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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-09 · 109 added, 133 removed, 109 unchanged (69% of the section changed)

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

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

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included in this report.

Additionally, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K promulgated by the Securities and Exchange Commission, in preparing this discussion and analysis, we presume that readers have access to and have read the discussion and analysis of our 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.

Additionally, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K promulgated by the Securities and Exchange Commission in preparing this discussion and analysis, we presume that readers have access to and have read the discussion and analysis of our financial condition and results of operations included in our annual report on Form 10-K for our fiscal year ended December 31, 2020 filed with the SEC on March 8, 2021, or the 2020 Annual Report .

As used in this discussion and analysis and elsewhere in this report, unless the context otherwise requires, the terms “Fulgent,” the “Company,” “we,” “us” and “our” refer to Fulgent Genetics, Inc.

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

We are a technology company offering large-scale COVID-19 testing services and comprehensive genetic testing to provide physicians with clinically actionable diagnostic information they can use to improve the quality of patient care.

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

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

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

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

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

Our 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 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.

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 .

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 offered several tests for the detection of SARS-CoV-2, the virus that causes COVID-19, including NGS and RT-PCR-based tests.

To date, we have processed orders for our COVID-19 tests from a variety of customers, including

governmental bodies, municipalities, and large corporations.

In 2020, we established and operated COVID-19 testing sites for certain customers including the County of Los Angeles and the New York City public school system.

We also offer at-home COVID-19 testing services through our Picture Genetics platform that is used by many customers, including individuals and large organizations, such as the New York City Test and Trace program.

We offer tests at competitive prices, averaging approximately $95 per billable test delivered in the first quarter of 2021, and at a lower cost to us than many of our competitors, averaging approximately $20 per billable test delivered in the first quarter of 2021.

Our volume has grown rapidly since our commercial launch, with 3.8 million billable tests delivered in the first quarter of 2021, compared to 13,000 billable tests delivered in the first quarter of 2020.

As of March 31, 2021, an aggregate of over 8.3 million billable tests have been delivered to over 1,400 customers since launching our first commercial genetic tests in 2013.

We have experienced compound quarterly growth of 117.5% 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 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.

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.

We recorded revenue and net income of $359.4 million and $200.7 million, respectively, in the first quarter of 2021, compared to revenue and net loss of $7.8 million and $2.0 million, respectively, in the first quarter of 2020.

We achieved profitability in the first half of 2017, the second and third quarters of 2019, the second, third and fourth quarters of 2020 and the first quarter of 2021 , but we have recorded losses in all other periods since our inception.

COVID-19 Considerations

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

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

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 .

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, circumstances regarding the emergence and prevalence of COVID-19 variants, the success of vaccination campaigns (both in the United States and internationally), the actions taken to contain COVID-19 or treat it and related impacts on local, regional, national and international markets and supply chains.

In the first quarter of 2021 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.

During the first quarter of 2021 and to date, the COVID-19 pandemic has not had a negative impact on our consolidated operating results.

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

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

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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 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.

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

The COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of March 31, 2021.

We have not incurred any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic as of March 31, 2021.

For additional information on risk factors related to the COVID-19 pandemic or other risks that could impact our results, please refer to “Item 1A.

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Three Months Ended

Nine Months Ended

September 30,

Statement of Operations Data:

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Interest and other income, net

Income before income taxes,

equity loss in investee

and impairment loss

Income (loss) before income taxes and equity loss in investee

Provision for income taxes

Income before equity loss

in investee and impairment loss

Income (loss) before equity loss in investee

Equity loss in investee

Impairment loss in equity-method

Net income (loss)

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Billable tests delivered (1)

Average price per billable test

delivered (2)

Average price per billable test delivered (2)

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 $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 increased $351.7 million, or 4536%, from $7.8 million in the first quarter of 2020 to $359.4 million in the first quarter of 2021 .

The increase in revenue between periods was primarily due to 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 $494, or 84%, from $589 in the first quarter of 2020 to $95 in the first quarter of 2021 .

The decrease was due to (i) lower price-points for the mix of tests we delivered, in the first quarter of 2021 versus 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 the first quarter of 2021.

