What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-05 compared with 2020-05-06 · 110 added, 92 removed, 110 unchanged (65% of the section changed)

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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, or SEC, 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, 2019 filed with the SEC on March 13, 2020, or the 2019 Annual 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 resul ts of operations included in our annual report on Form 10-K for our fiscal year ended December 31, 2019 filed with the SEC on March 13, 2020.

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.

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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, and Section 21E of the Securities Exchange Act of 1934, as amended.

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.

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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 change s in our 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 a fter the date of this report to conform these statements to actual results or to changes in our expectations.

We are a technology company offering comprehensive genetic testing providing physicians with clinically actionable diagnostic information they can use to improve the quality of patient care.

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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 existing customer base consists primarily of hospitals, medical institutions and other laboratories, which are typically frequent and high-volume users of genetic tests and which often pay us directly for our tests.

Our existing customer base consists primarily of hospitals, medical institutions, other laboratories, governmental bodies, municipalities, and large corporations, which are typically frequent and high-volume users of tests and which often pay us directly for our tests.

We believe our relationships with these customers provide a meaningful opportunity for further growth, as we seek to deepen these relationships and drive increased ordering.

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Although we have devoted fewer overall resources to sales and marketing efforts than many of our competitors, we made material investments in our sales and marketing team and strategies, the global reach of our business and other aspects of our operations.

We offer tests at competitive prices, averaging approximately $ 589 per billable test delivered in the first quarter of 2020, and at a lower cost to us than many of our competitors, averaging approximately $308 per billable test delivered in the first quarter of 2020.

Our volume has grown rapidly since our commercial launch, with 13,163 billable tests delivered in the first quarter of 2020, compared to 7,530 billable tests delivered in the first quarter of 2019.

An aggregate of over 130,937 billable tests were delivered to approximately 1,130 customers since launching our first commercial genetic tests in 2013 and through March 31, 2020.

Since March 2020, we have commercially launched several tests, or 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 EUAs from 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 our at-home COVID-19 testing service through Picture Genetics.

Our at-home testing service for COVID-19 and RT-PCR-based tests have been granted EUAs by the FDA only for the detection of nucleic acid from SARS-CoV-2, not for any other viruses or pathogens.

We are currently accepting patient samples directly to our Biosafety Level 2, or BSL-2, certified laboratory in Temple City, California 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 was 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.

We offer tests at competitive prices averaging approximately $ 129 per billable test delivered in the six months ended June 30, 2020 , and at a lower cost to us than many of our competitors, averaging approximately $ 61 per billable test delivered in the six months ended June 30, 2020 .

Our volume has grown rapidly since our commercial launch, with 180,513 and 193,676 billable tests delivered in the three and six months ended June 30 , 2020, respectively, compared to 16,369 and 23,899 billable tests delivered in the three and six months ended June 30 , 2019, respectively.

An aggregate of over 311,450 billable tests were delivered to approximately 1,180 customers since launching our first commercial genetic tests in 2013 and t hrough June 30, 2020 .

We have experienced compound quarterly growth of 64% in the number of billable tests delivered in our last eight completed fiscal quarters.

We recorded revenue and net loss of $7.8 million and $2.0 million, respectively, in the first quarter of 2020, compared to revenue and net loss of $5.4 million and $1.9 million, respectively, in the first quarter of 2019.

We achieved profitability in the first half of 2017 and the second and third quarters of 2019 , but we have recorded losses in all other periods since our inception.

COVID-19 Consideration s

We recorded revenue and net income of $ 17.3 million and $ 3.3 million , respectively, in the thr ee months ended June 30, 2020 , compared to revenue and net income of $8.4 million and $331 ,000 , respectively, in the three months ended June 30, 2019 .

We recorded revenue and net income of $ 25.0 million and $ 1.4 million , respectively, in the six months ended June 30, 2020 , compared to revenue and net loss of $13.8 million and $1.6 million, respectively, in the six months ended June 30, 2019 .

We achieved profitability in the first half of 2017 , the second and third quarters of 2019 and the second quarter of 2020 , but we have recorded losses in all other periods since our inception.

