What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-08 compared with 2020-03-13 · 186 added, 134 removed, 218 unchanged (59% of the section changed)

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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 and Section 21E of the Securities 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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These forward-looking statements are subject to a number of risks and uncertainties, including, among others, those described under “Item 1A.

Risk Factors” Part I of this report.

Risk Factors” in Part I of this report.

Moreover, we operate in a competitive and rapidly evolving industry and new risks emerge from time to time.

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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 growing technology company with an initial focus on offering comprehensive genetic testing to provide physicians with clinically actionable diagnostic information they can use to improve the quality of patient care.

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

We have developed a proprietary technology platform that allows us to offer a broad and flexible test menu and continually expand and improve our proprietary genetic reference library, while maintaining accessible pricing, high accuracy and competitive turnaround times.

Combining NGS with our technology platform, we perform full-gene sequencing with deletion/duplication analysis in single-gene tests;

pre-established, multi-gene, disease-specific panels;

and customized panels that can be tailored to meet specific customer needs.

We believe our test menu offers more genes for testing than our competitors in today’s market, which enables us to provide expansive options for test customization and clinically actionable results.

Our 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.

In addition, in 2019 we launched our first patient-initiated offering, Picture Genetics, but as of yet Picture Genetics does not represent a substantial percentage of the amount of tests we delivered.

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.

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 $555 per billable test delivered in 2019, and at a lower cost to us than many of our competitors, averaging approximately $241 per billable test delivered in 2019.

Our volume has grown rapidly since our commercial launch, with 58,573 billable tests delivered in 2019, 22,298 billable tests delivered in 2018, and an aggregate of over 117,774 billable tests delivered to approximately 1,100 customers from inception through December 31, 2019.

After launching our first commercial genetic tests in 2013, we have expanded our test menu to include more than 18,000 single-gene tests and more than 900 panels that collectively test for more than 5,700 genetic conditions, including various cancers, cardiovascular diseases, neurological disorders and pediatric conditions.

A cornerstone of our business is our ability to provide expansive options and flexibility for all clients’ unique genetic testing needs.

Our technology platform, which integrates sophisticated data comparison and suppression algorithms, adaptive learning software, advanced genetic diagnostics tools and integrated laboratory processes, allows us to offer a test menu with expansive genetic coverage.

We believe the comprehensive data output and high detection rates of our tests, both made possible by this expansive genetic coverage, provide physicians with information they can readily incorporate into treatment decisions for their patients, which we refer to as clinical actionability.

In addition, our technology platform facilitates our ability to perform customized genetic tests using our expansive library of genes, and we believe this flexibility increases the utility of the genetic data we produce.

Further, our technology platform provides us with operating efficiencies that help lower our internal costs, which allows us to offer our tests at accessible price points.

As a result, our efforts to build and continually enhance our technology platform allow us to deliver comprehensive, adaptable, clinically actionable and affordable genetic analysis while maintaining a low cost per billable test, enabling us to efficiently meet the needs of our growing base of customers.

Since March 2020, we have also commercially launched several tests for the detection of SARS-CoV-2, the virus that causes COVID-19, including NGS and RT-PCR-based tests.

To date, we have processed orders for our COVID-19 tests from a variety of customers, including governmental bodies, municipalities, and large corporations.

We have experienced rapid volume growth since our commercial launch, with 4.4 million billable tests delivered in 2020, compared to 59,000 billable tests delivered in 2019, and an aggregate of over 4.5 million billable tests delivered to over 1,300 customers from inception through December 31, 2020.

W e offer tests at competitive prices, averaging approximately $ 96 per billable test delivered in 2020 , and at a lower cost to us than many of our competitors, averaging approximately $ 20 per billable test delivered in 2020 .

Our volume has grown rapidly since our commercial launch, with 4.4 million billable tests delivered in 2020 , 59,000 billable tests delivered in 2019 , and an aggregate of over 4.5 million billable tests delivered to over 1,300 customers from inception through December 31, 2020 .

We have experienced compound quarterly growth of 137.2% in the number of billable tests delivered in our last eight completed fiscal quarters.

We recorded revenue and loss from operations of $32.5 million and $411,000, respectively, in 2019, compared to revenue and loss from operations of $21.4 million and $5.6 million, respectively, in 2018.

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

We recorded revenue and income from operations of $ 421.7 million and $ 214.3 million , respectively, in 2020 , compared to revenue and loss from operations of $ 32.5 million and $ 411,000 , respectively, in 2019 .

We achieved profitability in the first quarter of 2017 , and in the second and the third quarter of 20 19, and the second, third and fourth quarters of 20 20 , but we have recorded losses in all other periods since our inception.

2020 Developments

Partnered with Columbia University Irving Medical Center on Expanded Carrier Screening

The Company and the Precision Genomics Laboratory, or PGL, in collaboration with the Department of Obstetrics and Gynecology, at Columbia University Irving Medical Center, or CUIMC, entered into a license and commercialization agreement to make on site performed, expanded carrier screening available to Columbia patients.

This unique collaboration will leverage both parties’ expertise in laboratory management, bioinformatics, clinical genetics and next-generation sequencing to deliver an expanded carrier screening test with many advantages over other currently available tests.

The PGL is jointly operated by the Institute for Genomic Medicine, or IGM, and the Department of Pathology and Cell Biology and is designed to enhance patient care through genomic diagnostics, research, and education at CUIMC.

Carrier screening is a genetic test used to identify whether individuals and carrier couples are at risk for passing genetic disorders to their children.

These genetic disorders may result in physical disabilities, cognitive impairment, and other severe health problems in newborn babies.

Traditionally, carrier screening tests targeted couples of certain ethnic groups that have historically been at higher risk for specific genetic disorders.

