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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-03-08 · 129 added, 145 removed, 259 unchanged (51% of the section changed)

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

Forward-Looking Statements

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.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in this report and contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act.

We have omitted discussion of 2019 results where it would be redundant to the discussion previously included in Item 7 of our 2020 Annual Report on Form 10-K.

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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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.

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;

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

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

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

Combining next generation sequencing, or 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.

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 have experienced rapid volume growth since our commercial launch in 2013, with approximately 10.0 million billable tests delivered in 2021, compared to 4.4 million billable tests delivered in 2020, and an aggregate of approximately 14.5 million billable tests delivered to over 1,800 customers from inception through December 31, 2021.

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

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

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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 offer tests at competitive prices, averaging approximately $100 per billable test delivered in 2021, and at a low cost to us, averaging approximately $22 per billable test delivered in 2021.

Our volume has grown rapidly since our commercial launch in 2013, with approximately 10.0 million billable tests delivered in 2021, 4.4 million billable tests delivered in 2020, and an aggregate of approximately 14.5 million billable tests delivered to over 1,800 customers from inception through December 31, 2021.

We have experienced compound quarterly growth of 111.0% in the number of billable tests delivered in our last eight completed fiscal quarters.

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

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.

We recorded revenue and income from operations of $992.6 million and $507.4 million, respectively, in 2021, compared to revenue and income from operations of $421.7 million and $214.3 million, respectively, in 2020.

We achieved profitability in the first quarter

of 2017 , and in the second and the third quarter of 20 19, the second, third and fourth quarters of 20 20 , and all the quarters of 2021 , but we have recorded losses in all other periods since our inception.

2021 Developments

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

University of Florida CTSI Data Coordinating Center, assisting with secure data storage;

and University of Rochester’s Clinical Trials Coordination Center.

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.

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.

This knowledge can assist patients and physicians in better understanding each case and can help to identify whether a patient qualifies for enrollment in certain clinical trials.

Participants will also be able to better understand their genetic test results through free genetic counseling provided by Indiana University and on-site clinicians.

Raw data accumulated through the initiative will be captured for future research by scientists to develop improved treatments and precision medicine options for Parkinson’s Disease.

Launched Picture Genetics, a Patient-Initiated Genetic Testing Offering

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.

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

Picture Genetics offers three distinct at-home test options:

Picture Parenting, Picture Newborn, and Picture Wellness.

Picture Parenting is a carrier screening test that gives prospective parents better insight into their status as carriers of variants in 30 different genes which could affect their children.

Picture Newborn and Picture Wellness offer insight into health risks based on genetic markers.

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

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.

Incremental Investment in Chinese Joint Venture entity, FF Gene Biotech

In May 2021, we entered into a restructuring agreement with Xilong Scientific and FJIP, resulting in the Company indirectly acquiring a controlling financial interest in FF Gene Biotech.

FF Gene Biotech was founded as a joint venture to bring our NGS capabilities to the Chinese genetic testing market through entities separate from our U.S.

operations, and FF Gene Biotech is pursuing this objective separate from our business elsewhere.

Acquisition of CSI

We completed the acquisition of CSI, a leading cancer testing laboratory, to expand our presence in somatic molecular diagnostics and cancer testing.

CSI was founded to provide a client- and patient-focused model of cancer diagnostic testing for pathologists, community hospitals, and their patients.

CSI offers approximately 400 unique tests with a focus on oncology and capabilities across flow cytometry, cytogenetic analysis, fluorescence in-situ hybridization, or FISH, immunohistochemistry, and molecular genetics.

CSI’s philosophy of providing expert diagnostic testing with speed, precision, and care, is highly complementary with our core value proposition of offering a broad menu of actionable diagnostic tests with quality results and rapid turnaround times.

CSI is based in Alpharetta, GA and expands our presence in the southeastern United States.

Strategic Partnership with Laboratory for Advanced Medicine, Inc., or Helio Health

We made an investment in and entered into a strategic partnership with Helio Health, an AI-biotechnology company developing blood-based early cancer detection tests, to commercialize Helio Health’s blood-based early cancer detection tests.

In conjunction with the commercial strategic partnership whereby Helio Health has secured exclusive commercial rights for laboratory develop tests, or LDTs, in the U.S.

Under this partnership, we and Helio Health commercialized and co-branded HelioLiver, a cell-free DNA (cfDNA) methylation blood test that incorporates protein markers and demographics for the detection of hepatocellular carcinoma (HCC) – or liver cancer.

COVID-19 Considerations

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During the year ended December 31, 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.

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

In years ended December 31, 2020 and December 31, 2021, 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 .