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 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, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international 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, the actions taken to contain it or treat it and the economic impact on local, regional, national and international markets and supply chains.

We continued to operate as an essential business in response to COVID-19.

We recently launched several tests for COVID-19 including NGS and RT-PCR based tests, and we have submitted our tests to the U.S.

Food and Drug Administration (“FDA”) for validation and emergency use authorization.

We have received temporary approval from the State of New York to perform COVID-19 testing on specimens from New York.

We are currently accepting samples directly to our BSL-2 certified laboratory in Temple City, California, and we have the capacity to accept and process thousands of samples per day for COVID-19 testing alone.

In the first quarter of 2020, the COVID-19 pandemic did not have a material negative impact on our consolidated operating results.

In the three and six months ended June 30, 2020, the COVID-19 pandemic did not have a material negative impact on our consolidated operating results.

However, the responses of the federal, international, state and regional governments to the pandemic, including the shelter in place orders and the allocation of healthcare resources to treating those infected with the virus, have caused and may continue to cause a significant decline in the number of our traditional genetics tests ordered, which may impact our future revenues .

Even after the COVID-19 outbreak has subsided, we may experience materially adverse impacts on our financial condition and results of operations.

Our ability to continue to operate without any significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain.

Our ability to continue to operate as currently planned, including continuing to offer our COVID-19 tests with a competitive results turn-around time, without any significant negative operational impact from the COVID-19 pandemic will in part depend 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.

For the three months ended March 31, 2020, we maintained the consistency of our operations during the onset of the COVID-19 pandemic.

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 workforce and supply chain.

Because the COVID-19 pandemic has not materially impacted our operations through March 31, 2020, it has also not negatively impacted the Company’s liquidity position as of such date.

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 March 31, 2020.

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

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 supply chain.

The COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of June 30, 2020.

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 June 30, 2020.

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

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Three Months Ended

Six Months Ended

Statement of Operations Data:

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Total operating expenses

Operating loss

Operating income (loss)

Interest and other income, net

Loss before income taxes and equity loss in investee

Provision for income taxes

Loss before equity loss in investee

Income (loss) before income taxes

and equity loss in investee

Provision for (benefit from)

Income (loss) before equity loss in

Equity loss in investee

Net income (loss)

Other Operating Data:

Billable tests delivered (1)

Average price per billable test delivered (2)

Average price per billable test

delivered (2)

Cost per billable test delivered (3)

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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.

Revenue increased $2.4 million, or 44%, from $5.4 million in the first quarter of 2019 to $7.8 million in the first quarter of 2020 .

The increase in revenue between periods was primarily due to increase in the number of billable tests delivered.

The average price of the billable tests we delivered decreased $124, or 17%, from $713 in the first quarter of 2019 to $589 in the first quarter of 2020 .

We believe this decrease was due to (i) lower price-points for the mix of tests we delivered in the first quarter of 2020, (ii) the mix of customers ordering tests in this period, which may order tests at different rates depending on the arrangements we have negotiated with them, and for which we may recognize different amounts of revenue at different times in the delivery and payment process based on the impact of our revenue recognition policy on, and differing collectability rates among, various customer groups, and (iii) the reduction of prices for certain of our tests due to general price degradation for genetic tests and other competitive factors during the first quarter of 2020 .

Revenue increased $8.8 million, or 105%, from $8.4 million in the three months ended June 30, 2019 to $17.3 million in the three months ended June 30, 2020 , and increased $11.2 million, or 81%, from $13.8 million in the six months ended June 30, 2019 to $25.0 million in the six months ended June 30, 2020.

The increase in revenue between periods was primarily due to increase in the number of billable tests delivered, including orders for our recently launched COVID-19 tests, offset by a substantial decline in the average selling price per test.

The average price of the billable tests we delivered decreased from $515 in the three months ended June 30, 2019 to $96 in the three months ended June 30, 2020, and decreased from $577 in the six months ended June 30, 2019 to $129 in the six months ended June 30, 2020.