This approach has presented difficulties for patients who are multiracial, adopted, or are unsure of their ethnic backgrounds.

To address this challenge, expanded carrier screening, or ECS, was developed to test for mutations that cause hundreds of different genetic disorders regardless of a patient’s ethnicity.

Professional medical associations like the American College of Obstetricians and Gynecologists, or ACOG, and the American College of Medical Genetics and Genomics, or ACMG, have published guidelines on ECS and its importance in reproductive care.

Launch of COVID-19 Tests

Since March 2020, we have commercially launched several COVID-19 tests, for the detection of SARS-CoV-2, the virus that causes COVID-19, including NGS and RT-PCR-based tests.

We have received an EUA from the FDA for 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 an EUA 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 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.

2019 Developments

Partnered with Parkinson’s Foundation on Launch of Genetic Testing Initiative for People with Parkinson’s Disease

In 2019, the Company partnered with the Parkinson’s Foundation on a new genetic testing initiative for individuals living with Parkinson’s Disease.

In 2019, we partnered with the Parkinson’s Foundation on a new genetic testing initiative for individuals living with Parkinson’s Disease.

The nation-wide initiative, called PD GENEration:

Mapping the Future of Parkinson’s Disease, provides genetic testing for clinically relevant Parkinson’s-related genes for eligible individuals.

The initiative is offered through the Parkinson’s Foundation Centers of Excellence network and Parkinson Study Group sites, and it leverages the next generation genetic testing technology of the Company.

As part of the collaboration agreement, the Company is compensated for processing, sequencing, and storing each DNA sample for patients participating in the initiative.

The initiative is offered through the Parkinson’s Foundation Centers of Excellence network and Parkinson Study Group sites, and it leverages our next generation genetic testing technology.

As part of the collaboration agreement, we are compensated for processing, sequencing, and storing each DNA sample for patients participating in the initiative.

Also supporting this initiative are Indiana University School of Medicine, providing genetic counseling for tested individuals;

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and University of Rochester’s Clinical Trials Coordination Center.

In collaboration with these partners, the Company has leveraged the flexibility of its broad testing catalog to select and develop a targeted list of seven genes relevant to Parkinson’s patients and clinicians:

In collaboration with these partners, we have leveraged the flexibility of our broad testing catalog to select and develop a targeted list of seven genes relevant to Parkinson’s patients and clinicians:

GBA, LRRK2, SNCA, PRKN, PARK7, VPS35, and PINK1.

The Company analyzes and generates clinical reports for these target genes, and the findings are made available to the treating physicians and future researchers.

We analyze and generate clinical reports for these target genes, and the findings are made available to the treating physicians and future researchers

Genetic testing can help determine whether an individual’s genetic makeup indicates a potential genetic cause for Parkinson’s disease.

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Launched Picture Genetics, a Patient-Initiated Genetic Testing Offering

In 2019, the Company launched its first patient-initiated genetic testing offering, a new line of at-home screening tests that combines the Company’s advanced NGS solutions with actionable results and genetic counseling options for patients.

Patients order test kits online, complete a sample collection at home and return the kits for processing and analysis by the Company.

In 2019, we launched our first patient-initiated genetic testing offering, a new line of at-home screening tests that combines our advanced NGS solutions with actionable results and genetic counseling options for patients.

Patients order test kits online, complete a sample collection at home and return the kits for our processing and analysis.

Patients receive results that have been reviewed by an independent external physician, as well as genetic counseling support to help them better understand their screening results.

The Company has partnered with PWNHealth, an independent provider network, for physician review and genetic counseling.

We have partnered with PWNHealth, an independent provider network, for physician review and genetic counseling.

Picture Genetics offers three distinct at-home test options:

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All three tests are completed at home without the need for a doctor visit or insurance.

Expanded Reproductive Testing Options Including Preimplantation Genetic Testing (PGT)

In 2019, the Company expanded the reproductive testing options, including Preimplantation Genetic Testing (PGT).

PGT (often called PGS, or preimplantation genetic screening), is appropriate for anyone undergoing IVF treatment, especially helpful for women who is over 35, who have previously experienced miscarriages, who want to reduce the likelihood of having multiples, couples experiencing infertility (male or female), and who have experienced IVF failure.

By purposefully selecting chromosomally normal embryos for implantation, it will expand the prospects of a successful IVF treatment and a healthy pregnancy.

Expanded Reproductive Testing Options Including Preimplantation Genetic Testing , or PGT

In 2019, we expanded our reproductive testing options, including Preimplantation Genetic Testing, or PGT.

PGT is appropriate for anyone undergoing IVF treatment, and is especially helpful for women over 35, women who have previously experienced miscarriages, women who want to reduce the likelihood of having multiples, couples experiencing infertility (male or female), and those who have experienced IVF failure in the past.

The information gained from these tests will allow for purposeful selection of chromosomally normal embryos for implantation which will expand the prospects of a successful IVF treatment and a healthy pregnancy.

COVID-19 Considerations

The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, patients, communities and business operations, as well as the U.S.

economy and financial markets.

We are closely monitoring the impact of COVID-19 on all aspects of our business, including its impact on our customers, suppliers, third-party service providers, and our employees.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and its variants, the actions taken to contain it or treat it and the economic impact on local, regional, national and international markets and supply chains.

During the year ended December 31, 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 year ended December 31, 2020, the COVID-19 pandemic did not have a negative impact on our consolidated operating results.

Since the outbreak of the current COVID-19 pandemic there has been strong demand for accurate COVID-19 testing with rapid turn-around times as private businesses, municipalities and healthcare providers began to increasingly rely on diagnostic testing to continue operations and as a tool to aide containment efforts, and as result we have recognized significant revenue growth in connection with sales of our COVID-19 tests.