Revenue from non-U.S.

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 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 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.

sources decreased $222,000, or 11%, from $2.1 million in the first quarter of 2020 to $1.9 million in the first quarter of 2021 .

The decrease in revenue from non-U.S.

sources between periods was primarily due to decreased sales of our traditional genetic testing services to customers in foreign countries adversely affected by the COVID-19 pandemic .

The number of billable tests we delivered increased 3.8 million , from 13, 000 in the first quarter of 20 20 to 3.8 million in the first quarter of 20 2 1 .

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.

After aggregating customers that are under common control or are affiliates, one customer, the County of Los Angeles, contributed 25% of our total revenue in the first quarter of 2021, and no customer contributed 10% or more of our total revenue in the first quarter of 2020.

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 $ 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.

Cost of revenue increased $70.0 million, or 1726%, from $4.1 million in the first quarter of 2020 to $74.1 million in the first quarter of 2021.

The increase was primarily due to increases of $42.9 million in reagent and supply expenses related to increased billable tests delivered, $14.3 million in consulting and outside labor expense related to increased outside labor for production in the current period, $5.1 million in personnel costs including equity-based compensation related to increased headcount and market price of the Company’s stock, $3.9 million in software expense related to usage of COVID-19 testing software, $1.3 million in depreciation expenses related to medical lab equipment purchased for our COVID-19 tests, and $1.1 million in facilities primarily related to certain modifications made to our mini vans used for our COVID-19 business.

Cost per billable test delivered decreased $288, or 94%, from $308 in the first quarter of 2020 to $20 in the first quarter of 2021 primarily attributable to our expanded test menu, including COVID-19 tests in 2020 which have a lower cost than our genetics tests.

Our cost per billable test also 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 $281.7 million, from $3.7 million in the first quarter of 2020 to $285.4 million in the first quarter of 2021 .

The increase in gross profit was primarily due to an increase in revenue between periods that exceeded the increase in cost of revenue over the same period.

Our gross profit as a percentage of revenue, or gross margin, increased from 47.7% to 79.4% between periods 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.

Research and development expenses increased $3.4 million, or 174%, from $2.0 million in the first quarter of 2020 to $5.4 million in the first quarter of 2021.

The increase was primarily due to increases of $1.6 million in personnel costs including equity-based compensation related to increased headcount and market price of the Company’s stock, and $1.5 million in reagent and supply expenses related to increased reagent usage for COVID-19 research.

Selling and Marketing

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.

Selling and marketing expenses increased $3.4 million, or 214% from $1.6 million in the first quarter of 2020 to $5.0 million in the first quarter of 2021.

The increase was primarily due to increases of $2.2 million in personnel costs including equity-based compensation related to increased headcount and market price of the Company’s stock, and $877,000 in consulting and outside labor expense and $389,000 in marketing cost related to COVID-19 testing related marketing projects in the current period.

General and Administrative

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 $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 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.

General and administrative expenses increased $6.0 million, or 293%, from $2.0 million in the first quarter of 2020 to $8.0 million in the first quarter of 2021.

The increase was primarily due to increases of $2.5 million in software and licensing related to the increased number COVID-19 tests, $1.2 million in personnel costs including equity-based compensation related to increased headcount and market price of the Company’s stock, $943,000 in bad debt expenses related to additional provision for credit losses in the current period, and $363,000 in legal and professional fees related to professional services obtained in the current period.

Interest and Other Income, Net

Net interest income was $230,000 and $326,000 in the first quarters of 2021 and 2020, respectively.

This income related to interest earned on various investments in marketable securities including holding gain or loss on marketable equity securities .

Other income (expense) was not significant for the first quarters of 2021 and 2020.

The primary components of other income (expense) for 2021 and 2020 were rental income net of rental expenses and foreign currency exchange gain (losses).

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 $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.

Provision for income taxes was $66.5 million and $34,000 for the first quarters of 2021 and 2020, respectively.

The effective tax rate was 25% and -2% for the first quarters of 2021 and 2020, respectively.

The change in effective tax rate for the first quarter of 2021, relative to 2020, was primarily attributable to a significant increase in income for the first quarter of 2021, partially offset by increased windfall tax deductions related to stock-based compensation.