The decreases were due to (i) lower price-points for the mix of tests we delivered, including our recently launched COVID-19 tests, in the three and six months ended June 30, 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 for which we may recognize different amounts of revenue at different times in the delivery and payment process based on the impact of our revenue recognition policy on, and differing collectability rates among, various customer groups, 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 three and six months ended June 30, 2020 .

Revenue from non-U.S.

sources increased $357,000, or 20%, from $1.8 million in the first quarter of 2019 to $2.1 million in the first quarter of 2020 .

The increase in revenue from non-U.S.

sources between periods was primarily due to increases of $ 276,000 in revenue from sales to customers in other countries and $81,000 in revenue from sales to customers in Canada.

The number of billable tests we delivered increased 5,633 , from 7,530 in the first quarter of 201 9 to 13,163 in the first quarter of 20 20 .

We believe this increase was primarily att ributable to new customers, the expansion of our test menu, increase in sales to certain of our existing customers and an increase in sequencing as a service test orders, combined with growth in the genetic testing market and increased physician awareness and acceptance of genetic tests generally.

In the first quarter of 2020 , when customers who, to our knowledge, are under common control or otherwise affiliated with each other are aggregated, no groups of affiliated customers contributed 10% or more of our total revenue.

sources decreased $611,000, or 35%, from $1.7 million in the three months ended June 30, 2019 to $1.1 million in the three months ended June 30, 2020, and decreased $253,000, or 7%, from $3.5 million in the six months ended June 30, 2019 to $3.2 million in the six months ended June 30, 2020 .

The decreases in revenue from non-U.S.

sources between periods were primarily due to decreased sales to customers in other countries, which decreased by $424,000 and $147,000 in the three and six months ended June 30, 2020, respectively, and specifically decreased sales to customers in Canada, which decreased by $187,000 and $106,000 in the three and six months ended June 30, 2020, respectively .

The number of billable tests we delivered increased 164,144, from 16,369 in the three months ended June 30, 2019 to 180,513 in the three months ended June 30, 2020, and increased 169,777, from 23,899 in the six months ended June 30, 2019 to 193,676 in the six months ended June 30, 2020 .

The increases were primarily attributable to the expansion of our test menu, including our recently launched COVID-19 tests, and increases in sales to certain of our existing and new customers.

After aggregating customers that are under common control or are affiliates, one customer contributed 45% of our total revenue in the three months ended June 30, 2020, and one customer contributed 31% of our total revenue in the six months ended June 30, 2020.

Cost of Revenue

Cost of revenue increased $1.1 million, or 37%, from $3.0 million in the first quarter of 2019 to $4.1 million in the first quarter of 2020.

The increase was primarily due to increases of $841,000 in reagent and supply expenses related to increased billable tests delivered, and $89,000 in stock-based compensation expense and $77,000 in personnel costs related to increased headcount.

Cost per billable test delivered decreased $86, or 22%, from $394 in the first quarter of 2019 to $308 in the first quarter of 2020 as the increase in the number of billable tests we delivered was greater than the increase in our cost of revenue from the increased number of billable tests due to economies of scale for the period.

The greater increase in the number of billable tests we delivered was primarily attributable to new customers .

Cost of revenue increased $4.1 million, or 113%, from $3.6 million in the three months ended June 30, 2019 to $7.7 million in the three months ended June 30, 2020 .

The increase was primarily due to increases of $2.9 million in reagent and supply expenses and $536,000 in outside labor expense related to increased billable tests delivered and $339,000 in personnel costs and $103,000 in equity-based compensation expense related to increased headcount and stock price.

Cost of revenue increased $5.2 million, or 79%, from $6.6 million in the six months ended June 30, 2019 to $11.8 million in the six months ended June 30, 2020.

The increase was primarily due to increases of $3.7 million in reagent and supply expenses and $535,000 in outside labor expense related to increased billable tests delivered, $417,000 in personnel costs and $192,000 in equity-based compensation expense related to increased headcount and stock price .

Cost per billable test delivered decreased $178, or 81%, from $221 in the three months ended June 30, 2019 to $43 in the three months ended June 30, 2020 as 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.

