policies of the current administration, which may threaten existing and proposed trade agreements and impose more restrictive U.S. export-import regulations that impact our business;

 

limits on our ability to penetrate international markets, including legal and regulatory requirements that would force us to conduct our tests locally by building additional laboratories or engaging in joint ventures or other relationships in order to offer our tests in certain countries, which relationships could involve significant time and resources to establish, deny us control over certain aspects of the foreign operations or reduce the economic value to us of these operations;

 

failure by us, any joint ventures or other arrangements we may establish or any distributors or other commercial partners we may engage to obtain any regulatory approvals required to market, sell and use our tests in various countries;

 

challenges predicting the market for genetic testing generally and tailoring our test menu to meet varying customer expectations in different countries and territories;

 

difficulties gaining market share in territories in which we do not have a strong physical presence or brand awareness;

 

complexities and difficulties obtaining protection for and enforcing our intellectual property rights;

 

difficulties in staffing and managing foreign operations;

 

complexities associated with managing multiple payor coverage and reimbursement regimes, government payors or patient self-pay systems;

 

financial risks, such as longer payment cycles, difficulty collecting trade accounts receivable and the impact of local and regional financial conditions on demand and payment for our tests;

 

exposure to foreign currency exchange rate fluctuations, including increased risk with respect to the Canadian dollar after we recently started billing certain of our Canadian hospital customers in their local currency and with respect to the RMB related to revenue received under our agreements with FF Gene Biotech;

 

risks relating to conversion and repatriation of certain foreign currencies, particularly the RMB, which is subject to legal procedures and restrictions on currency conversion and movement outside China and which could impact our ability to receive the anticipated financial benefits of our controlling interest in FF Gene Biotech;

 

natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease (e.g. the COVID-19 pandemic), boycotts and other business restrictions; and

 

regulatory and compliance risks related to applicable anti-bribery laws, including requirements to maintain accurate information and control over activities that may fall within the purview of these laws.

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Any of these factors could significantly harm our existing relationships with international customers or derail our international expansion plans, which would cause our revenue and results of operations to suffer.

In addition, we are exposed to a number of additional risks and challenges related to our efforts to access customers in China through FF Gene Biotech. These risks include, among others, difficulties predicting the market for genetic testing in Asia; competitive factors in this market, including challenges securing market share; local differences in customer demands and preferences and regulatory requirements; and many of the other risks of doing business internationally that are discussed above. Although we believe FF Gene Biotech could result in expanded long-term opportunities to address the genetic testing market in Asia, this belief could turn out to be wrong and we may never realize these or any other benefits we anticipate from FF Gene Biotech. Moreover, any joint venture we may seek to establish may never produce sufficient revenue to us to recover our capital and other investments in the joint venture, and we could become subject to liabilities based on our involvement in the joint venture’s operations. The materialization of any of these risks could materially harm our performance and prospects.

If we are sued for product or professional liability, we could face substantial liabilities that exceed our resources.

Our business depends on our ability to provide reliable and accurate test results that incorporate rapidly evolving information about the role of genes and gene variants in disease and clinically relevant outcomes associated with these variants. Hundreds of genes can be implicated in some disorders and overlapping networks of genes and symptoms can be implicated in multiple conditions. As a result, substantial judgment is required in order to interpret the results of each test we perform and produce a report summarizing these results. Errors, such as failures to detect genomic variants with high accuracy, or mistakes, such as failures to completely and correctly identify the significance of gene variants, could subject us to product liability or professional liability claims. Any such claim against us could result in substantial damages and be costly and time-consuming to defend. Although we maintain liability insurance, including for errors and omissions, our insurance may not fully protect us from the financial impact of defending against these types of claims or any judgments, fines or settlement costs arising out of any such claims. Additionally, any liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing adequate insurance coverage in the future. Moreover, any liability lawsuit could damage our reputation or force us to suspend sales of our tests. The occurrence of any of these events could have a material adverse effect on our business, reputation and results of operations.

If our laboratory facilities become inoperable, if we are forced to vacate a facility or if we are unable to obtain additional laboratory space as and when needed, we would be unable to perform our tests and our business would be harmed.

We perform all of our tests at our CLIA-certified laboratories in Temple City, California, Houston, Texas and in Alpharetta, Georgia. Our laboratories and the equipment we use to perform our tests would be costly to replace and could require substantial lead time to replace and qualify for use. This and any other laboratory facilities and equipment we may use could be damaged or rendered inoperable by natural or man-made disasters, including earthquakes, floods, fires and power outages, which could render it difficult or impossible for us to perform our tests for some period of time. The inability to perform our tests or the backlog that could develop if a laboratory becomes inoperable for even a short time could result in the loss of customers or harm to our reputation. Although we maintain insurance for damage to our property and disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all.

Further, if we need to relocate from one laboratory facility to another laboratory facility or obtain additional laboratory space, we may have difficulty locating suitable space in a timely manner, on reasonable terms or at all, and even if acceptable space was available, it would be challenging, time-consuming and expensive to obtain or transfer the licensure and accreditation required for a commercial laboratory like ours and the equipment we use to perform our tests. These challenges could be amplified if we or our joint ventures or other commercial partners seek to procure and maintain laboratory space outside the United States as we pursue international expansion. If we are unable to obtain or are delayed in obtaining new laboratory space as needed, we may not be able to provide our existing tests or develop and launch new tests, which could result in harm to our business, reputation, financial condition and results of operations.

We face risks related to the impact of the COVID-19 pandemic and the related protective public health measures.

Despite our recent revenue growth and recent demand for our COVID-19 tests, our business could be materially and adversely affected by the effects of the global pandemic of COVID-19 and the related protective public health measures. Our business depends upon the continuous testing services that we provide at our laboratory facilities, and our business faces the same risks as are currently prevalent in most of the United States, including the risks that employees could contract COVID-19, which could result in a disruption in our ability to continue to provide testing services. Although we take what we believe are reasonable precautions to prevent the spread of COVID-19 within our facilities and among our employees, we cannot provide assurance that we will not suffer from an exposure to the SARS-CoV-2 virus that would require a temporary closure of our laboratory facilities, which would materially adversely affect our operations and financial results. Other adverse effects of the pandemic on our business could include disruptions or restrictions on our employees’ ability to travel, as well as temporary closures of the facilities of our suppliers, third party service

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providers or customers, which could impact our test volume and results of operations. In addition, a significant outbreak of contagious disease in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our tests and impact our results of operations.

We rely on a limited number of suppliers and, in some cases, a sole supplier, for certain of our laboratory substances, equipment and other materials, and any delays or difficulties securing these materials could disrupt our laboratory operations and materially harm our business.

We rely on a limited number of suppliers for certain of our laboratory substances, including reagents, as well as for the sequencers and various other equipment and materials we use in our laboratory operations. In particular, we rely on Illumina, Inc. as the sole supplier of the next generation sequencers and associated reagents we use to perform our genetic tests and as the sole provider of maintenance and repair services for these sequencers. We do not have long-term agreements with most of our suppliers and, as a result, they could cease supplying these materials and equipment to us at any time due to an inability to reach agreement with us on supply terms, disruptions in their operations, a determination to pursue other activities or lines of business or for other reasons, or they could fail to provide us with sufficient quantities of materials that meet our specifications. These suppliers may also be affected by the ongoing COVID-19 pandemic or its related effects on the global supply chain. Transitioning to a new supplier or locating a temporary substitute, if any are available, would be time-consuming and expensive, could result in interruptions in or otherwise affect the performance specifications of our laboratory operations or could require that we revalidate our tests. In addition, the use of equipment or materials provided by a replacement supplier could require us to alter our laboratory operations and procedures. Moreover, we believe there are currently only a few manufacturers that are capable of supplying and servicing some of the equipment and other materials necessary for our laboratory operations, including sequencers and various associated reagents. As a result, replacement equipment and materials that meet our quality control and performance requirements may not be available on reasonable terms, in a timely manner or at all. If we encounter delays or difficulties securing, reconfiguring or revalidating the equipment, reagents and other materials we require for our tests, including as a result of the COVID-19 pandemic, our operations could be materially disrupted and our business, financial condition, results of operations and reputation could be adversely affected.

Billing and collections processing for our tests is complex and time-consuming, and any delay in transmitting and collecting claims could have an adverse effect on our revenue.

Billing for our tests is complex, time-consuming and expensive. Depending on the billing arrangement and applicable law, we may bill various different parties for our tests, including customers directly in the case of our hospital and medical institution customers, as well as Medicare, Medicaid, insurance companies and patients, all of which may have different billing requirements. We may face increased risk in our collection efforts due to the complexities of these billing requirements, including long collection cycles and lower collection rates, which could adversely affect our business, results of operations and financial condition.

Several factors make this billing process complex, including:

 

differences between the list price for our tests and the reimbursement rates of payors;

 

compliance with complex federal and state regulations related to billing government healthcare programs, including Medicare and Medicaid;

 

disputes among payors as to which party is responsible for payment;

 

differences in coverage among payors and the effect of patient co-payments or co-insurance;

 

differences in information and billing requirements among payors;

 

incorrect or missing billing information; and

 

the resources required to manage the billing and claims appeals process.

We have developed internal systems and procedures to handle these billing and collections functions, but we will need to make significant efforts and expend substantial resources to further develop our systems and procedures to handle these aspects of our business, which could become increasingly important as we focus on increasing test volumes from non-hospital and medical institution customer groups and establishing coverage and reimbursement policies with third-party payors. As a result, these billing complexities, along with the related uncertainty in obtaining payment for our tests, could negatively affect our revenue and cash flow, our ability to achieve or sustain profitability and the consistency and comparability of our results of operations. In addition, if claims for our tests are not submitted to payors on a timely basis, or if we are required to switch to a different provider to handle our processing and collections functions, our revenue and our business could be adversely affected.

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Ethical, legal and social concerns related to the use of genetic information could reduce demand for our tests.

Genetic testing has raised ethical, legal and social issues regarding privacy and the appropriate uses of the resulting information. Government authorities could, for social or other purposes, limit or regulate the use of genetic information or genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, these concerns may cause patients to refuse to use, or physicians to be reluctant to order, genetic tests such as ours, even if permissible. These and other ethical, legal and social concerns may limit market acceptance and adoption of our tests or reduce the potential markets for our tests, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, California recently enacted a new law called the Genetic Information Privacy Act that will impose new privacy requirements on direct-to-consumer genetic testing companies that could change the discussion among patients and physicians related to genetic testing as a whole, and potentially reduce consumer interest in such testing more broadly.  

Actual or attempted security breaches, loss of data or other disruptions could compromise sensitive information related to our business or to patients or prevent us from accessing critical information, any of which could expose us to liability and adversely affect our business and our reputation.

In the ordinary course of our business, we generate, collect and store sensitive data, including protected health information, or PHI, personally identifiable information, intellectual property and proprietary and other business-critical information, such as research and development data, commercial data and other business and financial information. We manage and maintain the data we generate, collect and store utilizing a combination of on-site systems and managed data center systems. We also communicate sensitive patient data when we deliver reports summarizing test results to our customers, which we deliver via our online encrypted web portal, encrypted email or fax or overnight courier. We face a number of risks related to protecting this information, including loss of access, unauthorized modification or inappropriate disclosure.