Equity Loss in Investees

No equity losses were recorded in the first quarter of 2021 due to impairment loss recorded in 2020.

Equity loss in investee related to our 30% ownership interest in FF Gene Biotech was $249,000 in the first quarter of 2020.

Liquidity and Capital Resources

Liquidity and Sources of Cash

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 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 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.

We had $151.5 million and $87.4 million in cash and cash equivalents as of March 31, 2021 and December 31, 2020, respectively.

We had $545.9 million and $344.4 million in marketable securities, primarily consisting of equity securities and corporate bonds , as of March 31, 2021 and December 31, 2020, respectively.

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 use of cash is to fund our operations as we continue to invest in and seek to grow our business.

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

In addition, in connection with the establishment of FF Gene Biotech, we became obligated to contribute to FF Gene Biotech genetic sequencing and other equipment with a total cost of 60,000,000 RMB, over a five-year period.

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.

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, and as of March 31, 2021, 29.7 million RMB (or approximately $4.5 million U.S.

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

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

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 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.

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 Securities and Exchange Commission on August 30, 2019, May 6, 2020 and August 5, 2020.

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.

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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.

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

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

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

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

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

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

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

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

During the first quarter of 2021, we sold approximately 583,000 shares of our common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $52.00 per share, which resulted in $30.3 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.

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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.

However, our expectations regarding the cash that may be provided by our operations and our cash needs in future periods could turn out to be wrong, in which case we may require additional financing to support our operations, as we do not presently have any commitments for future capital.

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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.

If we raise additional funds by issuing equity securities, our existing stockholders could experience substantial dilution.

Additionally, any preferred stock we issue could provide for rights, preferences or privileges senior to those of our common stock, and our issuance of any additional equity securities, or the possibility of such an issuance, could cause the market price of our common stock to decline.

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

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

Net cash provided by operating activities

Net cash (used in) provided by investing activities

Net cash provided by financing activities

Cash provided by operating activities

Cash used in investing activities

Cash provided by (used in) financing activities

Operating Activities

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.

Cash provided by operating activities increased between periods primarily due to a $588,000 decrease in accounts receivable mainly due to timing of collections from customers.

Cash provided by operating activities in the first quarter of 2021 was $233.2 million.

The difference between net income and cash provided by operating activities for the period was primarily due to the effects of $3.0 million in equity-based compensation expenses and $1.9 million in the depreciation of assets.

Cash provided by operating activities increased between periods primarily due to increases of $67.2 million in income tax payable due to a significant increase in income, $16.8 million in customer deposit due to payments received from customers in excess of their outstanding trade accounts receivable balances, and $3.9 million in other current liabilities related to increased payroll liabilities, partially offset by the negative impact of increases of $34.6 million in trade accounts receivable mainly due to timing of collections from customers and insurance companies and $9.1 million in other current and long-term assets related to additions in reagents and supplies, and decreases of $12.6 million in contract liabilities due to increased revenue recognized in the current period, and $6.3 million in accounts payable mainly due to timing of payments.

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

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

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

Investing Activities

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.

Cash used in investing activities in the first quarter of 2021 was $216.5 million , which primarily related to purchase of $219.5 million marketable securities, purchase of $11.5 million fixed assets consisting mainly of medical lab equipment, and partially offset by maturity of $14.5 million marketable securities.

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

Financing Activities

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.

Cash provided by the first quarter of 2021 was $47.3 million, which primarily represents net proceeds from sale of our common stock made pursuant to the November 2020 Equity Distribution Agreement.

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

Critical Accounting Policies and Use of Estimates

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

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.

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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, the Company’s estimates and assumptions may evolve as conditions change.

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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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 fiscal year before that date.

We will remain an emerging growth company until December 31, 2021, unless our gross revenue exceeds $1.07 billion in any fiscal year before that date, we issue more than $1.0 billion of non-convertible debt in any three-year period before that date or the date of which the Company qualifies as a “large accelerated filer.”.

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 Qualitati ve Disclosures About Market Risk.

Quantitative and Qualitative 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