Cost per billable test delivered decreased $215, or 78%, from $276 in the six months ended June 30, 2019 to $61 in the six months ended June 30, 2020 as the increase in the number of billable tests we delivered was greater than the increase in our cost of revenue.

The greater increase in the number of billable tests we delivered was primarily attributable to new customers and our expanded test menu, including our recently launched COVID-19 tests .

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.

Our gross profit increased $1.3 million, from $2.4 million in the first quarter of 2019 to $3.7 million in the first quarter of 2020 .

Our gross profit as a percentage of revenue, or gross margin, increased from 44.7% to 47.7% between three months ended March 31, 2019 and 2020, for the reasons described above .

Research and Development

Research and development expenses increased $554,000, or 39%, from $1.4 million in the first quarter of 2019 to $2.0 million in the first quarter of 2020.

The increase was primarily due to increases of $318,000 in personnel costs and $135,000 in stock-based compensation expense related to increased headcount, and $157,000 in reagent and supply expenses related to additional reagents and supplies purchased for research of COVID-19 testing in the current period.

Our gross profit increased $4.7 million, from $4.8 million in the three months ended June 30, 2019 to $9.5 million in the three months ended June 30, 2020, and increased $6.0 million, from $7.2 million in the six months ended June 30, 2019 to $13.2 million in the six months ended June 30, 2020.

Our gross profit as a percentage of revenue, or gross margin, decreased from 57.0% to 55.3% between three months ended June 30, 2019 and 2020, and increased from 52.2% to 52.9% between six months ended June 30, 2019 and 2020, due in part to the increase in revenue and decreases in our cost per billable test and cost of revenue described above.

R esearch and Development

Research and development expenses increased $275,000, or 17%, from $1.6 million in the three months ended June 30, 2019 to $1.8 million in the three months ended June 30, 2020.

The increase was primarily due to increases of $209,000 in personnel costs and $131,000 in equity-based compensation expense related to increased headcount and stock price.

Research and development expenses increased $829,000, or 28%, from $3.0 million in the six months ended June 30, 2019 to $3.8 million in the six months ended June 30, 2020.

The increase was primarily due to increases of $528,000 in personnel costs and $265,000 in equity-based compensation expense related to increased headcount and stock price, and $134,000 in reagent and supply expenses related to increased reagent usage for COVID-19 research.

Selling and Marketing

Selling and marketing expenses increased $325,000, or 26% from $1.3 million in the first quarter of 2019 to $1.6 million in the first quarter of 2020.

The increase was primarily due to increases of $185,000 in marketing materials cost related to increased billable tests delivered and additional supplies purchased for COVID-19 testing, $79,000 in consulting and outside labor expense related to the increase of outside labor for customer services in the current period, and $47,000 in stock-based compensation expense and $39,000 in personnel costs related to increased headcount.

Selling and marketing expenses increased $2.0 million, or 150% from $1.3 million in the three months ended June 30, 2019 to $3.3 million in the three months ended June 30, 2020.

The increase was primarily due to increases of $1.7 million in marketing supplies to potential customers including kits related to the increased number of COVID-19 tests delivered in the current period, $156,000 in consulting and outside labor expense related to COVID-19 marketing projects in the current period, and $104,000 in personnel costs related to increased commission expense and stock awards granted to sales representatives.

Selling and marketing expenses increased $2.3 million, or 89% from $2.6 million in the six months ended June 30, 2019 to $4.9 million in the six months ended June 30, 2020.

The increase was primarily due to increases of $1.8 million in marketing supplies to potential customers including kits related to the increased number of COVID-19 tests delivered in the current period, $235,000 in consulting and outside labor expense related to COVID-19 marketing projects in the current period, and $143,000 in personnel costs related to increased commission expense and stock award granted to sales representatives.

General and Administrative

General and administrative expenses increased $506,000, or 33%, from $1.5 million in the first quarter of 2019 to $2.0 million in the first quarter of 2020.