The secure processing, storage, maintenance and transmission of this information is vital to our operations and business strategy, and we devote significant resources to protecting the confidentiality and integrity of this information. Although we have implemented security measures and other controls designed to protect sensitive information from unauthorized access, use or disclosure, our information technology and infrastructure could fail, be inadequate or vulnerable to attacks by hackers or viruses or be breached due to employee error, malfeasance or other disruptions. A breach or interruption could compromise our information systems and the information we store could be accessed by unauthorized parties, manipulated, publicly disclosed, lost, or stolen. Any such unauthorized access, manipulation, disclosure or other loss of information could result in legal claims or proceedings and could result in liability or penalties under federal, state or foreign laws that protect the privacy of personal information, discussed below under “—We are subject to broad legal requirements regarding the information we test and analyze, and any failure to comply with these requirements could result in harsh penalties, damage our reputation and materially harm our business.” Additionally, unauthorized access, manipulation, loss, or dissemination could significantly damage our reputation and disrupt our operations, including our ability to perform our tests, analyze and provide test results, bill customers or other payors, process claims for reimbursement, provide customer service, conduct research and development activities, collect, process, and prepare company financial information, conduct education and outreach activities and manage the administrative aspects of our operations, as described further below under “—We depend on our information technology systems and any failure of these systems, due to hardware or software malfunctions, delays in operation, failures to implement new or enhanced systems or cybersecurity breaches, could harm our business.” The occurrence of any of these risks could materially adversely affect our business.

The loss of any member of our senior management team could adversely affect our business.

Our success depends in large part on the skills, experience and performance of our executive management team and others in key leadership positions, especially Ming Hsieh, our founder, Chief Executive Officer and Chairman of our board of directors, Paul Kim, our Chief Financial Officer, Dr. Han Lin Gao, our Chief Scientific Officer and Laboratory Director, and Jian Xie, our Chief Operating Officer. The continued efforts of these persons will be critical to us as we continue to develop our technologies and test processes and focus on growing our business. If we lose one or more key executives, we could experience difficulties maintaining our operations, including the ability to deliver reports to customers after review and approval by a licensed and qualified laboratory director, competing effectively, advancing our technologies, developing new tests and implementing our business strategies. All of our executives and employees, including Messrs. Hsieh, Kim and Xie, and Dr. Gao, are at-will, which means either we or the executive or employee may terminate their employment at any time. We do not carry key man insurance for any of our executives or other employees. In addition, we do not have long-term retention agreements in place with any of our executives or key employees.

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We rely on highly skilled personnel in a broad array of disciplines, and if we are unable to hire, retain or motivate these individuals, we may not be able to maintain the quality of our tests or grow our business.

Our business, including our research and development programs, laboratory operations and administrative functions, largely depends on our continued ability to identify, hire, train, motivate and retain highly skilled personnel for all areas of our organization, including biostatisticians, geneticists, software engineers, laboratory directors and specialists, sales and marketing experts and other scientific, technical and managerial personnel. Competition in our industry for qualified executives and other employees is intense, and we may not be able to attract or retain the qualified personnel we need to execute our business plans due to high levels of competition for these personnel among our competitors, other life science businesses, universities and public and private research institutions. In addition, our compensation arrangements may not be successful in attracting new employees and retaining and motivating our existing employees. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that could adversely affect our ability to expand our business and support our clinical laboratory operations and our sales and marketing and research and development efforts, which would negatively affect our prospects for future growth and success.

Any inability to obtain additional capital when needed and on acceptable terms may limit our ability to execute our business plans, and our liquidity needs could be materially affected by market fluctuations and general economic conditions.

We expect our capital expenditures and operating expenses to increase over the next several years as we seek to expand our infrastructure, sales and marketing and other commercial operations and research and development activities. As of September 30, 2021, we had cash and cash equivalents of approximately $214.9 million. We maintain our cash, cash equivalents and short-term marketable securities with high quality, accredited financial institutions. However, these accounts may exceed federally insured limits, and, while we believe the Company is not exposed to significant credit risk due to the financial strength of these depository institutions or investments, the failure or collapse of one or more of these depository institutions or default on these investments could materially adversely affect our ability to recover these assets and/or materially harm our financial condition. We may seek to fund future cash needs through securities offerings, credit facilities or other debt financings, asset sales or collaborations or licensing arrangements. Additional funding may not be available to us when needed, on acceptable terms or at all. For example, the COVID-19 pandemic has recently caused extreme disruption and volatility in the global capital markets, which could reduce our ability to access capital and/or adversely affect the stability of the depository institutions maintaining our assets.

If we raise additional funds by issuing equity securities, our existing stockholders could experience substantial dilution. Additionally, any preferred stock we issue could provide for rights, preferences or privileges senior to those of our common stock, and our issuance of any additional equity securities, or the possibility of such an issuance, could cause the market price of our common stock to decline. The terms of any debt securities we issue or borrowings we incur, if available, could impose significant restrictions on our operations, such as limitations on our ability to incur additional debt or issue additional equity or other restrictions that could adversely affect our ability to conduct our business, and would result in increased fixed payment obligations. If we seek to sell assets or enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms or relinquish or license to a third party our rights to important or valuable technologies or tests we may otherwise seek to develop ourselves. Moreover, we may incur substantial costs in pursuing future capital, including investment banking, legal and accounting fees, printing and distribution expenses and other similar costs. If we are not able to secure funding if and when needed and on reasonable terms, we may be forced to delay, reduce the scope of or eliminate one or more sales and marketing initiatives, research and development programs or other growth plans or strategies. In addition, we may be forced to work with a partner on one or more aspects of our tests or market development programs or initiatives, which could lower the economic value to us of these tests, programs or initiatives. Any such outcome could significantly harm our business, performance and prospects.

U.S. federal income tax reform could adversely affect us.

New legislation or regulation which could affect our tax burden could be enacted by a governmental authority. We cannot predict the timing or extent of such tax-related developments which could have a negative impact on our financial results. U.S. federal legislation affecting the tax laws was enacted in December, 2017 in the Tax Cuts and Jobs Act; twice in March, 2020, first in the Families First Coronavirus Response Act and again in the CARES Act; in December, 2020 in the Consolidated Appropriates Act, 2021; and in March, 2021 in the American Rescue Plan Act of 2021. We cannot estimate how the changes in tax law from this legislation will affect our tax liability in future years.

Additionally, we use our best judgment in attempting to quantify and reserve for these tax obligations. However, a challenge by a taxing authority, our ability to utilize tax benefits such as carryforwards or tax credits, or a deviation from other tax-related assumptions may cause actual financial results to deviate from previous estimates.

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We have previously and may again in the future acquire businesses or assets, form joint ventures, make investments in other companies or technologies or establish other strategic relationships, any of which could harm our operating results or dilute our stockholders’ ownership.

As part of our business strategy, we have previously and may again in the future pursue acquisitions of complementary businesses or assets, investments in other companies, such as our recent acquisition of CSI and our investment in Helio Health, technology licensing arrangements, joint ventures or other strategic relationships. As an organization, we have limited experience with respect to acquisitions, investments or the formation of strategic relationships or joint ventures. If we pursue relationships with pharmaceutical companies or other strategic relationships, our ability to establish and maintain these relationships could be challenging due to several factors, including competition with other testing companies and internal and external constraints placed on pharmaceutical and other organizations that limit the number and type of relationships they can establish with companies like ours. Moreover, we may not be able to identify or complete any acquisition, investment, technology license, joint venture or other strategic relationship in a timely manner, on a cost-effective basis or at all, and we may not realize the anticipated benefits of any acquisition, investment or joint venture as needed to recoup our costs.

To finance any acquisitions, investments, joint ventures or other strategic relationships, we may seek to raise additional funds through securities offerings, credit facilities, asset sales or collaborations or licensing arrangements. To the extent these financing transactions call for the issuance of shares of our capital stock, our existing stockholder would experience dilution in their relative ownership of shares of our capital stock. Each of these methods of fundraising is subject to a variety of risks, including those discussed above under “—Any inability to obtain additional capital when needed and on acceptable terms may limit our ability to execute our business plans.” Further, additional funds from capital-raising transactions may not be available when needed, on acceptable terms or at all. Any inability to fund any acquisitions, investments or strategic relationships we pursue could cause us to forfeit opportunities we believe are promising or valuable, which could harm our prospects.

We may not be successful in our efforts to integrate any acquired businesses and technologies, and this may adversely affect our business and results of operations. We may incur unexpected liabilities as a result of our acquisitions.

Our ability to integrate any organizations or technology that we may acquire, including our recent acquisition of CSI, is subject to a number of risks including the following:

 

failure to integrate successfully the personnel, information systems, technology and operations of the acquired business;

 

failure to maximize the potential financial and strategic benefits of the acquisition;

 

failure to realize the expected synergies of the acquired business;

 

possible impairment of relationships with employees and clients as a result of any integration of new businesses and management personnel;

 

impairment of goodwill;

 

increased demand on human resources and operating systems, procedures and controls; and

 

reductions in future operating results as a result of the amortization of intangible assets.

 

Acquisitions are also accompanied by the risk that obligations and liabilities of an acquired business may not be adequately reflected in the historical financial statements of that business and the risk that historical financial statements may be based on assumptions, which are incorrect or inconsistent with our assumptions or approach to accounting policies. The acquisition and integration of businesses may not be managed effectively and any failure to manage the integration process could lead to disruptions in the overall activities of the Company, a loss of clients and revenue and increased expenses. Further, integration of an acquired business or technology could involve significant difficulties, and could require management and capital resources that otherwise would be available for ongoing development of our existing business or pursuit of other opportunities. We may also acquire contingent liabilities in connection with the acquisitions of business, which maybe material. Any estimates we might make regarding any acquired contingent liabilities and the likelihood that these liabilities will materialize could differ materially from the liabilities actually incurred. These circumstances could materially harm our business, results of operations and prospects.

We depend on our information technology systems and any failure of these systems, due to hardware or software malfunctions, delays in operation, and/or failures to implement new or enhanced systems or cybersecurity breaches, could harm our business.

We depend on information technology and telecommunications systems for significant elements of our operations, such as our laboratory information management systems, including test validation, specimen tracking and quality control; our bioinformatics analytical software systems; our reference library of information relating to genetic variants and their role in disease; personal

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information storage, maintenance and transmission; our customer-facing web-based software and customer service functions; our report production systems; our billing and reimbursement procedures; our scientific and medical data analysis and other research and development activities and programs; and our general and administrative activities, including disclosure controls, internal control over financial reporting and other public reporting functions. In addition, our third-party service providers depend on technology and telecommunications systems in order to provide contracted services for us. We expect we will need to continue to expand and strengthen a number of enterprise software systems that affect a broad range of business processes and functions, particularly if and as our operations grow, including, for example, systems handling human resources, financial and other disclosure controls and reporting, customer relationship management, regulatory compliance, security controls and other infrastructure functions.