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 and, if repeated, may again cause the volume of our traditional genetic tests to decline .

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 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.

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.

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Launch of 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.

We have experienced rapid volume growth since our commercial launch in 2013, especially after the launch of our COVID-19 testing services, with approximately 10.0 million billable tests delivered in 2021, compared to 4.4 million billable tests delivered in 2020, and an aggregate of approximately 14.5 million billable tests delivered to over 1,800 customers from inception through December 31, 2021.

Most of the recent growth in our testing volume has resulted from COVID-19 tests that we conduct for certain counties, states and municipalities.

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.

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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.

(i) Insurance, including claim reimbursement from HRSA for uninsured individuals, (ii) Institutional, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations or (iii) Patients who pay directly.

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.

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As a result, the amount, timing, nature and success of these investments, as well as other influences on our cost of revenue from period to period, can impact the amount of our cost per billable test.

Moreover, changes in our other operating expenses, due to investments in these aspects of our business or other factors, are not taken into account in the calculation of this measure but impact our overall results, which can limit the utility of cost per billable test as an overall cost measurement tool.

Moreover, changes in our other operating expenses, due to investments in these aspects

of our business or other factors, are not taken into account in the calculation of this measure but impact our overall results, which can limit the utility of cost per billable test as an overall cost measurement tool.

Ability to Obtain Reimbursement

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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 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.

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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 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:

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

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

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These costs consist of personnel costs, laboratory supplies, consulting costs and allocated overhead expenses, including rent and utilities.

We expense all research and development costs in the periods in which they are incurred.

We expense all

research and development costs in the periods in which they are incurred.

We expect our research and development expenses will continue to increase in absolute dollars as we expect to continue to invest in research and development activities.

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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

Provision for Income Taxes

Provision for income taxes consists of U.S.

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General and administrative

Amortization of intangible assets

Total operating expenses

Operating income (loss)

Operating income

Interest and other income, net

Income before income taxes and equity loss in

investee and impairment loss

Income before income taxes, equity loss in investee and gain (loss) on equity-method investments

Provision for income taxes

Income before equity loss in investee and impairment loss

Income before equity loss in investee and gain (loss) on equity-method investments

Equity loss in investee

Impairment loss in equity-method investment

Net income (loss)

Gain (loss) on equity-method investments

Net income from consolidated operations

Net loss attributable to noncontrolling interests

Net income attributable to Fulgent

Other Operating Data:

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Revenue increased $570.9 million, or 135%, from $421.7 million in 2020 to $992.6 million in 2021.

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.

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.

The increase in revenue between periods was primarily due to an increase in the number of COVID-19 billable tests delivered, as well as a higher average price per billable test.

The average price of the billable tests we delivered increased $4, or 4%, from $96 in 2020 to $100 in 2021.

The increase was due to t he mix of tests we delivered in 2021 and 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.

Revenue from non-U.S.

sources decreased $1.1 million, or 15%, from $7.5 million in 2019 to $6.4 million in 2020.

The decrease 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 $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 .

sources increased $7.2 million, or 113%, from $6.4 million in 2020 to $13.6 million in 2021.

The increase in revenue from non-U.S.

sources between periods were primarily due to increased sales of our traditional genetic testing services to customers in China through FF Gene Biotech which contributed $6.6 million in total revenue in 2021.

The number of billable tests we delivered in 2021 increased approximately 5.6 million , from 4.4 million in 20 20 to 10.0 million .

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

Aggregating customers that are under common control, one customer, the County of Los Angeles, contributed 26% of our revenue in 2021, and two customers, the County of Los Angeles and San Bernardino County, contributed 28% and 10% of our revenue in 2020.

respectively .

Cost of Revenue

Cost of revenue increased $125.7 million, or 140%, from $89.8 million in 2020 to $215.5 million in 2021.

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 and our expanded test menu, including our launch of COVID-19 tests in 2020.

Our cost per billable test decreased in part due to our efforts to leverage our technology, such as engineered chemistry and competitive analytics powered by artificial intelligence and machine learning.

The increase was primarily due to increases of $43.3 million in reagent and supply expenses related to increased billable tests delivered, $35.9 million in consulting and outside labor expense related to increase of outside labor for production 2021, $18.0 million in personnel costs and equity-based compensation related to increased headcount and the market price of the Company’s stock, $11.6 million in shipping and handling costs related to delivery of collection kits for of COVID-19 tests , $6.8 million in software expense related to usage of COVID-19 testing software , $5.8 million in depreciation related to medical lab equipment purchased , and $2.6 million in facilities primarily related to certain modifications made to our mini vans used for our COVID-19 business.