The increase was primarily due to increases of $121,000 in bad debt expenses related to additional reserve for doubtful accounts in the current period, $103,000 in accounting fees related to increased audit fees, $71,000 in equity-based compensation expense and $63,000 in personnel costs related to increased headcount, $65,000 in legal and professional fees related to professional services obtained in the current period, $46,000 in software license fees related to software obtained after the prior period, and $28,000 in insurance costs related to increased insurance premium.

Interest Income and Other Losses

Interest income was $326,000 and $214,000 in the first quarters of 2020 and 2019, respectively.

General and administrative expenses increased $168,000, or 10% from $1.6 million in the three months ended June 30, 2019 to $1.8 million in the three months ended June 30, 2020.

The increase was primarily due to increases of $107,000 in accounting fees, $83,000 in personnel costs and $73,000 in equity-based compensation expense related to increased headcount and stock price, $63,000 in other state tax related to increased franchise tax, business property tax and business licenses tax, and $60,000 in software and licensing related to new billing software, partially offset by a decrease of $229,000 in legal fees related to case settlement in the prior period.

General and administrative expenses increased $674,000, or 21% from $3.2 million in the six months ended June 30, 2019 to $3.8 million in the six months ended June 30, 2020.

The increase was primarily due to increases of $211,000 in accounting fees, $146,000 in personnel costs and $145,000 in equity-based compensation related to increased headcount and stock price, $135,000 in bad debt expense related to additional reserve for doubtful accounts in the current period, and $106,000 in software and licensing related to new billing software, partially offset by a decrease of $165,000 in legal and professional fees related to case settlement in the prior period.

Interest Income and Other Income (Losses)

Interest income was $249,000 and $204,000 in the three months ended June 30, 2020 and 2019, respectively, and $575,000 and $418,000 in the six months ended June 30, 2020 and 2019, respectively.

This income related to interest received on various investments in marketable securities .

Other losses were $85,000 in the first quarter of 2020.

Other losses were not significant in the first quarter of 2019.

Other income (losses) were $26,000 and $(59,000) in the three and six months ended June 30, 2020.

Other losses were not significant in the three or six months ended June 30, 2019.

The primary component of other losses in both periods was foreign currency valuation losses.

Provision for ( B enefit from ) Income Taxes

Provision for income taxes was $34,000 and $13,000 for the first quarters of 2020 and 2019, respectively.

The effective tax rate was -2% and -1% for the first quarters of 2020 and 2019, respectively.

The change in effective tax rate for the first quarter of 2019, was primarily attributable to the full valuation allowance and certain minimum state income taxes.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes were $(599,000) and $(565,000) for the three and six months ended June 30, 2020, respectively, and $7,000 and $20,000 for the three and six months ended June 30, 2019, respectively.

The effective tax rate was -21% for the three months ended June 30, 2020 compared with 1% for the three months ended June 30, 2019.

The effective tax rate was -45% for the six months ended June 30, 2020 compared with -2% for the six months ended June 30, 2019.

The change in effective tax rates for the three and six months ended June 30, 2020, relative to the comparative 2019 periods, was primarily attributable to deferred tax benefit related to the partial release of valuation allowance.

This partial release is related to the projected increase in taxable income attributable to the Company’s new COVID testing capabilities.

Equity Loss in Investee

Equity loss in investee was $249,000 and $279,000 in the first quarters of 2020 and 2019, respectively.

Equity loss in investee was $193,000 and $149,000 in the three months ended June 30, 2020 and 2019, respectively, and $442,000 and $428,000 in the six months ended June 30, 2020 and 2019, respectively.

Equity loss in investee relates to our 30% ownership interest in our joint venture, which we refer to as FF Gene Biotech.

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We had $2.4 million in cash and cash equivalents and $63.9 million in marketable securities, consisting of corporate bonds and U.S.

government agency securities, as of March 31, 2020.

government agency securities, as of June 30, 2020 .

We had $12.0 million in cash and cash equivalents and $58.3 million in marketable securities, consisting of corporate bonds, as of December 31, 2019.

Since commencing operations in May 2012, our operations have been financed primarily by our founder, Chief Executive Officer and Chairman of our board of directors, Ming Hsieh, and in more recent p eriods, by cash from our operations and equity financings.