Information technology and telecommunications systems are vulnerable to disruption and damage from a variety of sources, including power outages and other telecommunications or network failures, natural disasters, and the outbreak of war or acts of terrorism. Breaches resulting in the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized disclosure of sensitive information, can occur in a variety of ways, including but not limited to, negligent or wrongful conduct by employees or former employees or others with permitted access to our information technology systems and information, or wrongful conduct by hackers, competitors, or certain governments. Our third-party vendors and business partners face similar risks. Moreover, despite network security and back-up measures, our servers and other electronic systems are potentially vulnerable to cybersecurity breaches, such as physical or electronic break-ins, computer viruses, ransomware attacks, phishing schemes, and similar disruptive events. Despite the precautionary measures we have taken to detect and prevent or solve problems that could affect our information technology and telecommunications systems, there may be significant downtime or failures of these systems or those used by our third-party service providers. There can be no assurance that we will promptly detect and/or intercept any such disruption or security breach, if at all. Any such downtime or failure could prevent us from conducting tests, preparing and providing reports to customers, billing payors, responding to customer inquiries, conducting research and development activities, maintaining our financial and disclosure controls and other reporting functions and managing the administrative aspects of our business. Moreover, any such downtime or failure could force us to transfer data collection operations to an alternate provider of server-hosting services, which could involve significant costs and result in further delays in our ability to conduct tests, deliver reports to our customers and otherwise manage our operations. Further, although we carry property, business interruption and cyber lability insurance, the coverage may not be adequate to compensate for all losses that may occur in the event of system downtime or failure. Any such disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have a material adverse effect on our business and our reputation.

Additionally, if and as our business grows, we will need to continually improve and expand the scope of our technology systems in order to maintain their adequacy for the scale of our operations. Any failure to make such improvements or any significant delay in the planned implementation of new or enhanced systems could render our systems obsolete or inadequate, in which case our service to our customers and our other business activities could suffer and we could be more vulnerable to electronic breaches from outside sources.

We rely on commercial courier delivery services to transport specimens to our laboratory facilities in a timely and cost-efficient manner, and if these delivery services are disrupted, our business would be harmed.

Our business depends on our ability to quickly and reliably deliver test results to our customers. We typically receive specimens from customers within days of shipment, or in some cases overnight, for analysis at our laboratory facilities. Disruptions in delivery service, whether due to labor disruptions, bad weather, natural disasters, pandemics or epidemics, terrorist acts or threats or for other reasons, could adversely affect specimen integrity and our ability to process specimens in a timely manner and otherwise service our customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected.

If we are unable to maintain effective internal control over financial reporting, investors could lose confidence in the accuracy and completeness of our reported financial information and the market price of our common stock could decline.

We are required to maintain internal control over financial reporting and report any material weaknesses in these internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and annually provide a management report on these internal controls. Although we have implemented systems, processes and controls and performed this evaluation as of the end of 2020, we will need to maintain and enhance these controls if and as we grow, and we may need to hire additional personnel and devote more resources to our financial reporting function in order to do so.

If we identify one or more material weaknesses during the process of evaluating our internal controls, we may not detect errors on a timely basis and our financial statements may be materially misstated. In addition, in that event, our management would be unable to conclude that our internal control over financial reporting is effective. Further, when we are no longer an emerging growth company, our independent registered public accounting firm will be required to issue an attestation report on the effectiveness of our

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internal control over financial reporting. When that occurs, our independent registered public accounting firm may conclude that there are material weaknesses in our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed even if our management concludes that our internal control over financial reporting is effective.

If we or our auditors were to conclude that our internal control over financial reporting was not effective because one or more material weaknesses had been identified or if internal control deficiencies result in the restatement of our financial results, investors could lose confidence in the accuracy and completeness of our financial disclosures and the price of our common stock could decline.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

We are subject to the periodic reporting and other requirements of the Exchange Act. We have implemented disclosure controls and procedures designed to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. However, any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. As a result, because of these inherent limitations in our control system, misstatements or omissions due to error or fraud may occur and may not be detected, which could result in failures to file required reports in a timely manner and filing reports containing incorrect information. Any of these outcomes could result in SEC enforcement actions, monetary fines or other penalties, damage to our reputation and harm to our financial condition and stock price.

We may elect to comply with reduced public company reporting requirements available to us because we are an emerging growth company and a smaller reporting company, which could make our common stock less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act, and a smaller reporting company, as defined in applicable SEC rules, and we expect to remain as such until December 31, 2021 and January 1, 2022, respectively. As an emerging growth company and smaller reporting company, we are eligible for exemptions from certain reporting requirements applicable to other public companies, including, reduced financial statement and other financial disclosure requirements in registration statements and periodic reports we file, reduced disclosure obligations regarding executive compensation and, so long as we remain an emerging growth company, an exemption from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, exemption from the requirements to hold non-binding advisory votes on executive compensation and exemption from the requirements to obtain stockholder approval for any golden parachute payments not previously approved. We have relied on many of these exemptions in periodic reports to date, and investors may find our common stock less attractive if we choose to continue to rely on these exemptions, in which case there may be a less active trading market for our common stock and our stock price may be more volatile.

Under the Securities Act, emerging growth companies can elect to delay adoption of new or revised accounting standards until those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, as a result, we are subject to the same new or revised accounting standards at the same time as other public companies that are not emerging growth companies.

The auditor for FF Gene Biotech, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of this inspection.

The independent registered public accounting firm that issues the audit reports for FF Gene Biotech, included in our reports filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards. On May 24, 2013, the PCAOB announced that it had signed a Memorandum of Understanding, or MOU, with Chinese securities regulators that would enable the PCAOB under certain circumstances to obtain audit work papers of China-based audit firms. The MOU establishes a framework under which the PCAOB can request and obtain audit papers and permits the PCAOB to share the work papers it obtains with the SEC, subject to certain requirements. But the MOU, which is non-binding, is also limited by its own terms. For instance, Chinese regulators may refuse to produce documents in specified circumstances, including where production would violate Chinese law or run contrary to the public interest. Moreover, the MOU does not provide the PCAOB with the ability to conduct on-the-ground inspections of auditors in China, an important part of the PCAOB’s oversight function. As a result, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB in the same way that PCAOB inspects independent registered public accounting firms operating outside China. Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct regular inspections of independent registered

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public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB regular inspections.

 

Regulatory Risks

Any changes in laws, regulations or the enforcement discretion of the FDA with respect to the marketing of diagnostic products, or violations of laws or regulations by us, could adversely affect our business, prospects, results of operations or financial condition.

The laws and regulations governing the marketing of diagnostic products are evolving, extremely complex and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Pursuant to its authority under the federal Food, Drug, and Cosmetic Act, or FDC Act, the FDA has jurisdiction over medical devices, including in vitro diagnostics and, therefore, potentially our clinical laboratory tests. Among other things, pursuant to the FDC Act and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion, and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. In addition, the FDA regulates the import and export of medical devices.

Although the FDA has statutory authority to assure that medical devices and in vitro diagnostics, including potentially our tests, are safe and effective for their intended uses, the FDA has historically exercised its enforcement discretion and not enforced applicable provisions of the FDC Act and regulations with respect to laboratory developed tests, or LDTs, which are a particular type of medical device. We believe our tests are LDTs. As a result, we believe our tests are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDC Act provisions.

Even though we commercialize our tests as LDTs, our tests may in the future become subject to more onerous regulation by the FDA. For example, the FDA may disagree with our assessment that our tests fall within the definition of an LDT and seek to regulate our tests as medical devices. Moreover, the FDA issued draft guidance and a 2017 Discussion Paper to allow for further public discussion about an appropriate LDT oversight approach and to give congressional committees the opportunity to develop a legislative solution. The FDA also solicited public input and published two final guidance documents in April 2018 relating to FDA oversight of NGS-based tests. These two guidance documents describe the FDA’s thinking and recommendations regarding test developer’s use of FDA-recognized standards to support analytical validity, and public human genetic variant databases to support clinical validity, of these tests.

On August 19, 2020, the U.S. Department of Health and Human Services, or HHS, published a policy announcement that the FDA must go through the formal notice-and-comment rulemaking process before requiring pre-market review of LDTs rather than making such changes through guidance documents, compliance manuals, or other informal policy statements. However, laboratories may still voluntarily submit LDTs to the FDA for pre-market review. Although the ultimate impact of HHS’s policy statement on the FDA’s plans for regulating LDTs and its current thinking relating to such testing products is unclear, the announcement appears to confirm that laboratories may commercialize LDTs for clinical use without submitting such tests for FDA review and marketing authorization, including EUA. HHS’s policy statement does not affect proposed legislation for the regulation of LDTs, which is discussed below.

In December 2018, members of Congress released a discussion draft of a possible bill to regulate in vitro clinical tests including LDTs, and provided opportunities for additional stakeholders to also provide input on the proposed reform legislation. On March 5, 2020, U.S. Representatives Diana DeGette (D-CO) and Dr. Larry Bucshon (R-IN) formally introduced the long-awaited legislation, called the Verifying Accurate, Leading-edge IVCT Development Act, or VALID Act. An identical version of the bill was also introduced in the Senate and is sponsored by U.S. Senators Michael Bennet (D-CO) and Richard Burr (R-NC), demonstrating both bicameral and bipartisan support for the effort to overhaul how the FDA reviews and approves diagnostic tests going forward. The VALID Act would codify into law the term “in vitro clinical test” to create a new medical product category separate from medical devices that includes products currently regulated as in vitro diagnostics, or IVDs, as well as LDTs. The VALID Act would also create a new system for labs and hospitals to use to submit their tests electronically to the FDA for approval, which is aimed at reducing the amount of time it takes for the agency to approve such tests, and establish a new program to expedite the development of diagnostic tests that can be used to address a current unmet need for patients. A substantively unchanged version of the VALID Act was re-introduced in both houses of Congress on June 24, 2021.

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It is unclear whether the VALID Act would be passed by Congress in its current form or signed into law by President Biden. Until the FDA promulgates binding regulations through notice-and-comment rulemaking regarding LDTs, or the VALID Act or other legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval.

If the FDA creates a new regulation to enforce its medical device requirements for LDTs or if the FDA disagrees with our assessment that our tests are LDTs, we could for the first time be subject to enforcement of a variety of regulatory requirements, including registration and listing, medical device reporting and quality control, and we could be required to obtain premarket clearance or approval for our existing tests and any new tests we may develop, which may force us to cease marketing our tests until we obtain the required clearance or approval. The premarket review process can be lengthy, expensive, time-consuming and unpredictable. Further, obtaining pre-market clearance may involve, among other things, successfully completing clinical trials. Clinical trials require significant time and cash resources and are subject to a high degree of risk, including risks of experiencing delays, failing to complete the trial or obtaining unexpected or negative results. If we are required to obtain premarket clearance or approval and/or conduct premarket clinical trials, our development costs could significantly increase, our introduction of any new tests we may develop may be delayed and sales of our existing tests could be interrupted or stopped. Any of these outcomes could reduce our revenue or increase our costs and materially adversely affect our business, prospects, results of operations or financial condition. Moreover, any cleared or approved labeling claims may not be consistent with our current claims or adequate to support continued adoption of and reimbursement for our tests. For instance, if we are required by the FDA to label our tests as investigational, or if labeling claims the FDA allows us to make are limited, order levels may decline and reimbursement may be adversely affected. As a result, we could experience significantly increased development costs and a delay in generating additional revenue from our existing tests or from tests we may develop.