While the duration of the ongoing COVID-19 pandemic and continuing market for COVID-19 diagnostic tests remains subject to a number of uncertainties, including uncertainties regarding the effectiveness of disease containment efforts, speed and effectiveness of global COVID-19 vaccine distributions, newly emerging viral variants, continuing government actions in response to the pandemic and regulatory requirements or preferences that may emerge following the pandemic, a robust market for COVID-19 diagnostic testing persists to present day.

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, previously 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 our ability to continue to offer our COVID‑19 tests with accurate results and competitive turn-around times without any significant negative operational impact from the COVID-19 pandemic will depend in part on our, and any of our third‑party service providers’ and suppliers’ ability to protect our respective employees and supply chains.

We have endeavored to follow the recommended actions of government and health authorities to protect our employees.

We intend to continue to adhere to our employee safety measures to ensure that any disruptions to our operations remain minimal during the pandemic.

However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our, or our third-party service providers’ and suppliers’, workforce and supply chain.

The COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of December 31, 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 December 31, 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 I of this Form 10-K.

Factors Affecting Our Performance

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If this growth trend continues, we believe genetic testing could become a more accepted part of standard medical care and the knowledge of a person’s unique genetic makeup could begin to play a more important role in the practice of medicine.

The advent of next generation sequencing, or NGS, technology, a relatively new genetic testing technique that enables millions of DNA fragments to be sequenced in parallel, has dramatically lowered the cost and improved the quality of genetic testing, contributing to increased adoption generally and increased volumes for our tests.

The advent of NGS technology, a relatively new genetic testing technique that enables millions of DNA fragments to be sequenced in parallel, has dramatically lowered the cost and improved the quality of genetic testing, contributing to increased adoption generally and increased volumes for our tests.

The growth of genetic testing in recent years has caused increased competition in our industry.

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We have approached these competitive and operational industry challenges by building and continually advancing a multi-faceted technology platform that we believe will facilitate our ability to address many of these challenges.

Launch of 2020 COVID-19 Testing Services

Most of the growth in our testing volume has resulted from COVID-19 tests that we conduct for certain counties and states including the County of Los Angeles and San Bernardino County.

The expansion of our COVID-19 testing business has resulted in a substantial change in our business that presents important challenges to our ability to manage our rapidly expanding business, and we anticipate that this business will eventually decrease after the development and widespread deployment of an effective vaccine.

Number and Mix of Billable Tests Delivered

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Mix of Customers

Through December 31, 2019, we have sold our tests to approximately 1,100 total customers.

Through December 31, 2020, we have sold our tests to over 1,300 total customers.

We consider each single billing and paying unit to be an individual customer, even though a unit may represent multiple physicians and healthcare providers ordering tests.

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Generally, we do not have long-term purchase agreements with any of our customers, including these key customers, and, as result, any or all of them could decide at any time to increase, accelerate, decrease, delay or discontinue their orders from us.

Although we believe some of these fluctuations in customer demand may be attributable in part to the nature of our business, in which our customers can experience significant volatility in their genetic testing demand from period to period in the ordinary course of their operations, these demand fluctuations, particularly for our key customers, can have a significant impact on our period-to-period performance regardless of their cause.

Our existing customer base consists prima rily of hospitals and medical institutions, which are typically frequent and high-volume users of genetic tests.

Additionally, collection of billings from these institutional customers is generally more attainable than from other types of customers in toda y’s reimbursement environment, as approximately 87% of our test billings that were generated and due in 201 9 were paid during that period.

As a result, we believe our ability to maintain, strengthen and build this customer base could have a meaningful impa ct on our potential for growth.

We are also making efforts to diversify our customer market, including building relationships with research and other institutional customers, as well as national clinical laboratories, regional medical networks and various other organizations to facilitate access to physicians, practitioners and other new customer groups, including certain U.S.

military and other government agencies.

In addition, in 2019 we also launched our first patient-initiated testing product, Picture Genetics, and we hope to gain share in the patient-initiated testing market.

Although we believe some of these fluctuations in customer demand may be attributable in part to the nature of our business, in which our customers can experience significant volatility in their testing demand from period to period in the ordinary course of their operations, these demand fluctuations, particularly for our key customers, can have a significant impact on our period-to-period performance regardless of their cause.

We currently classify our customers into three payor types:

(i) Insurance, (ii) Institutional, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations or (iii) Patients who pay directly.

Typically, we bill our Institutional customers for our tests and they are responsible for paying us directly and billing their patients separately or obtaining reimbursement from third-party payors in connection with a patient’ s DRG.

A small percentage of our customers are patients, who elect to pay for tests themselves with out-of-pocket payments after their physicians have ordered our tests.

We are making efforts to diversify our customer market, including building relationships with research institutions and other similar institutional customers, national clinical laboratories, governmental bodies, municipalities and large corporations in need of regular COVID-19 testing for large populations and various other organizations to facilitate access to physicians, practitioners and other new customer groups, including certain U.S.

government agencies.

We are also pursuing relationships with payors, including Medicare, some state Medicaid programs and commercial payors, in an effort to obtain coverage and reimbursement for our tests to make them accessible to more individual physicians.

Subject to limited exceptions, none of these relationships obligate any party to order our tests at any agreed volume or frequency or at all, and as a result, these relationships may not lead to meaningful or any increases in our customer base, the number of billable tests we deliver or our revenue.

However, we believe our ability to establish these relationships with new customer groups is critical to the growth of our business.

Generally, when we establish these new customer relationships, we agree with the applicable payor, laboratory or other customer to provide certain of our tests at negotiated rates, but, subject to limited exceptions, most of these relationships do not obligate any party to order our tests at any agreed volume or frequency or at all.