Cost per billable test delivered increased $2, or 10% from $20 in 2020 to $22 in 2021 as t he increase in our cost of revenue was greater than in the number of billable tests we delivered primarily due to increased shipping and handling costs for our at-home COVID-19 testing services and increased outside labor related to testing site operations.

Our gross profit increased $445.1 million, or 134%, from $331.9 million in 2020 to $777.1 million in 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 56.6% to 78.7% between periods due in part to the increase in revenue and decreases in our cost per billable test and cost of revenue described above.

The increase in gross profit was primarily due to the increase in revenue from our COVID-19 tests that exceeded the increase in cost of revenue described above.

Our gross profit as a percentage of revenue, or gross margin, decreased from 78.7% to 78.3% due to the increased cost per billable test delivered for reasons stated above.

Research and Development

Research and development expenses increased $12.6 million, or 109%, from $11.6 million in 2020 to $24.2 million in 2021.

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.

The increase was primarily due to increases of $8.8 million in personnel costs and equity-based compensation related to increased headcount and the market price of the Company’s stock and $2.0 million in reagent and supply expenses related to increased reagent usage for COVID-19 research.

Selling and Marketing

Selling and marketing expenses increased $9.5 million, or 63%, from $15.0 million in 2020 to $24.4 million in 2021.

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.

The increase was primarily due to increases of $8.8 million in personnel costs and equity-based compensation related to increased commission expense and market price of the Company’s stock , $2.4 million in consulting and outside labor costs for increased outside labor used , partially offset by a decrease of $2.4 million in marketing supplies and related shipping costs.

General and Administrative

General and administrative expenses increased $35.5 million, or 233%, from $15.2 million in 2020 to $50.7 million in 2021.

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.

The increase was primarily due to increases of $13.4 million in personnel costs and equity-based compensation related to increased bonus accrued for executive officers, increased headcount and the market price of the Company’s stock, $7.8 million additional provision for credit losses , $3.2 million in software and licensing related to increased number of billings, $2.9 million in consulting and $2.6 million in legal expenses related to business acquisitions and internal control compliance, $1.5 million in accounting expenses related to financial statement and internal control audit and reviews , $1.1 million in facility repair and maintenance, and $1.0 million in business insurance expenses.

Amortization of I ntangible A ssets

Amortization of intangible assets represents amortization expenses on the intangible assets arose from the business combinations and a patent purchased in 2021.

Interest and Other Income, Net

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.

Interest income, net was $1.3 million and $1.5 million for 2021 and 2020, respectively.

This income mainly related to interest received on various investments in marketable securities and holding gain or loss on marketable equity securities .

Other income (expense) was not significant for 2021 or 2020.

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

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

Provision for Income Taxes

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.

Provision for income taxes were $174.8 million and $72.5 million in 2021 and 2020, respectively.

The effective income tax rate was 25.8% and 24.9% of income before income taxes for 2021 and 2020, respectively.

The increase in tax expense for 2021 relative to 2020 was primarily attributable to a significant increase in income for the year ended December 31, 2021.

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

Gain (Loss) on Equity-Method Investments

We recognized a gain of $3.7 million in 2021 related to our preexisting equity interest at FF Gene Biotech as a result of remeasuring to fair value our 30 % equity interest held before the FF Gene Biotech Acquisition .

The fair value of the preexisting equity interest was determined based on the characteristics before consummating the FF Gene Biotech Acquisition and estimated by applying income approach and utilizing the discounted cash flow method.

Impairment loss in equity-method investments was $4.4 million in 2020 related to our 30% ownership interest in FF Gene Biotech and 25% ownership interest in BostonMolecules.

Equity Loss in Investee

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.

Equity loss in investee was $488,000 in 2020 related to our 30% ownership interest in FF Gene Biotech.

There was no such loss in 2021.

Net Loss Attributable to Noncontrolling Interest

Net loss attributable to noncontrolling interest represents net loss of FF Gene Biotech attributable to the minority shareholders, Xilong Scientific and FJIP.

Liquidity and Capital Resources

Liquidity and Sources of Cash

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.

We had $935.5 million and $431.9 million in cash, cash equivalents and marketable securities as of December 31, 2021 and 2020, respectively.

Our marketable securities primarily consist of equity securities and corporate bonds, municipal bonds, and U.S.

government and U.S.

agency debt securities as of December 31, 2021 and 2020.

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

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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 60.0 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.

Shares sold under the 2019 Equity Distribution Agreement were 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.

On November 13, 2019, we entered into a purchase agreement with Piper, as representative of the several underwriters, pursuant to which we sold 2.7 million shares of our common stock at a price of $10.52 per share, with a public offering price of $11.25 per share.