In addition, while we qualify all materials used in our products in accordance with the regulations and guidelines of CLIA, the FDA could promulgate regulations or guidance documents impacting our ability to purchase materials necessary for the performance of our tests. If any of the reagents we obtain from suppliers and use in our tests are affected by future regulatory actions, our business could be adversely affected, including by increasing the cost of testing or delaying, limiting or prohibiting the purchase of reagents necessary to perform testing with our products.

Failure to comply with any applicable FDA requirements could trigger a range of enforcement actions by the FDA, including warning letters, civil monetary penalties, injunctions, criminal prosecution, recall or seizure, operating restrictions, partial suspension or total shutdown of operations and denial of or challenges to applications for clearance or approval, as well as significant adverse publicity.

If we fail to comply with applicable federal, state, local and foreign laboratory licensing requirements, we could lose the ability to perform our tests or experience disruptions to our business.

We are subject to CLIA, a federal law that establishes quality standards for all laboratory testing and is intended to ensure the accuracy, reliability and timeliness of patient results. CLIA requires that we hold a certificate specific to the laboratory examinations we perform and that we comply with various standards with respect to personnel qualifications, facility administration, proficiency testing, quality control, quality assurance and inspections. CLIA certification is required in order for us to be eligible to bill federal and state health care programs, as well as many private third-party payors, for our tests.      We have obtained CLIA certification to conduct our tests at our laboratories in Temple City, California, Houston, Texas and Alpharetta, Georgia.

In addition to CLIA requirements, we elect to participate in the accreditation program of CAP. The Centers for Medicare & Medicaid Services, or CMS, has deemed CAP standards to be equally or more stringent than CLIA regulations and has approved CAP as a recognized accrediting organization. Inspection by CAP is performed in lieu of inspection by CMS for CAP-accredited laboratories. Because we are accredited by the CAP Laboratory Accreditation Program, we are deemed to also comply with CLIA. In addition, some countries outside the United States require CAP accreditation as a condition to permitting clinical laboratories to test samples taken from their citizens. Failure to maintain CAP accreditation could have a material adverse effect on the sales of our tests and the results of our operations.

We are also required to maintain a license to conduct testing in the State of California. California laws establish standards for day-to-day operation of our clinical reference laboratory in Temple City, including with respect to the training and skills required of personnel, quality control and proficiency testing requirements. In addition, because we receive test specimens originating from New York, we have obtained a state laboratory permit for our Temple City laboratory from the New York Department of Health, or DOH. The New York state laboratory laws, regulations and rules are equal to or more stringent than the CLIA regulations. The laboratory director must maintain a Certificate of Qualification issued by New York’s DOH in permitted categories. We are subject to on-site routine and complaint-driven inspections under both California and New York state laboratory laws and regulations. If we are found to be out of compliance with either California or New York requirements, the CA Department of Public Health or New York’s DOH may suspend, restrict or revoke our license or laboratory permit, respectively (and, with respect to California, may exclude persons or

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entities from owning, operating or directing a laboratory for two years following such license revocation), assess civil monetary penalties, or impose specific corrective action plans, among other sanctions. Any such actions could materially and adversely affect our business by prohibiting or limiting our ability to offer testing.

Moreover, certain other states require us to maintain out-of-state laboratory licenses or obtain approval on a test-specific basis to perform testing on specimens from these states. Additional states could adopt similar licensure requirements in the future, which could require us to modify, delay or discontinue our operations in such jurisdictions. We are also subject to regulation in foreign jurisdictions, which we expect will increase as we seek to expand international utilization of our tests or if jurisdictions in which we pursue operations adopt new or modified licensure requirements. Foreign licensure requirements could require review and modification of our tests in order to offer them in certain jurisdictions or could impose other limitations, such as restrictions on the transport of human blood or other tissue necessary for us to perform our tests that may limit our ability to make our tests available outside the United States. Additionally, complying with licensure requirements in new jurisdictions may be expensive, time-consuming and subject us to significant and unanticipated delays.

Failure to comply with applicable clinical laboratory licensure requirements could result in a range of enforcement actions, including license suspension, limitation or revocation, directed plan of correction, onsite monitoring, civil monetary penalties, civil injunctive suits, criminal sanctions and exclusion from the Medicare and Medicaid programs, as well as significant adverse publicity. Any sanction imposed under CLIA, its implementing regulations or state or foreign laws or regulations governing clinical laboratory licensure, or our failure to renew our CLIA certificate or any other required local, state or foreign license or accreditation, could have a material adverse effect on our business, financial condition and results of operations. In such case, even if we were able to bring our laboratory back into compliance, we could incur significant expenses and lose revenue while doing so.

We are subject to broad legal requirements regarding the information we test and analyze, and any failure to comply with these requirements could result in harsh penalties, damage our reputation and materially harm our business.

Our business is subject to federal and state laws that protect the privacy and security of personal information, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the Health Information Technology for Economic and Clinical Health Act, or HITECH, and similar state laws, as well as numerous other federal, state and foreign laws, including consumer protection laws and regulations, that govern the collection, dissemination, use, access to, confidentiality and security of patient health information. In addition, new laws and regulations that further protect the privacy and security of medical records or medical information are regularly considered by federal and state governments. Further, with the recent increase in publicity regarding data breaches resulting in improper dissemination of consumer information, federal and state governments have passed or are considering laws regulating the actions that a business must take if it experiences a data breach, such as prompt disclosure to affected customers. The Federal Trade Commission, or FTC, and states’ Attorneys General have also brought enforcement actions and prosecuted some data breach cases as unfair and/or deceptive acts or practices under the Federal Trade Commission Act, or the FTC Act, and comparable state laws. In addition to data breach notification laws, some states have enacted statutes and rules requiring businesses to reasonably protect certain types of personal information they hold or to otherwise comply with certain specified data security requirements for personal information. We intend to continue to comprehensively protect all personal information and to comply with all applicable laws regarding the protection of such information.

Any failure to implement appropriate security measures to protect the confidentiality and integrity of personal information or any breach or other failure of these systems resulting in the unauthorized access, manipulation, disclosure or loss of this information could result in our noncompliance with these laws. Penalties for failure to comply with a requirement of HIPAA and HITECH vary significantly depending on the failure and could include civil monetary or criminal penalties.

The European Union formally adopted the General Data Protection Regulation, or GDPR, in 2016, which applies to all European Union member states from May 25, 2018 and replaced the European Data Protection Directive. The GDPR introduced stringent new data protection and operational requirements in the European Union for companies that receive or process personal data of European residents, as well as substantial fines for breaches of the data protection rules. It has increased our responsibility and liability in relation to personal data that we process and we are required to maintain additional mechanisms ensuring compliance with the GDPR. The GDPR is a complex law and the regulatory guidance is still evolving, including with respect to how the GDPR should be applied in the context of clinical studies and the collection, processing, and storage of sensitive personal data, including genetic information and testing. Furthermore, many of the countries within the European Union are still in the process of drafting supplementary data protection legislation in key fields where the GDPR allows for national variation, including the fields of clinical study and other health-related information. These variations in the law may raise our costs of compliance and result in greater legal risks. On July 16, 2020, the Court of Justice of the European Union or the CJEU, issued a landmark opinion in the case Maximilian Schrems vs. Facebook (Case C-311/18), or Schrems II. This decision calls into question certain data transfer mechanisms as between the European Union member states and the US. The CJEU is the highest court in Europe and the Schrems II decision heightens the burden on data importers to assess U.S. national security laws on their business, and future actions of European Union data protection authorities are difficult to predict at this early date. Consequently, there is some risk of any such data transfers from the European

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Union being halted by one or more European Union member states. Any contractual arrangements requiring the transfer of personal data from the European Union to us in the United States will require greater scrutiny and assessments as required under Schrems II and may have an adverse impact on cross-border transfers of personal data, or increase costs of compliance.

In addition, many states, such as California (where one of our clinical laboratories is located), have implemented similar privacy laws and regulations, such as the California Confidentiality of Medical Information Act, that impose restrictive requirements regulating the use and disclosure of patient health information and other personal information. In addition to fines and penalties imposed upon violators, some of these state laws also afford private rights of action to individuals who believe their personal information has been misused. California’s patient privacy laws, for example, provide for penalties of up to $250,000 and permit injured parties to sue for damages. In addition to the California Confidentiality of Medical Information Act, California also recently enacted the California Consumer Privacy Act of 2018, or CCPA, which became effective on January 1, 2020. The CCPA has been characterized as the first “GDPR-like” privacy statute to be enacted in the United States because it mirrors a number of the key provisions of the GDPR. The CCPA establishes a new privacy framework for covered businesses in the State of California by creating an expanded definition of personal information, establishing new data privacy rights for California residents, imposing special rules on the collection of personal data from minors, and creating a new and potentially severe statutory damages framework for violations of the CCPA and for businesses that fail to implement reasonable security procedures and practices to prevent data breaches. On November 3, 2020, California voters passed the California Privacy Rights Act, or CPRA, which expands the CCPA. The CPRA will be fully effective in January of 2023 and, among other things, establishes the California Privacy Protection Agency, or CPPA, a new regulatory authority charged with administering and enforcing the CRPA and privacy rights in California. The CPPA will have the power to levy fines and bring other enforcement actions. The CPRA could impact our operations or that of our collaborators and business partners and impose new regulatory requirements and increase costs of compliance. Other states are considering expanded privacy legislation similar to the GDPR and CPRA, with Virginia recently enacting its own statute called the Consumer Data Protection Act, and several federal privacy proposals are under consideration in Congress.

The interplay of federal and state laws may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and potentially exposing us to additional expense, adverse publicity and liability. Further, as regulatory focus on privacy issues continues to increase and laws and regulations concerning the protection of personal information expand and become more complex, these potential risks to our business could intensify. Additionally, the interpretation, application and interplay of consumer and health-related data protection laws in the United States, Europe and elsewhere are often uncertain, contradictory and in flux. As a result, it is possible that laws may be interpreted and applied in a manner that is inconsistent with our current practices. Moreover, these laws and their interpretations are constantly evolving and they may become more stringent over time. Complying with these laws or any new laws or interpretations of their application could involve significant time and substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business. We may not be able to obtain or maintain compliance with the diverse privacy and security requirements in all of the jurisdictions in which we currently or plan to do business, and failure to comply with any of these requirements could result in civil or criminal penalties, harm our reputation and materially adversely affect our business.

We conduct business in a heavily regulated industry. Complying with the numerous statutes and regulations pertaining to our business is expensive and time-consuming, and any failure by us, our consultants or commercial partners to comply could result in substantial penalties.