Further, any relationships we may develop with any government agencies are subject to unique risks associated with government contracts, including cancellation if adequate appropriations for subsequent performance periods are not made and modification or termination at the government’s convenience without prior notice.

Our efforts to pursue individual consumers under our Picture Genetics platform, new payor or institutional customers, new COVID-19 testing customers or other new customer markets could fail, and even if we are able to develop relationships with new customers in these or any other new customer groups, these relationships may not lead to meaningful or any increases in our customer base, the number of billable tests we deliver or our revenue, and may not improve our ability to achieve or sustain profitability.

Ability to Maintain Our Broad and Flexible Test Menu

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However, we cannot predict whether, under what circumstances, or at what payment levels payors will cover and reimburse for our tests, and even if we are successful, we believe it could take several years to achieve coverage and adequate contracted reimbursement with third-party payors.

To date, we have contracted directly with national health insurance companies to become an in-network provider and enrolled as a supplier with the Medicare program an d some state Medicaid programs, which means that we have agreed with these payors to provide certain of our tests at negotiated rates.

To date, we have contracted directly with national health insurance companies to become an in-network provider and enrolled as a supplier with the Medicare program and some state Medicaid programs, which means that we

have agreed with these payors to provide certain of our tests at negotiated rates.

Although this does not guarantee that we will receive reimbursement for our tests from these or any other payors at adequate levels, we believe our low cost per billable test could enhance our ability to compete effectively in the third-party payor market and our flexibility in establishing relationships with additional third-party payors in the future.

Our level of success in obtaining and maintaining adequate coverage and reimbursement from third-party payors for our testing services will, we believe, be a key factor in the rate and level of growth of our business over the long term.

Impact of Certain Recent Accounting Pron ouncements

The majority of our revenue is generated from hospitals, medical institutions and research institutions, with a lesser amount from reimbursement by third-party payors, including managed care organizations, private health insurers and government healthcare programs, such as Medicare and Medicaid.

In 2017, 2016 and all other historical periods, we recognized revenue based on a revenue recognition standard that requires the satisfaction of specified criteria, including when the amount of revenue becomes fixed or determinable and when collectability of revenue is reasonably assured, in order to recognize the revenue.

Under this standard, if all of the required criteria were not satisfied before payment was received, then we recognized revenue on a cash basis, which means that revenue is recognized only when we receive a cash payment from a customer for the genetic tests it has ordered.

As a result, for revenue received from hospitals and medical institutions, in general, we have recognized revenue upon our delivery to a customer of genetic test results from an ordered test, because all criteria to recognize this revenue have been satisfied at that time.

For revenue received from third-party payors, in general, we have recognized revenue on a cash basis due to the inability to satisfy the criteria described above before receipt of payment.

Beginning on January 1, 2018, we recognized revenue pursuant to a comprehensive new revenue recognition standard based on several recent accounting pronouncements.

Under the new standard, which is designed to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, we expect to recognize revenue from all customers on an accrual basis, which means that revenue will be recognized at the time of delivery to customers of genetic test results from an ordered test based on our expectation of receiving a cash payment for such tests.

In general, the new revenue recognition standard will result in our recognition of revenue from hospitals and medical institutions at a similar time as we recognized revenue from these customers under the prior standard, and will result in our recognition of revenue from third-party payors earlier than we recognized revenue from these customers under the prior standard.

Upon adopting the new standard on January 1, 2018, we recorded an adjustment of $327,000 to beginning accumulated deficit and accounts receivable to reflect genetic tests previously delivered to third-party payors for which revenue was not recognized as of such date.

Foreign Currency Exchange Rate Fluctuations

Much of our business to date has been from non-U.S.

Some of our business to date has been from non-U.S.

customers, and we may record increasing revenue levels from non-U.S.

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however, the impact of foreign currency exchange rate fluctuations may increase in future periods as we pursue continued international expansion.

For instance, all of our revenue-producing transactions have historically been denominated in U.S.

dollars, but we started billing certain of our Canadian hospital customers in their local currency in the second quarter of 2017, and we may expand this practice in the future to other customers in Canada or other international markets.

Additionally, all payments we receive from FF Gene Biotech, including royalty revenue under the license agreement and our share of any earnings of the joint venture, are paid to us in RMB and then converted by us to U.S.

dollars, and we expect these payments to increase in the future.

These or other changes in the currencies in which we receive payments and record revenue could result in an increased impact in future periods of foreign currency translations and exchange rate fluctuations.

Business Risks and Uncertainties

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Financial Overview

We generate revenue from sales of our genetic tests.

We generate revenue from sales of our COVID-19 tests and genetic tests.

We recognize revenue upon delivery of a report to the ordering physician or other customer based on the established billing rate, less contractual and other adjustments, to arrive at the amount we expect to collect.

We generally bill directly to a hospital, medical or research institution customer, or to a patient, a third-party payor or a combination of a patient and a third-party payor.

We currently classify our customers into three payor types:

(i) Insurance;

(ii) Institutional, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations;

and (iii) Patients who pay directly.

Cost of Revenue

Cost of revenue reflects the aggregate costs incurred in delivering test results, including sequencing as a service tests, and consists of:

personnel costs, including salaries, employee benefit costs, bonuses and equity-based compensation expenses;

costs of laboratory supplies;

costs of laboratory supplies, including collection kits, personnel costs, including salaries, employee benefit costs, bonuses and equity-based compensation expenses;

depreciation of laboratory equipment;

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We expect our general and administrative expenses will continue to increase in absolute dollars as we seek to continue to scale our operations.

We also expect to continue to incur increased general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission, or the SEC, and the Nasdaq Stock Market, additional insurance expenses, investor relations activities and other administrative and professional services.