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

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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.

During the year ended December 31, 2021, we sold approximately 1.1 million shares of our common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $64.83 per share, which resulted in $72.0 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.

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

Additionally, if our business 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.

support our business in future periods, even if our expenses also increase as a result of the growth of our business.

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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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.

For example, the COVID-19 pandemic 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 operations

Net cash provided by operating activities

Net cash used in investing activities

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Cash provided by operating activities in 2021 was $538.6 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.

The difference between net income and cash provided by operating activities for the period was primarily due to the effect of $15.9 million in equity-based compensation expenses and $11.0 million in the depreciation and amortization.

Cash provided by operating activities decreased between periods primarily due to decreases of $52.5 million in income tax payable due to tax payments made during the current period and $12.2 million in accounts payable partially offset by the negative impact of a decrease of $ 42.3 million in accounts receivable mainly due to the timing of collections from customers and an increase of $13.1 million in accrued and other liabilities primary due to increased customer deposits and bonus accrual.

Cash provided by operating activities in 2020 was $140.6 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 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 .

Investing Activities

Cash used in investing activities in 2021 was $546.5 million, which primarily related to $710.5 million in purchases of marketable securities, $61.9 million related to business acquisitions, $23.8 million related to purchase of fixed assets consisting mainly medical laboratory equipment and building improvement, and $20.0 million related to purchase of r edeemable preferred stock , partially offset by proceeds of $185.7 million related to sales of marketable securities and $83.8 million related to maturities of marketable securities.

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.

Financing Activities

Cash provided by financing activities in 2021 was $85.4 million, which primarily related to $89.5 million proceeds from the November 2020 Equity Distribution Agreement, partially offset by $4.2 million in common stock withholding for employee tax obligations.

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, 2021

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

As of December 31, 2021, we have an outstanding balance of $15.1 million in our margin account and $6.1 million in notes payable which is payable on December 31, 2022.

The following summarizes our contractual obligations as of December 31, 2021:

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(in thousands)

Operating lease liabilities ( 1)

Operating lease obligations (1)

Finance lease obligations (2)

Purchase obligations (3)

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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.

Represents non-cancelable finance 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, see Note 8 to the Consolidated Financial Statements.

Critical Accounting Policies and Use of Estimates

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

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

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

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 valuation of intangible assets and goodwill in recent business combinations and 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 COVID-19 tests and genetic tests.

We generate revenue from sales of our COVID-19, molecular diagnostic and genetic testing services .

We currently receive payments from:

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

research institutions ;

individual patients and third-party payors.

insurance, institutional customers, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, and patients who pay directly .

We recognize revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for the transfer of promised goods or services to our customers.

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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.

Accounting for insurance contracts includes estimation of the transaction price, defined as the amount we expect to be entitled to receive in exchange for providing the services under the contract.

Due to our out-of-network status with the majority of insurance payors for COVID-19 tests, estimation of the transaction price represents variable consideration.

We estimate that the variable consideration paid by insurance payors will approximate our self-pay rate for COVID-19 tests that is published on our website, which is the rate established by the Center for Medicare & Medicaid Services, as supported by a historical reimbursement trend analysis.

Valuation of Goodwill and Intangible Assets

The valuation of assets acquired in a business combination and asset impairment reviews require the use of significant estimates and assumptions.

The acquisition method of accounting for business combinations requires us to estimate the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in an acquired business to properly allocate purchase price consideration between assets that are depreciated or amortized and goodwill.

Long-lived assets, including property and equipment and intangible assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

An impairment loss would be recognized when estimated future cash flows expected from an asset and its eventual disposition is less than the carrying amount.

We evaluate goodwill annually or more frequently if events or changes in circumstances indicate that goodwill may be impaired.

In accordance with guidance related to impairment testing, we have the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test.

If the qualitative assessment option is not elected, or if the qualitative assessment indicates that it is more likely than not that the fair value is less than its carrying amount, a quantitative analysis is then performed.

The quantitative analysis, if performed, compares the fair value of the reporting unit with its respective carrying amount, including goodwill.

If the fair value of the reporting unit exceeds its carrying amount, including goodwill, goodwill is considered not to be impaired and no additional steps are necessary.

If the fair value is less than the carrying amount, including goodwill, then an impairment adjustment must be recorded up to the carrying amount of goodwill.

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 JOBS Act.

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

We have chosen to “opt out” of this extended transition period and, as a result, we will comply with new or revised accounting standards as required when they are adopted.

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

We 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.

Off-Balance Sheet Arrangements

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Not applicable.

Financial Statemen ts and Supplementary Data.

Financial Statements 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