Our industry and our operations are heavily regulated by various federal, state, local and foreign laws and regulations, and the regulatory environment in which we operate could change significantly and adversely in the future. These laws and regulations currently include, among others:

 

the HHS policy decision from August 2020 establishing that the FDA does not presently have authority to oversee LDTs;

 

CLIA’s and CAP’s regulation of our laboratory activities;

 

federal and state laws and standards affecting reimbursement by government payors, including certain coding requirements to obtain reimbursement and certain changes to the payment mechanism for clinical laboratory services resulting from the Protecting Access to Medicare Act of 2014, or PAMA;

 

HIPAA and HITECH, which establish comprehensive federal standards with respect to the privacy and security of PHI, and requirements for the use of certain standardized electronic transactions with respect to transmission of such information, as well as similar laws protecting other types of personal information;

 

state laws governing the maintenance of personally identifiable information of state residents, including medical information, and which impose varying breach notification requirements, some of which allow private rights of action by individuals for violations and also impose penalties for such violations;

 

the federal Anti-Kickback Statute, which generally prohibits knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in return for or to induce a person to refer to an individual any good, facility, item or service that is reimbursable under a federal health care program;

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the federal Stark Law, which generally prohibits a physician from making a referral for certain designated health services covered by the Medicare program, including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity providing the designated health services;

 

the federal False Claims Act, which imposes civil penalties, and provides for civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

the federal Civil Monetary Penalties Law, which generally prohibits, among other things, the offering or transfer of remuneration to a Medicare or Medicaid beneficiary if it is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of services reimbursable by Medicare or Medicaid;

 

the Eliminating Kickbacks in Recovery Act of 2018, or EKRA, which imposes criminal penalties for knowing or willful payment or offer, or solicitation or receipt, of any remuneration, whether directly or indirectly, overtly or covertly, in cash or in kind, in exchange for the referral or inducement of laboratory testing (among other health care services) covered by health care benefit programs (including commercial insurers) unless a specific exception applies;

 

the Affordable Care Act, or ACA, which, among other things, establishes a requirement for providers and suppliers to report and return any overpayments received from the Medicare and Medicaid programs;

 

other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, fee-splitting restrictions, insurance fraud laws, anti-markup laws, prohibitions on the provision of tests at no or discounted cost to induce physician or patient adoption and false claims acts, some of which may extend to services reimbursable by any third-party payor, including private payors;

 

the federal Physician Sunshine Payment Act and various state laws on reporting relationships with health care providers and customers, which could be determined to apply to our LDTs;

 

the prohibition on reassignment of Medicare claims and other Medicare and Medicaid billing and coverage requirements;

 

state laws that prohibit other specified healthcare practices, such as billing physicians for tests that they order, waiving coinsurance, copayments, deductibles and other amounts owed by patients, business corporations practicing medicine or employing or engaging physicians to practice medicine and billing a state Medicaid program at a price that is higher than what is charged to one or more other payors;

 

the U.S. Foreign Corrupt Practices Act, or FCPA, and applicable foreign anti-bribery laws;

 

federal, state and local regulations relating to the handling and disposal of regulated medical waste, hazardous waste and biohazardous waste and workplace safety for healthcare employees;

 

laws and regulations relating to health and safety, labor and employment, public reporting, taxation and other areas applicable to businesses generally, all of which are subject to change, including, for example, the significant changes to the taxation of business entities were enacted in December 2017; and

 

similar foreign laws and regulations that apply to us in the countries in which we operate or may operate in the future.

The genetic testing industry is currently under a high degree of government scrutiny. The Office of Inspector General for the Department of Health and Human Services and a variety of states’ Attorneys General have issued fraud alerts regarding a variety of cancer genetic testing fraud schemes, and the Department of Justice has announced indictments and guilty pleas in such fraud schemes involving a variety of individuals and entities, including genetic testing and other laboratories, physicians who ordered genetic testing for a large volume of patients without treating them, and third parties who arranged for the genetic testing by approaching patients through telemarketing calls, booths at public events, health fairs, and door-to-door visits. These individuals then shared the proceeds received from Medicare, TRICARE, and other third-party payors, which allegedly violated the federal Anti-Kickback Statute and other criminal laws. This increased regulatory scrutiny could decrease demand for our testing services or increase our costs of regulatory compliance, either of which could have a material adverse effect on our business.

Any future growth of our business, including, in particular, growth of our international business and continued reliance on consultants, commercial partners and other third parties, may increase the potential for violating these laws. In some cases, our risk of violating these or other laws and regulations is further increased because of the lack of their complete interpretation by applicable regulatory authorities or courts, and their provisions are thus open to a variety of interpretations. Our Picture Genetics line of at-home genetic test offerings are patient-initiated screening tests, which may receive greater scrutiny from regulatory authorities than our traditional testing services that are offered directly to health care providers.

We have adopted policies and procedures designed to comply with these laws and regulations and, in the ordinary course of our business, we conduct internal reviews of our compliance with these laws. Our compliance is also subject to review by applicable government agencies. It is not always possible to identify and deter misconduct by employees, distributors, consultants and commercial partners, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from government investigations or other actions or lawsuits stemming from a failure to comply with applicable laws or regulations. Additionally, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. Any action brought against us for violation of these or other laws or regulations,

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even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and harm our reputation. If our operations, including the conduct of our employees, consultants and commercial partners, are found to be in violation of any of these laws and regulations, we may be subject to applicable penalties associated with the violation, including administrative, civil and criminal penalties, damages, fines, individual imprisonment, exclusion from participation in federal healthcare programs, refunding of payments received by us and curtailment or cessation of our operations. Any of these consequences could seriously harm our business and our financial results.

Healthcare policy changes, including recently enacted and proposed new legislation reforming the U.S. healthcare system, could cause significant harm to our business, operations and financial condition.

The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private payors. The ACA also introduced mechanisms to reduce the per capita rate of growth in Medicare spending if expenditures exceed certain targets. Any such reductions could affect reimbursement payments for our tests. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict.

In April 2014, Congress passed PAMA, which included substantial changes to the way in which clinical laboratory services will be paid under Medicare. Under PAMA, certain clinical laboratories are required to periodically report to CMS private payor payment rates and volumes for their tests. Laboratories that fail to report the required payment information may be subject to substantial civil monetary penalties. Further, effective January 1, 2018, under PAMA, Medicare reimbursement for diagnostic tests will be based on the weighted-median of the payments made by private payors for these tests, rendering private payor payment levels even more significant. As a result, future Medicare payments may fluctuate more often and become subject to the willingness of private payors to recognize the value of diagnostic tests generally and any given test individually. The impact of this new payment system on rates for our tests, including any current or future tests we may develop, is uncertain.

On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, which included the Laboratory Access for Beneficiaries Act, or LAB Act. The LAB Act delayed by one year the reporting of payment data under PAMA for clinical diagnostic laboratory tests that are not advanced diagnostic laboratory tests until the first quarter of 2021. The CARES Act, which was signed into law on March 27, 2020, delayed the reporting period by an additional year, until the first quarter of 2022.

In addition, under PAMA, as amended by the LAB Act, any reduction to a particular payment rate resulting from the new methodology is limited to 10% per test per year in 2020 and to 15% per test per year in each of the years 2021 through 2023. The CARES Act delayed the 15% cut scheduled to take effect on January 1, 2021, for one year.

We cannot predict whether or when these or other recently enacted healthcare initiatives will be implemented at the federal or state level or how any such legislation or regulation may affect us. For instance, the payment reductions imposed by the ACA and the changes to reimbursement amounts paid by Medicare for tests such as ours based on the procedure set forth in PAMA, could limit the prices we will be able to charge or the amount of available reimbursement for our tests, which would reduce our revenue. Additionally, these healthcare policy changes could be amended or additional healthcare initiatives could be implemented in the future. For instance, the new Democrat-led presidential administration has been taking steps to strengthen the ACA and, following several years of litigation in the federal courts, in June 2021, the U.S. Supreme Court upheld the ACA when it dismissed a legal challenge to the ACA’s constitutionality. Legislation related to precision medicine is also being considered in Congress and, if passed and signed into law, such legislation may affect genetic or genomic testing and related clinical laboratory offerings.

Further, the impact on our business of the expansion of the federal and state governments’ role in the U.S. healthcare industry generally, including the social, governmental and other pressures to reduce healthcare costs while expanding individual benefits, is uncertain. Any future changes or initiatives could have a materially adverse effect on our business, financial condition, results of operations and cash flows.

Changes in laws and regulations, or in their application, may adversely affect our business, financial condition and results of operations.

The clinical laboratory testing industry is highly regulated, and failure to comply with applicable regulatory, supervisory, accreditation, registration or licensing requirements may adversely affect our business, financial condition and results of operations. In particular, the laws and regulations governing the marketing and research of clinical diagnostic testing are extremely complex, and in many instances there are no clear regulatory or judicial interpretations of these laws and regulations, increasing the risk that we may be found to be in violation of these laws.

Furthermore, the genetic testing industry as a whole is a growing industry and regulatory agencies such as HHS or the FDA may apply heightened scrutiny to new developments in the field, or the U.S. Congress may do so. Since 2017, Congress has been working

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on legislation to create an LDT and IVD regulatory framework that would be separate and distinct from the existing medical device regulatory framework. On March 5, 2020, U.S. Representatives Diana DeGette (D-CO) and Dr. Larry Bucshon (R-IN) formally introduced the VALID Act in the House and an identical version of the bill was introduced in the U.S. Senate by Senators Michael Bennet (D-CO) and Richard Burr (R-NC). As anticipated from a discussion draft of the legislation released for stakeholder comment in December 2018, the VALID Act would codify into law the term “in vitro clinical test” to create a new medical product category separate from medical devices, and bring all such products within the scope of the FDA’s oversight. A substantively unchanged version of the VALID Act was re-introduced in both houses of Congress on June 24, 2021. It is unclear whether the VALID Act would be passed by Congress in its current form or signed into law by President Biden.

In addition, there has been a recent trend of increased U.S. federal and state regulation, scrutiny and enforcement relating to payments made to referral sources, which are governed by laws and regulations including the Stark law, the federal Anti-Kickback Statute, the federal False Claims Act, as well as state equivalents of such laws. For example, the Eliminating Kickbacks in Recovery Act of 2018, or EKRA, was passed in October 2018 as part of the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act. Similar to the federal Anti-Kickback Statute, EKRA imposes criminal penalties for knowing or willful payment or offer, or solicitation or receipt, of any remuneration, whether directly or indirectly, overtly or covertly, in cash or in kind, in exchange for the referral or inducement of laboratory testing (among other health care services) unless a specific exception applies. We cannot assure you that our relationships with physicians, sales representatives, hospitals, customers, or any other party will not be subject to scrutiny or will survive regulatory challenge under such laws. If imposed for any reason, sanctions under the EKRA could have a negative effect on our business.

Marketing of our COVID-19 tests under the EUA from FDA is subject to certain limitations and we are required to maintain compliance with the terms of the EUA, among other things, and the continuance of our EUA is subject to government discretion.

