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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-05 · 112 added, 90 removed, 130 unchanged (61% of the section changed)

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

Management’s Discussion and Analysis of Financial Condition and Re sults 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 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.

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 financi al 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.

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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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 a fter the date of this report to conform these statements to actual results or to changes 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 after 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, 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.

Our 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.

We also believe our offering could be attractive to other types of customers, including individual physicians and other practitioners, research institutions and other organizations, and we are building relationships in these new customer markets.

We also believe our offerings could be attractive to other types of customers, including individual physicians and other practitioners, research institutions and other organizations, and we are building relationships in these new customer markets.

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.

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 offer tests at competitive prices averaging $ 103 per billable test delivered in the n ine months ended September 30 , 2020 , and at a lower cost to us than many of our competitors, averaging approximately $ 31 per billable test delivered in the n ine months ended September 30 , 2020 .

Our volume has grown rapidly since our commercial launch, with 1,035,000 and 1,229,000 billable tests delivered in the three and n ine months ended September 30 , 2020, respectively, co mpared to 2 1,000 and 4 5,000 billable tests delivered in the three and n ine months ended September 30 , 2019, respectively.

An aggregate of 1,347,000 billable tests were delivered to 1,299 groups of customers since launching our first commercial genetic tests in 2013 and through September 30 , 2020 .

We have experienced compound quarterly growth of 107% in the number of billable tests delivered in our last eight completed fiscal quarters.

We recorded revenue and net income of $ 101.7 million and $ 46.6 million , respectively, in the three months ended September 30 , 2020 , compared to revenue and net income of $ 10.3 million and $ 1.5 million , respectively, in the three months ended September 30 , 2019 .

We recorded reven ue and net income of $ 126.7 million and $ 48.0 million , respectively, in the n ine months ended September 30 , 2020 , compared to revenue and net loss of $ 24.1 million and $ 115,000 , respectively, in the n ine months ended September 30 , 2019 .

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

Impact of COVID-19 Testing Business

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 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.

We are currently accepting patient samples directly to our Biosafety Level 2, or BSL-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 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 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.

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 from 154 in March 2020 to 473 in September, and the volume of tests we perform on a daily basis has increased by more than 6,000% in that time.

In addition, while most of our genetic 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 insurance providers 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.

We believe that our scalable technology platform has been a critical element of our ability to meet the increasing demand for high-quality, reliable testing delivered with rapid turnaround times.

While we anticipate that demand for COVID-19 tests will eventually decrease once an effective vaccine is developed and widely deployed, we are continuing to invest in expanding our capacity to meet the increasing demand that we anticipate over at least the next two quarters.

COVID-19 Considerations

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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.

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 .

During the three months ended September 30, 2020, and for the entirety of the COVID-19 pandemic to such point, we continued to operate as an essential business in response to COVID-19.

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

Rather, we have recognized significant revenue growth in connection with s ales of our COVID-19 tests.

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

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 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.

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.

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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.

The COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of September 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 September 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.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Statement of Operations Data:

(dollars in thousands, except Other Operating Data)

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

Cost of revenue

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Interest and other income, net

Income (loss) before income taxes

and equity loss in investee

Provision for (benefit from)

Income (loss) before equity loss in

Income before income taxes,

equity loss in investee

and impairment loss

Provision for income taxes

Income before equity loss

in investee and impairment loss

Equity loss in investee

Impairment loss in equity-method

Net income (loss)

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Cost per billable test delivered (3)

* Percentage not meaningful.

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.

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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 $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 increased $91.4 million, or 883%, from $10.3 million in the three months ended September 30, 2019 to $101.7 million in the three months ended September 30, 2020 , and increased $102.6 million, or 425%, from $24.1 million in the nine months ended September 30, 2019 to $126.7 million in the nine months ended September 30, 2020.

The increase in revenue between periods was primarily due to an increase in the number of billable tests delivered, primarily related to the increased orders for our 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 $493 in the three months ended September 30, 2019 to $98 in the three months ended September 30, 2020, and decreased from $536 in the nine months ended September 30, 2019 to $103 in the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2020 .

Revenue from non-U.S.

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 .

sources decreased $375,000, or 20%, from $1.9 million in the three months ended September 30, 2019 to $1.5 million in the three months ended September 30, 2020, and decreased $628,000, or 12%, from $5.4 million in the nine months ended September 30, 2019 to $4.7 million in the nine months ended September 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 .

sources between periods were primarily due to decreased sales of our traditional genetic testing services to customers in other countries adversely affected by the COVID-19 pandemic, which decreased by $203,000 and $350,000 in the three and nine months ended September 30, 2020, respectively, and specifically decreased sales to customers in Canada, which decreased by $172,000 and $278,000 in the three and nine months ended September 30, 2020, respectively .

The number of billable tests we delivered increased 1,014,000, from 21,000 in the three months ended September 30, 2019 to 1,035,000 in the three months ended September 30, 2020, and increased 1,184,000, from 45,000 in the nine months ended September 30, 2019 to 1,229,000 in the nine months ended September 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.

After aggregating customers that are under common control or are affiliates, one customer contributed 37% of our total revenue in the three months ended September 30, 2020, and one customer contributed 35% of our total revenue in the nine months ended September 30, 2020.

Cost of Revenue

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.

Cost of revenue increased $22.4 million, or 576%, from $3.9 million in the three months ended September 30, 2019 to $26.3 million in the three months ended September 30, 2020 .

The increase was primarily due to increases of $15.0 million in reagent and supply expenses and $2.8 million in outside labor expense related to increased billable tests delivered, and $2.5 million in personnel costs and $253,000 in equity-based compensation expense related to increased headcount to support our recent growth and COVID-19 testing business.

Cost of revenue increased $27.6 million, or 263%, from $10.5 million in the nine months ended September 30, 2019 to $38.0 million in the nine months ended September 30, 2020.

The increase was primarily due to increases of $18.7 million in reagent and supply expenses and $3.4 million in outside labor expense related to increased billable tests delivered, $2.9 million in personnel costs and $446,000 in equity-based compensation expense related to increased headcount and stock price .

Cost per billable test delivered decreased $160, or 86%, from $185 in the three months ended September 30, 2019 to $25 in the three months ended September 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 $202, or 87%, from $233 in the nine months ended September 30, 2019 to $31 in the nine months ended September 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 $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.

Our gross profit increased $ 69.0 million , from $ 6.5 million in the three months ended September 30 , 2019 to $ 75.5 million in the three months e nded September 30 , 2020 , and increased $ 75.0 million , from $ 13.7 million in the n ine months ended September 30 , 2019 to $ 88.7 million in the n ine months ended September 30 , 2020 .

Our gross profit as a percentage of revenue, or gross margin, in creased from 62.5 % to 74.2% between three months ended September 30 , 2019 and 20 20 , and increased from 5 6.6 % to 70.0% between n ine months ended September 30 , 2019 and 20 20 , due in part to the increase in revenue and decreases in our cost per billable test and cost of revenue described above.

Research and Development

Research and development expenses increased $1.4 million, or 82%, from $1.7 million in the three months ended September 30, 2019 to $3.2 million in the three months ended September 30, 2020.

The increase was primarily due to increases of $680,000 in personnel costs and $608,000 in equity-based compensation expense related to increased headcount and stock price, and $117,000 in reagent and supply expenses related to increased reagent usage for COVID-19 research.

Research and development expenses increased $2.3 million, or 48%, from $4.7 million in the nine months ended September 30, 2019 to $7.0 million in the nine months ended September 30, 2020.

The increase was primarily due to increases of $1.2 million in personnel costs and $873,000 in equity-based compensation expense related to increased headcount and stock price, and $251,000 in reagent and supply expenses related to increased reagent usage for COVID-19 research.

Selling and Marketing

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.

Selling and marketing expenses increased $3.3 million, or 197% from $1.7 million in the three months ended September 30, 2019 to $5.0 million in the three months ended September 30, 2020.

The increase was primarily due to increases of $1.1 million in personnel costs and $853,000 in equity-based compensation expense related to increased commission expense and stock awards granted to sales representatives, respectively, $621,000 in consulting and outside labor expense related to COVID-19 marketing projects in the current period, and $613,000 in marketing supplies and shipping to potential customers related to the increased number of COVID-19 tests.

Selling and marketing expenses increased $5.6 million, or 132% from $4.3 million in the nine months ended September 30, 2019 to $9.9 million in the nine months ended September 30, 2020.

The increase was primarily due to increases of $1.2 million in personnel costs and $934,000 in equity-based compensation expense related to increased commission expense and stock awards granted to sales representatives, respectively, $2.5 million in marketing supplies and shipping to potential customers including kits related to the increased number of COVID-19 tests, and $856,000 in consulting and outside labor expense related to COVID-19 marketing projects in the current period.

General and Administrative

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.

General and administrative expenses increased $2.2 million, or 146% from $1.5 million in the three months ended September 30, 2019 to $3.7 million in the three months ended September 30, 2020.

The increase was primarily due to increases of $532,000 in personnel costs and $485,000 in equity-based compensation expense related to increased headcount and stock price, $393,000 in software and licensing related to the increased number of COVID-19 tests, $269,000 in bad debt expense related to additional reserve for doubtful accounts in the current period, and $244,000 in accounting fees.

General and administrative expenses increased $2.9 million, or 62% from $4.7 million in the nine months ended September 30, 2019 to $7.6 million in the nine months ended September 30, 2020.

The increase was primarily due to increases of $678,000 in personnel costs and $630,000 in equity-based compensation related to increased headcount and stock price, $499,000 in software and licensing related to the increased number of COVID-19 tests, $454,000 in accounting fees, and $404,000 in bad debt expense related to additional reserve for doubtful accounts in the current 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.

Interest income was $424,000 and $202,000 in the three months ended September 30, 2020 and 2019, respectively, and $999,000 and $619,000 in the nine months ended September 30, 2020 and 2019, respectively.

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

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.

Other losses were $3,000 and $62,000 in the three and nine months ended September 30, 2020.

Other losses were not significant in the three or nine months ended September 30, 2019.

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

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.

Provision for Income Taxes

Provision for income taxes were $14.5 million and $14.0 million for the three and nine months ended September 30, 2020, respectively, and $61,000 and $81,000 for the three and nine months ended September 30, 2019, respectively.

The effective tax rate was 23% for the three months ended September 30, 2020 compared with 4% for the three months ended September 30, 2019.

The effective tax rate was 21% for the nine months ended September 30, 2020 compared with 14% for the nine months ended September 30, 2019.

The increase in effective tax rates for the three and nine months ended September 30, 2020, relative to the comparative 2019 periods, was primarily attributable to a significant increase in income for the three and nine months ended September 30, 2020, partially offset by a reduction in the valuation allowance on deferred tax assets and increased windfall tax deductions related to stock-based compensation.

The decrease in the 2020 tax rates related to the reduction in the valuation allowance is due to management’s conclusion that, as of September 30, 2020, the allowance is generally no longer appropriate given the Company’s increase in current and forecasted future earnings, as well as other positive evidence.

Equity Loss in Investee

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 was $189,000 and $175,000 in the three months ended September 30, 2020 and 2019, respectively, and $631,000 and $603,000 in the nine months ended September 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.

Impairment Loss in Equity Method Investment

Impairment loss in equity-method investment was $2.6 million in the three months and nine months ended September 30, 2020.

Impairment loss in equity relates to our 25% ownership interest in BostonMolecules.

Liquidity and Capital Resources

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We had $53.0 million in cash and cash equivalents and $50.9 million in marketable securities, consisting of corporate bonds and U.S.

government agency securities, as of June 30, 2020 .

government agency securities, as of September 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 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.

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 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.

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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 RMB, over a five-year period.

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.

To date, we have purchased and contributed to FF Gene Biotech equipment with an aggregate fair value of $4.5 million, and as of September 30, 2020 , 29,700,000 RMB (or approximately $4.4 million U.S.

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

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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.

333-233227) filed with the SEC on August 12, 2019 and declared effective on August 23, 2019, and a prospectus supplement and accompanying base prospectus filed with the Securities and Exchange Commission on August 30, 2019.

On August 30, 2019, we entered into the Equity Distribution Agreement, with Piper, as sales agent, which was subsequently amended on August 4, 2020.

Pursuant to the Equity Distribution Agreement, we offered and sold, from time to time, through Piper shares of our common stock with an aggregate offering price of $44.9 million.

During the three months ended September 30, 2020, the Company sold an aggregate of 1,107,884 shares of our common stock pursuant to the Equity Distribution Agreement at a weighted-average 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 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 Securities and Exchange Commission on August 30, 2019, May 6, 2020 and August 5, 2020.

On November 13, 2019, we entered into a Purchase Agreement with Piper, as representative of the several underwriters, pursuant to which we sold 2,673,750 shares of our common stock at a price of $10.51875 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 a shelf registration statement registered under the Securities Act on a registration statement on Form S-3 (File No.

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 Securities and Exchange Commission on November 13, 2019.

In September 2020, we entered into the 2020 Equity Distribution Agreement, with Piper as sales agent, 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 $125.0 million.

Piper may receive a commission of up to 3% of the gross proceeds received by the Company for sales pursuant to the 2020 Equity Distribution Agreement.

During the three months ended September 30, 2020 sold an aggregate of 200,000 shares of our common stock pursuant to the 2020 Equity Distribution Agreement at a weighted-average selling price of $39.24 per share, which resulted in $7.8 million of net proceeds to the Company.

Shares sold under the 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 prospectus supplement and accompanying base prospectus filed with the Securities and Exchange Commission on September 25, 2020.

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.

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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 grows 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.

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 in the next 12 months and in the longer term.

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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, 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.

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

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

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands)

Net cash (used in) provided by operating activities

Net cash provided by operating activities

Net cash (used in) provided by investing activities

Net cash (used in) provided by financing activities

Net cash provided by financing activities

Operating Activities

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.

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.

Cash provided by operating activities in the nine months ended September 30, 2019 was $5.6 million.

The difference between net loss and cash provided by operating activities for the period was primarily due to the effects of $2.3 million in equity-based compensation expenses, $1.5 million in the depreciation of assets and $603,000 in equity loss in investee.

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Investing Activities

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.

Cash used in investing activities in the n ine 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 .

Cash provided by investing activities in the nine months ended September 30, 2019 was $7.0 million, which primarily related to proceeds of $19.6 million related to maturities of marketable securities, partially offset by purchase of $11.8 million marketable securities and purchase of $721,000 fixed assets consisting mainly of medical laboratory equipment, leasehold improvements, and computer hardware.

Financing Activities

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.

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

Cash provided by financing activities in the nine months ended September 30, 2019 was $1.1 million, which primarily represents net proceeds from sales pursuant to the Equity Distribution Agreement.

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 generally accepted accounting principles in the United States of America, or U.S.

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.

The preparation of consolidated financial statements in accordance with U.S.

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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 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.

Quantitative and Qualitati 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