We also expect to continue to incur increased general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, and the Nasdaq Stock Market, additional insurance expenses, investor relations activities and other administrative and professional services.

Provision for (Benefit from) Income Taxes

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federal and state income taxes.

We record a valuation allowance when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

In making such a determination, we consider all the available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and ongoing prudent and feasible tax planning strategies, to assess the amount of the valuation allowance.

When we determine to establish or reduce the valuation allowance against the deferred tax assets, our provision for income taxes will increase or decrease, respectively, in the period in which the determination is made.

The factors that most significantly impact our effective tax rate include the levels of certain deductions, including those related to equity-based compensation, a full valuation allowance, the effect of state income taxes, return to provision adjustments, and foreign tax rate differential.

We expect these factors will continue to cause our consolidated effective tax rate to differ significantly from the U.S.

A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences, operating losses and tax credit carryforwards.

A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The factors that most significantly impact our effective tax rate include the levels of net earnings and certain deductions, including those related to equity-based compensation, the effect of state income taxes, return to provision adjustments, and foreign tax rate differential.

We expect that these factors could cause our consolidated effective tax rate to differ significantly from the U.S.

federal income tax rate in future periods.

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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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Total operating expenses

Operating loss

Operating income (loss)

Interest and other income, net

Income (loss) before income taxes and equity loss in

Income before income taxes and equity loss in

investee and impairment loss

Provision for income taxes

Income (loss) before equity loss in investee

Income before equity loss in investee and impairment loss

Equity loss in investee

Impairment loss in equity-method investment

Net income (loss)

Other Operating Data:

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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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Revenue increased $389.2 million, or 1196%, from $32.5 million in 2019 to $421.7 million in 2020.

The increase in revenue between periods was primarily due to an increased number of billable tests delivered, offset by a substantial decline in the average selling price per test.

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 $459, or 83%, from $555 in 2019 to $96 in 2020.

We believe this decrease was due to (i) lower price-points for the mix of tests we delivered in 2019, (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) our reduction of prices for certain of our tests due to general price degradation for genetic tests and other competitive factors during 2019.

The decrease was due to (i) lower price-points for the mix of tests we delivered in 2020, including our COVID-19 tests launched in 2020, (ii) the mix of customers ordering tests in this period, who may order tests at different rates depending on the arrangements we have negotiated with them, and (iii) our reduction of prices for certain of our tests due to general price degradation for genetic tests and other competitive factors during 2020.

Revenue from non-U.S.

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The decrease in revenue from non-U.S.

sources between periods was primarily due to decreased sales to customers in Canada, which decreased by $1.7 million, partially offset by an increase of $481,000 in revenue from sales to customers in other countries.

The decrease in sales to customers in Canada was primarily attributable to decreased sales to a few customers that contributed a significant portion of our revenue in 2018 but ordered significantly fewer tests and generated significantly less revenue to us in 2019.

Aggregating customers that are under common control or are affiliates, one customer contributed 28% of our revenue in 2019, and one customer contributed 13%, respectively, in 2018 .

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 $616,000 and specifically decreased sales to customers in Canada, which decreased by $520,000 in 2020.

The number of billable tests we delivered increased approximately 4.4 million, from 59,000 in 2019 to 4.4 million in 2020.

The increase was primarily attributable to the expansion of our test menu, including our COVID-19 tests launched in 2020, and increases in sales to certain of our existing and new customers.

Aggregating customers that are under common control or are affiliates, two customers, the County of Los Angeles and San Bernardino County, contributed 28% and 10% of our revenue in 2020, respectively, and one customer contributed 28% of our revenue in 2019 .

Cost of Revenue

Cost of revenue increased $75.7 million, or 537%, from $14.1 million in 2019 to $89.8 million in 2020.

The increase was primarily due to increases of $2.5 million in reagent and supply expenses related to increased billable tests delivered, $752,000 in personnel costs and $153,000 in stock-based compensation expense related to increased headcount.

The increase was primarily due to increases of $49.9 million in reagent and supply expenses related to increased billable tests delivered, $10.6 million in consulting and outside labor expense related to increase of outside labor for production 2020, $8.1 million in personnel costs and equity-based compensation related to increased headcount and the market price of the Company’s stock, and $3.5 million in software expense related to usage of COVID-19 tests software.

Cost per billable test delivered decreased $221, or 92% from $241 in 2019 to $20 in 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.

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

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, for the increased number of billable tests during 2019.

The greater increase in the number of billable tests we delivered was primarily attributable to new customers and our expanded test menu, including our launch of COVID-19 tests in 2020.

Our gross profit increased $313.5 million, or 1702%, from $18.4 million in 2019 to $331.9 million in 2020.

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Research and development expenses increased $5.0 million, or 77%, from $6.5 million in 2019 to $11.6 million in 2020.

The increase was primarily due to increases of $879,000 in personnel costs and $291,000 in stock-based compensation expense related to increased headcount, and $141,000 in depreciation costs related to our increased efforts to maintain our technological advantage and expand our test menu, partially offset by a decrease of $410,000 in reagent and supply expenses related to additional consumables purchased in the prior period.

The increase was primarily due to increases of $3.9 million in personnel costs and equity-based compensation related to increased headcount and the market price of the Company’s stock and $758,000 in reagent and supply expenses related to increased reagent usage for COVID-19 research.

Selling and Marketing

Selling and marketing expenses increased $9.1 million, or 154%, from $5.9 million in 2019 to $15.0 million in 2020.

The increase was primarily due to increases of $585,000 in personnel costs and $385,000 in stock-based compensation expense related to increased commission expense and stock award granted to sales representative, $159,000 in marketing materials cost related to increased billable tests delivered, and $95,000 in consulting and outside labor expense related to the increase of outside labor for customer services in the current period.

The increase was primarily due to increases of $4.4 million in personnel costs and equity-based compensation related to increased commission expense and stock award granted to sales representative, $2.6 million in marketing supplies and shipping to potential customers including kits related to the increased number of COVID-19 tests, and $1.7 million in consulting and outside labor expense related to COVID-19 marketing projects in 2020.

General and Administrative

General and administrative expenses increased $876,000, or 16%, from $5.5 million in 2018 to $6.4 million in 2019.

The increase was primarily due to increases of $401,000 in legal and professional fees related to case settlement in the current period, $322,000 in merchant service fees related to increased revenue, $190,000 in personnel costs related to increased headcount, and $143,000 in software and licensing related to new billing software, partially offset by a decrease of $125,000 in bad debt expenses related to additional reserve for doubtful accounts in the prior period.

General and administrative expenses increased $8.8 million, or 137%, from $6.4 million in 2019 to $15.2 million in 2020.

The increase was primarily due to increases of $2.6 million in personnel costs and equity-based compensation related to increased headcount and the market price of the Company’s stock, $2.8 million in software and licensing related to the increased number COVID-19 tests, $981,000 in bad debt expenses related to additional reserve for doubtful accounts in the current period, $879,000 in accounting fees, and $580,000 in other state tax.

Interest and Other Income, Net

Interest income was $871,000 and $578,000 for 2019 and 2018, respectively.

Interest income, net was $1.5 million and $871,000 for 2020 and 2019, respectively.

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

Other income (expense) was not significant for 2020 or 2019.

The primary component of other income (expense) for 2019 and 2018 was foreign currency valuation gains (losses).

The primary components of other income (expense) for 2020 and 2019 were rental income net of rental expenses and foreign currency valuation gains (losses).

Provision for Income Taxes

We recorded income tax of $43,000 and $36,000 for 2019 and 2018, respectively.

Our effective income tax rate was 10.5% and 0.7% of loss before income taxes for 2019 and 2018, respectively.

The primary factors impacting our effective tax rate for 2019 were the effect of a full valuation allowance, return to provision adjustments, the foreign income tax rate differential, state income taxes, and certain expenses or adjustments related to equity-based compensation.

For 2018, the primary factors impacting our effective tax were the effect of a full valuation allowance, state income taxes, changes in foreign tax laws and certain expenses or adjustments related to equity-based compensation.

We have evaluated the realizability of our deferred tax assets and have concluded that it is more likely t han not that we may not realize the benefit of the deferred tax assets, primarily as a result of operating losses in recent years and, accordingly, we have provided a full valuation allowance of $2.1 million and $1.4 million at December 31, 2019 and 2018, respectively.

As a result, we did not record any federal or state income tax expense or benefit in the statement of operations, other than state minimum taxes.

The temporary differences in existence for 2019 and 2018 are primarily from net operating losses , depreciation , research and development credits, equity-based compensation , our foreign joint venture investment, and the lease liability and related right of use asset.

We recorded income tax of $72.5 million and $43,000 for 2020 and 2019, respectively.

Our effective income tax rate was 24.9% and 10.5% of income before income taxes for 2020 and 2019, respectively.

The increase in effective tax rates for 2020 relative to 2019 was primarily attributable to a significant increase in income for the year ended December 31, 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 rate related to the reduction in the valuation allowance is due to management’s conclusion that, as of December 31, 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.

See Note 11, Income Taxes , to our consolidated financial statements included in this report for more information regarding our income taxes.

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Equity loss in investee was $488,000 and $777,000 in 2020 and 2019, respectively, and relates to our 30% ownership interest in FF Gene Biotech.

Impairment Loss in Equity Method Investments

Impairment loss in equity-method investments was $4.4 million in the year ended December 31, 2020.

Impairment loss in equity relates to our 30% ownership interest in FF Gene Biotech and 25% ownership interest in BostonMolecules.

Liquidity and Capital Resources

Liquidity and Sources of Cash

We had $12.0 million and $6.7 million in cash and cash equivalents as of December 31, 2019 and 2018, respectively, and $58.3 million and $ 30.7 million in marketable securities, consisting of corporate bonds, as of December 31, 2019 and 2018, respectively.

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.

We had $87.4 million and $12.0 million in cash and cash equivalents as of December 31, 2020 and 2019, respectively.

We had $344.4 million in marketable securities, primarily consisting of equity securities and corporate bonds, as of December 31, 2020 and $ 58.3 million in marketable securities, primarily consist of corporate bonds, as of December 31, 2019.

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

Our primary uses of cash are to fund our operations as we continue to invest in and seek to grow our business.

Cash used to fund operating expenses is impacted by the timing of our expense payments, as reflected in the changes in our outstanding accounts payable and accrued expenses.

In addition, in April 2017, 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, 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 pursuant to these contribution obligations, of which $137,000 and $510,000 were contributed in 2019 and 2018, respectively.

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 t o 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 flow.

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.

In August 2019, the Company entered into an Equity Distribution Agreement with Piper Jaffray & Co., as sales agent (“Piper”), pursuant to which the Company may offer and sell, from time to time through Piper, shares of its common stock having an aggregate offering price of up to $30.0 million.

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

During the year ended December 31, 2019, the Company sold an aggregate of 104,390 shares of its common stock pursuant to the Equity Distribution Agreement at a weighted-average selling price of $12.14 per share, which resulted in $979,000 of net proceeds to the Company.

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 November 13, 2019 we entered into a Purchase Agreement with Piper Jaffray & Co., 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.

In addition, in April 2017, 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 60.0 million 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 $4.5 million pursuant to these contribution obligations, of which $1.4 million and $137,000 were contributed in 2020 and 2019 , respectively.

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 flow.

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 2019 Equity Distribution Agreement, with Piper, as sales agent, which was subsequently amended on August 4, 2020.

Pursuant to the 2019 Equity Distribution Agreement, we offered and sold an aggregate of 104,000 shares of our common stock at a weighted-average net selling price of $9.37 per share, which resulted in $979,000 of net proceeds to the Company during the year ended December 31, 2019, and we sold an aggregate of 1.1 million shares of our common stock at a weighted-average net selling price of $38.50 per share, which resulted in $42.7 million of net proceeds to the Company during the year ended December 31, 2020.

Shares sold under the 2019 Equity Distribution Agreement are offered and sold pursuant to the Company’s registration statement on Form S-3 (File No.

333-233227) filed with the SEC on August 12, 2019 and declared effective on August 23, 2019, and prospectus supplements and accompanying base prospectus filed with the SEC on August 30, 2019, May 6, 2020 and August 5, 2020.

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 $10.52 per share, with a public offering price of $11.25 per share.

We received net proceeds of approximately $27.6 million, after deducting underwriting discounts and commissions and offering expenses paid or payable by us of approximately $2.4 million.

The shares issued and sold in the underwritten offering were sold pursuant to 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.

Much of the losses we have incurred were attributable to a variety of non-cash charges, including equity-based compensation expenses.

Additionally, if our business grows and we are able to achieve increased efficiencies and economies of scale in line with this growth, we expect that 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.

The shares issued and sold in the underwritten offering were sold pursuant to the Company’s registration statement on Form S-3 (File No.

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

On September 25, 2020, we entered into the September 2020 Equity Distribution Agreement, with Piper as sales agent, pursuant to which we offered and sold an aggregate of 2.8 million shares of our common stock at a weighted-average net selling price of $42.90 per share, which resulted in $122.1 million of net proceeds to the Company.

Shares sold under the September 2020 Equity Distribution Agreement were offered and sold pursuant to the Company’s registration statement on Form S-3 (File No.

333-239964) filed with the SEC on July 21, 2020, as amended on August 5, 2020, and declared effective on August 12, 2020, and a prospectus supplement and accompanying base prospectus filed with the SEC on September 25, 2020.

On November 20, 2020, we entered into the November 2020 Equity Distribution Agreement, with Piper, Oppenheimer & Co.

Inc., and BTIG LLC, as sales agents, pursuant to which we may offer and sell, from time to time through Piper, shares of our common stock having an aggregate offering price of up to $175.0 million.

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

During the year ended December 31, 2020, the Company sold an aggregate of 2.0 million shares of our common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $48.70 per share, which resulted in $99.1 million of net proceeds to the Company.

Shares sold under the November 2020 Equity Distribution Agreement were offered and sold pursuant to the Company’s registration statement on Form S-3 (File No.

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

Much of the losses we have incurred in certain prior periods were attributable to a variety of non-cash charges, including equity-based compensation expenses.

As a result, in spite of the losses we recorded during these periods, cash provided by continuing operations has been mostly positive since 2015 and has significantly contributed to our ability to meet our liquidity needs, including paying for capital expenditures.

Additionally, if our business continues to grow and we are able to achieve increased efficiencies and economies of scale in line with this growth, we expect increased revenue levels would increase our ability to rely on cash from our operations to support our business in future periods, even if our expenses also increase as a result of the growth of our business.

Based on these factors, we anticipate that cash from our operations will continue to play a meaningful role in our ability to meet our liquidity requirements and pursue our business plans and strategies 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 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.

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.

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

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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(in thousands)

Net cash provided by (used in) operations

Net cash (used in) provided by investing activities

Net cash provided by operations

Net cash used in investing activities

Net cash provided by financing activities

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Cash provided by operating activities in 2020 was $140.6 million.

The difference between net income and cash provided by operating activities for the period was primarily due to the effect of $8.2 million in equity-based compensation expenses, $4.4 million in impairment loss from equity-method investments and $3.0 million in the depreciation of assets.

Cash provided by operating activities decreased between periods primarily due to the negative effect of increases of $ 178.5 million in accounts receivable mainly due to the timing of collections from customers and $21.1 million in other current assets related to purchases of an increased amount of reagents and supplies , partially offset by increases of $53.3 million in income tax payable due to a significant increase in income , $32.7 million in accrued and other liabilities related to contract liabilities, and $22.6 million in accounts payable mainly due to timing of payments.

Cash provided by operating activities in 2019 was $5.5 million.

The difference between net loss and cash provided by operating activities for the period was primarily due to the effect of $3.2 million in equity-based compensation expenses and $2.1 million in the depreciation of assets.

Cash provided by operating activities decreased between periods primarily due to the negative effect of a $ 839,000 increase in accounts receivable mainly due to the timing of collections from customers.

Cash used in operating activities in 2018 was $675,000.

The difference between net loss and cash used in operating activities for the period was primarily due to the effect of $2.3 million in equity-based compensation expenses and $2.2 million in the depreciation of assets.

Cash used in operating activities decreased between periods primarily due to the negative effect of a $ 2.0 million increase in accounts receivable mainly due to the timing of collections from customers, partially offset by the positive effect of a $533,000 increase in accrued liabilities mainly related to payroll liabilities and contract liabilities.

Investing Activities

Cash used in investing activities in 2020 was $326.4 million, which primarily related to $324.4 million in purchases of marketable securities, $35.1 million in purchases of fixed assets consisting mainly of medical laboratory equipment, real property located in El Monte, California, a 2008 Cessna Citation Sovereign aircraft , computer hardware and building and land improvements, $2.6 million in investment in BostonMolecules and direct costs associates with the investment , and purchase equipment with an aggregate fair value of $1.4 million contributed to FF Gene Biotech, partially offset by maturities of $19.9 million of marketable debt securities and proceeds of $17.1 million from sales of marketable securities.

Cash used in investing activities in 2019 was $29.0 million, which primarily related to $52.1 million in purchases of marketable securities, $1.2 million in purchases of fixed assets consisting mainly of medical laboratory equipment, computer hardware and leasehold improvements, and purchased equipment with an aggregate fair value of $137,000 contributed to FF Gene Biotech, partially offset by maturities of $24.4 million of marketable securities.

Cash provided by investing activities in 2018 was $950,000, which primarily related to maturities of $28.0 million of marketable securities, partially offset by $24.2 million in purchases of marketable securities, $2.3 million in purchases of fixed assets consisting mainly of medical laboratory equipment, computer hardware and leasehold improvements, and purchased equipment with an aggregate fair value of $510,000 contributed to FF Gene Biotech.

Financing Activities

Cash provided by financing activities in 2019 was $28.8 million, which primarily represents net proceeds from our at-the-market offering in August 2019 and our underwritten offering in November 2019.

Cash provided by financing activities in 2018 was minimal.

Cash provided by financing activities in 2020 was $261.3 million, which primarily represents net proceeds from sales of shares of our common stock made pursuant to various equity distribution agreements with Piper and $15.0 million borrowed from a margin loan collateralized by marketable debt securities held by the Company, to purchase real property located in El Monte, California.

Cash provided by financing activities in 2019 was $28.8 million, which primarily represents net proceeds from sales of shares of our common stock pursuant to 2019 Equity Distribution Agreements with Piper and our underwritten offering in November 2019.

Material Cash Requirements and Contractual Obligations as of December 31, 2020

As of December 31, 2020, we have an outstanding balance of $15.0 million in our margin account.

The following summarizes our contractual obligations as of December 31, 2020:

Payments Due by Period

Less than 1 year

More than 5 years

(in thousands)

Operating lease liabilities ( 1)

Purchase obligations ( 2)

Total contractual obligations

Represents non-cancelable operating leases.

For further information, refer to Note 9 to the Consolidated Financial Statements.

Represents non-cancelable purchase obligations for medical lab equipment, reagents and other supplies.

Critical Accounting Policies and Use of Estimates

This discussion and analysis is based on our consolidated financial statements, 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 consolidated financial statements included in this report, which have been prepared in accordance with U.S.

Generally Accepted Accounting Principles, or U.S.

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

GAAP requires management to make certain estimates, judgments and assumptions and decisions that affect the reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates.

In making these estimates and assumptions and reaching these decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including historical data and experience available at the date of the consolidated financial statements, as well as various other factors management believes to be reasonable under the circumstances.

In making these estimates and assumptions and reaching these decisions, we apply judgment based on our understanding and analysis of the relevant circumstances , including historical data and experience available at the date of the consolidated financial statements, as well as various other factors management believes to be reasonable under the circumstances, including but not limited to the potential impacts arising from the recent global pandemic related to COVID-19.

As the extent and duration of the impacts from COVID-19 remain unclear, our estimates and assumptions may evolve as conditions change.

Actual results could differ from our estimates.

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Revenue Recognition

We generate revenue from sales of our genetic tests.

We generate revenue from sales of our COVID-19 tests and genetic tests.

We currently receive payments from:

hospitals and medical institutions with which we have direct-bill relationships;

hospitals, medical institutions, municipalities, governmental bodies, large corporations and other laboratories with which we have direct-bill relationships;

research institutions ;

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(1) identifies the contract with the customer, (2) identifies the performance obligations in the contract, (3) determines the transaction price, (4) allocates the transaction price to the performance obligations in the contract, and (5) recognizes revenue when (or as) the entity satisfies a performance obligation.

Our test results are delivered electronically, and as such there are no shipping and handling fees incurred by us or billed to customers.

Our sales are typically exempt from state sales taxation due to the nature of the results delivered.

As a result, we do not charge customers state sales tax.

Our test results are primarily delivered electronically.

We bill certain customers for shipping and handling fees incurred by us associated with COVID-19 tests, and s hipping and handling fees billed to customers are included in revenue, and shipping and handling fees incurred are included in cost of revenue in the accompanying Consolidated Statements of Operations.

While the transaction price is typically stated within the contract, we may accept payments from third-party payors that are less than the contractually stated price and is therefore variable consideration, and revenue is recognized based on an estimate of the consideration to which we will be entitled at an amount for which it is probable that a reversal of cumulative consideration will not occur.

In developing the estimate of variable consideration, we utilize the expected value method under a portfolio approach.

Our estimate requires significant judgment and is developed using known reimbursement rates and historical reimbursement data from payors and patients.

As these contracts typically have a single performance obligation, no allocation of the transaction price is required.

Control over COVID-19 and genetic testing services is transferred to our ordering physicians at a point in time.

Specifically, we determined the customer obtains control of the promised service upon delivery of the test results.

These judgments are reviewed each reporting period and updated as necessary.

Recent Accounting Pronouncements

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

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

We qualify as an “emerging growth company” as defined in the JOBS Act.

As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable to public companies that are not emerging growth companies, including an extended transition period to comply with new or revised accounting standards applicable to public companies.

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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.

We did not have, and do not currently have, any off-balance sheet arrangements during the periods presented, 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 Qualitative Disclosures About Market Risk.

Not applicable.

Financial Statemen ts a nd Supplementary Data.

Financial Statemen ts and Supplementary Data.

The information required by this Item 8 immediately follows the signature page to this report and is incorporated herein by reference.

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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-K

Item 7. Management’s Discussion and Analysis