Since March 2020, we have commercially launched several molecular tests for the detection of SARS-CoV-2, the virus that causes COVID-19, including NGS and RT-PCR-based tests as well as related antibody testing options. In May 2020, we were granted an EUA for our RT-PCR-based test for the detection of SARS-CoV-2 using upper and lower respiratory specimens (nasal, nasopharyngeal, and oropharyngeal swabs). In June 2020, we received an amendment to the EUA to add our at-home testing solution for COVID-19 through Picture Genetics. Since that time, the FDA has granted authorizations to revise the authorized labeling for the RT-PCR test and to allow for the use of an additional at-home specimen collection kit in conjunction with our test. In addition, the FDA recently established additional conditions for emergency authorizations of COVID-19 molecular, antigen, and serology tests to account for emerging mutations of the SARS-CoV-2 virus, which revise our previously issued EUA.

Although there are certain regulatory requirements the FDA has waived for the duration of the EUA, we remain subject to specific conditions of the authorizations. As with other FDA-regulated tests, issues could emerge during the course of the marketing and use of our test under an EUA that could impact our ability to continue the sale and distribution of the authorized test or home collection kit. Factors that may be out of the Company’s control, such as the availability of supplies and key personnel, may impact the Company’s ability to maintain testing capacity and test result delivery, and its other responses to the COVID-19 pandemic, and may have an adverse impact on the Company’s operations. Our EUA remains effective only until the HHS declaration is terminated or revoked, and FDA also may revoke an EUA if it determines the criteria for issuance are no longer met or other circumstances make such revocation appropriate to protect the public health or safety.

However, on August 19, 2020, HHS published a policy announcement that the FDA must go through the formal notice-and-comment rulemaking process before requiring pre-market review (including emergency use authorization) of LDTs rather than making such changes through guidance documents, compliance manuals, or other informal policy statements. Based on the HHS’s policy announcement, which specifically states that LDT developers are not required to obtain an EUA or other marketing authorization from FDA prior to commercialization, we believe we may continue to market our COVID-19 tests even if our EUA is terminated or revoked. The FDA may seek to establish a new regulation through notice-and-comment rulemaking requiring pre-market review and authorization of LDTs, and if that were to occur and if our EUA is either terminated or revoked, then in order to continue marketing our COVID-19 tests, we could be required to obtain the necessary regulatory clearances or approvals and be subject to the full and usual regulatory obligations. It continues to be unclear whether the Biden Administration, which assumed control of the executive branch on January 20, 2021, would take the same position as the former administration or seek to revoke or revise the HHS policy announcement from August 2020.

If the hazardous materials we use in our operations cause contamination or injury, we could be liable for resulting damages.

Our operations require the use of regulated medical waste, hazardous waste and biohazardous waste, including chemicals, biological agents and compounds and blood and other tissue specimens. We are subject on an ongoing basis to federal, state and local laws and regulations governing the use, storage, handling and disposal of these hazardous materials and other specified waste products. Although we typically use licensed or otherwise qualified outside vendors to dispose of this waste, applicable laws and

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regulations could hold us liable for damages and fines if our, or others’, business operations or other actions result in contamination to the environment or personal injury due to exposure to hazardous materials. We cannot eliminate the risk of contamination or injury, and any liability imposed on us for any resulting damages or injury could exceed our resources or any applicable insurance coverage. The cost to secure such insurance coverage and to comply with these laws and regulations could become more significant in the future, and any failure to comply could result in substantial costs and other business and reputational consequences, any of which could negatively affect our operating results.

If we were deemed to be an investment company under the Investment Company Act of 1940, as amended, applicable restrictions could make it impractical for us to continue our business as currently conducted and could have a material adverse effect on our business, financial condition and results of operations.

Under the Investment Company Act of 1940, or 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (1) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (2) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act, and we intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as it is currently being conducted and could have a material adverse effect on our business, financial condition and results of operations.

Our partnerships and activities in China subject us to risks and uncertainties relating to the laws and regulations of China and the changes in relations between the United States and China.

Under its current leadership, the government of China has been pursuing economic reform policies, including by encouraging foreign trade and investment. However, there is no assurance that the Chinese government will continue to pursue such policies, that such policies will be successfully implemented, that such policies will not be significantly altered, or that such policies will be beneficial to our partnerships or activities in China. China’s system of laws can be unpredictable, especially with respect to foreign investment and foreign trade. The United States government has called for substantial changes to foreign trade policy with China and has raised, and has proposed to further raise in the future, tariffs on several Chinese goods. China has retaliated with increased tariffs on United States goods. Moreover, China’s legislature has recently adopted a national security law to substantially change the way Hong Kong has been governed since the territory was handed over by the United Kingdom to China in 1997. This law increases the power of the central government in Beijing over Hong Kong, limits the civil liberties of residents of Hong Kong and could restrict the ability of businesses in Hong Kong to continue to conduct business or to continue to with business as previously conducted. The U.S. State Department has indicated that the United States no longer considers Hong Kong to have significant autonomy from China. The U.S. State Department has recently enacted sanctions related to China’s governing of Hong Kong. Any further changes in United States trade policy could trigger retaliatory actions by affected countries, including China, resulting in trade wars. Any regulatory changes and changes in United States and China relations may have a material adverse effect on our partnerships or activities in China, which could materially harm our business and financial condition.

We could be adversely affected by violations of the FCPA and other anti-bribery laws.

Our international operations are subject to various anti-bribery laws, including the FCPA and similar anti-bribery laws in the non-U.S. jurisdictions in which we operate. The FCPA prohibits companies and their intermediaries from offering, making, or authorizing improper payments to non-U.S. or foreign officials for the purpose of obtaining or retaining business or securing any other improper advantage. These laws are complex and far-reaching in nature, and we may be required in the future to alter one or more of our practices to be in compliance with these laws or any changes to these laws or their interpretation.

We currently engage in significant business outside the United States, and we plan to increase our international operations in the future. These operations could involve dealings with governments, foreign officials and state-owned entities, such as government hospitals, outside the United States. In addition, we may engage distributors, other commercial partners or third-party intermediaries, such as representatives or contractors, or establish joint ventures or other arrangements to manage or assist with promotion and sale of our tests abroad and obtaining necessary permits, licenses and other regulatory approvals. Any such third parties could be deemed to be our agents and we could be held responsible for any corrupt or other illegal activities of our employees or these third parties, even if we do not explicitly authorize or have actual knowledge of such activities. We have instituted policies, procedures, and internal controls reasonably designed to promote compliance with the FCPA and other anti-corruption laws and we exercise a high degree of vigilance in maintaining, implementing and enforcing these policies and controls. However, these policies and controls could be circumvented or ignored and they cannot guarantee compliance with these laws and regulations. Any violations of these laws or allegations of such violations could disrupt our operations, involve significant management distraction, involve significant costs and

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expenses, including legal fees, and harm our reputation. Additionally, other U.S. companies in the medical device and pharmaceutical fields have faced substantial fines and criminal penalties in the recent past for violating the FCPA, and we could also incur these types of penalties, including criminal and civil penalties, disgorgement, and other remedial measures, if we violate the FCPA or other applicable anti-bribery laws. Any of these outcomes could result in a material adverse effect on our business, prospects, financial condition, or results of operations.

Our services present the potential for embezzlement, identity theft or other similar illegal behavior by our employees, consultants, service providers or commercial partners.

Our operations involve the use and disclosure of personal and business information that could be used to impersonate third parties or otherwise gain access to their data or funds. If any of our employees, consultants, service providers or commercial partners takes, converts or misuses these funds or data, we could be liable for any resulting damages, which could harm our financial condition and damage our business reputation.

We could be adversely affected by alleged violations of the FTC Act or other truth-in-advertising and consumer protection laws.

Our advertising for laboratory services and tests is subject to federal truth-in-advertising laws enforced by the FTC, as well as comparable state consumer protection laws. Under the FTC Act, the FTC is empowered, among other things, to (a) prevent unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; and (c) gather and compile information and conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce. The FTC has very broad enforcement authority, and failure to abide by the substantive requirements of the FTC Act and other consumer protection laws can result in administrative or judicial penalties, including civil penalties, injunctions affecting the manner in which we would be able to market services or products in the future, or criminal prosecution. In conjunction with the launch of our Picture Genetics line of at-home genetic test offerings that are initiated by consumers, we plan to increase our advertising activities that would be subject to these federal and state truth-in-advertising laws. Any actual or perceived non-compliance with those laws could lead to an investigation by the FTC or a comparable state agency, or could lead to allegations of misleading advertising by private plaintiffs. Any such action against us would disrupt our business operations, cause damage to our reputation, and result in a material adverse effect on our business.

Intellectual Property Risks

We primarily rely on trade secret protection, non-disclosure agreements and invention assignment agreements to protect our proprietary information, which may not be effective.

We currently rely on trade secret protection, non-disclosure agreements and invention assignment agreements with our employees, consultants and third-parties to protect our confidential and proprietary information. Although our competitors have utilized and are expected to continue to utilize technologies and methods similar to ours and have aggregated and are expected to continue to aggregate libraries of genetic information similar to ours, we believe our success will depend in part on our ability to develop proprietary methods and libraries and to defend any advantages afforded to us by these methods and libraries relative to our competitors. If we do not protect our intellectual property and other confidential information adequately, competitors may be able to use our proprietary technologies and information and thereby erode any competitive advantages they provide us.

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent these rights are effectively maintained as confidential. We expect to rely primarily on trade secret and contractual protections for our confidential and proprietary information and we have taken security measures we believe are appropriate to protect this information. These measures, however, may not provide adequate protection for our trade secrets, know-how or other confidential information. We seek to protect our proprietary information by, among other things, entering into confidentiality agreements with employees, consultants and other third parties. These confidentiality agreements may not sufficiently safeguard our trade secrets and other confidential information and may not provide adequate remedies in the event of unauthorized use or disclosure of this information. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret or other proprietary information could be difficult, expensive and time-consuming and the outcome could be unpredictable. In addition, trade secrets or other confidential information could otherwise become known or be independently developed by others in a manner that could prevent legal recourse by us. If any of our trade secrets or other confidential or proprietary information were disclosed or misappropriated or if any such information was independently developed by a competitor, our competitive position could be harmed and our business could suffer.

Litigation or other proceedings or third-party claims of intellectual property infringement or misappropriation could require us to spend significant time and money and prevent us from selling our tests.

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We believe our ability to succeed will depend in part on our avoidance of infringement of patents and other proprietary rights owned by third parties, including the intellectual property rights of competitors. There are numerous third-party-owned U.S. and foreign patents, pending patent applications and other intellectual property rights that cover technologies relevant to genetic testing. We may be unaware of patents or other intellectual property rights that a third-party might assert are infringed by our business, and there may be pending patent applications that, if issued, could be asserted against us. As a result, our existing or future operations may be alleged or found to infringe existing or future patents or other intellectual property rights of others. Moreover, as we continue to sell our existing tests and if we launch new tests and enter new markets, competitors may claim that our tests infringe or misappropriate their intellectual property rights as part of strategies designed to impede our existing operations or our entry into new markets.

If a patent infringement or misappropriation of intellectual property lawsuit was brought against us, we could be forced to discontinue or delay our development or sales of any tests or other activities that are the subject of the lawsuit while it is pending, even if it is not ultimately successful. In the event of a successful claim of infringement against us, we could be forced to pay substantial damages, including treble damages and attorneys’ fees if we were found to have willfully infringed patents; obtain one or more licenses, which may not be available on commercially reasonable terms when needed or at all; pay royalties, which may be substantial; or redesign any infringing tests or other activities, which may be impossible or require substantial time and expense. In addition, third parties making claims against us for infringement or misappropriation of their patents or other intellectual property rights could seek and obtain injunctive or other equitable relief, which, if granted, could prohibit us from performing some or all of our tests. Further, defense against these claims, regardless of their merit or success, could cause us to incur substantial expenses, be a substantial diversion to our management and other employee resources and significantly harm our reputation. Any of these outcomes could delay our introduction of new tests, significantly increase our costs or prevent us from conducting certain of our essential activities, which could materially adversely affect our ability to operate and grow our business.

Developments in patent law could have a negative impact on our business.

From time to time, the Supreme Court, other federal courts, the U.S. Congress or the U.S. Patent and Trademark Office, or USPTO, may change the standards of patentability, and any such changes could have a negative impact on our business.

Three cases involving diagnostic method claims and “gene patents” have been decided by the Supreme Court in recent years. In March 2012, the Supreme Court issued a decision in Mayo Collaborative v. Prometheus Laboratories, or Prometheus, a case involving patent claims directed to optimizing the amount of drug administered to a specific patient, holding that the applicable patents’ claims failed to incorporate sufficient inventive content above and beyond mere underlying natural correlations to allow the claimed processes to qualify as patent-eligible processes that apply natural laws. In June 2013, the Supreme Court decided Association for Molecular Pathology v. Myriad Genetics, or Myriad, a case challenging the validity of patent claims relating to the breast cancer susceptibility genes BRCA1 and BRCA2, holding that isolated genomic DNA that exists in nature, such as the DNA constituting the BRCA1 and BRCA2 genes, is not patentable subject matter, but that cDNA, which is an artificial construct created from RNA transcripts of genes, may be patent eligible. In June 2014, the Supreme Court decided Alice Corporation Pty. Ltd. v. CLS Bank International, or Alice, which affirmed the Prometheus and Myriad decisions and provided additional interpretation.

If we make efforts to seek patent protection for our technologies and tests, these efforts may be negatively impacted by the Prometheus, Myriad and Alice decisions, rulings in other cases or guidance or procedures issued by the USPTO. However, we cannot fully predict the impact of the Prometheus, Myriad and Alice decisions on the ability of genetic testing, biopharmaceutical or other companies to obtain or enforce patents relating to DNA, genes or genomic-related discoveries in the future, as the contours of when claims reciting laws of nature, natural phenomena or abstract ideas may meet patent eligibility requirements are not clear and may take years to develop via interpretation at the USPTO and in the courts. There are many previously issued patents claiming nucleic acids and diagnostic methods based on natural correlations that issued before these recent Supreme Court decisions and, although many of these patents may be invalid under the standards set forth in these decisions, they are presumed valid and enforceable until they are successfully challenged, and third parties holding these patents could allege that we infringe or request that we obtain a license under such patents. Whether based on patents issued before or after these Supreme Court decisions, we could be forced to defend against claims of patent infringement or obtain license rights, if available, under these patents. In particular, although the Supreme Court has held in Myriad that isolated genomic DNA is not patent-eligible subject matter, third parties could allege that our activities infringe other classes of gene-related patent claims. There are numerous risks associated with any patent infringement claim that may be brought against us, as discussed above under “—Litigation or other proceedings or third-party claims of intellectual property infringement or misappropriation could require us to spend significant time and money and prevent us from selling our tests.”

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In addition, the Leahy-Smith America Invents Act, or America Invents Act, which was signed into law in 2011, includes a number of significant changes to U.S. patent law. These changes include a transition from a “first-to-invent” system to a “first-to-file” system, changes to the way issued patents are challenged and changes to the way patent applications are disputed during the examination process. These changes may favor larger and more established companies that have greater resources to devote to patent application filing and prosecution. The USPTO has developed new regulations and procedures to govern the full implementation of the America Invents Act, but the impact of the America Invents Act on the cost of prosecuting any patent applications we may file, our ability to obtain patents based on our discoveries if we pursue them and our ability to enforce or defend any patents that may issue remains uncertain.

These and other substantive changes to U.S. patent law could affect our susceptibility to patent infringement claims and our ability to obtain any patents we may pursue and, if obtained, to enforce or defend them, any of which could have a material adverse effect on our business.

We may not be able to enforce our intellectual property rights outside the United States.

The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant challenges in establishing and enforcing their proprietary rights outside the United States. These challenges can be caused by the absence of rules and methods for the establishment and enforcement of intellectual property rights in certain jurisdictions. In addition, the legal systems of some countries, particularly developing countries, do not favor the enforcement of certain intellectual property protection, especially relating to healthcare. These aspects of many foreign legal systems could make it difficult for us to prevent or stop the misappropriation of our intellectual property rights in these jurisdictions. Moreover, changes in the law and legal decisions by courts in foreign countries could affect our ability to obtain adequate protection for our technologies and enforce our intellectual property rights. As a result, our efforts to protect and enforce our intellectual property rights outside the United States may prove inadequate, in which case our ability to remain competitive and grow our business and revenue could be materially harmed.

Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.

We employ individuals who were previously employed at universities and biometric solution, genetic testing, diagnostic or other healthcare companies, including our competitors or potential competitors. Further, we may become subject to ownership disputes in the future arising from, for example, conflicting obligations of consultants or others who are involved in developing our and other parties’ technologies and intellectual property rights. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees or consultants have inadvertently or otherwise used or disclosed intellectual property rights, including trade secrets or other proprietary information, of a former employer or other third-party. Litigation may be necessary to defend against these claims, should they arise. If we fail in defending against any such claims, we could be subject to monetary damages and the loss of valuable intellectual property rights or personnel. Even if we are successful in defending against any such claims, litigation could result in substantial costs, distract management and other employees and damage our reputation.

Common Stock Risks

An active, liquid trading market for our common stock may not be sustained, which could make it difficult for stockholders to sell their shares of our common stock.

An active trading market for our common stock may not be sustained. Further, Mr. Hsieh, our founder, Chief Executive Officer and Chairman of our board of directors, beneficially owns approximately 26% of our outstanding voting equity as of September 30, 2021. As a result, fewer shares are actively traded in the public market, which reduces the liquidity of our common stock. The lack of an active trading market could impair our stockholders’ ability to sell their shares at the desired time or at a price considered reasonable. Further, an inactive trading market may impair our ability to raise capital by selling shares of our common stock in the future, and may impair our ability to enter into strategic relationships or acquire companies or technologies using shares of our common stock as consideration.

Our common stock is listed on the Nasdaq Global Market, or Nasdaq, under the symbol “FLGT.” If we fail to satisfy the continued listing standards of Nasdaq, however, we could be de-listed, which would negatively impact the price and liquidity of our common stock.

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The price of our common stock may be volatile and you could lose all or part of your investment.

The trading price of our common stock has experienced, and may continue to experience, wide fluctuations and significant volatility. This volatility may be exacerbated by the relatively small and illiquid market for our common stock. Other factors that may contribute to this volatility include, among others:

 

actual or anticipated fluctuations in our operating results;

 

competition from existing tests or new tests that may emerge, particularly if competitive factors in our industry, including prices for genetic or other testing, become more acute;

 

failures to meet or exceed financial estimates and projections of the investment community or guidance we have provided to the public;

 

issuance of new or updated research or reports by securities analysts or changed recommendations for our common stock;

 

announcements by us or our competitors of significant acquisitions, investments, strategic relationships, joint ventures, collaborations or capital commitments;

 

the timing and amount of our investments in our business and the market’s perception of these investments and their impact on our prospects;

 

actual or anticipated changes in laws or regulations applicable to our business or our tests;

 

additions or departures of key management or other personnel;

 

changes in coverage and reimbursement by current or potential payors;

 

inability to obtain additional funding as and when needed on reasonable terms;

 

disputes or other developments with respect to our or others’ intellectual property rights;

 

product liability claims or other litigation;

 

sales of our common stock by us or our stockholders;

 

general economic, political, industry and market conditions, including factors not directly related to our operating performance or the operating performance of our competitors, such as increased uncertainty in the U.S. regulatory environment for healthcare, trade and tax-related matters;

 

events that affect, or have the potential to affect, general economic conditions, including but not limited to political unrest, global trade wars, natural disasters, act of war, terrorism, or disease outbreaks (such as the global pandemic related to COVID-19);

 

and the other risk factors discussed in this report.

In addition, the stock market in general, and the market for the stock of companies in the life sciences and technology industries in particular, has experienced extreme price and volume fluctuations in recent years that have at times been unrelated or disproportionate to the operating performance of specific companies. These broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against such company. This type of litigation, if instituted against us, could result in substantial costs, a diversion of our management’s attention and resources and could damage our reputation.

Our principal stockholders and management own a significant percentage of our capital stock and are able to exert significant control over matters subject to stockholder approval.

Our executive officers, directors, beneficial owners of 5% or more of our outstanding voting equity and their respective affiliates collectively beneficially owns approximately 40% of our outstanding voting equity as of September 30, 2021, and of this, Mr. Hsieh, our founder, Chief Executive Officer and Chairman of our board of directors, by himself beneficially owns 26% of our outstanding voting equity as of September 30, 2021. As a result, these stockholders have the ability to control matters submitted to our stockholders for approval, including elections of directors, amendments to our organizational documents or approval of any merger, sale of assets or other major corporate transaction. This concentration of ownership may prevent or discourage unsolicited acquisition proposals or offers to acquire our common stock that some of our stockholders feel are in their best interests, as the interests of these stockholders may not coincide with the interests of our other stockholders and they may act in a manner that advances their best interests and not necessarily those of all of our stockholders. Further, this concentration of ownership could adversely affect the prevailing market price for our common stock.

Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales could occur, could cause the price of our common stock to fall.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. Any such sales, or the perception in the market that sales are pending or could occur, could reduce the market price of our common stock. All of the outstanding shares of our common stock are freely tradable without restriction in the public market, subject to certain volume and

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manner of sale limitations applicable to shares held by our affiliates, as that term is defined in the Securities Act. In addition, subject to similar limitations and any other applicable legal and contractual limitations, all of the shares of our common stock subject to outstanding equity-based awards or reserved for issuance pursuant to such awards we may grant in the future are registered under the Securities Act or are otherwise eligible under applicable securities laws for free trading in the public market upon their issuance.

Future issuances of our common stock or rights to purchase our common stock, including pursuant to our equity incentive plan, could result in additional dilution to the percentage ownership of our stockholders and could cause the price of our common stock to fall.

To raise capital or for other strategic purposes, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. In addition, in November 2020 we entered into the November 2020 Equity Distribution Agreement, with Piper, Oppenheimer & Co. Inc., and BTIG LLC, as sales agents, pursuant to which we may, from time to time, sell through Piper as our sales agent shares of our common stock with an aggregate purchase price of up to $175.0 million. During the year ended December 31, 2020, we sold an aggregate of 2.0 million shares of our common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $48.70 per share. During the three months ended September 30, 2021, the Company did not sell any shares of its common stock pursuant to the November 2020 Equity Distribution Agreement. During the nine months ended September 30, 2021, the Company sold approximately 961,000 shares of its common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $60.56. We also may issue common stock or grant other equity awards for compensatory purposes under our equity incentive plan. If we issue common stock, convertible securities or other equity securities, including shares pursuant to the November 2020 Equity Distribution Agreement or equity awards under our equity incentive plan, our then-existing stockholders could be materially diluted by such issuances and, if we otherwise issue preferred stock, new investors could gain rights, preferences and privileges senior to the holders of our common stock, any of which could cause the price of our common stock to decline.

We do not intend to pay dividends on our common stock, so any returns will be limited to the value of our common stock.

We currently anticipate that we will retain any future earnings to finance the continued development, operation and expansion of our business. As a result, we do not anticipate declaring or paying any cash dividends or other distributions in the foreseeable future. Further, if we were to enter into a credit facility or issue debt securities or preferred stock in the future, we may become contractually restricted from paying dividends. If we do not pay dividends, our common stock may be less valuable because stockholders must rely on sales of their common stock after price appreciation, which may never occur, to realize any gains on their investment.

If securities or industry analysts do not publish research or reports about our business or if they issue an adverse or misleading opinion regarding our common stock, our stock price and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the financial markets, which could cause the price and trading volume of our common stock to decline. Further, if any of these analysts issues an adverse or misleading opinion regarding us, our business model, our industry or our stock performance or if our operating results fail to meet analyst expectations, the price of our common stock could also decline.

Provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company or changes in our management and depress the market price of our common stock.

Our certificate of incorporation and bylaws contain provisions that could depress the market price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that our stockholders may deem advantageous. These provisions, among other things:

 

authorize our board of directors to issue, without further action by our stockholders, up to 1.0 million shares of undesignated or “blank check” preferred stock;

 

prohibit stockholder action by written consent, thus requiring all stockholder actions to be taken at a duly noticed and held meeting of our stockholders;

 

specify that special meetings of our stockholders can be called only by our board of directors, the Chairman of our board of directors or our President, thereby eliminating the ability of our stockholders to call special meetings;

 

permit only our board of directors to establish the number of directors and fill vacancies on the board of directors, except as may be required by law;

 

permit our board of directors to amend our bylaws, subject to the power of our stockholders to repeal any such amendment;

 

do not permit cumulative voting by our stockholders on the election of directors; and

 

establish advance notice requirements for stockholders to propose nominees for election as directors or matters to be acted upon at annual meetings of stockholders.

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In addition, we are subject to Section 203 of the Delaware General Corporation Law, or DGCL, which imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock. Section 203 may have the effect of discouraging, delaying or preventing a change in control of our company.

Holders of our common stock could be adversely affected if we issue preferred stock.

Pursuant to our certificate of incorporation, our board of directors is authorized to issue up to 1.0 million shares of preferred stock without any action by our stockholders. Our board of directors also has the power, without stockholder approval, to set the terms of any series of preferred stock that may be issued, among others, including voting rights, dividend rights and preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up. If we issue preferred stock in the future that has preferences over our common stock with respect to payment of dividends or upon a liquidation, dissolution or winding up, or if we issue preferred stock that is convertible into our common stock at greater than a one-to-one ratio, the voting and other rights of the holders of our common stock and the market price of our common stock could be adversely affected.

Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a judicial forum they consider favorable for disputes with us or our directors, officers or other employees.

Our certificate of incorporation and bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for:

 

any derivative action brought on our behalf;

 

any direct action brought by a stockholder against us or any of our directors, officers or other employees, alleging a breach of a fiduciary duty;

 

any action brought by a stockholder against us or any of our directors, officers or other employees, alleging a violation of the DGCL, our certificate of incorporation or our bylaws; and

 

any action brought by a stockholder against us or any of our directors, officers or other employees, asserting a claim against us governed by the internal affairs doctrine.

We refer to the forgoing limitations as the Exclusive Forum Provisions. The Exclusive Forum Provisions do not apply to (i) actions in which the Court of Chancery in the State of Delaware concludes that an indispensable party is not subject to the jurisdiction of the Delaware courts, and (ii) actions in which a federal court has assumed exclusive jurisdiction of a proceeding.

Accordingly, the Exclusive Forum Provisions do not apply to actions brought to enforce a duty or liability created by the Exchange Act or the rules and regulations thereunder, or Exchange Act Claims. Further, the clause in our certificate of incorporation excepting “actions in which a federal court has assumed exclusive jurisdiction of a proceeding” from the Exclusive Forum Provisions is not intended to mean that a federal court must take any actual or affirmative action to assume jurisdiction over an Exchange Act Claim, as Section 27 of the Exchange Act creates exclusive federal jurisdiction over all Exchange Act Claims, regardless of whether a federal court takes any action. The Exclusive Forum Provisions also do not apply to federal and state suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder, or Securities Act Claims. To the extent applicable or enforceable, the Exclusive Forum Provisions may limit a stockholder’s ability to bring a claim in a judicial forum it finds favorable for disputes with us or our directors, officers or other employees, which may discourage these lawsuits. Alternatively, for Securities Act Claims, Exchange Act Claims or claims for which a court were to find these Exclusive Forum Provisions inapplicable or unenforceable for one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving these matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Use of Proceeds from Registered Securities

On October 4, 2016, we completed the IPO of our common stock, in which we issued and sold an aggregate of 4.8 million shares of common stock (including 630,000 shares issued and sold on October 7, 2016 pursuant to the underwriters’ exercise in full of their option to purchase additional shares) at a public offering price of $9.00 per share. We received net proceeds from the IPO of approximately $36.0 million, after deducting underwriting discounts and commissions and offering expenses paid or payable by us of approximately $4.4 million. The shares issued and sold in the IPO were registered under the Securities Act on a registration statement on Form S-1 (File No. 333-213469), as amended, and the final prospectus dated September 28, 2016 included in such registration statement, or the Prospectus.

To date, we have used $28.8 million of the net proceeds from the IPO, of which, $4.5 million was used for contributions to FF Gene Biotech prior to the FF Gene Biotech Acquisition and $24.3 million was used to fund the Company’s operations. All other net proceeds from sales of our common stock are invested in investment-grade and interest-bearing securities, such as equity securities, corporate bonds, municipal bonds, and U.S. government and U.S. agency debt securities. There has been no material change in the planned use of proceeds from the IPO from that described in the Prospectus.

On August 30, 2019, we entered into the 2019 Equity Distribution Agreement with Piper as sales agent, which was amended on August 4, 2020. During the year ended December 31, 2019, we sold an aggregate of 104,000 shares of our common stock pursuant to the 2019 Equity Distribution Agreement at a weighted-average net selling price of $9.37 per share, which resulted in $979,000 of net proceeds to the Company. During the year ended December 31, 2020, we sold an aggregate of 1.1 million shares of our common stock pursuant to the 2019 Equity Distribution Agreement at a weighted-average net selling price of $38.50 per share, which resulted in $42.7 million of net proceeds to the Company. Shares sold under the Equity Distribution Agreement were offered and sold pursuant to our shelf registration statement on Form S-3 (File No. 333-233227) filed with the SEC on August 12, 2019 and declared effective on August 23, 2019, and prospectus supplements and accompanying base prospectus filed with the SEC on August 30, 2019, May 6, 2020 and August 5, 2020. There has been no material change in the planned use of proceeds as described in the prospectus supplements and accompanying base prospectus.

On November 13, 2019, we entered into a purchase agreement with Piper, as representative of the several underwriters, pursuant to which we sold 2.7 million shares of our common stock at a price of $10.52 per share, with a public offering price of $11.25 per share. We received net proceeds of approximately $27.6 million, after deducting underwriting discounts and commissions and offering expenses paid or payable by us of approximately $2.4 million. The shares issued and sold in the underwritten offering were registered under the Securities Act and sold pursuant to our shelf registration statement on Form S-3 (File No. 333-233227), and a prospectus supplement and accompanying base prospectus filed with the SEC on November 13, 2019. There has been no material change in the planned use of proceeds as described in the prospectus supplement and accompanying base prospectus.

On September 25, 2020, we entered into an Equity Distribution Agreement, or the September 2020 Equity Distribution Agreement, with Piper as sales agent, pursuant to which we sold 2.8 million shares of our common stock pursuant to the September 2020 Equity Distribution Agreement at a weighted-average net selling price of $42.90 per share during the year ended December 31, 2020, which resulted in $122.1 million of net proceeds to the Company. Piper may receive a commission of up to 3% of the gross proceeds received by the Company for sales pursuant to the September 2020 Equity Distribution Agreement. Shares sold under the September 2020 Equity Distribution Agreement were offered and sold pursuant to our registration statement on Form S-3 (File No. 333-239964) filed with the SEC on July 21, 2020, as amended on August 5, 2020, and declared effective on August 12, 2020, and a prospectus supplement and accompanying base prospectus filed with the SEC on September 25, 2020. There has been no material change in the planned use of proceeds as described in the prospectus supplement and accompanying base prospectus.

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On November 20, 2020, we entered into the November 2020 Equity Distribution Agreement, with Piper, Oppenheimer & Co. Inc., and BTIG LLC, as sales agents, pursuant to which we may offer and sell, from time to time through Piper, shares of our common stock having an aggregate offering price of up to $175.0 million. Piper may receive a commission of up to 3% of the gross proceeds received by the Company for sales pursuant to the November 2020 Equity Distribution Agreement. During the year ended December 31, 2020, we sold an aggregate of 2.0 million shares of our common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $48.70 per share, which resulted in $99.1 million of net proceeds to the Company. During the nine months ended September 30, 2021, we sold approximately 961,000 shares of our common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $60.56, which resulted in $58.2 million of net proceeds to the Company. Shares sold under the November 2020 Equity Distribution Agreement were offered and sold pursuant to our registration statement on Form S-3 (File No. 333-239964) filed with the SEC on July 21, 2020, as amended on August 5, 2020, and declared effective on August 12, 2020, and a prospectus supplement and accompanying base prospectus filed with the SEC on November 20, 2020. There has been no material change in the planned use of proceeds as described in the prospectus supplement and accompanying base prospectus.

Item 6. Exhibits.

The information required by this Item 6 is set forth on the Exhibit Index that immediately precedes the signature page to this report and is incorporated herein by reference.

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EXHIBIT INDEX

 

Exhibit

No.

Exhibit Title

Filed

with this

Form 10-Q

Incorporated

by Reference

Form

 

Form No.

 

Date filed

 

 

 

 

 

 

 

 

31.1

Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1*

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH

Inline XBRL Taxonomy Extension Schema Document

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

X

 

 

 

 

 

 

 

 

 

 

 

 

 

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

X

 

 

 

 

 

 

*

Furnished herewith.

 

68


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

FULGENT GENETICS, INC.

 

 

 

 

Date: November 9, 2021

 

By:

/s/ Ming Hsieh

 

 

 

Ming Hsieh

 

 

 

President, Chief Executive Officer

(principal executive officer)

 

 

 

 

Date: November 9, 2021

 

By:

/s/ Paul Kim

 

 

 

Paul Kim

 

 

 

Chief Financial Officer

(principal financial and accounting officer)

 

69