Since commencing operations in May 2012, our operations have been financed primarily by our founder, Chief Ex ecutive 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.

In addition, in connection with the establishment of FF Gene Biotech, we became obligated to contribute to FF Gene Biotech genetic sequencing and other equipment with a total cost of 60,000,000 renminbi, or RMB, over a five-year period, previously three-year per original agreement and amended in April 2019.

To date, we have purchased and contributed to FF Gene Biotech equipment with an aggregate fair value of $3.1 million, and as of March 31, 2020, 39,300,000 RMB (or approximately $5.5 million U.S.

To date, we have purchased and contributed to FF Gene Biotech equipment with an aggregate fair value of $3.1 million, and as of June 30, 2020 , 39,300,000 RMB (or approximately $5.6 million U.S.

dollars) of our total contribution obligations remain to be satisfied.

Depending on the performance of FF Gene Biotech, this joint venture may never produce sufficient revenue to us to recover these capital and other investments, and could cause our revenue to decrease if any of our direct customers in Asia choose to order genetic tests from FF Gene Biotech instead of from us, any of which could negatively affect our liquidity and cash flows.

In addition, although we have in the past made cash distributions for tax and other purposes to the equity holders of our predecessor, we do not expect to use our cash make these or any other types of distributions or dividends in the foreseeable future.

On August 30 2019, we entered into an Equity Distribution Agreement with Piper Sandler & Co.

(“Piper”) as sales agent, pursuant to which we may, from time to time, sell through Piper shares of our common stock with an aggregate purchase price of up to $30.0 million.

During the three months ended March 31, 2020, the Company did not sell any shares of its common stock pursuant to the Equity Distribution Agreement.

In addition, although we have in the past made cash distributions for tax and other purposes to the equity holders of our predecessor, we do not expect to use our cash to make these or any other types of distributions or dividends in the foreseeable future.

On August 30 2019, we entered into an Equity Distribution Agreement, or the Equity Distribution Agreement, with Piper Sandler & Co., or Piper, as sales agent, pursuant to which was subsequently amended on August 4, 2020.

Pursuant to the Equity Distribution Agreement, we may, from time to time, sell through Piper shares of our common stock with an aggregate purchase price of up to $44.9 million.

During the three and six months ended June 30, 2020, the Company did not sell any shares of its common stock pursuant to the Equity Distribution Agreement.

Shares sold under the Equity Distribution Agreement are offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No.

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The shares issued and sold in the underwritten offering were sold pursuant to a shelf registration statement registered under the Securities Act on a registration statement on Form S-3 (File No.

333-233227), as amended, and a prospectus supplement and accompanying base prospectus filed with the Securities and Exchange Commission on November 13, 2019.

We believe our existing cash, along with cash from our operations and proceeds from our equity financings, will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

333-233227), and a prospectus supplement and accompanying base prospectus filed with the Securities and Exchange Commission on November 13, 2019.

We believe our existing cash, along with 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.

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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 in 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 d o not presently have any commitments for future capital.

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 var iety 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 mix, customer mix, general price degradation for genetic 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.

Additional funding may not be available to us when needed, on acceptable terms or at all.

For example, t he COVID-19 pandemic has recently caused extreme disruption and volatili ty in the global capital markets, which could reduce our ability to access capital.

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 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 liqui dity 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 funds by issuing equity securities, our existing stockholders could experience substantial dilution.

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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 recently caused extreme disruption and volatility in the global capital markets, which could reduce 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.

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

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands)

Cash provided by operating activities

Cash used in investing activities

Cash (used in) provided by financing activities

Net cash (used in) provided by operating activities

Net cash (used in) provided by investing activities

Net cash (used in) provided by financing activities

Operating Activities

Cash provided by operating activities in the first quarter of 2020 was $1.4 million.

The difference between net loss and cash provided by operating activities for the period was primarily due to the effects of $924,000 in equity-based compensation expenses and $569,000 in the depreciation of assets.

Cash provided by operating activities increased between periods primarily due to an increase of $1.9 million in accounts payable mainly due to timing of payments, and partially offset by an increase of $924,000 in other current and long-term assets primarily related to increased inventory.

Cash provided by operating activities in the first quarter of 2019 was $1.1 million.

The difference between net loss and cash provided by operating activities for the period was primarily due to the effects of $583,000 in equity-based compensation expenses and $535,000 in the depreciation of assets.

Cash provided by operating activities increased between periods primarily due to a $1.4 million decrease in accounts receivable mainly due to timing of collections from customers.

Cash used in operating activities in the six months ended June 30, 2020 was $3.0 million.

The difference between net income and cash used in operating activities for the period was primarily due to increases of $7.4 million in accounts receivable mainly due to timing of collections from customers and increased revenue and $3.8 million in other current assets related to purchases of an increased amount of reagents and supplies and equipment purchased that will be contributed to FF Gene Biotech, partially offset by the effects of $2.0 million in equity-based compensation expenses, $1.1 million in the depreciation of assets and $442,000 in equity loss in investee.

Cash provided by operating activities in the six months ended June 30, 2019 was $1.7 million.

The difference between net loss and cash provided by operating activities for the period was primarily due to the effects of $1.3 million in equity-based compensation expenses, $1.0 million in the depreciation of assets and $428,000 in equity loss in investee.

Cash provided by operating activities increased between periods primarily due to a $368,000 decrease in accounts receivable mainly due to timing of collections from customers.

Investing Activities

Cash used in investing activities in the first quarter of 2020 was $3.9 million , which primarily related to purchase of $8.0 million marketable securities, purchase of $796,000 fixed assets consisting mainly of medical lab equipment, and partially offset by maturity of $4.9 million marketable securities.

Cash used in investing activities in the first quarter of 2019 was $2.5 million , which primarily related to purchase of $6.0 million marketable securities, purchase of $134,000 fixed assets consisting mainly of computer hardware, and partially offset by maturity of $3.6 million marketable securities.

Cash used in investing activities in the six months ended June 30, 2020 was $6.3 million , which is primarily related to purchases of $12.4 million of marketable securities and purchases of $1.2 million of fixed assets consisting mainly of medical laboratory equipment, leasehold improvements, and computer hardware, partially offset by proceeds of $7.3 million related to maturities of marketable securities .

Cash provided by investing activities in the six months ended June 30, 2019 was $689,000 , which primarily related to purchases of $10.2 million marketable securities, purchases of $633,000 fixed assets consisting mainly of computer hardware, and partially offset by maturity of $11.5 million of marketable securities.

Financing Activities

Cash used in the first quarter of 2020 was $164,000, which primarily represents payment for costs related to our underwritten offering in November 2019.

Cash provided by financing activities in the first quarter of 2019 was minimal.

Cash used in financing activities in the six months ended June 30, 2020 was $223,000, which primarily represents payment for costs related to our underwritten offering in November 2019.

Cash provided by financing activities in the six months ended June 30, 2019 was minimal.

Critical Accounting Policies and Use of Estimates

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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 below, there have been no significant changes to our critical accounting policies and estimates as described in the 2019 Annual Report.

See Note 2, Summary of Significant Accounting Policies, to our condensed consolidated financial statements included in this report for information about recent accounting pronouncements.

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 2019 Annual Report.

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or JOBS Act.

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This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We will remain an emerging growth company until December 31, 2021, unless our gross revenue exceeds $1.07 billion in any fiscal year before that date, we issue more than $1.0 billion of non-convertible debt in an y three-year period before that date or the market value of our common stock held by non-affiliates exceeds $700.0 million as of the last business day of the second fiscal quarter of any fiscal year before that date.

We will remain an emerging growth company until December 31, 2021, unless our gross revenue exceeds $1.07 billion in any fiscal year before that date, we issue more than $1.0 billion of non-convertible debt in any three-year period before that date or the market value of our common stock held by non-affiliates exceeds $700.0 million as of the last business day of the second fiscal quarter of any f iscal year 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.

Quantitative and Q ualitati ve Disclosures About Market Risk.

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis