ANNUAL
REPORT
2020
www.FulgentGenetics.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
(cid:4) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-37894
FULGENT GENETICS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
4978 Santa Anita Avenue
Temple City, CA
(Address of principal executive offices)
81-2621304
(I.R.S. Employer
Identification No.)
91780
(Zip Code)
Registrant’s telephone number, including area code: (626) 350-0537
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.0001 per share
Name of each exchange on which registered
The Nasdaq Stock Market
(Nasdaq Global Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:4) NO (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES (cid:4) NO (cid:3)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES (cid:3) NO (cid:4)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). YES (cid:3) NO (cid:4)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
(cid:4)
Large accelerated filer
(cid:3)
Non-accelerated filer
(cid:2)
(cid:4)
(cid:3)
(cid:3)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:3)
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. (cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES (cid:4) NO (cid:3)
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates as of June 30, 2020 (computed by
reference to the price at which the registrant’s common stock was last sold on such date, the last business day of the registrant’s most recently
completed second fiscal quarter, as reported by the Nasdaq Global Market) was approximately $191.3 million. For purposes of this calculation, it has
been assumed that all shares of the registrant’s common stock held by directors, executive officers and persons beneficially owning 10% or more of
the registrant’s common stock are held by affiliates; however, the treatment of these persons as affiliates for purposes of this calculation is not, and
shall not be considered, a determination as to whether such persons are affiliates of the registrant for any other purpose.
As of March 1, 2021, there were 28,874,395 outstanding shares of the registrant’s common stock.
Accelerated filer
Smaller reporting company
Emerging growth company
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s definitive proxy statement for its 2021 annual meeting of stockholders are incorporated by reference in Part III of
this report.
TABLE OF CONTENTS
Business........................................................................................................................................................................
Risk Factors ..................................................................................................................................................................
Unresolved Staff Comments ........................................................................................................................................
Properties......................................................................................................................................................................
Legal Proceedings ........................................................................................................................................................
Mine Safety Disclosures...............................................................................................................................................
Cautionary Note Regarding Forward-Looking Statements ..............................................................................................................
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities......
Selected Financial Data ................................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ......................................
Quantitative and Qualitative Disclosures About Market Risk .....................................................................................
Financial Statements and Supplementary Data ............................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................................
Controls and Procedures...............................................................................................................................................
Other Information.........................................................................................................................................................
Directors, Executive Officers and Corporate Governance ...........................................................................................
Executive Compensation ..............................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ....................
Certain Relationships and Related Transactions, and Director Independence.............................................................
Principal Accounting Fees and Services ......................................................................................................................
Exhibits, Financial Statement Schedules......................................................................................................................
Form 10-K Summary...................................................................................................................................................
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,
or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements
are statements other than historical facts and relate to future events or circumstances or our future performance, and they are based on
our current assumptions, expectations and beliefs concerning future developments and their potential effect on our business. The
words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,”
“expect,” “possible,” “likely,” “probable,” and similar expressions that convey uncertainty of future events or outcomes identify
forward-looking statements.
The forward-looking statements in this report include statements about, among other things:
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developments, projections and trends relating to us, our competitors and our industry;
our strategic plans for our business;
our expectations regarding the impact of the COVID-19 pandemic on our business, including the duration of the demand
for our COVID-19 testing services;
our operating performance, including our ability to achieve equal or higher levels of revenue, stabilize the historical
fluctuations in our performance and maintain or grow profitability;
the rate and degree of market acceptance and adoption of our genetics and clinical tests and genetic testing and clinical
testing generally and other anticipated trends in our industry;
our ability to remain competitive, particularly if the testing markets continue to expand and competition becomes more
acute;
our ability to continue to expand the number of genes covered by our tests and introduce other improvements to our tests;
our continued ability to offer affordable pricing for our tests, in spite of recent price degradation in the genetic testing
industry, and our ability to maintain the low internal costs of our business model and record acceptable margins on our
sales;
our ability to strengthen our existing base of customers by maintaining or increasing demand from these customers;
our ability to grow and diversify our customer base, including our plans to target new institutional and individual
customer groups;
our reliance on a limited number of suppliers and ability to adapt to possible disruptions in their operations;
our use of our laboratory facilities and our ability to adapt in the event any of our facilities are damaged or rendered
inoperable;
the level of success of our efforts to increase our global presence, including strengthening relationships with existing and
new international customers and establishing other types of arrangements, including our joint venture in the People’s
Republic of China, or China, or other international joint venture or distributor relationships we may pursue;
the impact on our business of our investments in building and restructuring our sales and marketing strategies and teams
and our plans for future sales and marketing efforts;
the impact of the investments we have made in increasing our testing capacity to meet the demand for COVID-19
testing;
advancements in technology by us and our competitors;
our use of technology and ability to prevent security breaches, loss of data and other disruptions;
our ability to effectively manage any growth we may experience, including expanding our infrastructure, developing
increased efficiencies in our operations and hiring additional skilled personnel in order to support any such growth;
developments with respect to U.S. and foreign regulations applicable to our business, and our ability to comply with
these regulations;
our ability to prevent errors in interpreting the results of our tests so as to avoid product liability and professional liability
claims;
our ability to obtain and maintain coverage and adequate reimbursement for our tests and to manage the complexity of
billing and collecting such reimbursement;
the state of the U.S. and foreign healthcare markets, including the role of governments in the healthcare industry
generally and pressures or incentives to reduce healthcare costs while expanding individual benefits, as well as the
impact of general uncertainty in the U.S. healthcare regulatory environment;
our ability to attract, retain and motivate key scientific and management personnel;
our expectations regarding our ability to obtain and maintain protection of our trade secrets and other intellectual
property rights and not infringe the rights of others;
our expectations regarding our future expense levels and our ability to appropriately forecast and plan our expenses;
our expectations regarding our future capital requirements and our ability to obtain additional capital if and when
needed; and
the impact of the above factors and other future events on the market price of our common stock.
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These forward-looking statements are subject to a number of risks and uncertainties, including, among others, those described
under Item 1A. “Risk Factors” and elsewhere in this report. Moreover, we operate in a competitive and rapidly evolving industry and new
risks emerge from time to time. It is not possible for us to predict all of the risks we may face, nor can we assess the impact of all factors
on our business or the extent to which any factor or combination of factors could cause actual results to differ from our expectations. In
light of these risks and uncertainties, the forward-looking events and circumstances described in this report may not occur, and actual
results could differ materially and adversely from those described in or implied by any forward-looking statements we make. Although
we have based our forward-looking statements on assumptions and expectations we believe are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements or other future events. As a result, forward-looking statements should not be relied
on or viewed as predictions of future events, and this report should be read with the understanding that our actual future results, levels of
activity, performance and achievements or other future events may be materially different than what we currently expect.
The forward-looking statements in this report speak only as of the date of this document, 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 qualify all of our forward-looking statements by this cautionary note.
* * * * * * *
We own registered or unregistered trademark rights to Fulgent®, Picture Genetics® and our company name and logo. Any other
service marks, trademarks and trade names appearing in this report are the property of their respective owners. We do not use the ®
or ™ symbol in each instance in which one of our trademarks appears in this report, but this should not be construed as any
indication that we will not assert our rights thereto to the fullest extent under applicable law.
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Item 1. Business.
PART I
Overview
Fulgent Genetics, Inc., together with its subsidiaries, collectively referred to as the Company, is 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 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
genetic test menu to include more than 18,000 single-gene tests and more than 900 panels that collectively test for more than 5,700
genetic conditions, including various cancers, cardiovascular diseases, neurological disorders and pediatric conditions. A cornerstone
of our business is our ability to provide expansive options and flexibility for all clients’ unique genetic testing needs.
Our technology platform, which integrates sophisticated data comparison and suppression algorithms, adaptive learning
software, advanced genetic diagnostics tools and integrated laboratory processes, allows us to offer a test menu with expansive genetic
coverage. We believe the comprehensive data output and high detection rates of our tests, both made possible by this expansive
genetic coverage, provide physicians with information they can readily incorporate into treatment decisions for their patients, which
we refer to as clinical actionability. In addition, our technology platform facilitates our ability to perform customized genetic tests
using our expansive library of genes, and we believe this flexibility increases the utility of the genetic data we produce. Further, our
technology platform provides us with operating efficiencies that help lower our internal costs, which allows us to offer our tests at
accessible price points. As a result, our efforts to build and continually enhance our technology platform allow us to deliver
comprehensive, adaptable, clinically actionable and affordable genetic analysis while maintaining a low cost per billable test, enabling
us to efficiently meet the needs of our growing base of customers.
Since March 2020, we have offered several tests for the detection of SARS-CoV-2, the virus that causes the novel coronavirus
disease, or COVID-19, including NGS and reverse transcription polymerase chain reaction – based tests, or 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 New York City public school system. We also offer at-home COVID-19 testing services through our Picture
Genetics platform that is used by the New York City Test and Trace program.
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.
Genetic Testing Industry
Genetic testing offers the possibility of early identification of a disease or a genetic predisposition to a disease and enhanced
disease treatment and prognosis. Recent improvements in testing technologies, including NGS technology, have dramatically lowered
the cost and improved the quality and availability of genetic testing. We believe widespread genetic testing could enable significant
health improvements and healthcare cost reductions by providing patients and clinicians with more advanced knowledge and options
for personal health management plans. This expansion of testing availability and accessibility, as well as a growing and aging
population; increasing overall incidence of disease; innovations in genomic medicine that enable the selection and implementation of
drug treatment programs based on genetic information, or pharmacogenomics; and other factors contributed to the growth in the
global market for genetic testing in recent years. If this growth trend continues, we believe genetic testing will become part of standard
medical care and the knowledge of a person’s unique genetic makeup could play a more important role in the practice of medicine.
While adoption of genetic testing has increased in recent years, we believe widespread utilization has been tempered because of
certain challenges and barriers to adoption that exist in today’s market. Among these industry challenges are that genetic testing can
be prohibitively expensive, only a limited number of genetic tests are currently reimbursable, certain genetic conditions cannot be
diagnosed due to the limited scope of some genetic analysis, genetic testing can be an inefficient process and the interpretation of
genetic results can be cumbersome and time-consuming. Through our technology platform, we have developed an offering that we
believe addresses these industry challenges and provides a sustainable competitive advantage, both in today’s genetic testing market
and as we seek to implement new diagnostic tools in the future.
1
COVID-19 Diagnostic Testing
Events surrounding the emergence of SARS-CoV-2 in Wuhan, China in late 2019 and the ensuing COVID-19 pandemic in 2020
and continuing today have dramatically affected populations and global industry. Demand for accurate COVID-19 testing with rapid
turn-around times correspondingly emerged 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. 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.
Currently available diagnostic tests for the detection of SARS-CoV-2 are based on a variety of technologies and formats,
including conventional antigen-based tests for detecting viral proteins and nucleic acid amplification tests which include RT-PCR-
based tests. While antigen-based diagnostic tests are relatively inexpensive and can be used at the point of care, antigen-based
diagnostic tests for the detection of SARS-CoV-2 have been observed to be less sensitive than genetic and RT-PCR-based tests. U.S.
Centers for Disease Control guidelines indicate that the “gold standard” for clinical diagnostic detection of SARS-CoV-2 is nucleic
acid amplification which includes RT-PCR-based tests. We believe our ability to provide COVID-19 NGS and RT-PCR-based
diagnostic testing services with expedited turn-around times makes us competitive in this new market.
Our technology-driven approach to the challenges facing our industry has resulted in our development of an integrated
technology platform featuring the following proprietary tools and processes:
Our Technology Platform
Proprietary Gene Probes
Many genetic testing providers use gene probes in the sequencing process to extract and target specific genomic regions. A gene
probe is a single strand of DNA or RNA that has a base sequence complementary to the base sequence of a targeted gene and that
binds to this complementary base sequence when introduced during the sequencing process, thereby identifying the presence and
location of the targeted gene. Many companies obtain these gene probes from third-party suppliers. We have developed technologies
to design and formulate our own proprietary gene probes, which, when combined with our proprietary genetic reference library and
publicly available genetic databases, support our ability to sequence DNA regions we believe laboratories using commercial probes
cannot sequence and improve the detection rate of our test data. In turn, we believe this enables us to produce clinically actionable
results physicians can use to improve care for their patients. In addition, our proprietary gene probes are specifically engineered to
generate genetic data optimized for our software, which enables us to rapidly incorporate new genes into our test menu, develop new
panels of disease-specific tests and customize tests for our customers. Moreover, once we develop a probe for a new gene, we can
efficiently reproduce, validate and assure the quality of that probe under applicable guidelines and standards, which allows us to
continuously and rapidly expand our library of genetic content while increasing the breadth of our test menu. Additionally, we believe
our probes more effectively enrich the targeted genes to improve the quality of the sequenced data we produce.
Advanced Database Algorithms
After DNA is sequenced using all appropriate equipment and tools, the fully sequenced genes are analyzed in a process known
as curation, in which every DNA sequence is aligned with a known reference sequence and differences between the DNA sequence
and the reference sequence are identified. These differences, which represent potential genomic alterations, are then compared to
publicly available genetic databases and proprietary genetic libraries to identify pathogenic alterations associated with disease or
disease risk. We have developed proprietary data comparison and data suppression algorithms to improve and simplify this curation
process by highlighting identified pathogenic mutations. Our advanced data comparison algorithms measure DNA sequences from
patient specimens against genetic data available from the broader scientific community and our own proprietary reference library of
genetic information, which enables us to rapidly and effectively detect pathogenic mutations. Our advanced data suppression
algorithms reduce irrelevant noise in the genetic data we analyze, which improves the efficiency and speed of our data analysis and
reduces the reliance upon manual review and comparison in the curation process.
Adaptive Learning Software
We have developed software that automatically incorporates the data from each completed test into our expansive genetic
reference library, enabling it to continuously evolve with each set of genes we analyze. This adaptive learning software supports the
continuous improvement of our proprietary gene probes and leverages the capabilities of these gene probes to improve the speed and
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effectiveness of curation and reporting. Our adaptive learning software also communicates with our integrated laboratory systems,
which leads to increased automation processes and other operating efficiencies.
Proprietary Laboratory Information Management Systems
We have developed proprietary laboratory information management systems that are highly integrated with our laboratory
processes and adaptive learning software. These systems provide the backbone by which we efficiently manage workflow, monitor
quality and ensure the fidelity of information generation and analytics for reporting to our customers. The result is a highly connected
platform that allows us to process tests and information in an efficient manner. Our talented team of software engineers continuously
iterates with our laboratory and customer-facing personnel to improve the efficiencies of these systems.
The benefits provided by our technology platform include:
Our Solution
Low Internal Cost per Billable Test
We have developed various proprietary technologies that improve our laboratory efficiency and reduce the costs we incur to
perform our tests. This technology platform enables us to perform each test and deliver its results at a lower internal cost than many of
our competitors, averaging approximately $20 per billable test delivered in 2020. This low cost per billable test allows us to maintain
affordable pricing for our customers, averaging approximately $96 per billable test delivered in 2020, which we believe encourages
repeat ordering from existing customers and attracts new customers. We believe our low cost per billable test could also facilitate the
process for establishing coverage and reimbursement from third-party payors at a level adequate for us to achieve profitability with
this payor group.
Broad and Flexible Test Menu
We currently offer single-gene tests on more than 18,000 genes, which we believe is thousands more than most of our
competitors’ portfolios. Based on the results of a retrospective study of individuals with a personal or family history of cancer,
described below, we believe the breadth of genes in our portfolio allows us to provide more comprehensive genetic information and
improves our variant detection rate, which can increase the clinical actionability of the data we produce. The breadth of genes in our
portfolio also allows us to provide a flexible and customizable test menu for our customers, which can reduce the need for sequential
retesting. We offer single-gene tests on all of the genes in our portfolio, as well as deletion/duplication analysis and site-specific tests.
If customers desire a broader test, we offer more than 900 pre-established, multi-gene panels that focus on specified genetic
conditions. These panels can be adjusted up or down to include more or fewer genes, or customers can design their own panels to their
exact specifications. We also offer clinical and full gene exome testing options. We offer our tests at different price points and
turnaround times depending on the size and complexity of the test, which increases optionality for our customers. We believe the
flexibility of our offering improves the efficiency and utility of the data output by our tests and decreases overall customer costs. We
also offer our customers access to our highly qualified genetic counselors and laboratory experts to assist in interpreting the data we
provide, which further increases the utility of our test results for ordering physicians.
Expansive and Growing Genetic Library
Using our proprietary gene probes and testing processes, we are able to capture large amounts of genetic information from each
test we perform—oftentimes more than is ordered for the test—without an incremental increase in our costs. Through this data
collection process, we have developed a proprietary reference library of expansive genetic information. This reference library is
automatically curated by our adaptive learning software and supplemented with manual curation by our team of highly trained
professionals, which adds to and improves upon the information available in public genetic databases. As a result, our integrated
technology systems allow us to leverage publicly available information from the broader scientific community with our internally
developed reference library to develop what we believe is a more reliable catalog of genetic information and to accelerate, standardize
and improve our curation and reporting process.
3
Our Genetic Tests and COVID-19 Tests
Our offering consists of a wide variety of tests and test types, and our customers have a high degree of choice when selecting a
test from our menu. A customer may select a single-gene test of any of the genes in our portfolio or a customer may select one of our
pre-established panel tests, which are designed to test particular genes and mutations within these genes that relate to a wide range of
specified conditions and diseases. For example, our Focus and Comprehensive oncology panels test 30 genes and 127 genes,
respectively, that relate to various cancers and our Beacon carrier screening panels test up to 410 genes covering over 400 inherited
conditions. We can perform full-gene sequencing with deletion/duplication analysis in all of these tests. In addition, we continually
seek to expand our test menu with new genes and panel tests. Our test offerings also include Solid Tumor Molecular Profiling for
somatic cancer testing, Rapid Whole Genome testing developed for children in neonatal intensive care units, or NICU, or pediatric
intensive care units, or PICU, our Newborn Genetic Analysis panel, and a single front-line test designed to comprehensively detect
ataxia-related variants and repeat expansions via sequencing. In 2019, we launched Picture Genetics, a patient-initiated genetic testing
offering aimed at individual consumers and which we advertise directly to consumers through a variety of methods including social
media and other digital avenues. New test offerings in 2020 included several COVID-19 tests and Pharmacogenetics testing, the use of
genetic data to guide drug therapy decisions, or PGx testing.
We also offer certain research service tests, which we refer to as “sequencing as a service” and which are primarily ordered by
research institutions and other similar institutional customers. In addition, we offer whole exome and clinical exome panel tests, which
test all genes included in our portfolio and up to 20,095 genes located in the exome, respectively, and produce results that we combine
with the individual’s unique clinical presentation and family history to enhance the clinical relevance of the results. Our whole exome
and clinical exome tests also include the option for Trio testing, which involves sequencing the genes of a patient’s parents and is
thought to enhance the utility of the test results. In addition, we offer whole genome testing, which determines and tests the complete
DNA sequence of a genome at a single time. We also provide known mutation testing, which can be used to target familial specific or
other desired mutations, as well as repeat expansion testing, which tests for a particular type of mutation known as “copy choice”
DNA replication.
Importantly, all of our pre-established panels are customizable, offering customers the ability to add or remove genes at their
election. To further increase test option flexibility, as well as to reduce the complexity of ordering tests, we consistently strive to
innovate our pricing structure and features for our available tests. We have upgraded many of our pre-set panels with additional genes.
In addition, if a variant is reported in a proband for whom duo or trio testing was not originally ordered for, the ordering physician is
given the option of adding complementary familial known mutation testing, or FKMT, for any variant reported by Fulgent in the
proband’s final report, for up to two first-degree relatives. We believe these options represent competitive pricing features that will
streamline the test ordering process, give customers more flexibility with added value, and reduce barriers to trio and familial testing,
which can both increase the clinical utility of genetic testing for a single proband.
Since March 2020, and as noted above, we have commercially launched several 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 Emergency Use Authorization, or EUA,
from the U.S. Food and Drug Administration, or the FDA, that authorizes the use of our RT-PCR-based tests for the detection of
SARS-CoV-2 using upper respiratory specimens (nasal, nasopharyngeal, and oropharyngeal swabs) and in conjunction with at-home
specimen collection kits that are offered as a service through Picture Genetics. Our at-home testing service for COVID-19 and RT-
PCR-based test are authorized for emergency use 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 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 a sample is 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.
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Our Customers
Historically, we primarily sold our tests to hospitals and medical institutions. We have approached the genetic testing market
with a focus on these customers in part because they are frequent and high-volume users of genetic tests. We believe this customer
base provides a meaningful opportunity for further growth by acquiring additional hospital and medical institution customers and by
deepening our relationships with existing customers to drive increased ordering. Additionally, collection of billings from these
institutional customers is generally more attainable than from other types of customers in today’s reimbursement environment. In
addition, we believe hospitals and medical institutions are early adopters of NGS technology and could influence broader clinical
acceptance of genetic testing. Beginning in March 2020, we also began processing orders for our COVID-19 tests from a variety of
customers, including governmental bodies, municipalities, and large corporations. Since inception, we have sold our tests to over
1,300 total customers. We consider each single billing and paying unit to be an individual customer, even though a unit may represent
multiple physicians and healthcare providers ordering tests. Aggregating customers that are under common control or are affiliates,
two of our customers, the County of Los Angeles and San Bernardino County, contributed 28% and 10%, respectively, of our total
revenue in 2020, and one of our customers contributed 28% of our total revenue in 2019.
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 diagnosis related group, or DRG. A small percentage
of our customers are patients, who elect to pay for tests themselves with out-of-pocket payments after their physicians have ordered
our tests.
Third-party payors, which consist of private health insurers and government health care programs, including Medicare and
Medicaid, require us to identify the test for which we are seeking reimbursement using a Current Procedural Terminology, or CPT,
code set maintained by the American Medical Association, or AMA. Where we offer a multi-gene panel and there is no CPT code for
the full panel but the panel includes a gene for which the AMA has an established CPT code, we identify the test provided under that
CPT code when billing a third-party payor for that test. In cases where there is not a specific CPT code, our test may be billed under a
miscellaneous code for an unlisted molecular pathology procedure. Because this miscellaneous code does not describe a specific
service, the insurance claim must be examined to determine what service was provided, whether the service was appropriate and
medically necessary, and whether payment should be rendered, which may require a letter of medical necessity from the ordering
physician. Given the changing CPT coding environment and our development of relationships with third-party payors, we expect that
our practices regarding billing these payors will evolve in the future.
We are making efforts to diversify our customer market, including building relationships with research institutions and other
similar institutional customers, national clinical laboratories, governmental bodies, municipalities and large corporations in need of
regular COVID-19 testing for large populations and various other organizations to facilitate access to physicians, practitioners and
other new customer groups, including certain U.S. government agencies. We are also pursuing relationships with payors, including
Medicare, some state Medicaid programs and commercial payors, in an effort to obtain coverage and reimbursement for our tests to
make them accessible to more individual physicians. Generally, when we establish these new customer relationships, we agree with
the applicable payor, laboratory or other customer to provide certain of our tests at negotiated rates but, subject to limited exceptions,
most of these relationships do not obligate any party to order our tests at any agreed volume or frequency or at all. Further, any
relationships we may develop with any government agencies are subject to unique risks associated with government contracts,
including cancellation if adequate appropriations for subsequent performance periods are not made and modification or termination at
the government’s convenience without prior notice. Our efforts to pursue individual consumers under our Picture Genetics platform,
new payor or institutional customers, new COVID-19 testing customers or other new customer markets could fail, and even if we are
able to develop relationships with new customers in these or any other new customer groups, these relationships may not lead to
meaningful or any increases in our customer base, the number of billable tests we deliver or our revenue, and may not improve our
ability to achieve or sustain profitability.
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Sales and Marketing
Our sales and marketing force currently consists of two internal teams of sales and marketing experts, respectively, with deep
experience in our industry, as well as a network of independent sales representatives who are knowledgeable about our tests.
Historically, we have significantly relied on organic growth and word-of-mouth among our customers to generate interest in our tests,
which we believe demonstrates the value of our offering. In recent years, we have invested significant time and capital to strengthen
our sales and marketing efforts, including increasing the size and restructuring the organization of our internal team, re-focusing our
initiatives and strategies, and increasing the overall scope of our marketing activities.
Our sales and marketing strategy is designed to expand our brand awareness, grow our customer base and further penetrate our
relationships with existing customers. We aim to achieve these objectives by providing education about the benefits and full scale of
our offerings, both to the medical community in general and to our targeted customer and geographic markets. We plan to expand our
presence and test volume in international markets through our own direct sales team, which includes sales people dedicated to
international markets, a number of independent contractor sales representatives, and, if and as opportunities arise, by engaging
distributors or establishing other types of arrangements, such as joint ventures or other relationships, to manage or assist with sales,
logistics, education and customer support in certain territories.
Our marketing activities also include targeted initiatives, including working with medical professional societies to promote
awareness of the benefits of our tests and genetic testing in general; presenting at medical, scientific or industry exhibitions and
conferences, such as an evaluation of the clinical utility of proactive genetic screening for healthy individuals that was presented at the
2018 American Society of Human Genetics Conference; and pursuing or supporting scientific studies of our tests and publication of
results in medical or scientific journals. In addition, we conduct email advertising campaigns and social media awareness campaigns
to existing and potential future customers when we want to send a specific message about our company and our brand, including, for
instance, when we launch new tests or new test options and when we add new genes to our test menu. In addition, in 2019, we
launched Picture Genetics, a patient-initiated genetic testing offering aimed at individual consumers and which we advertise directly to
consumers through a variety of methods including social media and other digital avenues.
Our sales and marketing strategy is also focused on offering differentiated and highly available customer service resources,
which we believe is an important factor in maintaining and deepening our customer relationships. Genetic tests are highly complex by
nature and we recognize that our customers may want to discuss with us available testing options, specimen collection requirements,
expected turnaround times, the cost of our tests and the clinical reports we produce. As a result, we offer comprehensive customer
service designed to enable efficient ordering and increase the accessibility of our clinical reports, including customer access to our
licensed and qualified laboratory directors who review and approve each report we produce.
Our sales and marketing teams also explore strategic collaboration opportunities with various research and medical institutions.
New partnerships formed in 2020 include partnering with governmental bodies, municipalities, and large corporations for providing
COVID-19 services to citizens, employees, and students.
Our Suppliers
We rely on a limited number of suppliers for certain laboratory substances used in the chemical reactions incorporated into our
processes, which we refer to as reagents, as well as for the sequencers, collection kits, and various other equipment and materials we
use in our laboratory operations. In particular, we rely on Illumina, Inc. as the sole supplier of the next generation sequencers and
associated reagents we use to perform our genetic tests and as the sole provider of maintenance and repair services for these
sequencers. In addition, we rely on a limited number of suppliers for COVID-19 test collection kits. Our laboratory operations would
be interrupted if we encounter delays or difficulties securing these reagents, collection kits, sequencers, other equipment or materials
or maintenance and repair services, which could occur for a variety of reasons, including if we need a replacement or temporary
substitute for any of our limited or sole suppliers and are not able to locate and make arrangements with an acceptable replacement or
temporary substitute.
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Competition
Our competitors include dozens of companies focused on molecular genetic testing services, including specialty and reference
laboratories that offer traditional single-gene and multi-gene tests and other COVID-19 diagnostic test providers. Principal
competitors include companies such as Ambry Genetics, a subsidiary of Konica Minolta Inc.; Baylor Genetics; Centogene AG; Color
Genomics, Inc.; Connective Tissue Gene Test LLC; Cooper Surgical, Inc.; Eurofins Scientific; GeneDx, a subsidiary of OPKO
Health, Inc.; Laboratory Corporation of America Holdings; MNG Laboratories, LLC; Myriad Genetics, Inc.; Natera, Inc.; Perkin
Elmer, Inc.; PreventionGenetics, LLC; Progenity, Inc.; Quest Diagnostics Incorporated; and Sema4 Genomics; as well as other
commercial and academic laboratories. In addition, other established and emerging healthcare, information technology and service
companies may develop and sell competitive tests, which may include informatics, analysis, integrated genetic tools and services for
health and wellness.
Additionally, participants in closely related markets, such as prenatal testing and clinical trial or companion diagnostic testing,
could converge on offerings that are competitive with the type of tests we perform. Instances where potential competitors are aligned
with key suppliers or are themselves suppliers could provide these potential competitors with significant advantages. Further,
hospitals, research institutions and eventually individual physicians and other practitioners may also seek to perform at their own
facilities the type of genetic testing we would otherwise perform for them. In this regard, continued development of, and associated
decreases in the cost of, equipment, reagents and other materials and databases and genetic data interpretation services may enable
broader direct participation in genetic testing and analysis and drive down the use of third-party testing companies such as ours.
Additionally, cost decreases and increased direct participation, as well as cost-saving initiatives on the part of government entities and
other third-party payors, could intensify the downward pressure on the price for genetic analysis and interpretation generally.
Moreover, the biotechnology and genetic testing fields continue to undergo significant consolidation, permitting larger clinical
laboratory service providers to increase cost efficiencies and service levels, resulting in more intense competition.
We believe the principal competitive factors in our market are:
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breadth and depth of genetic content;
flexibility of test customization;
price of tests;
quality of results, including their reliability, accuracy and clinical actionability;
accessibility of results;
coverage and reimbursement arrangements with third-party payors;
turnaround time;
customer service;
convenience of testing; and
brand recognition.
We believe we compare favorably with our competitors on the basis of these factors. However, many of our existing and
potential future competitors have longer operating histories, larger customer bases, more expansive brand recognition and deeper
market penetration, substantially greater financial, technological and research and development resources and selling and marketing
capabilities and considerably more experience dealing with third-party payors. As a result, they may be able to respond more quickly
to changes in customer requirements or preferences, develop faster and better advancements for their technologies and tests, create and
implement more successful strategies for the promotion and sale of their tests, obtain more favorable results from third-party payors
regarding coverage and reimbursement for their offerings, adopt more aggressive pricing policies for their tests, secure supplies from
vendors on more favorable terms or devote substantially more resources to infrastructure and systems development. In addition,
competitors may be acquired by, receive investments from or enter into other commercial relationships with larger, well-established
and well-financed companies as use of NGS for clinical diagnosis and preventative care increases. Further, companies or governments
that effectively control access to genetic testing through umbrella contracts or regional preferences could promote our competitors or
prevent us from performing certain tests in certain territories. We may not be able to compete effectively against these organizations.
Research and Development
We have assembled a highly-qualified team with expertise in a number of fields important to our business, such as
bioinformatics, genetics, software engineering, laboratory management and sales and marketing. We rely on this team to conduct all of
our research and development activities, including efforts to develop and curate our expansive library of genetic information and
further expand our technology platform.
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We rely on a combination of registered and unregistered intellectual property rights, including trade secrets, trademarks and
customary contractual protections, to protect our core technology and intellectual property.
Intellectual Property
Trade Secrets
We rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain and
develop the competitive position afforded by many of our laboratory, analytic and business practices. For example, significant
elements of our genetic tests and our testing procedures, including aspects of specimen preparation, our bioinformatics algorithms and
related processes and our adaptive learning software, are based on unpatented trade secrets and know-how. We try to protect trade
secrets and know-how by taking reasonable steps to keep them confidential, including entering into nondisclosure and confidentiality
agreements with parties who have access to them, such as our employees and certain third parties, and entering into invention
assignment agreements with our employees and consultants that obligate them to assign to us any inventions developed in the course
of their work for us.
Trademarks
We own registered and unregistered trademark and service mark rights under applicable U.S. and foreign law to distinguish
and/or protect our brand, including our company name and logo.
CLIA
Regulation
As a clinical laboratory, we are required to hold certain federal licenses, certifications and permits to conduct our business.
Congress passed the Clinical Laboratory Improvement Amendments of 1988, or CLIA, which establishes quality standards for all
laboratory testing designed to ensure the accuracy, reliability and timeliness of patient test results. Our laboratories located in
California and Texas are CLIA-certified and accredited by the College of American Pathologists, or CAP, a CMS-approved
accrediting organization.
Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of
providing information for the diagnosis, prevention or treatment of disease or the impairment or assessment of health. CLIA requires
that we hold a certificate applicable to the type of laboratory examinations we perform and that we comply with various standards
with respect to personnel qualifications, facility administration, proficiency testing, quality control and assurance and inspections.
Laboratories must register and list their tests with Centers for Medicare & Medicaid Services, or CMS, the agency that oversees
CLIA, and CLIA compliance and certification is a prerequisite to be eligible to bill government payors and many private payors for
our tests.
We are subject to survey and inspection every two years to assess compliance with CLIA’s program standards, and we may be
subject to additional unannounced inspections. Our CLIA certification for the laboratory located in California was last renewed
October 23, 2019, and our CLIA certification for the laboratory located in Texas was initially received on July 27, 2020, and each of
them is valid for two years from the date of issuance. If our clinical reference laboratories are found to be out of compliance with
CLIA requirements at any of these inspections, we may be subject to sanctions such as suspension, limitation or revocation of our
CLIA certificate, a directed plan of correction, on-site monitoring, civil monetary penalties, civil injunctive suits, criminal penalties,
exclusion from the Medicare and Medicaid programs and significant adverse publicity.
In addition, we elect to participate in the accreditation program of CAP. CMS has deemed CAP standards to be equally or more
stringent than CLIA regulations and has approved CAP as a recognized accrediting organization. Inspection by CAP is performed in
lieu of inspection by CMS for CAP-accredited laboratories. Because we are accredited by the CAP Laboratory Accreditation Program,
we are deemed to also comply with CLIA.
State and Foreign Laboratory Licensure
Our laboratories are located in Temple City, California and Houston, Texas. Our Temple City, California laboratory is required
to maintain a license to conduct testing in the State of California. California laws establish standards for day-to-day operations of our
laboratory, including with respect to the training and skills required of personnel, quality control and proficiency testing requirements.
If our clinical reference laboratory is out of compliance with California standards, the State of California Department of Public Health,
or CA DPH, may suspend, restrict or revoke our license to operate our clinical reference laboratory, assess substantial civil money
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penalties or impose specific corrective action plans. Any such actions could materially affect our business. We maintain a current
license in good standing with CA DPH.
Additionally, several states require the licensure of out-of-state laboratories that accept specimens from those states and/or
receive specimens from laboratories in those states. Our Temple City, California laboratory holds the required out-of-state laboratory
licenses to perform testing on specimens from Maryland, Rhode Island and Pennsylvania. The laboratory director must also maintain a
Certificate of Qualification issued by New York’s Department of Health, or DOH, in permitted categories. Our Houston, Texas
laboratory holds the required out-of-state licenses to perform testing on specimens from California. We obtained a state laboratory
permit for our Temple City, California laboratory from the New York DOH in 2019. The New York state laboratory laws, regulations
and rules are equal to or more stringent than the CLIA regulations and establish standards for the operation of a clinical laboratory and
performance of test services, including education and experience requirements for laboratory directors and personnel; physical
requirements of a laboratory facility; equipment validations; and quality management practices. In addition to having a laboratory
license in New York, our Temple City, California laboratory is required to obtain approval on a test-specific basis by the New York
DOH before specific testing is performed on specimens from New York, and our Houston, Texas laboratory received temporary
exemption from New York to perform tests on specimens from New York for COVID-19 tests.
Other states may adopt similar licensure requirements in the future, which could require us to modify, delay or discontinue our
operations in such jurisdictions. If we identify any other state with such requirements or if we are contacted by any other state advising
us of such requirements, we intend to follow instructions from the state regulators as to how to comply with such requirements.
We are also subject to regulation in foreign jurisdictions, which we expect will increase as we seek to expand international
utilization of our tests or if jurisdictions in which we pursue operations adopt new or modified licensure requirements. Foreign
licensure requirements could require review and modification of our tests in order to offer them in certain jurisdictions or could
impose other limitations, such as restrictions on the transport of human blood or other tissue necessary for us to perform our tests that
may limit our ability to make our tests available outside of the United States on a broad scale.
FDA
Pursuant to its authority under the Federal Food, Drug, and Cosmetic Act, or FDC Act, the U.S. Food and Drug Administration,
or FDA, has jurisdiction over medical devices, which are defined to include, among other things, in vitro diagnostic products, or IVDs,
used for clinical purposes. The tests that we offer may be considered IVDs and as such, medical devices. The laws and regulations
governing the marketing of IVDs are evolving, extremely complex, and in many instances, there are no significant regulatory or
judicial interpretations of these laws and regulations. The FDA regulates, among other things, the research, testing, manufacturing,
safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion and sales and distribution of
medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended
uses. In addition, the FDA regulates the import and export of medical devices.
The FDC Act classifies medical devices into one of three categories based on the risks associated with the device and the level
of control necessary to provide reasonable assurance of safety and effectiveness. Devices deemed by the FDA to pose the greatest risk,
such as life-sustaining, life-supporting or implantable devices or devices deemed not substantially equivalent to a previously 510(k)
cleared device, are categorized as Class III. These devices typically require submission and approval of a premarket approval
application, or PMA. Devices deemed to pose lower risk are categorized as either Class I or II, which requires the manufacturer to
submit to the FDA a 510(k) premarket notification submission requesting clearance of the device for commercial distribution in the
United States. Some low-risk devices are exempted from this requirement. When a 510(k) premarket notification submission is
required, the manufacturer must submit to the FDA a premarket notification submission demonstrating that the device is “substantially
equivalent” to: (i) a device that was legally marketed prior to May 28, 1976, for which PMA approval is not required, (ii) a legally
marketed device that has been reclassified from Class III to Class II or Class I, or (iii) another legally marketed, similar device that has
been cleared through the 510(k) clearance process.
After the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply. These include: the
Quality System Regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality
assurance procedures during the manufacturing process; labeling regulations; the FDA’s general prohibition against promoting
products for unapproved or “off-label” uses; and the Medical Device Reporting regulation, which requires that manufacturers report to
the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause
or contribute to a death or serious injury if it were to recur. The FDA has broad post-market and regulatory and enforcement powers.
Failure to comply with the applicable U.S. medical device regulatory requirements could result in, among other things, warning
letters, fines, injunctions, consent decrees, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial
suspension of production, the FDA’s refusal to grant future premarket clearances or approvals, withdrawals or suspensions of current
product applications, and criminal prosecution.
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Although the FDA has statutory authority to assure that medical devices, including IVDs, are safe and effective for their
intended uses, the FDA has historically exercised its enforcement discretion and not enforced applicable provisions of the FDC Act
and regulations with respect to laboratory developed tests, or LDTs, which are a subset of IVDs that are intended for clinical use and
designed, manufactured and used within a single laboratory. We believe our tests fall within the definition of an LDT. As a result, we
believe our diagnostic tests are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable
FDC Act provisions.
Even though we commercialize our tests as LDTs, our tests may in the future become subject to more onerous regulation by the
FDA. For example, in 2017, the FDA published a Discussion Paper on Laboratory Developed Tests to further public discussion about
an appropriate LDT oversight approach and to give congressional committees the opportunity to develop a legislative solution to the
competing interests of ensuring the public health and promoting innovation in the clinical testing industry. However, on August 19,
2020, the United States Department of Health and Human Services, or HHS, published a policy announcement that FDA must go
through the formal notice-and-comment rulemaking process before requiring premarket review of LDTs rather than making such
changes through guidance documents, compliance manuals, or other informal policy statements. Laboratories may still voluntarily
submit LDTs to FDA for premarket review, although the agency does not appear to be prioritizing such applications for review at the
present time, in light of the HHS announcement. Although the ultimate impact of HHS’s policy statement on FDA’s plans for
regulating LDTs and its current thinking relating to such diagnostic testing products is unclear, the August 2020 announcement
appears to confirm that laboratories may commercialize LDTs for clinical use without submitting such tests for FDA review and
marketing authorization, including emergency use authorization during the ongoing COVID-19 pandemic. HHS’s policy statement
does not affect proposed legislation for the regulation of LDTs, which is discussed below. It is also unclear whether the Biden
Administration, which assumed control of the executive branch on January 20, 2021, would take the same position as the former
administration or seek to revoke or revise the HHS policy announcement from August 2020.
In December 2018, members of Congress released a discussion draft of a possible bill to regulate in vitro clinical tests including
LDTs, and provided opportunities for additional stakeholders to also provide input on the proposed reform legislation. On March 5,
2020, U.S. Representatives Diana DeGette (D-CO) and Dr. Larry Bucshon (R-IN) formally introduced the long-awaited legislation,
called the Verifying Accurate, Leading-edge IVCT Development, or VALID Act. An identical version of the bill was introduced
concurrently in the Senate, demonstrating both bicameral and bipartisan support for the effort to overhaul how the FDA reviews and
approves diagnostic tests going forward. The VALID Act would codify into law the term “in vitro clinical test”, or IVCT, to create a
new medical product category separate from medical devices that includes products currently regulated as IVDs as well as LDTs. The
VALID Act would also create a new system for labs and hospitals to use to submit their tests electronically to the FDA for approval,
which is aimed at reducing the amount of time it takes for the agency to approve such tests, and establish a new program to expedite
the development of diagnostic tests that can be used to address a current unmet need for patients.
It is unclear whether the VALID Act would be passed by Congress in its current form or signed into law by the President. Until
the FDA finalizes its position on regulation of LDTs through formal notice-and-comment rulemaking, or the VALID Act or other
federal legislation is passed reforming the government’s regulation of LDTs, or alternatively, if the FDA disagrees with our
assessment that our tests fall within the definition of an LDT, we could for the first time be subject to enforcement of regulatory
requirements such as registration and listing requirements, medical device reporting requirements and quality control requirements.
Any new legislation or formal FDA regulations affecting LDTs may result in increased regulatory burdens on our ability to continue
marketing our tests and to develop and introduce new tests in the future. Additionally, if and when the FDA begins to actively enforce
its premarket submission regulations with respect to LDTs generally or our tests in particular, whether as a result of new legislative
authority or following formal notice-and-comment rulemaking, we may be required to obtain premarket clearance for our tests under
Section 510(k) of the FDC Act or approval of a PMA. The process for submitting a 510(k) premarket notification and receiving FDA
clearance usually takes from three to 12 months, but it can take significantly longer and clearance is never guaranteed. The process for
submitting and obtaining FDA approval of a PMA generally takes from one to three years or even longer and approval is not
guaranteed. PMA approval typically requires extensive clinical data and can be significantly longer, more expensive and more
uncertain than the 510(k) clearance process. If premarket review is required for some or all of our tests, the FDA could require that we
stop selling our products pending clearance or approval and conduct clinical testing prior to making submissions to FDA to obtain
premarket clearance or approval. The FDA could also require that we label our tests as investigational or limit the labeling claims we
are permitted to make.
Additionally, the FDA previously solicited public input and published two draft guidance documents relating to FDA oversight
of NGS-based tests. The two draft guidance documents on NGS-based tests describe the FDA’s current thinking and proposed
approach regarding the possible use of FDA-recognized standards to support analytical validity, and public human genetic variant
databases to support clinical validity, of these tests. The drafts were published in final form in April 2018. While it appears that the
FDA is striving to provide a flexible pathway to device clearance or approval for manufacturers seeking to market NGS-based tests, it
is unknown how the FDA may regulate such tests in the future and what testing and data may be required to support such clearance or
approval. If premarket review is required for some or all of our tests and the FDA requires more extensive testing such as clinical
trials, for example, we could experience significantly increased development costs and delay.
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The FDA enforces its medical device requirements by various means, including inspection and market surveillance. If the FDA
finds a violation, it can institute a wide variety of enforcement actions, ranging from an Untitled Letter or Warning Letter to more
severe sanctions, such as: fines, injunctions and civil penalties; recall or seizure of products; operating restrictions, partial suspension
or total shutdown of production; and criminal prosecution. Failure to comply with any applicable FDA requirements could trigger a
range of enforcement actions by the FDA, including warning letters, civil monetary penalties, injunctions, criminal prosecution, recall
or seizure, operating restrictions, partial suspension or total shutdown of operations and denial of or challenges to applications for
clearance or approval, as well as significant adverse publicity.
Advertising of Laboratory Services or LDTs
Whether regulated by FDA as a Class I or Class II device or not directly subject to FDA’s device requirements as an LDT, our
advertising for laboratory services and genetic tests is subject to federal truth-in-advertising laws enforced by the Federal Trade
Commission, or FTC, as well as comparable state consumer protection laws. Under the Federal Trade Commission Act, or the FTC
Act, the FTC is empowered, among other things, to (a) prevent unfair methods of competition and unfair or deceptive acts or practices
in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; and (c) gather and compile
information and conduct investigations relating to the organization, business, practices, and management of entities engaged in
commerce. The FTC has very broad enforcement authority, and failure to abide by the substantive requirements of the FTC Act and
other consumer protection laws can result in administrative or judicial penalties, including civil penalties, injunctions affecting the
manner in which we would be able to market services or products in the future, or criminal prosecution.
Reimbursement
CPT Codes
We bill third-party payors, both commercial and government, using Current Procedural Terminology, or CPT, codes, which are
published by the American Medical Association, or AMA. CPT codes in their current form are not readily applied to many of the
genetic tests we conduct. For example, for many of our multi-gene panels, there may not be an appropriate CPT code for any of the
genes in a panel, in which case our test would be billed under a miscellaneous code for an unlisted molecular pathology procedure.
Many third-party payors do not have set reimbursement fee rates for this miscellaneous code. Prior to starting a test, we negotiate the
reimbursement rate with the payor if the benefits investigation has determined the test to be medically necessary and the payor has
issued prior authorization. When the test results are delivered, after we file the claim, we may also need to resubmit documentation or
appeal a denial, which can cause delay in the reimbursement of the claim.
In September 2014, the AMA published new CPT codes for genomic sequencing procedures that are effective for dates of
service on or after January 1, 2015. These include genomic sequencing procedure codes for certain multi-gene panel tests. In a final
determination under the Medicare Clinical Laboratory Fee Schedule, or CLFS, published in November 2014, CMS set the 2015
payment rate for these codes using the gap-fill process. Under the gap-fill process, local Medicare Administrative Contractors, or
MACs, establish rates for the codes that each MAC believes meet the criteria for Medicare coverage and considering laboratory
charges and discounts to charges, resources, amounts paid by other third-party payors for the tests and amounts paid by the MAC for
similar tests. In 2015, gap-filled payment rates were established for some, but not all, of the published codes for genomic sequencing
procedures. For the codes for which local gap-filled rates were established in 2015, a national limitation amount for Medicare was
established for 2016. For the codes for which local gap-filled rates were not established in 2015, associated procedures are priced by
the local MACs in 2016 if an individual MAC determines that such codes should be covered. Where available, the national limitation
amount serves as a cap on the Medicare and Medicaid payment rates for a test procedure, which may not be adequate for all of the
procedures covered by the applicable codes, including our tests to the extent we are required to report them under these codes.
PAMA
In April 2014, Congress passed the Protecting Access to Medicare Act of 2014, or PAMA, which included substantial changes
to the way in which clinical laboratory services are priced and paid under Medicare. On June 23, 2016, CMS published the final rule
implementing the reporting and rate-setting requirements. Under PAMA, laboratories that receive the majority of their Medicare
revenue from payments made under the CLFS or the Physician Fee Schedule are required to report to CMS, beginning in 2017 and
every three years thereafter (or annually for an advanced diagnostic laboratory test, or ADLT), private payor payment rates and
volumes for clinical diagnostic laboratory tests, or CDLTs. Laboratories that fail to report the required payment information may be
subject to substantial civil monetary penalties. We do not believe that any of our tests meet the current definition of ADLTs. We
therefore report private payor rates for our tests every three years.
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As required under PAMA, CMS uses the data reported by laboratories to develop Medicare payment rates for laboratory tests
equal to the volume-weighted median of the private payor payment rates. For tests furnished on or after January 1, 2019, Medicare
payments for CDLTs are based upon reported private payor rates. For a CDLT that is assigned a new or substantially revised CPT
code, the initial payment rate is assigned using the gap-fill methodology, as under prior law.
On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, which included the Laboratory
Access for Beneficiaries Act, or LAB Act. The LAB Act delayed by one year the reporting of payment data under PAMA for CDLTs
that are not ADLTs until the first quarter of 2021. The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act,
which was signed into law on March 27, 2020, delayed the reporting period by an additional year, until the first quarter of 2022. As a
result, Medicare payment rates determined by data reported in 2017 will continue through December 31, 2022.
In addition, under PAMA, as amended by the LAB Act, any reduction to a particular payment rate resulting from the new
methodology is limited to 10% per test per year in 2020 and to 15% per test per year in each of the years 2021 through 2023. The
CARES Act delayed the 15% cut scheduled to take effect on January 1, 2021, for one year.
Privacy and Security Laws
HIPAA and HITECH
Under the Administrative Simplification provisions of the federal Health Insurance Portability and Accountability Act of 1996,
or HIPAA, as amended by the federal Health Information Technology for Economic and Clinical Health Act, or HITECH, the U.S.
Department of Health and Human Services, or HHS, has issued regulations that establish uniform standards governing the conduct of
certain electronic healthcare transactions and requirements for protecting the privacy and security of protected health information, or
PHI, used or disclosed by healthcare providers, health plans, and healthcare clearinghouses that conduct certain healthcare transactions
electronically, known as covered entities. The following four principal regulations with which we are required to comply have been
issued in final form under HIPAA and HITECH: privacy regulations, security regulations, the breach notification rule and standards
for electronic transactions, which establish standards for common healthcare transactions.
The privacy regulations of HIPAA and HITECH protect medical records and other PHI by limiting their use and release, giving
patients a variety of rights, including the right to access their medical records and limiting most disclosures of health information to
the minimum amount necessary to accomplish an intended purpose. HIPAA also requires covered entities to enter into business
associate agreements to obtain a written assurance of compliance with HIPAA from individuals or organizations who provide services
to covered entities involving the use or disclosure of PHI, or also known as business associates. As a general rule, a covered entity or
business associate may not use or disclose PHI except as permitted under the privacy regulations of HIPAA and HITECH.
Covered entities must also comply with the security regulations of HIPAA and HITECH, which establish requirements for
safeguarding the confidentiality, integrity and availability of electronic PHI. The HIPAA security regulations require the
implementation of administrative, physical and technical safeguards and the adoption of written security policies and procedures.
In addition, HITECH established, among other things, certain breach notification requirements with which covered entities must
comply. In particular, a covered entity must report breaches of PHI that has not been encrypted or otherwise secured in accordance
with guidance from the Secretary of HHS, or the Secretary. Required breach notices must be made as soon as is reasonably
practicable, but no later than sixty days following discovery of the breach. Reports must be made to affected individuals, the
Secretary, and depending on the size of the breach, the local and national media. Covered entities are also subject to audit under
HHS’s HITECH-mandated audit program and may be investigated in connection with a privacy or data security complaint.
There are significant civil and criminal fines and other penalties that may be imposed for violating HIPAA. A covered entity or
business associate is liable for civil monetary penalties for a violation that is based on an act or omission of any of its agents, including
a downstream business associate, as determined according to the federal common law of agency. Penalties for failure to comply with a
requirement of HIPAA and HITECH vary significantly depending on the failure and include civil monetary penalties of up to $1.5
million per violation of the same requirement per calendar year. A single breach incident can violate multiple requirements, resulting
in potential penalties in excess of $1.5 million. Additionally, a person who knowingly obtains or discloses individually identifiable
health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one year of imprisonment. These
criminal penalties increase if the wrongful conduct involves false pretenses or the intent to sell, transfer or use identifiable health
information for commercial advantage, personal gain or malicious harm. Covered entities are also subject to enforcement by state
attorneys general who were given authority to enforce HIPAA under HITECH. Further, to the extent that we submit electronic
healthcare claims and payment transactions that do not comply with the electronic data transmission standards established under
HIPAA and HITECH, payments to us may be delayed or denied.
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The HIPAA privacy, security, and breach notification regulations establish a uniform federal “floor” but do not supersede state
laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their
records containing PHI or insofar as such state laws apply to personal information that is broader in scope than PHI as defined under
HIPAA. The compliance requirements of these laws, including additional breach reporting requirements, and the penalties for
violation vary widely and new privacy and security laws in this area are evolving. For example, several states, such as California, have
implemented comprehensive privacy laws and regulations. The California Confidentiality of Medical Information Act imposes
restrictive requirements regulating the use and disclosure of health information and other personally identifiable information. In
addition to fines and penalties imposed upon violators, some of these state laws also afford private rights of action to individuals who
believe their personal information has been misused. California’s patient privacy laws, for example, provide for penalties of up to
$250,000 and permit injured parties to sue for damages. In addition to the California Confidentiality of Medical Information Act,
California recently adopted the California Consumer Privacy Act of 2018, or CCPA, which came into effect on January 1, 2020. The
CCPA establishes a new privacy framework for covered businesses by creating an expanded definition of personal information,
establishing new data privacy rights for consumers in the State of California, imposing special rules on the collection of consumer data
from minors, and creating a new and potentially severe statutory damages framework for violations of the CCPA and for businesses
that fail to implement reasonable security procedures and practices to prevent data breaches. There is uncertainty surrounding the
application of the CCPA to parts of our business, and amendments to the law before its effective data may have impact on operations.
In addition to the CCPA, other states are introducing similar legislation which will impact compliance obligations and increase
complexity and cost of compliance.
Many states, such as Massachusetts, have also implemented genetic testing and privacy laws imposing specific patient consent
requirements and requirements for protecting test results. The interplay of federal and state laws may be subject to varying
interpretations by courts and government agencies, creating complex compliance issues for us and our clients and potentially exposing
us to additional expense, adverse publicity, and liability. Further, as regulatory focus on privacy issues continues to increase and laws
and regulations concerning the protection of personal information expand and become more complex, these potential risks to our
business could intensify. In addition, the interpretation and application of consumer, health-related, and data protection laws are often
uncertain, contradictory, and in flux. The applicability and requirements of these laws and penalties for violations vary widely. Failure
to maintain compliance, or changes in state or federal laws regarding privacy or security, could result in civil and/or criminal penalties
and could have a material adverse effect on our business.
Numerous other federal, state and foreign laws, including consumer protection laws and regulations, govern the collection,
dissemination, use, access to, confidentiality and security of patient health information. In addition, Congress and some states are
considering new laws and regulations that further protect the privacy and security of medical records or medical information. With the
recent increase in publicity regarding data breaches resulting in improper dissemination of consumer information, all 50 states have
passed laws regulating the actions that a business must take if it experiences a data breach, as defined by state law, including prompt
disclosure within a specified amount of time to affected individuals. Congress has also been considering similar federal legislation
relating to data privacy and data protection. The FTC and states’ Attorneys General have also brought enforcement actions and
prosecuted some data breach cases as unfair and/or deceptive acts or practices under the FTC Act and comparable state laws. In
addition to data breach notification laws, some states have enacted statutes and rules requiring businesses to reasonably protect certain
types of personal information they hold or to otherwise comply with certain specified data security requirements for personal
information. We intend to continue to comprehensively protect all personal information and to comply with all applicable laws
regarding the protection of such information.
Foreign Laws
We are also subject to foreign privacy laws in the jurisdictions in which we sell our tests. The interpretation, application and
interplay of consumer and health-related data protection laws in the United States, Europe and elsewhere are often uncertain,
contradictory and in flux. For example, the new General Data Protection Regulation, or GDPR, and Cybersecurity Directive have been
enacted in the European Union and became effective in May 2018. These texts introduced many changes to privacy and security in the
European Union, including stricter rules on consent and security duties for critical industries, including for the health sector. The
interpretation of some rules is still unclear, and some requirements may be completed by national legislation. This makes it difficult to
assess the impact of these new data protection laws on our business at this time. More generally, foreign laws and interpretations
governing data privacy and security are constantly evolving and it is possible that laws may be interpreted and applied in a manner
that is inconsistent with our current practices, in which case we could be subject to government-imposed fines or orders requiring that
we change our practices. These fines can be very high. For instance, the GDPR introduces fines of up to approximately $22 million or
4% of a group’s worldwide annual turnover for certain infringements. In addition, privacy regulations differ widely from country to
country.
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In many activities, including the conduct of clinical trials, we are subject to laws and regulations governing data privacy and the
protection of health-related and other personal information. These laws and regulations govern our processing of personal data,
including the collection, access, use, analysis, modification, storage, transfer, security breach notification, destruction and disposal of
personal data. We must comply with laws and regulations associated with the international transfer of personal data based on the
location in which the personal data originates and the location in which it is processed.
If we or our vendors fail to comply with applicable data privacy laws, or if the legal mechanisms we or our vendors rely upon to
allow for the transfer of personal data from the European Union to the United States (or other countries not considered by the
European Commission to provide an adequate level of data protection) are not considered adequate, we could be subject to
government enforcement actions and significant penalties against us, and our business could be adversely impacted if our ability to
transfer personal data outside of the European Union is restricted, which could adversely impact our operating results. The GDPR has
increased our responsibility and potential liability in relation to European Union personal data that we process, and we may be
required to put in place additional mechanisms to ensure compliance with the GDPR. However, our ongoing efforts related to
compliance with the GDPR may not be successful and could increase our cost of doing business. In addition, data protection
authorities of the different European Union member states may interpret the GDPR differently, and guidance on implementation and
compliance practices are often updated or otherwise revised, which adds to the complexity of processing personal data in the European
Union. In addition to the GDPR, other countries have enacted data protection legislation which increase the complexity of doing
international business and transferring sensitive personal information from those countries to the United States.
The privacy and security of personally identifiable information stored, maintained, received or transmitted, including
electronically, subject to significant regulation in the United States and abroad. While we strive to comply with all applicable privacy
and security laws and regulations, legal standards for privacy continue to evolve and any failure or perceived failure to comply may
result in proceedings or actions against us by government entities or others, or could cause reputational harm, which could have a
material adverse effect on our business.
Fraud and Abuse Laws
In the United States, we must comply with various fraud and abuse laws, and we are subject to regulation by various federal,
state and local authorities, including CMS, other divisions of HHS (such as the Office of Inspector General), the U.S. Department of
Justice, individual U.S. Attorney’s Offices within the Department of Justice and state and local governments. We also may be subject
to foreign fraud and abuse laws.
Anti-Kickback and Fraud Statutes
In the United States, the federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying,
soliciting or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in order to induce or in return for the
referral of an individual for the furnishing of, or the recommending or arranging for the furnishing of, purchasing, leasing, ordering or
arranging for or recommending purchasing, leasing or ordering of any good, facility, service or item for which payment may be made
in whole or in part by a federal healthcare program. Courts have stated that a financial arrangement may violate the Anti-Kickback
Statute if any one purpose of the arrangement is to encourage patient referrals or other federal healthcare program business, regardless
of whether there are other legitimate purposes for the arrangement. The definition of “remuneration” has been broadly interpreted to
include anything of value, including gifts, discounts, credit arrangements, payments of cash, consulting fees, waivers of co-payments,
ownership interests and providing anything at less than its fair market value. The Anti-Kickback Statute is broad and may technically
prohibit many innocuous or beneficial arrangements within the healthcare industry, although it does contain several exceptions. HHS
has issued a series of regulatory “safe harbors” setting forth certain provisions that, if met, will immunize the parties to the
arrangement from prosecution under the Anti-Kickback Statute. Although full compliance with the statutory exceptions or regulatory
safe harbors ensures against prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit
within a specific statutory exception or regulatory safe harbor does not necessarily mean that the transaction or arrangement is illegal
or that prosecution under the Anti-Kickback Statute will be pursued. Furthermore, a person or entity does not need to have actual
knowledge of the statute or specific intent to violate it in order to have committed a violation. Penalties for violations of the Anti-
Kickback Statute are severe and include imprisonment, criminal fines, civil monetary penalties and exclusion from participation in
federal healthcare programs. In addition, a violation of the federal Anti-Kickback Statute can serve as a basis of liability under the
federal False Claims Act (described below). Many states also have anti-kickback statutes, some of which may apply to items or
services reimbursed by any third-party payor, including commercial insurers.
In addition, in October 2018, the Eliminating Kickbacks in Recovery Act of 2018, or EKRA, was enacted as part of the
Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act. EKRA is an all-
payer anti-kickback law that makes it a criminal offense to pay any remuneration to induce referrals to, or in exchange for, patients
using the services of a recovery home, a substance use clinical treatment facility, or laboratory. However, unlike the federal Anti-
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Kickback Statute, EKRA is not limited to services covered by federal or state health care programs but applies more broadly to
services covered by “health care benefit programs,” including commercial insurers. Although it appears that EKRA was intended to
reach patient brokering and similar arrangements to induce patronage of substance use recovery and treatment, the language in EKRA
is broadly written. Further, certain of EKRA’s exceptions, such as the exception applicable to relationships with employees that
effectively prohibits incentive compensation, are inconsistent with the federal anti-kickback statute and regulations, which permit
payment of employee incentive compensation, a practice that is common in the industry. Significantly, EKRA permits the U.S.
Department of Justice to issue regulations clarifying EKRA’s exceptions or adding additional exceptions, but such regulations have
not yet been issued. Laboratory industry stakeholders are reportedly seeking clarification or correction regarding EKRA’s scope.
There are also U.S. federal laws related to healthcare fraud and false statements relating to healthcare matters. The healthcare
fraud statute prohibits, among other things, knowingly and willfully executing a scheme to defraud any healthcare benefit program,
including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government
payor programs such as the Medicare and Medicaid programs. The false statements statute prohibits knowingly and willfully
falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection
with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or
entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. A
violation of this statute is also a felony and may result in fines, imprisonment or exclusion from government payor programs.
False Claims Act
Another development affecting the healthcare industry is the increased enforcement of the federal False Claims Act and, in
particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes
liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for
payment to the federal government. The qui tam provisions of the False Claims Act allow a private individual to bring an action under
the False Claims Act on behalf of the federal government and permit such an individual to share in any amounts paid by the entity to
the government in fines or settlement. In addition, providers and suppliers must report and return any overpayments received from the
Medicare and Medicaid programs within 60 days of identification. Failure to identify and return such overpayments exposes the
provider or supplier to False Claims Act liability. When an entity is determined to have violated the False Claims Act, it may be
required to pay up to three times the actual damages sustained by the government, plus civil penalties ranging from $5,500 to $11,000
for each false claim, as set by statute. However, the civil penalty amounts are adjusted annually for inflation. For civil penalties
assessed after June 19, 2020, whose associated violations occurred after November 2, 2015, the civil penalty amount ranges between
$11,665 and $23,331 per claim.
In addition, various states have enacted false claim laws analogous to the federal False Claims Act, although many of these state
laws apply where a claim is submitted to any third-party payor and not merely a government payor program.
Civil Monetary Penalties Law
The federal Civil Monetary Penalties Law, or the CMP Law, prohibits, among other things, (1) the offering or transfer of
remuneration to a Medicare or state health care program beneficiary if the person knows or should know it is likely to influence the
beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state health care
program, unless an exception applies; (2) employing or contracting with an individual or entity that the provider knows or should
know is excluded from participation in a federal health care program; (3) billing for services requested by an unlicensed physician or
an excluded provider; and (4) billing for medically unnecessary services. The penalties for violating the CMP Law include exclusion,
substantial fines, and payment of up to three times the amount billed, depending on the nature of the offense.
Physician Referral Prohibitions
The U.S. federal law directed at “self-referrals,” commonly known as the “Stark Law,” prohibits a physician from making
referrals for certain designated health services, including laboratory services, that are covered by the Medicare program, to an entity
with which the physician or an immediate family member has a direct or indirect financial relationship, unless an exception applies.
Violation of the Stark Law results in a denial of payment for any services provided pursuant to a prohibited referral. A physician or
entity that engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $172,137 (which reflects the
annual adjustment for inflation effective as of January 17, 2020) for each such arrangement or scheme. In addition, any person who
presents or causes to be presented a claim to the Medicare program in violation of the Stark Law is subject to civil monetary penalties
of up to $ 25,820 per service (which reflects the annual inflation adjustment effective as of January 17, 2020), an assessment of up to
three times the amount claimed and possible exclusion from participation in federal healthcare programs. The Stark Law is a strict
liability statute, meaning that a physician’s financial relationship with a laboratory must meet an exception under the Stark Law or the
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referrals are prohibited. Thus, unlike the Anti-Kickback Statute’s safe harbors, if a laboratory’s financial relationship with a referring
physician does not meet the requirements of a Stark Law exception, then the physician is prohibited from making Medicare and
Medicaid referrals to the laboratory and any such referrals will result in overpayments to the laboratory and subject the laboratory to
the Stark Law’s penalties. A violation of the Stark Law can serve as a basis of liability under the federal False Claims Act.
Many states, including California, have comparable laws that are not limited to Medicare referrals. The Stark Law also prohibits
state receipt of federal Medicaid matching funds for services furnished pursuant to a prohibited referral, but this provision of the Stark
Law has not been implemented by regulations.
Physician Sunshine Laws
The Physician Payments Sunshine Act imposes reporting requirements on manufacturers of certain devices, drugs and biologics
for certain payments and transfers of value by them (and in some cases their distributors) to physicians, teaching hospitals and certain
advanced non-physician health care practitioners, as well as ownership and investment interests held by physicians and their
immediate family members. The reporting program (known as the Open Payments program) is administered by CMS. Because we
manufacture our own LDTs solely for use by or within our own laboratory, we believe we are exempt from these reporting
requirements. We may become subject to such reporting requirements under the terms of current CMS regulations, however, if the
VALID Act or other legislation renders our tests regulated by FDA or if FDA engages in notice-and-comment rulemaking to exercise
authority over LDTs or otherwise requires us to obtain premarket clearance or approval for our tests.
Anti-Bribery Laws
FCPA
We are subject to U.S. Foreign Corrupt Practices Act, or FCPA, which prohibits companies and their intermediaries from
making payments in violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing
any other improper advantage. The sale of our tests internationally demands a high degree of vigilance in maintaining, implementing
and enforcing a policy against participation in corrupt activity. Other U.S. companies in the medical device and pharmaceutical fields
have faced substantial monetary fines and criminal penalties under the FCPA for allowing their agents to deviate from appropriate
practices in doing business with non-U.S. government officials.
Foreign Laws
We are also subject to similar anti-bribery laws in the foreign jurisdictions in which we operate. In Europe, various countries
have adopted anti-bribery laws providing for severe consequences, in the form of criminal penalties and/or significant fines for
individuals and/or companies committing a bribery offence. For instance, in the United Kingdom, under the Bribery Act of 2010,
which became effective in July 2011, a bribery occurs when a person offers, gives or promises to give a financial or other advantage to
induce or reward another individual to improperly perform certain functions or activities, including any function of a public or private
nature. Bribery of foreign public officials also falls within the scope of the Bribery Act of 2010. An individual found in violation of
the Bribery Act of 2010 faces imprisonment of up to 10 years and could be subject to an unlimited fine, as could commercial
organizations for failure to prevent bribery.
Healthcare Policy Laws
In March 2010, the Affordable Care Act, or ACA, was enacted in the United States. The ACA made a number of substantial
changes to the way healthcare is financed both by governmental and private payors. Although the ACA included a medical device tax,
the tax never went into effect and was fully repealed by Congress with enactment of the 2019 federal spending package signed into
law by President Trump on December 20, 2019.
Since the ACA’s enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, and we
expect there will be additional challenges and amendments to the ACA in the future. Members of the US Congress have indicated that
they may continue to seek to modify, repeal or otherwise invalidate all, or certain provisions of, the ACA. During his term in office,
President Trump signed Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA
or otherwise circumvent some of the requirements for health insurance mandated by the ACA. Concurrently, Congress considered
legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal
legislation, at least two bills affecting the implementation of certain taxes under the ACA have been signed into law. For example, the
Tax Cuts and Jobs Act of 2017, or TCJA, repealed the tax-based shared responsibility payment imposed by the ACA on certain
individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual
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mandate.” In December 2019, the Fifth Circuit Court of Appeals upheld a district court’s finding that the individual mandate in the
ACA is unconstitutional following removal of the penalty provision from the law. However, the Fifth Circuit reversed and remanded
the case to the district court to determine if other reforms enacted as part of the ACA but not specifically related to the individual
mandate or health insurance could be severed from the rest of the ACA so as not to have the law declared invalid in its entirety. On
March 2, 2020, the United States Supreme Court, or the Supreme Court, granted the petitions for writs of certiorari to review this case
and allocated one hour for oral arguments, which occurred on November 10, 2020. A decision from the Supreme Court is expected to
be issued in spring 2021. It is unclear how this litigation and other efforts to repeal and replace the ACA will affect the
implementation of that law and our business. However, the new Democrat-led presidential administration has been taking steps to
strengthen the ACA and the 117th Congress is not expected to have the same interest in repealing the law, in part due to the healthcare
economic impacts of the ongoing COVID-19 pandemic on many subsets of the U.S. population. Following his inauguration on
January 20, 2021, President Biden also took immediate steps to order a regulatory freeze on all pending substantive executive actions
taken by the previous administration, in order to permit incoming department and agency heads to review whether questions of fact,
policy, and law may be implicated and to determine how to proceed. We continue to evaluate the potential impact of the ACA and its
possible repeal or replacement on our business.
Corporate Practice of Medicine
Numerous states have enacted laws prohibiting business corporations, such as us, from practicing medicine and employing or
engaging physicians to practice medicine, generally referred to as the prohibition against the corporate practice of medicine. These
laws are designed to prevent interference in the medical decision-making process by anyone who is not a licensed physician. For
example, California’s Medical Board has indicated that determining the appropriate diagnostic tests for a particular condition and
taking responsibility for the ultimate overall care of a patient, including providing treatment options available to the patient, would
constitute the unlicensed practice of medicine if performed by an unlicensed person. Violation of these corporate practice of medicine
laws may result in civil or criminal fines, as well as sanctions imposed against the business corporation and/or the professional
through licensure proceedings. Typically, such laws are only applicable to entities with a physical presence in the applicable state.
Environmental and Other Regulatory Requirements
Our laboratory is subject on an ongoing basis to federal, state and local laws and regulations governing the use, storage,
handling and disposal of regulated medical waste, hazardous waste and biohazardous waste, including chemicals, biological agents
and compounds and blood and other tissue specimens. Typically, we use licensed or otherwise qualified outside vendors to dispose of
this waste. However, many of these laws and regulations provide for strict liability, holding a party potentially liable without regard to
fault or negligence. As a result, we could be held liable for damages and fines if our, or others’, business operations or other actions
result in contamination of the environment or personal injury due to exposure to hazardous materials. Our costs for complying with
these laws and regulations cannot be estimated or predicted and depends on a number of factors, including the amount and nature of
waste we produce (which depends in part on the number of tests we perform) and the terms we negotiate with our waste disposal
vendors.
Our operations are also subject to extensive requirements established by the U.S. Occupational Safety and Health
Administration relating to workplace safety for healthcare employees, including requirements to develop and implement programs to
protect workers from exposure to blood-borne pathogens by preventing or minimizing any exposure through needle stick or similar
penetrating injuries.
Employees
We believe growing and retaining a strong team is crucial to our success. As of March 1, 2021, we had 429 full-time employees,
engaged in bioinformatics, genetics and COVID-19 testing, software engineering, laboratory management, sales and marketing and
corporate and administrative activities. None of our employees are represented by a labor union or covered by collective bargaining
agreements and we believe our relationship with our employees is good.
Corporate Information
We were incorporated in Delaware on May 13, 2016. We are the holding company of our subsidiaries, including primarily
Fulgent Therapeutics LLC, which was initially formed in June 2011. On September 30, 2016, Fulgent Therapeutics LLC became our
wholly owned subsidiary in a transaction we refer to as the Reorganization, in which the holders of all equity interests in Fulgent
Therapeutics LLC immediately prior to the Reorganization became all of our stockholders immediately following the Reorganization.
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Our initial operations focused on Fulgent Therapeutics LLC’s former pharmaceutical business, or the Pharma Business, and in
2013 we commenced the genetic testing business we are currently pursuing. In October 2015, we recapitalized Fulgent Therapeutics
LLC to establish two series of units, with the Class D units having economic rights based on the genetic testing business we are
currently pursuing and the Class P units having economic rights based on the Pharma Business. On April 4, 2016, Fulgent
Therapeutics LLC separated the Pharma Business from the genetic testing business we are currently pursuing. The operating results of
the Pharma Business have been reported as discontinued operations for all periods in our consolidated financial statements included in
this report.
Our headquarters and laboratory are located at 4978 Santa Anita Avenue, Temple City, California 91780, and our telephone
number is (626) 350-0537. Our website address is www.fulgentgenetics.com. The information contained on or that can be accessed
through our website is not part of and is not incorporated into this report by this reference.
We qualify as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or
JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are
applicable generally to other public companies. We expect we will remain an emerging growth company until December 31, 2021.
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Available Information
We file reports with the Securities and Exchange Commission, or the SEC, and make available, free of charge, on or through
our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information
statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC on their website located at
www.sec.gov.
Item 1A. Risk Factors.
Summary Risk Factors
The risk factors described below are a summary of the principal risk factors associated with an investment in us. These are not
the only risks we face. You should carefully consider these risk factors, together with the risk factors set forth in “Item 1A. Risk
Factors” of this Report and the other reports and documents filed by us with the SEC.
• Our results of operations may fluctuate significantly from period to period and can be difficult to predict.
•
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.
• We have a history of losses, and we may not be able to achieve or sustain profitability.
• Our industry is subject to rapidly changing technology and new and increasing amounts of scientific data, and if we fail
•
•
to keep pace with these technological advances, we may be unable to compete effectively and our business and prospects
could suffer.
If we are not able to grow and diversify our customer base and increase demand for our tests from existing and new
customers, our potential for growth could be limited.
Failure to comply with government laws and regulations related to submission of claims for our services could result in
significant monetary damages and penalties and exclusion from the Medicare and Medicaid programs and corresponding
foreign reimbursement programs.
• We rely on a limited number of suppliers and, in some cases, a sole supplier, for certain of our laboratory substances,
equipment and other materials, and any delays or difficulties securing these materials could disrupt our laboratory
operations and materially harm our business.
Billing and collections processing for our tests is complex and time-consuming, and any delay in transmitting and
collecting claims could have an adverse effect on our revenue.
•
• We rely on highly skilled personnel in a broad array of disciplines, and if we are unable to hire, retain or motivate these
individuals, we may not be able to maintain the quality of our tests or grow our business.
• We may acquire businesses or assets, form joint ventures, make investments in other companies or technologies or
establish other strategic relationships, any of which could harm our operating results, dilute our stockholders’ ownership
or cause us to incur debt or significant expense.
• Any changes in laws, regulations or the enforcement discretion of the FDA with respect to the marketing of diagnostic
products, or violations of laws or regulations by us, could adversely affect our business, prospects, results of operations
or financial condition.
If we fail to comply with applicable federal, state, local and foreign laboratory licensing requirements, we could lose the
ability to perform our tests or experience disruptions to our business.
•
• We conduct business in a heavily regulated industry. Complying with the numerous statutes and regulations pertaining to
our business is expensive and time-consuming, and any failure by us, our consultants or commercial partners to comply
could result in substantial penalties.
Changes in laws and regulations, or in their application, may adversely affect our business, financial condition and
results of operations.
•
• Marketing of our COVID-19 tests under the EUA from FDA is subject to certain limitations and we are required to
maintain compliance with the terms of the EUA, among other things, and the continuance of our EUA is subject to
government discretion.
• We primarily rely on trade secret protection, non-disclosure agreements and invention assignment agreements to protect
•
our proprietary information, which may not be effective.
Litigation or other proceedings or third-party claims of intellectual property infringement or misappropriation could
require us to spend significant time and money and prevent us from selling our tests.
• An active, liquid trading market for our common stock may not be sustained, which could make it difficult for
stockholders to sell their shares of our common stock.
The price of our common stock may be volatile and you could lose all or part of your investment.
•
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• Our principal stockholders and management own a significant percentage of our capital stock and are able to exert
significant control over matters subject to stockholder approval.
Investing in our common stock involves a high degree of risk. Before making any investment decision with respect to our
common stock, you should carefully consider the risks described below and all of the other information included in this report and the
other filings we make with the SEC. We believe the risks and uncertainties described below are the most significant we face and the
occurrence of any of these risks could harm our business, financial condition, results of operations, prospects and reputation and
could cause the trading price of our common stock to decline. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business.
Business and Strategy Risks
Our results of operations may fluctuate significantly from period to period and can be difficult to predict.
Our results of operations have experienced fluctuations from period to period, which we expect may continue in the future.
These fluctuations can occur because of a variety of factors, including, among others, the amount and timing of sales of billable tests;
the prices we charge for our tests due to changes in product, customer or payor mix, general price degradation for genetic tests or other
competitive factors, global health crises and pandemics which may generate demand for our tests, such as the ongoing pandemic
related to COVID-19, the disease caused by the novel coronavirus since named SARS-CoV-2, the rate and timing of our billings and
collections and the timing and amount of our commitments and other payments, as well as the other risk factors discussed in this
report. Our results have been, and may in the future be, impacted by events that may not recur regularly, in the same amounts or at all
in the future. In 2020, we developed and began offering a series of COVID-19 tests, but the pricing and margins from these tests
continue to evolve. For the year ended December 31, 2020, we experienced substantial revenue growth due primarily to recent sales
of, and growing demand, for these COVID-19 tests. While we believe there will be a continued demand for our COVID-19 tests in the
near term, the future outcome and circumstances of the COVID-19 pandemic continue to rapidly evolve and remain uncertain. There
can be no assurance our COVID-19 related growth or other growth we may experience will continue. This recent growth and other
fluctuations in our operating results may render period-to-period comparisons less meaningful, and investors should not rely on the
results of any one period as an indicator of future performance. These fluctuations in our operating results could cause our
performance in any particular period to fall below the expectations of securities analysts or investors or guidance we have provided to
the public, which could negatively affect the price of our common stock. Moreover, our limited operating history may make it difficult
to determine if fluctuations in our performance reflect seasonality, pandemic-related demand or other trends or if these fluctuations are
the result of other factors or events.
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.
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 our 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. 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 480 in December 2020, and the volume of tests we perform on a daily basis has
increased by more than 19,000% in that time.
In addition, while most of our genetics 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 private insurance 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. Each of
these developments presents new challenges for our company and management team, and we cannot provide assurance that we will
continue to be able to manage those challenges effectively. Our management team has not previously managed a business through
such a dramatic acceleration, and the impacts of any failures, mistakes or missed opportunities could be magnified by our current rate
of growth. The continued success of this business will depend upon our ability to rapidly deliver accurate results, and any failure, or
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perceived failure, in meeting these objectives could cause our COVID-19 testing business to decline rapidly. In addition, there are
many new entrants to this market, and these competitors may cause price declines or reduced market share for us. The increase of our
business with third party payors increases the regulatory scrutiny and risks that we face. While we anticipate that demand for our
COVID-19 tests will eventually decrease once effective vaccines are widely deployed, we are continuing to invest in expanding our
capacity to meet the increasing demand that we anticipate over the next several years. There can be no assurance that our increased
investments in our COVID-19 testing capacity and capabilities will result in desirable returns, and if our operating results decline as a
result of decreased demand, whether before or after the deployment of an effective vaccine, our stock price could decline.
We have a history of losses, and we may not be able to achieve or sustain profitability.
We have a history of losses. Although we achieved profitability in the first half of 2017, the second and third quarters of 2019
and the second, third and fourth quarters of 2020, we recorded losses in all other periods since our inception. We may not be able to
maintain profitability in future periods. Further, our revenue levels may not grow at historical rates or at all, and we may not be able to
achieve additional profitability or sustain profitability. We may incur additional losses in the future, particularly as we focus on
investing in and growing our business and operations in response to recent demand for our COVID-19 tests. Our prior losses have had
and any future losses will continue to have an adverse effect on our stockholders’ equity and working capital, which could negatively
impact our operations and your investment in our company. Any failure to sustain or grow our revenue levels and achieve or maintain
profitability would negatively affect our business, financial condition, results of operations and cash flows, and could cause the market
price of our common stock to decline.
We are an early-stage company with a limited operating history, which could expose us to enhanced risks and increase the
difficulty of evaluating our business and prospects.
We began operations in May 2012 and commercially launched our first genetic tests in 2013. As a result, we have only a limited
operating history upon which you can evaluate our business and prospects. Our limited operating history makes it difficult to evaluate
our current business and hinders our ability to reliably forecast our future operating results, including revenue, cash flows and
movement toward sustained profitability. Our revenue levels may not continue to grow at historical rates or at all, and we may not be
able to achieve or sustain profitability. We have encountered and will continue to encounter risks and uncertainties frequently
experienced by growing companies in the life sciences and technology industries, such as risks related to an evolving and
unpredictable industry and business model, management of growth and the other uncertainties described in this report. If our
assumptions regarding these risks and uncertainties are incorrect or these risks and uncertainties change due to fluctuations in our
markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our
expectations and our business could suffer.
Our industry is subject to rapidly changing technology and new and increasing amounts of scientific data, and if we fail to
keep pace with these technological advances, we may be unable to compete effectively and our business and prospects could
suffer.
In recent years, there have been numerous advances in the ability to analyze large amounts of genomic information and the role
of genetics and gene variants in disease diagnosis and treatment. Our industry has been, and we believe will continue to be,
characterized by rapid technological change, increasing amounts of data, frequent introductions of new genetic tests and evolving
industry standards, all of which could make our tests obsolete if we are not able to enhance our technologies and tests faster and better
than our competitors. We believe our future success will depend in part on our ability to keep pace with the evolving needs of our
customers in a timely and cost-effective manner and to pursue new market opportunities that develop as a result of technological and
scientific advances. If we are not able to keep pace with these advances and increased customer expectations that develop as a result of
these advances, we may be unable to sustain or grow our business and our future operations and prospects could suffer.
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Our mix of customers can fluctuate from period to period and our revenue may be concentrated among only a small number
of customers, and the loss of or a reduction in sales to any of our customers could materially harm our business.
The composition and concentration of our customer base can fluctuate from period to period, and in certain prior periods, a
small number of customers accounted for a significant portion of our revenue. When customers who, to our knowledge, are under
common control or otherwise affiliated with each other are aggregated, two customers, the County of Los Angeles and San Bernardino
County, contributed 28% and 10% of our total revenue in the year ended December 31, 2020, respectively. For these customers and
for customers generally, tests are purchased on a test-by-test basis and not pursuant to any long-term purchasing arrangements. As a
result, any or all of our customers, including affiliated customers or customers under common control who purchase large quantities of
billable tests, could decide at any time to decrease, delay or discontinue their orders from us which could adversely affect our revenue.
Although we believe some of these fluctuations in customer demand may be attributable, in part, to the nature of our business, in
which our customers can experience significant volatility in their genetic testing demand from period to period in the ordinary course
of their operations, these demand fluctuations, particularly for any key customers, can have a significant impact on our period-to-
period performance regardless of their cause. In addition, the failure of any one of our customers or their payors to pay on a timely
basis would negatively impact our results and cash flows. Our ability to maintain or increase sales to our existing customers depends
on a variety of factors, including the other risk factors discussed in this report, many of which are beyond our control. Because of
these and other factors, sales to any of our customers, including any key, affiliated or commonly controlled customers, may not
continue in the amounts or at the rates as they have in the past, and such sales may never reach or exceed historical levels in any future
period. The loss of any of our customers, or a reduction in orders or difficulties collecting payments for tests ordered by any of them,
could significantly reduce our revenue and adversely affect our operating results.
If we are not able to grow and diversify our customer base and increase demand for our tests from existing and new
customers, our potential for growth could be limited. We may incur cost overruns as a result of fixed price contracts which
could limit profits or otherwise adversely affect our business results of operations and financial condition.
To achieve our desired revenue growth, we must increase test volume by further penetrating our existing hospital and medical
institution customers and by expanding sales of our COVID-19 tests to additional governmental bodies, municipalities and large
corporations in need of regular COVID-19 testing for large populations. In addition, we must grow our customer base beyond
hospitals, medical institutions and other laboratories and into additional customer groups, such as individual physicians, other
practitioners and research institutions. To this end, we are making efforts to diversify our customer market, including building
relationships with research institutions and other similar institutional customers, national clinical laboratories, governmental bodies,
municipalities and large corporations in need of regular COVID-19 testing for large populations and various other organizations to
facilitate access to physicians, practitioners and other new customer groups, including certain U.S. government agencies. We are also
pursuing relationships with payors, including Medicare, some state Medicaid programs and commercial payors, in an effort to obtain
coverage and reimbursement for our tests to make them accessible to more individual physicians and are pursuing relationships with
individual customers through our Picture Genetics platform. These efforts could fail. Even if we successfully develop relationships
with new customers in these or any other new customers groups, these relationships may not lead to improve our ability to achieve or
sustain profitability.
Generally, when we establish these new customer relationships, we agree with the applicable payor, laboratory or other
customer to provide certain of our tests at negotiated rates, but, subject to limited exceptions, most of these relationships do not
obligate any party to order our tests at any agreed volume or frequency or at all. Further, any relationships we may develop with any
government agencies are subject to unique risks associated with government contracts, including cancellation if adequate
appropriations for subsequent performance periods are not made and modification or termination at the government’s convenience and
without prior notice. In particular, certain of government contracts are multi-award, indefinite-delivery and indefinite-quantity, or
IDIQ, task order-based contracts, which generally provide for fixed price schedules for products and services, have no pre-set delivery
schedules, have very low minimum purchase requirements, are typically competed among multiple awardees and force us to carry the
burden of any cost overruns. Due to their nature, fixed-priced contracts inherently have more risk than cost reimbursable contracts. If
we are unable to control costs or if our initial cost estimates are incorrect, we can lose money on these contracts. In addition, some of
our contracts may have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those
contracts, we may not realize their full benefits. Low earnings caused by cost overruns and cost controls would have a negative impact
on our results of operations. Since the price competition to win both IDIQ and fixed-priced contracts is intense and costs of further
contracts performance cannot be predicted with certainty, there can be no assurance as to the profits, if any, that the Company will
realize over the term of such contracts.
We may fail to obtain the customer growth needed to grow volumes and revenue levels as desired or anticipated or at all, which
could occur for a variety of reasons, including, among others:
•
the genetic testing market generally, and particularly the market for NGS genetic tests and our COVID-19 tests, is
relatively new and may not grow as predicted or may decline;
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our efforts to improve our existing tests and develop and launch new tests may be unsuccessful;
•
• we may not be able to convince additional hospitals, medical institutions and other laboratories or additional customer
•
groups of the utility of our tests and their potential advantages over existing and new alternatives;
our investments in our sales and marketing functions, including our efforts to increase and restructure our sales force and
re-focus and expand our marketing initiatives and strategies, may fail;
• we may be unsuccessful in convincing customers of the benefits of our broad and customizable test menu;
•
genetic testing is expensive and many existing and potential new customers may be sensitive to pricing, particularly if
we are not able to maintain low prices relative to our competitors;
potential new customers, particularly individual physicians and other practitioners, may not adopt our tests if coverage
and adequate reimbursement are not available;
negative publicity or regulatory investigations into the actions of companies in our industry could raise doubts about the
legitimacy of diagnostic technologies generally, and could result in scrutiny of diagnostic activities by the FDA, or other
applicable government agencies; and
our competitors could introduce new tests that cover more genes or that provide more accurate, reliable or rapid results.
•
•
•
If we are unable to address these and other risks associated with growing our customer base and deepening our relationships
with existing customers, we may not achieve our desired growth in billable tests and revenue, and our results of operations could be
adversely impacted.
We face intense competition, which could intensify further in the future, and we may fail to maintain or increase our revenue
levels, maintain the current prices and margins for our billable tests, or achieve or sustain profitability if we cannot compete
successfully.
With the development of NGS, the clinical genetic testing market has become increasingly competitive, and as the COVID-19
pandemic continues, potentially competitive COVID-19 tests have entered and may continue to enter the market. We expect this
competition to intensify in the future. We face competition from a variety of sources, including, among others, an increasing number
of companies seeking to develop and commercialize, or who have developed and commercialized, COVID-19 tests, dozens of
companies focused on molecular genetic testing services, such as specialty and reference laboratories that offer traditional single-gene
and multi-gene tests, and established and emerging healthcare, information technology and service companies that may develop and
sell competitive products or services, which may include informatics, analysis, integrated genetic tools and services for health and
wellness.
Additionally, participants in closely related markets, such as prenatal testing and clinical trial or companion diagnostic testing,
could converge on offerings that are competitive with the type of tests we perform. Instances where potential competitors are aligned
with key suppliers or are themselves suppliers could provide these potential competitors with significant advantages. Further,
hospitals, research institutions, individual physicians and other practitioners, governmental bodies, municipalities and corporations
may also seek to perform testing, including rapid COVID-19 testing, at their own facilities rather than use our services. In this regard,
access to these on site or point-of-care testing solutions and the continued development of, and associated decreases in the cost of,
equipment, reagents and other materials and databases and genetic data interpretation services may enable broader direct participation
in genetic testing and analysis and drive down the use of third-party testing companies such as ours. Moreover, the biotechnology and
genetic testing fields continue to undergo significant consolidation, permitting larger clinical laboratory service providers to increase
cost efficiencies and service levels, resulting in more intense competition.
Many of our existing and potential future competitors have longer operating histories, larger customer bases, more expansive
brand recognition and deeper market penetration, substantially greater financial, technological and research and development
resources and selling and marketing capabilities, and considerably more experience dealing with third-party payors. As a result, they
may be able to respond more quickly to changes in customer requirements or preferences, develop faster, better and more expansive
advancements for their technologies and tests, create and implement more successful strategies for the promotion and sale of their
tests, obtain more favorable results from third-party payors regarding coverage and reimbursement for their offerings, adopt more
aggressive pricing and/or price reduction policies for their tests, secure supplies from vendors on more favorable terms or devote
substantially more resources to infrastructure and systems development. We may not be able to compete effectively against these
organizations.
Additionally, increased competition and cost-saving initiatives on the part of government entities and other third-party payors
could result in downward pressure on the price for our testing services and genetic analysis and interpretation generally, which could
harm our revenue levels and sales volume and our ability to gain market share. This downward pricing pressure could intensify in
future periods as adoption of genetic and COVID-19 testing becomes more widespread, and we may not be able to maintain
acceptable margins on our sales if we are forced to reduce prices for our tests to try to remain competitive, especially if we are also
experiencing increasing expenses as we make efforts to grow our business or otherwise meet customer demands. The occurrence of
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these risks could materially harm our ability to achieve or sustain profitability. In addition, competitors may be acquired by, receive
investments from or enter into other commercial relationships with larger, well-established and well-financed companies. Further,
companies or governments that effectively control access to testing through umbrella contracts or regional preferences could promote
our competitors or prevent us from performing certain tests in certain territories. If we are unable to compete successfully against
current and future competitors for these or any other reasons, we may be unable to increase market acceptance and sales volume of our
tests, which could prevent us from maintaining or increasing our revenue levels or achieving or sustaining profitability or could
otherwise negatively affect our performance.
Our level of commercial success will depend in part on our ability to generate and grow sales with our sales and marketing
team, strategies and partnerships, and we may be unsuccessful in these efforts.
We may not be able to market or sell our existing tests or any tests we may develop in the future in order to drive demand
sufficiently to support our desired growth. We currently sell our tests through a small internal sales force and a number of contractors
who serve as independent sales representatives. Although we have made efforts to enhance and improve our internal sales department,
it remains significantly smaller than many of our competitors’ sales teams. We have historically relied significantly on organic growth
and word-of-mouth among our customers to generate interest in our tests, but our ability to rely on this type of interest in future
periods is uncertain.
We believe our ability to maintain and grow sales volume in the future will depend in large part on our ability to further develop
our sales team and create and implement effective sales and marketing strategies. We have been focused on these objectives and have
taken steps to pursue them in recent periods, including hiring new key members and restructuring the organization of our sales and
marketing team, re-focusing our sales and marketing initiatives and strategies and increasing the overall scope of our marketing
activities. These efforts have required and will continue to involve significant time and expense. Moreover, these efforts may be
unsuccessful. For instance, we may not be able to attract and hire the qualified personnel we need to grow or otherwise improve our
sales and marketing team as quickly or as successfully as we would like for various reasons, including intense competition in our
industry for qualified personnel and our relative lack of experience selling and marketing our tests. Even if we are able to further
develop our sales and marketing team and strategy, we may not be successful in growing our customer base or increasing order
volumes from our existing customers. Further, our reliance on independent sales representatives subjects us to risks, as we have very
little control over their activities and they are generally free to market and sell other, potentially competing, products. As a result,
these independent sales representatives could devote insufficient time or resources to marketing and selling our tests, could market
them in an ineffective manner or could otherwise be unsuccessful in selling adequate or expected quantities of our tests.
In addition, our future sales levels will depend in large part on the effectiveness of our sales and marketing strategies, including
our ability to expand our brand awareness by providing education about the benefits and full scale of our offering to the medical
community in general and to our targeted geographic and customer markets. We also intend to continue to pursue targeted marketing
initiatives, including working with medical professional societies to promote awareness of the benefits of our tests and genetic testing
in general, pursuing or supporting scientific studies of our tests and publication of results in medical or scientific journals and making
presentations at medical, scientific or industry conferences and trade shows. We may not be successful in implementing these
initiatives or other marketing strategies we may develop and pursue. If we are not able to drive sufficient revenue using our sales and
marketing strategies to support our planned growth, our business and results of operations would be negatively affected.
Our sales and marketing strategies also include a continued focus on growing our international sales and customer base, which
we plan to pursue through our direct sales team, a number of independent contractor sales representatives, and, if opportunities arise,
by engaging distributors or establishing other types of arrangements, such as joint ventures or other relationships, to manage or assist
with sales, logistics, education or customer support in certain territories. To this end, we worked with Xi Long USA, Inc. to form a
joint venture in the second quarter of 2017, which we refer to as FF Gene Biotech, to offer genetic testing to customers in China.
Although we believe this joint venture could result in expanded long-term opportunities to address the genetic testing market in Asia,
these expectations could turn out to be wrong and we may never realize the benefits we anticipate from this joint venture. While it
may become necessary to identify, qualify and engage other commercial partners or distributors with local industry experience and
knowledge in order to effectively market and sell our tests outside the United States, we have established some relationships to cover
any non-U.S. territories including this joint venture in China and other distribution relationships. As a result, we may not be successful
in finding, attracting and retaining qualified distributors or other commercial partners or we may not be able to enter into arrangements
covering desired territories on favorable terms. In addition, sales practices utilized by distributors or other commercial partners that are
locally acceptable may not comply with sales practices or standards required under U.S. laws that apply to us, which could subject us
to additional compliance risks. If our sales and marketing efforts outside the United States are not successful, we may not achieve
significant acceptance for our tests in international markets, which could materially and adversely impact our business operations.
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We will need to invest in and expand our infrastructure and hire additional skilled personnel in order to support our desired
growth, and our failure to effectively manage any future growth could jeopardize our business.
To continue to increase the volume of tests we offer and deliver, we must make substantial investments in our infrastructure,
including our testing capacity, laboratory capacity, information systems, enterprise software systems, customer service, billing and
collections systems and processes and internal quality assurance programs. We will also need to invest in our workforce by hiring
additional skilled personnel, including biostatisticians, geneticists, software engineers, laboratory directors and specialists, sales and
marketing experts and other scientific, technical and managerial personnel to market, process, interpret and validate the quality of
results of our genetic tests and otherwise manage our operations. For example, before we deliver a report for any of our tests,
including our COVID-19 tests, the results summarized in the report must be reviewed and approved by a licensed and qualified
laboratory director. We currently have four laboratory directors with all of the required licenses, including Dr. Han Lin Gao. We may
need to hire additional licensed laboratory directors in the future to further scale our business. If we fail to hire additional qualified
personnel when needed or otherwise develop our infrastructure sufficiently in advance of demand or if we fail to generate demand
commensurate with our level of investment in our infrastructure, our business, prospects, financial condition and results of operations
could be adversely affected. We are expanding our existing laboratory space and we may acquire new laboratory space, which would
involve significant costs and attention from our management.
The time and resources required to implement new systems, to add and train new skilled personnel and to expand or acquire new
laboratory space as needed are uncertain. Any future growth we may experience could create a strain on our organizational,
administrative and operational infrastructure, including laboratory operations, quality control, customer service, sales and marketing
and management. We may not be able to maintain the quality of or expected turnaround times for our tests or satisfy customer demand
if and when it grows. Our ability to effectively manage any growth we experience will also require us to continue to improve our
laboratory and other operational, financial and management systems and controls and our reporting processes and procedures, which
may involve significant time and costs and which we may not be able to do successfully.
Our ability to achieve or sustain profitability depends on our collection of payment for the tests we deliver, which we may not
be able to do successfully.
Since starting our genetic testing business, we have historically focused primarily on providing our tests to hospitals, medical
institutions and other laboratories, our traditional genetic testing customer base. Our customer base for our COVID-19 tests is
principally comprised of governmental bodies, municipalities, and large corporations who pay us directly or through third-party
payors for our COVID-19 tests. In March 2020, the CARES Act was enacted, and it provides for reimbursement to healthcare
providers for COVID-19 tests provided to uninsured individuals, subject to continued available funding. In recent months, this
reimbursement has accounted for a significant portion of our revenue. Should reimbursement under the CARES Act for COVID-19
testing cease to be available for any reason, our ability to collect payment would be adversely affected. Further, healthcare policy
changes that influence the way healthcare is financed or other changes in the market that impact payment rates by institutional or non-
institutional customers could also affect our collection rates. If we are unable to convince hospitals, medical institutions and other
laboratories of the value and benefit provided by our tests, these customers may slow, or stop altogether, their purchases of our tests.
Moreover, our ability to collect payment for our tests in a timely manner or at all from our healthcare provider customers may decline
to the extent we expand our business into new healthcare provider customer groups, including individual physicians and other
practitioners, from which collection rates are often significantly lower than hospitals, medical institutions and other laboratories and
which involve substantial additional risks that are discussed in these risk factors below. Our collection risks also include the potential
for default or bankruptcy by the party responsible for payment and other risks associated with payment collection generally. Any
inability to maintain our past payment collection levels could cause our revenue and ability to achieve profitability to decline and
adversely affect our business, prospects and financial condition.
If third-party payors do not provide coverage and adequate reimbursement for our tests, our potential for growth could be
limited.
Coverage and reimbursement by third-party payors, including managed care organizations, private health insurers and
government healthcare programs, such as Medicare and Medicaid, for the types of genetic tests we perform can be limited and
uncertain. Although our existing customer base consists primarily of hospitals, medical institutions, municipalities, governmental
bodies, large corporations and other laboratories, from which we typically receive direct payment for ordered tests, including our
COVID-19 tests, we believe our potential for future growth is dependent on our ability to attract new customer groups, including
individual physicians and other practitioners. Our healthcare provider customers and laboratories may not order our tests unless third-
party payors cover and provide adequate reimbursement for a substantial portion of the price of the tests. If we are not able to obtain
coverage and an acceptable level of reimbursement for our tests from third-party payors, there would typically be a greater co-
insurance or co-payment requirement from the patient for whom the test is ordered or the patient may be forced to pay the entire cost
of the test out-of-pocket, which could dissuade practitioners from ordering our tests and, if ordered, could result in a delay in or
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decreased likelihood of collecting payment, whether from patients or from third-party payors. We believe our ability to increase the
number of tests we sell to our healthcare provider customers and any corresponding revenue will depend in part on our ability to
achieve broad coverage and reimbursement for our tests from third-party payors.
Coverage and reimbursement by a third-party payor may depend on a number of factors, including a payor’s determination that
a test is appropriate, medically necessary and cost-effective. Each payor makes its own decision as to whether to establish a policy or
enter into a contract to cover our tests and the amount it will reimburse for each test, and any determination by a payor regarding
coverage and amount of reimbursement for our tests would likely be made on an indication-by-indication basis. Even if a test has been
approved for reimbursement for any particular indication or in any particular jurisdiction, there is no guarantee this test will remain
approved for reimbursement or that any similar or additional tests will be approved for reimbursement in the future. Moreover, there
can be no assurance that any new tests we launch will be reimbursed or reimbursed at rates comparable to the rates of any previously
reimbursed tests if reimbursement is available at all. In addition, the coding procedure used by all third-party payors with respect to
establishing payment rates for various procedures, including our tests, is complex, does not currently adapt well to the genetic tests we
perform and may not enable coverage and adequate reimbursement rates for our tests. If physicians fail to provide appropriate codes
for desired tests, we may not be reimbursed for our tests. Additionally, if we are not able to obtain sufficient clinical information in
support of our tests, third-party payors could designate our tests as experimental or investigational and decline to cover and reimburse
our tests because of this designation. As a result of these factors, obtaining approvals from third-party payors to cover our tests and
establishing adequate reimbursement levels is an unpredictable, challenging, time-consuming and costly process, and we may never be
successful.
To date, we have contracted directly with national health insurance companies to become an in-network provider and enrolled as
a supplier in the Medicare program and some state Medicaid programs, and we have also received payment for our tests from other
third-party payors as an out-of-network provider. Although becoming an in-network provider or enrolling as a supplier means that we
have agreed with these payors to provide certain of our tests at negotiated rates, it does not obligate any physicians or other
practitioners to order our tests or guarantee that we will receive reimbursement for our tests from these or any other payors at adequate
levels. As a result, these payor relationships, any other similar relationships we may establish in the future, or any additional payments
we may receive from other payors as an out-of-network provider, may not amount to acceptable levels of reimbursement for our tests
or meaningful or any increases in our physician customer base or the number of billable tests we sell to physicians. We expect to focus
on increasing coverage and reimbursement for our current tests and any future tests we may develop, but we cannot predict whether,
under what circumstances, or at what payment levels payors will cover and reimburse us for our tests. Further, even if we are
successful, we believe it could take several years to achieve coverage and adequate contracted reimbursement with third-party payors.
If we fail to establish and maintain broad coverage and reimbursement for our tests, our ability to maintain or grow our test volume,
customer base, collectability rates and revenue levels could be limited and our future prospects and our business could suffer.
Failure to comply with government laws and regulations related to submission of claims for our services could result in
significant monetary damages and penalties and exclusion from the Medicare and Medicaid programs and corresponding
foreign reimbursement programs.
We are subject to laws and regulations governing the submission of claims for payment for our services, such as those relating
to: coverage of our services under Medicare, Medicaid and other state, federal and foreign health care programs; the amounts that we
may bill for our services; and the party to which we must submit claims. Our failure to comply with applicable laws and regulations
could result in our inability to receive payment for our services or in attempts by state and federal healthcare programs, such as
Medicare and Medicaid, to recover payments already made. Submission of claims in violation of these laws and regulations can result
in recoupment of payments already received, substantial civil monetary penalties, and exclusion from state and federal health care
programs, and can subject us to liability under the federal False Claims Act and similar laws. The failure to report and return an
overpayment to the Medicare or Medicaid program within 60 days of identifying its existence can give rise to liability under the False
Claims Act. Further, a government agency could attempt to hold us liable for causing the improper submission of claims by another
entity for services that we performed if we were found to have knowingly participated in the arrangement at issue.
We may not be successful in developing and marketing new tests, which could negatively impact our performance and
prospects.
We believe our future success will depend in part on our ability to continue to expand our test offerings and develop and sell
new tests. We may not be successful in launching or marketing any new tests we may develop, including our recently launched
COVID-19 testing and Picture Genetics offerings, and, even if we are successful, the demand for our other tests could decrease or may
not continue to increase at historical rates due to sales of the new tests. Our pipeline of new tests is in various stages of development
and will be time-consuming and costly to fully develop and introduce, as development and marketing of new tests requires us to
conduct research and development activities regarding the new tests and to further scale our laboratory processes and infrastructure to
be able to analyze increasing amounts of more diverse data. Further, we may be unable to discover or develop and launch new tests for
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a variety of reasons, including failure of any proposed test to perform as expected, lack of validation or reference data for the test or
failure to demonstrate the utility of the test. Further, any new test we are able to discover and develop may not be launched in a timely
manner, meet applicable regulatory standards, successfully compete with other technologies and available tests, avoid infringing the
proprietary rights of others, achieve coverage and adequate reimbursement from third-party payors, be capable of performance at
commercial levels and at reasonable costs, be successfully marketed or achieve sufficient market acceptance for us to recoup our time
and capital investment in the development of the test. Any failure to successfully develop, market and sell new tests could negatively
impact our ability to attract and retain customers and our revenue and prospects.
We are exposed to additional business, regulatory, political, operational, financial and economic risks related to our
international operations.
Our existing customer base includes international customers from a variety of geographic markets. In addition, we have
established FF Gene Biotech to offer genetic testing to customers in China. As part of our strategy, we aim to increase our volume of
direct sales to international customers in a variety of markets by conducting targeted marketing outreach activities and, if opportunities
arise, engaging distributors or establishing other types of arrangements, such as joint ventures or other relationships. However, we
may never be successful in achieving these objectives, and even if we are successful, these strategies may not result in meaningful or
any increases in our customer base, test volumes or revenue.
Doing business internationally involves a number of risks, including, among others:
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compliance with the laws and regulations of multiple jurisdictions, which may be conflicting or subject to increasing
stringency or other changes, including privacy regulations, tax laws, employment laws, healthcare regulatory
requirements and other related approvals, including permitting and licensing requirements;
logistics associated with the shipment of blood or other tissue specimens, including infrastructure conditions,
transportation delays and the impact of U.S. and local laws and regulations, such as export and import restrictions, tariffs
or other charges and other trade barriers, all of which involve increased risk related to the trade policies of the current
administration, which may threaten existing and proposed trade agreements and impose more restrictive U.S. export-
import regulations that impact our business;
limits on our ability to penetrate international markets, including legal and regulatory requirements that would force us to
conduct our tests locally by building additional laboratories or engaging in joint ventures or other relationships in order
to offer our tests in certain countries, which relationships could involve significant time and resources to establish, deny
us control over certain aspects of the foreign operations or reduce the economic value to us of these operations;
failure by us, any joint ventures or other arrangements we may establish or any distributors or other commercial partners
we may engage to obtain any regulatory approvals required to market, sell and use our tests in various countries;
challenges predicting the market for genetic testing generally and tailoring our test menu to meet varying customer
expectations in different countries and territories;
difficulties gaining market share in territories in which we do not have a strong physical presence or brand awareness;
complexities and difficulties obtaining protection for and enforcing our intellectual property rights;
difficulties in staffing and managing foreign operations;
complexities associated with managing multiple payor coverage and reimbursement regimes, government payors or
patient self-pay systems;
financial risks, such as longer payment cycles, difficulty collecting accounts receivable and the impact of local and
regional financial conditions on demand and payment for our tests;
exposure to foreign currency exchange rate fluctuations, including increased risk with respect to the Canadian dollar
after we recently started billing certain of our Canadian hospital customers in their local currency and with respect to the
RMB related to revenue received under our agreements with FF Gene Biotech;
risks relating to conversion and repatriation of certain foreign currencies, particularly the RMB, which is subject to legal
procedures and restrictions on currency conversion and movement outside China and which could impact our ability to
receive the anticipated financial benefits of our FF Gene Biotech joint venture;
natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease
(e.g. the COVID-19 pandemic), boycotts and other business restrictions; and
regulatory and compliance risks related to applicable anti-bribery laws, including requirements to maintain accurate
information and control over activities that may fall within the purview of these laws.
Any of these factors could significantly harm our existing relationships with international customers or derail our international
expansion plans, which would cause our revenue and results of operations to suffer.
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In addition, we are exposed to a number of additional risks and challenges related to our efforts to access customers in China
with the formation of FF Gene Biotech. These risks include, among others, difficulties predicting the market for genetic testing in
Asia; competitive factors in this market, including challenges securing market share; local differences in customer demands and
preferences and regulatory requirements; our lack of control over FF Gene Biotech due to our non-majority ownership interest; and
many of the other risks of doing business internationally that are discussed above. Further, we could experience declines in our direct
sales to, and revenue from, customers in Asia if any of these customers choose to order genetic tests from FF Gene Biotech instead of
directly from us. As a result of these risks, although we believe FF Gene Biotech could result in expanded long-term opportunities to
address the genetic testing market in Asia, this belief could turn out to be wrong and we may never realize these or any other benefits
we anticipate from this joint venture. Moreover, FF Gene Biotech or any other joint venture we may seek to establish may never
produce sufficient revenue to us to recover our capital and other investments in the joint venture, and we could become subject to
liabilities based on our involvement in the joint venture’s operations. The materialization of any of these risks related to FF Gene
Biotech could materially harm our performance and prospects.
If we are sued for product or professional liability, we could face substantial liabilities that exceed our resources.
Our business depends on our ability to provide reliable and accurate test results that incorporate rapidly evolving information
about the role of genes and gene variants in disease and clinically relevant outcomes associated with these variants. Hundreds of genes
can be implicated in some disorders and overlapping networks of genes and symptoms can be implicated in multiple conditions. As a
result, substantial judgment is required in order to interpret the results of each test we perform and produce a report summarizing these
results. Errors, such as failures to detect genomic variants with high accuracy, or mistakes, such as failures to completely and correctly
identify the significance of gene variants, could subject us to product liability or professional liability claims. Any such claim against
us could result in substantial damages and be costly and time-consuming to defend. Although we maintain liability insurance,
including for errors and omissions, our insurance may not fully protect us from the financial impact of defending against these types of
claims or any judgments, fines or settlement costs arising out of any such claims. Additionally, any liability claim brought against us,
with or without merit, could increase our insurance rates or prevent us from securing adequate insurance coverage in the future.
Moreover, any liability lawsuit could damage our reputation or force us to suspend sales of our tests. The occurrence of any of these
events could have a material adverse effect on our business, reputation and results of operations.
If our laboratory facilities become inoperable, if we are forced to vacate a facility or if we are unable to obtain additional
laboratory space as and when needed, we would be unable to perform our tests and our business would be harmed.
We perform all of our tests at our laboratories in Temple City, California and Houston, Texas. Our laboratories and the
equipment we use to perform our tests would be costly to replace and could require substantial lead time to replace and qualify for use.
This and any other laboratory facilities and equipment we may use could be damaged or rendered inoperable by natural or man-made
disasters, including earthquakes, floods, fires and power outages, which could render it difficult or impossible for us to perform our
tests for some period of time. The inability to perform our tests or the backlog that could develop if a laboratory becomes inoperable
for even a short time could result in the loss of customers or harm to our reputation. Although we maintain insurance for damage to
our property and disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not
continue to be available to us on acceptable terms, if at all.
Further, if we need to relocate from one laboratory facility to another laboratory facility or obtain additional laboratory space,
we may have difficulty locating suitable space in a timely manner, on reasonable terms or at all, and even if acceptable space was
available, it would be challenging, time-consuming and expensive to obtain or transfer the licensure and accreditation required for a
commercial laboratory like ours and the equipment we use to perform our tests. These challenges could be amplified if we or our joint
ventures or other commercial partners seek to procure and maintain laboratory space outside the United States as we pursue
international expansion. If we are unable to obtain or are delayed in obtaining new laboratory space as needed, we may not be able to
provide our existing tests or develop and launch new tests, which could result in harm to our business, reputation, financial condition
and results of operations.
We face risks related to the impact of the COVID-19 pandemic and the related protective public health measures.
Despite our recent revenue growth and recent demand for our COVID-19 tests, our business could be materially and adversely
affected by the effects of the global pandemic of COVID-19 and the related protective public health measures. Our business depends
upon the continuous testing services that we provide at our laboratory facilities, and our business faces the same risks as are currently
prevalent in most of the United States, including the risks that employees could contract COVID-19 which could result in a disruption
in our ability to continue to provide testing services. Although we take what we believe are reasonable precautions to prevent the
spread of COVID-19 within our facilities and among our employees, we cannot provide assurance that we will not suffer from an
exposure to the SARS-CoV-2 virus that would require a temporary closure of our laboratory facilities, which would materially
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adversely affect our operations and financial results. In addition, the responses of the federal, international, state and regional
governments to the pandemic, including the shelter in place orders and the allocation of healthcare resources to treating those infected
with the virus, has caused and may continue to cause a significant decline in sales of our non-COVID-19 tests. Other adverse effects
of the pandemic on our business could include disruptions or restrictions on our employees’ ability to travel, as well as temporary
closures of the facilities of our suppliers, third party service providers or customers, which could impact our test volume and results of
operations. In addition, a significant outbreak of contagious disease in the human population could result in a widespread health crisis
that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could
affect demand for our tests and impact our results of operations.
We rely on a limited number of suppliers and, in some cases, a sole supplier, for certain of our laboratory substances,
equipment and other materials, and any delays or difficulties securing these materials could disrupt our laboratory operations
and materially harm our business.
We rely on a limited number of suppliers for certain of our laboratory substances, including reagents, as well as for the
sequencers and various other equipment and materials we use in our laboratory operations. In particular, we rely on Illumina, Inc. as
the sole supplier of the next generation sequencers and associated reagents we use to perform our genetic tests and as the sole provider
of maintenance and repair services for these sequencers. We do not have long-term agreements with most of our suppliers and, as a
result, they could cease supplying these materials and equipment to us at any time due to an inability to reach agreement with us on
supply terms, disruptions in their operations, a determination to pursue other activities or lines of business or for other reasons, or they
could fail to provide us with sufficient quantities of materials that meet our specifications. These suppliers may also themselves be
affected by the COVID-19 pandemic or its related effects on the global supply chain. Transitioning to a new supplier or locating a
temporary substitute, if any are available, would be time-consuming and expensive, could result in interruptions in or otherwise affect
the performance specifications of our laboratory operations or could require that we revalidate our tests. In addition, the use of
equipment or materials provided by a replacement supplier could require us to alter our laboratory operations and procedures.
Moreover, we believe there are currently only a few manufacturers that are capable of supplying and servicing some of the equipment
and other materials necessary for our laboratory operations, including sequencers and various associated reagents. As a result,
replacement equipment and materials that meet our quality control and performance requirements may not be available on reasonable
terms, in a timely manner or at all. If we encounter delays or difficulties securing, reconfiguring or revalidating the equipment,
reagents and other materials we require for our tests, including as a result of the COVID-19 pandemic, our operations could be
materially disrupted and our business, financial condition, results of operations and reputation could be adversely affected.
Billing and collections processing for our tests is complex and time-consuming, and any delay in transmitting and collecting
claims could have an adverse effect on our revenue.
Billing for our tests is complex, time-consuming and expensive. Depending on the billing arrangement and applicable law, we
may bill various different parties for our tests, including customers directly in the case of our hospital and medical institution
customers, as well as Medicare, Medicaid, insurance companies and patients, all of which may have different billing requirements. We
may face increased risk in our collection efforts due to the complexities of these billing requirements, including long collection cycles
and lower collection rates, which could adversely affect our business, results of operations and financial condition.
Several factors make this billing process complex, including:
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differences between the list price for our tests and the reimbursement rates of payors;
compliance with complex federal and state regulations related to billing government healthcare programs, including
Medicare and Medicaid;
disputes among payors as to which party is responsible for payment;
differences in coverage among payors and the effect of patient co-payments or co-insurance;
differences in information and billing requirements among payors;
incorrect or missing billing information; and
the resources required to manage the billing and claims appeals process.
We have developed internal systems and procedures to handle these billing and collections functions, but we will need to make
significant efforts and expend substantial resources to further develop our systems and procedures to handle these aspects of our
business, which could become increasingly important as we focus on increasing test volumes from non-hospital and medical
institution customer groups and establishing coverage and reimbursement policies with third-party payors. As a result, these billing
complexities, along with the related uncertainty in obtaining payment for our tests, could negatively affect our revenue and cash flow,
our ability to achieve or sustain profitability and the consistency and comparability of our results of operations. In addition, if claims
for our tests are not submitted to payors on a timely basis, or if we are required to switch to a different provider to handle our
processing and collections functions, our revenue and our business could be adversely affected.
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Ethical, legal and social concerns related to the use of genetic information could reduce demand for our tests.
Genetic testing has raised ethical, legal and social issues regarding privacy and the appropriate uses of the resulting information.
Government authorities could, for social or other purposes, limit or regulate the use of genetic information or genetic testing or
prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, these
concerns may cause patients to refuse to use, or physicians to be reluctant to order, genetic tests such as ours, even if permissible.
These and other ethical, legal and social concerns may limit market acceptance and adoption of our tests or reduce the potential
markets for our tests, any of which could have an adverse effect on our business, financial condition and results of operations.
Actual or attempted security breaches, loss of data or other disruptions could compromise sensitive information related to our
business or to patients or prevent us from accessing critical information, any of which could expose us to liability and
adversely affect our business and our reputation.
In the ordinary course of our business, we generate, collect and store sensitive data, including PHI, personally identifiable
information, intellectual property and proprietary and other business-critical information, such as research and development data,
commercial data and other business and financial information. We manage and maintain the data we generate, collect and store
utilizing a combination of on-site systems and managed data center systems. We also communicate sensitive patient data when we
deliver reports summarizing test results to our customers, which we deliver via our online encrypted web portal, encrypted email or
fax or overnight courier. We face a number of risks related to protecting this information, including loss of access, unauthorized
modification or inappropriate disclosure.
The secure processing, storage, maintenance and transmission of this information is vital to our operations and business strategy,
and we devote significant resources to protecting the confidentiality and integrity of this information. Although we have implemented
security measures and other controls designed to protect sensitive information from unauthorized access, use or disclosure, our
information technology and infrastructure could fail, be inadequate or vulnerable to attacks by hackers or viruses or be breached due
to employee error, malfeasance or other disruptions. A breach or interruption could compromise our information systems and the
information we store could be accessed by unauthorized parties, manipulated, publicly disclosed, lost, or stolen. Any such
unauthorized access, manipulation, disclosure or other loss of information could result in legal claims or proceedings and could result
in liability or penalties under federal, state or foreign laws that protect the privacy of personal information, discussed below under “—
We are subject to broad legal requirements regarding the information we test and analyze, and any failure to comply with these
requirements could result in harsh penalties, damage our reputation and materially harm our business.” Additionally, unauthorized
access, manipulation, loss, or dissemination could significantly damage our reputation and disrupt our operations, including our ability
to perform our tests, analyze and provide test results, bill customers or other payors, process claims for reimbursement, provide
customer service, conduct research and development activities, collect, process, and prepare company financial information, conduct
education and outreach activities and manage the administrative aspects of our operations, as described further below under “—We
depend on our information technology systems and any failure of these systems, due to hardware or software malfunctions, delays in
operation, failures to implement new or enhanced systems or cybersecurity breaches, could harm our business.” The occurrence of any
of these risks could materially adversely affect our business.
The loss of any member of our senior management team could adversely affect our business.
Our success depends in large part on the skills, experience and performance of our executive management team and others in
key leadership positions, especially Ming Hsieh, our founder, Chief Executive Officer and Chairman of our board of directors, Paul
Kim, our Chief Financial Officer, Dr. Han Lin Gao, our Chief Scientific Officer and Laboratory Director, and Jian Xie, our Chief
Operating Officer. The continued efforts of these persons will be critical to us as we continue to develop our technologies and test
processes and focus on growing our business. If we lose one or more key executives, we could experience difficulties maintaining our
operations, including the ability to deliver reports to customers after review and approval by a licensed and qualified laboratory
director, competing effectively, advancing our technologies, developing new tests and implementing our business strategies. All of our
executives and employees, including Messrs. Hsieh, Kim and Xie, and Dr. Gao, are at-will, which means either we or the executive or
employee may terminate their employment at any time. We do not carry key man insurance for any of our executives or other
employees. In addition, we do not have long-term retention agreements in place with any of our executives or key employees.
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We rely on highly skilled personnel in a broad array of disciplines, and if we are unable to hire, retain or motivate these
individuals, we may not be able to maintain the quality of our tests or grow our business.
Our business, including our research and development programs, laboratory operations and administrative functions, largely
depends on our continued ability to identify, hire, train, motivate and retain highly skilled personnel for all areas of our organization,
including biostatisticians, geneticists, software engineers, laboratory directors and specialists, sales and marketing experts and other
scientific, technical and managerial personnel. Competition in our industry for qualified executives and other employees is intense,
and we may not be able to attract or retain the qualified personnel we need to execute our business plans due to high levels of
competition for these personnel among our competitors, other life science businesses, universities and public and private research
institutions. In addition, our compensation arrangements may not be successful in attracting new employees and retaining and
motivating our existing employees. If we are not able to attract and retain the necessary personnel to accomplish our business
objectives, we may experience constraints that could adversely affect our ability to expand our business and support our clinical
laboratory operations and our sales and marketing and research and development efforts, which would negatively affect our prospects
for future growth and success.
Any inability to obtain additional capital when needed and on acceptable terms may limit our ability to execute our business
plans, and our liquidity needs could be materially affected by market fluctuations and general economic conditions.
We expect our capital expenditures and operating expenses to increase over the next several years as we seek to expand our
infrastructure, sales and marketing and other commercial operations and research and development activities. As of December 31,
2020, we had cash and cash equivalents of approximately $87.4 million. We maintain our cash, cash equivalents and short-term
marketable securities with high quality, accredited financial institutions. However, these accounts may exceed federally insured limits,
and, while we believe the Company is not exposed to significant credit risk due to the financial strength of these depository
institutions, the failure or collapse of one or more of these depository institutions could materially adversely affect our ability to
recover these assets. We may seek to fund future cash needs through securities offerings, credit facilities or other debt financings,
asset sales or collaborations or licensing arrangements. Additional funding may not be available to us when needed, on acceptable
terms or at all. For example, the COVID-19 pandemic has recently caused extreme disruption and volatility in the global capital
markets, which could reduce our ability to access capital and/or adversely affect the stability of the depository institutions maintaining
our assets.
If we raise 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.
The terms of any debt securities we issue or borrowings we incur, if available, could impose significant restrictions on our operations,
such as limitations on our ability to incur additional debt or issue additional equity or other restrictions that could adversely affect our
ability to conduct our business, and would result in increased fixed payment obligations. If we seek to sell assets or enter into
collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms or relinquish or license to a
third party our rights to important or valuable technologies or tests we may otherwise seek to develop ourselves. Moreover, we may
incur substantial costs in pursuing future capital, including investment banking, legal and accounting fees, printing and distribution
expenses and other similar costs. 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. In addition, we may be forced to work with a partner on one or more aspects of our tests or market
development programs or initiatives, which could lower the economic value to us of these tests, programs or initiatives. Any such
outcome could significantly harm our business, performance and prospects.
U.S. federal income tax reform could adversely affect us.
New legislation or regulation which could affect our tax burden could be enacted by any governmental authority. We cannot
predict the timing or extent of such tax-related developments which could have a negative impact on our financial results. U.S. federal
legislation affecting the tax laws was enacted in December 2017 (the TCJA); and twice in March 2020, first in the Families First
Coronavirus Response Act and again in the CARES Act. We cannot estimate how the changes in tax law from this legislation will
affect our tax liability in future years.
Additionally, we use our best judgment in attempting to quantify and reserve for these tax obligations. However, a challenge by
a taxing authority, our ability to utilize tax benefits such as carryforwards or tax credits, or a deviation from other tax-related
assumptions may cause actual financial results to deviate from previous estimates.
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We may acquire businesses or assets, form joint ventures, make investments in other companies or technologies or establish
other strategic relationships, any of which could harm our operating results, dilute our stockholders’ ownership or cause us to
incur debt or significant expense.
As part of our business strategy, we may pursue acquisitions of complementary businesses or assets, investments in other
companies, such as our recent investment in BostonMolecules, technology licensing arrangements, joint ventures or other strategic
relationships. As an organization, we have limited experience with respect to acquisitions, investments or the formation of strategic
relationships or joint ventures. If we make acquisitions in the future, we may not be able to successfully integrate the acquired
businesses or technologies into our existing operations, we could assume unknown or contingent liabilities and we could be forced to
record significant write-offs or incur debt as a result of the acquisitions, any of which could harm our operating results. Further,
integration of an acquired business or technology could involve significant difficulties, and could require management and capital
resources that otherwise would be available for ongoing development of our existing business or pursuit of other opportunities. If we
pursue relationships with pharmaceutical companies or other strategic relationships, our ability to establish and maintain these
relationships could be challenging due to several factors, including competition with other genetic testing companies and internal and
external constraints placed on pharmaceutical and other organizations that limit the number and type of relationships they can
establish with companies like ours. Moreover, we may not be able to identify or complete any acquisition, investment, technology
license, joint venture or other strategic relationship in a timely manner, on a cost-effective basis or at all, and we may not realize the
anticipated benefits of any such transaction sufficiently to recoup our costs.
To finance any acquisitions, investments, joint ventures or other strategic relationships, we may seek to raise additional funds
through securities offerings, credit facilities, asset sales or collaborations or licensing arrangements. Each of these methods of
fundraising is subject to a variety of risks, including those discussed above under “—Any inability to obtain additional capital when
needed and on acceptable terms may limit our ability to execute our business plans.” Further, additional funds from capital-raising
transactions may not be available when needed, on acceptable terms or at all. Any inability to fund any acquisitions, investments or
strategic relationships we pursue could cause us to forfeit opportunities we believe are promising or valuable, which could harm our
prospects.
We depend on our information technology systems and any failure of these systems, due to hardware or software
malfunctions, delays in operation, and/or failures to implement new or enhanced systems or cybersecurity breaches, could
harm our business.
We depend on information technology and telecommunications systems for significant elements of our operations, such as our
laboratory information management systems, including test validation, specimen tracking and quality control; our bioinformatics
analytical software systems; our reference library of information relating to genetic variants and their role in disease; personal
information storage, maintenance and transmission; our customer-facing web-based software and customer service functions; our
report production systems; our billing and reimbursement procedures; our scientific and medical data analysis and other research and
development activities and programs; and our general and administrative activities, including disclosure controls, internal control over
financial reporting and other public reporting functions. In addition, our third-party service providers depend on technology and
telecommunications systems in order to provide contracted services for us. We expect we will need to continue to expand and
strengthen a number of enterprise software systems that affect a broad range of business processes and functions, particularly if and as
our operations grow, including, for example, systems handling human resources, financial and other disclosure controls and reporting,
customer relationship management, regulatory compliance, security controls and other infrastructure functions.
Information technology and telecommunications systems are vulnerable to disruption and damage from a variety of sources,
including power outages and other telecommunications or network failures, natural disasters, and the outbreak of war or acts of
terrorism. Breaches resulting in the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized
disclosure of sensitive information, can occur in a variety of ways, including but not limited to, negligent or wrongful conduct by
employees or former employees or others with permitted access to our information technology systems and information, or wrongful
conduct by hackers, competitors, or certain governments. Our third-party vendors and business partners face similar risks. Moreover,
despite network security and back-up measures, our servers and other electronic systems are potentially vulnerable to cybersecurity
breaches, such as physical or electronic break-ins, computer viruses, ransomware attacks, phishing schemes, and similar disruptive
events. Despite the precautionary measures we have taken to detect and prevent or solve problems that could affect our information
technology and telecommunications systems, there may be significant downtime or failures of these systems or those used by our
third-party service providers. There can be no assurance that we will promptly detect and/or intercept any such disruption or security
breach, if at all. Any such downtime or failure could prevent us from conducting tests, preparing and providing reports to customers,
billing payors, responding to customer inquiries, conducting research and development activities, maintaining our financial and
disclosure controls and other reporting functions and managing the administrative aspects of our business. Moreover, any such
downtime or failure could force us to transfer data collection operations to an alternate provider of server-hosting services, which
could involve significant costs and result in further delays in our ability to conduct tests, deliver reports to our customers and
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otherwise manage our operations. Further, although we carry property, business interruption and cyber lability insurance, the coverage
may not be adequate to compensate for all losses that may occur in the event of system downtime or failure. Any such disruption or
loss of information technology or telecommunications systems on which critical aspects of our operations depend could have a
material adverse effect on our business and our reputation.
Additionally, if and as our business grows, we will need to continually improve and expand the scope of our technology systems
in order to maintain their adequacy for the scale of our operations. Any failure to make such improvements or any significant delay in
the planned implementation of new or enhanced systems could render our systems obsolete or inadequate, in which case our service to
our customers and our other business activities could suffer and we could be more vulnerable to electronic breaches from outside
sources.
We rely on commercial courier delivery services to transport specimens to our laboratory facilities in a timely and cost-
efficient manner, and if these delivery services are disrupted, our business would be harmed.
Our business depends on our ability to quickly and reliably deliver test results to our customers. We typically receive specimens
from customers within days of shipment, or in some cases overnight, for analysis at our laboratory facilities. Disruptions in delivery
service, whether due to labor disruptions, bad weather, natural disasters, pandemics or epidemics, terrorist acts or threats or for other
reasons, could adversely affect specimen integrity and our ability to process specimens in a timely manner and otherwise service our
customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery
services on commercially reasonable terms, our operating results may be adversely affected.
If we are unable to maintain effective internal control over financial reporting, investors could lose confidence in the accuracy
and completeness of our reported financial information and the market price of our common stock could decline.
We are required to maintain internal control over financial reporting and report any material weaknesses in these internal
controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over
financial reporting and annually provide a management report on these internal controls. Although we have implemented systems,
processes and controls and performed this evaluation as of the end of 2020, we will need to maintain and enhance these controls if and
as we grow, and we may need to hire additional personnel and devote more resources to our financial reporting function in order to do
so.
If we identify one or more material weaknesses during the process of annually evaluating our internal controls, we may not
detect errors on a timely basis and our financial statements may be materially misstated. In addition, in that event, our management
would be unable to conclude that our internal control over financial reporting is effective. Further, when we are no longer an emerging
growth company or when and if we become a large accelerated filer or accelerated filer, our independent registered public accounting
firm will be required to issue an attestation report on the effectiveness of our internal control over financial reporting. When that
occurs, our independent registered public accounting firm may conclude that there are material weaknesses in our internal controls or
the level at which our internal controls are documented, designed, implemented or reviewed even if our management concludes that
our internal control over financial reporting is effective.
If we or our auditors were to conclude that our internal control over financial reporting was not effective because one or more
material weaknesses had been identified or if internal control deficiencies result in the restatement of our financial results, investors
could lose confidence in the accuracy and completeness of our financial disclosures and the price of our common stock could decline.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are subject to the periodic reporting and other requirements of the Exchange Act. We have implemented disclosure controls
and procedures designed to provide reasonable assurance that information we must disclose in reports we file or submit under the
Exchange Act is accumulated and communicated to management and recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC. However, any disclosure controls and procedures, no matter how well-conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent
limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple
errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more
people or by an unauthorized override of the controls. As a result, because of these inherent limitations in our control system,
misstatements or omissions due to error or fraud may occur and may not be detected, which could result in failures to file required
reports in a timely manner and filing reports containing incorrect information. Any of these outcomes could result in SEC enforcement
actions, monetary fines or other penalties, damage to our reputation and harm to our financial condition and stock price.
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We may elect to comply with reduced public company reporting requirements available to us because we are an emerging
growth company and a smaller reporting company, which could make our common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and we will remain an emerging growth company until
December 31, 2021. In addition, we are a smaller reporting company, as defined in applicable SEC rules, and we will remain a smaller
reporting company until the market value of our common stock held by non-affiliates, or public float, equals or exceeds $250 million.
When and if our public float exceeds $250 million, we may still qualify to report as a smaller reporting company provided our public
float is less than $700 million and our annual revenues are less than $100 million for the year preceding the date of determination. As
an emerging growth company and smaller reporting company, we are eligible for exemptions from certain reporting requirements
applicable to other public companies, including, reduced financial statement and other financial disclosure requirements in registration
statements and periodic reports we file, reduced disclosure obligations regarding executive compensation and, so long as we remain an
emerging growth company, an exemption from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act,
exemption from the requirements to hold non-binding advisory votes on executive compensation and exemption from the
requirements to obtain stockholder approval for any golden parachute payments not previously approved. We have relied on many of
these exemptions in periodic reports to date, and investors may find our common stock less attractive if we choose to continue to rely
on these exemptions, in which case there may be a less active trading market for our common stock and our stock price may be more
volatile.
Under the Securities Act, emerging growth companies can elect to delay adoption of new or revised accounting standards until
those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, as a result, we
are subject to the same new or revised accounting standards at the same time as other public companies that are not emerging growth
companies.
The auditor for our joint venture in China, like other independent registered public accounting firms operating in China, is
not permitted to be subject to inspection by the Public Company Accounting Oversight Board, and as such, investors may be
deprived of the benefits of such inspection.
The independent registered public accounting firm that issues the audit reports for our joint venture in China, FF Gene Biotech,
included in our reports filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm
registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United
States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards.
On May 24, 2013, the PCAOB announced that it had signed a Memorandum of Understanding, or MOU, with Chinese securities
regulators that would enable the PCAOB under certain circumstances to obtain audit work papers of China-based audit firms. The
MOU establishes a framework under which the PCAOB can request and obtain audit papers and permits the PCAOB to share the
work papers it obtains with the SEC, subject to certain requirements. But the MOU, which is non-binding, is also limited by its own
terms. For instance, Chinese regulators may refuse to produce documents in specified circumstances, including where production
would violate Chinese law or run contrary to the public interest. Moreover, the MOU does not provide the PCAOB with the ability to
conduct on-the-ground inspections of auditors in China, an important part of the PCAOB’s oversight function. As a result, our auditor,
like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB in the same way
that PCAOB inspects independent registered public accounting firms operating outside China. Inspections of other firms that PCAOB
has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which
may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct regular
inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness
of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB
regular inspections.
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Regulatory Risks
Any changes in laws, regulations or the enforcement discretion of the FDA with respect to the marketing of diagnostic
products, or violations of laws or regulations by us, could adversely affect our business, prospects, results of operations or
financial condition.
The laws and regulations governing the marketing of diagnostic products are evolving, extremely complex and in many
instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Pursuant to its authority under
the federal FDC Act, the FDA has jurisdiction over medical devices, including in vitro diagnostics and, therefore, potentially our
clinical laboratory tests. Among other things, pursuant to the FDC Act and its implementing regulations, the FDA regulates the
research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion,
and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and
effective for their intended uses. In addition, the FDA regulates the import and export of medical devices.
Although the FDA has statutory authority to assure that medical devices and in vitro diagnostics, including potentially our tests, are
safe and effective for their intended uses, the FDA has historically exercised its enforcement discretion and not enforced applicable
provisions of the FDC Act and regulations with respect to LDTs, which are a particular type of medical device. We believe our tests are
LDTs. As a result, we believe our tests are not currently subject to the FDA’s enforcement of its medical device regulations and the
applicable FDC Act provisions.
Even though we commercialize our tests as LDTs, our tests may in the future become subject to more onerous regulation by the
FDA. For example, the FDA may disagree with our assessment that our tests fall within the definition of an LDT and seek to regulate
our tests as medical devices. Moreover, the FDA issued draft guidance and a 2017 Discussion Paper to allow for further public
discussion about an appropriate LDT oversight approach and to give congressional committees the opportunity to develop a legislative
solution. The FDA also solicited public input and published two final guidance documents in April 2018 relating to FDA oversight of
NGS-based tests. These two guidance documents describe the FDA’s thinking and recommendations regarding test developer’s use of
FDA-recognized standards to support analytical validity, and public human genetic variant databases to support clinical validity, of
these tests.
On August 19, 2020, the HHS, published a policy announcement that FDA must go through the formal notice-and-comment
rulemaking process before requiring pre-market review of LDTs rather than making such changes through guidance documents,
compliance manuals, or other informal policy statements. However, laboratories may still voluntarily submit LDTs to the FDA for
pre-market review. Although the ultimate impact of HHS’s policy statement on FDA’s plans for regulating LDTs and its current
thinking relating to such testing products is unclear, the announcement appears to confirm that laboratories may commercialize LDTs
for clinical use without submitting such tests for FDA review and marketing authorization, including EUA. HHS’s policy statement
does not affect proposed legislation for the regulation of LDTs, which is discussed below. It is also unclear whether the Biden
Administration, which assumed control of the executive branch on January 20, 2021, would take the same position as the former
administration or seek to revoke or revise the HHS policy announcement from August 2020.
In December 2018, members of Congress released a discussion draft of a possible bill to regulate in vitro clinical tests including
LDTs, and provided opportunities for additional stakeholders to also provide input on the proposed reform legislation. On March 5,
2020, U.S. Representatives Diana DeGette (D-CO) and Dr. Larry Bucshon (R-IN) formally introduced the long-awaited legislation,
called the VALID Act. An identical version of the bill was also introduced in the Senate and is sponsored by U.S. Senators Michael
Bennet (D-CO) and Richard Burr (R-NC), demonstrating both bicameral and bipartisan support for the effort to overhaul how the
FDA reviews and approves diagnostic tests going forward. The VALID Act would codify into law the term “in vitro clinical test” to
create a new medical product category separate from medical devices that includes products currently regulated as in vitro diagnostics,
or IVDs, as well as LDTs. The VALID Act would also create a new system for labs and hospitals to use to submit their tests
electronically to the FDA for approval, which is aimed at reducing the amount of time it takes for the agency to approve such tests,
and establish a new program to expedite the development of diagnostic tests that can be used to address a current unmet need for
patients.
It is unclear whether the VALID Act would be passed by Congress in its current form or signed into law by President Trump.
Until the FDA promulgates binding regulations through notice-and-comment rulemaking regarding LDTs, or the VALID Act or other
legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the
future and what testing and data may be required to support any required clearance or approval.
If the FDA creates a new regulation to enforce its medical device requirements for LDTs or if the FDA disagrees with our
assessment that our tests are LDTs, we could for the first time be subject to enforcement of a variety of regulatory requirements,
including registration and listing, medical device reporting and quality control, and we could be required to obtain premarket clearance
or approval for our existing tests and any new tests we may develop, which may force us to cease marketing our tests until we obtain
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the required clearance or approval. The premarket review process can be lengthy, expensive, time-consuming and unpredictable.
Further, obtaining pre-market clearance may involve, among other things, successfully completing clinical trials. Clinical trials require
significant time and cash resources and are subject to a high degree of risk, including risks of experiencing delays, failing to complete
the trial or obtaining unexpected or negative results. If we are required to obtain premarket clearance or approval and/or conduct
premarket clinical trials, our development costs could significantly increase, our introduction of any new tests we may develop may be
delayed and sales of our existing tests could be interrupted or stopped. Any of these outcomes could reduce our revenue or increase
our costs and materially adversely affect our business, prospects, results of operations or financial condition. Moreover, any cleared or
approved labeling claims may not be consistent with our current claims or adequate to support continued adoption of and
reimbursement for our tests. For instance, if we are required by the FDA to label our tests as investigational, or if labeling claims the
FDA allows us to make are limited, order levels may decline and reimbursement may be adversely affected. As a result, we could
experience significantly increased development costs and a delay in generating additional revenue from our existing tests or from tests
we may develop.
In addition, while we qualify all materials used in our products in accordance with the regulations and guidelines of CLIA, the
FDA could promulgate regulations or guidance documents impacting our ability to purchase materials necessary for the performance
of our tests. If any of the reagents we obtain from suppliers and use in our tests are affected by future regulatory actions, our business
could be adversely affected, including by increasing the cost of testing or delaying, limiting or prohibiting the purchase of reagents
necessary to perform testing with our products.
Failure to comply with any applicable FDA requirements could trigger a range of enforcement actions by the FDA, including
warning letters, civil monetary penalties, injunctions, criminal prosecution, recall or seizure, operating restrictions, partial suspension
or total shutdown of operations and denial of or challenges to applications for clearance or approval, as well as significant adverse
publicity.
If we fail to comply with applicable federal, state, local and foreign laboratory licensing requirements, we could lose the ability
to perform our tests or experience disruptions to our business.
We are subject to CLIA, a federal law that establishes quality standards for all laboratory testing and is intended to ensure the
accuracy, reliability and timeliness of patient results. CLIA requires that we hold a certificate specific to the laboratory examinations
we perform and that we comply with various standards with respect to personnel qualifications, facility administration, proficiency
testing, quality control, quality assurance and inspections. CLIA certification is required in order for us to be eligible to bill federal
and state health care programs, as well as many private third-party payors, for our tests. We have obtained CLIA certification to
conduct our tests at our laboratories in Temple City, California and in Houston, Texas. To renew this certification, we are subject to
survey and inspection every two years and we may be subject to additional unannounced inspections.
In addition to CLIA requirements, we elect to participate in the accreditation program of CAP. The Centers for Medicare &
Medicaid Services, or CMS, has deemed CAP standards to be equally or more stringent than CLIA regulations and has approved CAP
as a recognized accrediting organization. Inspection by CAP is performed in lieu of inspection by CMS for CAP-accredited
laboratories. Because we are accredited by the CAP Laboratory Accreditation Program, we are deemed to also comply with CLIA.
While not required to operate a CLIA-certified laboratory, many private payors require CAP accreditation as a condition to
contracting with clinical laboratories to cover their tests. In addition, some countries outside the United States require CAP
accreditation as a condition to permitting clinical laboratories to test samples taken from their citizens. Failure to maintain CAP
accreditation could have a material adverse effect on the sales of our tests and the results of our operations.
We are also required to maintain a license to conduct testing in the State of California. California laws establish standards for
day-to-day operation of our clinical reference laboratory in Temple City, including with respect to the training and skills required of
personnel, quality control and proficiency testing requirements. In addition, because we receive test specimens originating from New
York, we have obtained a state laboratory permit for our Temple City laboratory from the New York DOH. The New York state
laboratory laws, regulations and rules are equal to or more stringent than the CLIA regulations and establish standards for the
operation of a clinical laboratory and performance of test services, including education and experience requirements for laboratory
directors and personnel; physical requirements of a laboratory facility; equipment validations; and quality management practices. The
laboratory director must maintain a Certificate of Qualification issued by New York’s DOH in permitted categories. We are subject to
on-site routine and complaint-driven inspections under both California and New York state laboratory laws and regulations. If we are
found to be out of compliance with either California or New York requirements, the CA Department of Public Health or New York’s
DOH may suspend, restrict or revoke our license or laboratory permit, respectively (and, with respect to California, may exclude
persons or entities from owning, operating or directing a laboratory for two years following such license revocation), assess civil
monetary penalties, or impose specific corrective action plans, among other sanctions. Any such actions could materially and
adversely affect our business by prohibiting or limiting our ability to offer testing.
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Moreover, certain other states require us to maintain out-of-state laboratory licenses or obtain approval on a test-specific basis to
perform testing on specimens from these states. Additional states could adopt similar licensure requirements in the future, which could
require us to modify, delay or discontinue our operations in such jurisdictions. We are also subject to regulation in foreign
jurisdictions, which we expect will increase as we seek to expand international utilization of our tests or if jurisdictions in which we
pursue operations adopt new or modified licensure requirements. Foreign licensure requirements could require review and
modification of our tests in order to offer them in certain jurisdictions or could impose other limitations, such as restrictions on the
transport of human blood or other tissue necessary for us to perform our tests that may limit our ability to make our tests available
outside the United States. Additionally, complying with licensure requirements in new jurisdictions may be expensive, time-
consuming and subject us to significant and unanticipated delays.
Failure to comply with applicable clinical laboratory licensure requirements could result in a range of enforcement actions,
including license suspension, limitation or revocation, directed plan of correction, onsite monitoring, civil monetary penalties, civil
injunctive suits, criminal sanctions and exclusion from the Medicare and Medicaid programs, as well as significant adverse publicity.
Any sanction imposed under CLIA, its implementing regulations or state or foreign laws or regulations governing clinical laboratory
licensure, or our failure to renew our CLIA certificate or any other required local, state or foreign license or accreditation, could have
a material adverse effect on our business, financial condition and results of operations. In such case, even if we were able to bring our
laboratory back into compliance, we could incur significant expenses and lose revenue while doing so.
We are subject to broad legal requirements regarding the information we test and analyze, and any failure to comply with
these requirements could result in harsh penalties, damage our reputation and materially harm our business.
Our business is subject to federal and state laws that protect the privacy and security of personal information, including HIPAA,
HITECH, and similar state laws, as well as numerous other federal, state and foreign laws, including consumer protection laws and
regulations, that govern the collection, dissemination, use, access to, confidentiality and security of patient health information. In
addition, new laws and regulations that further protect the privacy and security of medical records or medical information are regularly
considered by federal and state governments. Further, with the recent increase in publicity regarding data breaches resulting in
improper dissemination of consumer information, federal and state governments have passed or are considering laws regulating the
actions that a business must take if it experiences a data breach, such as prompt disclosure to affected customers. The FTC and states’
Attorneys General have also brought enforcement actions and prosecuted some data breach cases as unfair and/or deceptive acts or
practices under the FTC Act and comparable state laws. In addition to data breach notification laws, some states have enacted statutes
and rules requiring businesses to reasonably protect certain types of personal information they hold or to otherwise comply with
certain specified data security requirements for personal information. We intend to continue to comprehensively protect all personal
information and to comply with all applicable laws regarding the protection of such information.
Any failure to implement appropriate security measures to protect the confidentiality and integrity of personal information or
any breach or other failure of these systems resulting in the unauthorized access, manipulation, disclosure or loss of this information
could result in our noncompliance with these laws. Penalties for failure to comply with a requirement of HIPAA and HITECH vary
significantly depending on the failure and could include civil monetary or criminal penalties.
The European Union formally adopted the GDPR, in 2016, which applies to all European Union member states from May 25,
2018 and replaced the European Data Protection Directive. The GDPR introduced stringent new data protection and operational
requirements in the European Union for companies that receive or process personal data of European residents, as well as substantial
fines for breaches of the data protection rules. It has increased our responsibility and liability in relation to personal data that we
process and we are required to maintain additional mechanisms ensuring compliance with the GDPR. The GDPR is a complex law
and the regulatory guidance is still evolving, including with respect to how the GDPR should be applied in the context of clinical
studies and the collection, processing, and storage of sensitive personal data, including genetic information and testing. Furthermore,
many of the countries within the European Union are still in the process of drafting supplementary data protection legislation in key
fields where the GDPR allows for national variation, including the fields of clinical study and other health-related information. These
variations in the law may raise our costs of compliance and result in greater legal risks. On July 16, 2020, the Court of Justice of the
European Union or the CJEU, issued a landmark opinion in the case Maximilian Schrems vs. Facebook (Case C-311/18), called
Schrems II. This decision calls into question certain data transfer mechanisms as between the European Union member states and the
US. The CJEU is the highest court in Europe and the Schrems II decision heightens the burden on data importers to assess U.S.
national security laws on their business, and future actions of European Union data protection authorities are difficult to predict at this
early date. Consequently, there is some risk of any such data transfers from the European Union being halted by one or more European
Union member states. Any contractual arrangements requiring the transfer of personal data from the European Union to us in the
United States will require greater scrutiny and assessments as required under Schrems II and may have an adverse impact on cross-
border transfers of personal data, or increase costs of compliance.
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In addition, many states, such as California (where one of our clinical laboratories is located), have implemented similar privacy
laws and regulations, such as the California Confidentiality of Medical Information Act, that impose restrictive requirements
regulating the use and disclosure of patient health information and other personal information. In addition to fines and penalties
imposed upon violators, some of these state laws also afford private rights of action to individuals who believe their personal
information has been misused. California’s patient privacy laws, for example, provide for penalties of up to $250,000 and permit
injured parties to sue for damages. In addition to the California Confidentiality of Medical Information Act, California also recently
enacted the CCPA, which became effective on January 1, 2020. The CCPA has been characterized as the first “GDPR-like” privacy
statute to be enacted in the United States because it mirrors a number of the key provisions of the GDPR. The CCPA establishes a new
privacy framework for covered businesses in the State of California by creating an expanded definition of personal information,
establishing new data privacy rights for California residents, imposing special rules on the collection of personal data from minors,
and creating a new and potentially severe statutory damages framework for violations of the CCPA and for businesses that fail to
implement reasonable security procedures and practices to prevent data breaches. On November 3, 2020, California voters passed the
California Privacy Rights Act, or CPRA, which expands the CCPA. The CPRA will be fully effective in January of 2023 and, among
other things, establishes the California Privacy Protection Agency, or CPPA, a new regulatory authority charged with administering
and enforcing the CRPA and privacy rights in California. The CPPA will have the power to levy fines and bring other enforcement
actions. The CPRA could impact our operations or that of our collaborators and business partners and impose new regulatory
requirements and increase costs of compliance. Other states are considering expanded privacy legislation similar to the GDPR and
CPRA, and several federal privacy proposals are under consideration in the current session of Congress.
The interplay of federal and state laws may be subject to varying interpretations by courts and government agencies, creating
complex compliance issues for us and potentially exposing us to additional expense, adverse publicity and liability. Further, as
regulatory focus on privacy issues continues to increase and laws and regulations concerning the protection of personal information
expand and become more complex, these potential risks to our business could intensify. Additionally, the interpretation, application
and interplay of consumer and health-related data protection laws in the United States, Europe and elsewhere are often uncertain,
contradictory and in flux. As a result, it is possible that laws may be interpreted and applied in a manner that is inconsistent with our
current practices. Moreover, these laws and their interpretations are constantly evolving and they may become more stringent over
time. Complying with these laws or any new laws or interpretations of their application could involve significant time and substantial
costs or require us to change our business practices and compliance procedures in a manner adverse to our business. We may not be
able to obtain or maintain compliance with the diverse privacy and security requirements in all of the jurisdictions in which we
currently or plan to do business, and failure to comply with any of these requirements could result in civil or criminal penalties, harm
our reputation and materially adversely affect our business.
We conduct business in a heavily regulated industry. Complying with the numerous statutes and regulations pertaining to our
business is expensive and time-consuming, and any failure by us, our consultants or commercial partners to comply could
result in substantial penalties.
Our industry and our operations are heavily regulated by various federal, state, local and foreign laws and regulations, and the
regulatory environment in which we operate could change significantly and adversely in the future. These laws and regulations
currently include, among others:
•
•
•
the HHS policy decision from August 2020 establishing that FDA does not presently have authority to oversee LDTs;
CLIA’s and CAP’s regulation of our laboratory activities;
federal and state laws and standards affecting reimbursement by government payors, including certain coding
requirements to obtain reimbursement and certain changes to the payment mechanism for clinical laboratory services
resulting from the Protecting Access to Medicare Act of 2014, or PAMA;
• HIPAA and HITECH, which establish comprehensive federal standards with respect to the privacy and security of PHI,
•
•
•
and requirements for the use of certain standardized electronic transactions with respect to transmission of such
information, as well as similar laws protecting other types of personal information;
state laws governing the maintenance of personally identifiable information of state residents, including medical
information, and which impose varying breach notification requirements, some of which allow private rights of action by
individuals for violations and also impose penalties for such violations;
the federal Anti-Kickback Statute, which generally prohibits knowingly and willfully offering, paying, soliciting or
receiving remuneration, directly or indirectly, in return for or to induce a person to refer to an individual any good,
facility, item or service that is reimbursable under a federal health care program;
the federal Stark Law, which generally prohibits a physician from making a referral for certain designated health services
covered by the Medicare program, including laboratory and pathology services, if the physician or an immediate family
member has a financial relationship with the entity providing the designated health services;
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•
•
•
•
•
•
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•
•
•
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the federal False Claims Act, which imposes civil penalties, and provides for civil whistleblower or qui tam actions,
against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for
payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money
to the federal government;
the federal Civil Monetary Penalties Law, which generally prohibits, among other things, the offering or transfer of
remuneration to a Medicare or Medicaid beneficiary if it is likely to influence the beneficiary’s selection of a particular
provider, practitioner or supplier of services reimbursable by Medicare or Medicaid;
the Affordable Care Act, which, among other things, establishes a requirement for providers and suppliers to report and
return any overpayments received from the Medicare and Medicaid programs;
other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, fee-splitting
restrictions, insurance fraud laws, anti-markup laws, prohibitions on the provision of tests at no or discounted cost to
induce physician or patient adoption and false claims acts, some of which may extend to services reimbursable by any
third-party payor, including private payors;
the federal Physician Sunshine Payment Act and various state laws on reporting relationships with health care providers
and customers, which could be determined to apply to our LDTs;
the prohibition on reassignment of Medicare claims;
state laws that prohibit other specified healthcare practices, such as billing physicians for tests that they order, waiving
coinsurance, copayments, deductibles and other amounts owed by patients, business corporations practicing medicine or
employing or engaging physicians to practice medicine and billing a state Medicaid program at a price that is higher than
what is charged to one or more other payors;
the FCPA, and applicable foreign anti-bribery laws;
federal, state and local regulations relating to the handling and disposal of regulated medical waste, hazardous waste and
biohazardous waste and workplace safety for healthcare employees;
laws and regulations relating to health and safety, labor and employment, public reporting, taxation and other areas
applicable to businesses generally, all of which are subject to change, including, for example, the significant changes to
the taxation of business entities were enacted in December 2017; and
similar foreign laws and regulations that apply to us in the countries in which we operate or may operate in the future.
The genetic testing industry is currently under a high degree of government scrutiny. The Office of Inspector General for the
Department of Health and Human Services and a variety of states’ Attorneys General have issued fraud alerts regarding a variety of
cancer genetic testing fraud schemes, and the Department of Justice has announced indictments in such fraud schemes involving a
variety of individuals and entities, including genetic testing and other laboratories, physicians who order genetic testing for a large
volume of patients without treating them, and third parties who arranged for the genetic testing by approaching patients through
telemarketing calls, booths at public events, health fairs, and door-to-door visits. These individuals then shared the proceeds received
from Medicare, TRICARE, and other third-party payors. This increased regulatory scrutiny could decrease demand for our testing
services or increase our costs of regulatory compliance, either of which could have a material adverse effect on our business.
Any future growth of our business, including, in particular, growth of our international business and continued reliance on
consultants, commercial partners and other third parties, may increase the potential for violating these laws. In some cases, our risk of
violating these or other laws and regulations is further increased because of the lack of their complete interpretation by applicable
regulatory authorities or courts, and their provisions are thus open to a variety of interpretations. Our recently launched Picture
Genetics line of at-home genetic test offerings are patient-initiated screening tests, which may receive greater scrutiny from regulatory
authorities than our traditional testing services that are offered directly to health care providers.
We have adopted policies and procedures designed to comply with these laws and regulations and, in the ordinary course of our
business, we conduct internal reviews of our compliance with these laws. Our compliance is also subject to review by applicable
government agencies. It is not always possible to identify and deter misconduct by employees, distributors, consultants and
commercial partners, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or
unmanaged risks or losses or in protecting us from government investigations or other actions or lawsuits stemming from a failure to
comply with applicable laws or regulations. Additionally, we are subject to the risk that a person or government could allege such
fraud or other misconduct, even if none occurred. Any action brought against us for violation of these or other laws or regulations,
even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from
the operation of our business and harm our reputation. If our operations, including the conduct of our employees, consultants and
commercial partners, are found to be in violation of any of these laws and regulations, we may be subject to applicable penalties
associated with the violation, including administrative, civil and criminal penalties, damages, fines, individual imprisonment,
exclusion from participation in federal healthcare programs, refunding of payments received by us and curtailment or cessation of our
operations. Any of these consequences could seriously harm our business and our financial results.
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Healthcare policy changes, including recently enacted and proposed new legislation reforming the U.S. healthcare system,
could cause significant harm to our business, operations and financial condition.
The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private payors. The
ACA also introduced mechanisms to reduce the per capita rate of growth in Medicare spending if expenditures exceed certain targets.
Any such reductions could affect reimbursement payments for our tests. The ACA also contains a number of other provisions,
including provisions governing enrollment in federal and state healthcare programs, reimbursement matters and fraud and abuse,
which we expect will impact our industry and our operations in ways that we cannot currently predict.
In April 2014, Congress passed PAMA, which included substantial changes to the way in which clinical laboratory services will
be paid under Medicare. Under PAMA, certain clinical laboratories are required to periodically report to CMS private payor payment
rates and volumes for their tests. Laboratories that fail to report the required payment information may be subject to substantial civil
monetary penalties. Further, effective January 1, 2018, under PAMA, Medicare reimbursement for diagnostic tests will be based on
the weighted-median of the payments made by private payors for these tests, rendering private payor payment levels even more
significant. As a result, future Medicare payments may fluctuate more often and become subject to the willingness of private payors to
recognize the value of diagnostic tests generally and any given test individually. The impact of this new payment system on rates for
our tests, including any current or future tests we may develop, is uncertain.
On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, which included the LAB Act.
The LAB Act delayed by one year the reporting of payment data under PAMA for CDLTs that are not ADLTs until the first quarter of
2021. The CARES Act, which was signed into law on March 27, 2020, delayed the reporting period by an additional year, until the
first quarter of 2022. As a result, Medicare payment rates determined by data reported in 2017 will continue through December 31,
2022.
In addition, under PAMA, as amended by the LAB Act, any reduction to a particular payment rate resulting from the new
methodology is limited to 10% per test per year in 2020 and to 15% per test per year in each of the years 2021 through 2023. The
CARES Act delayed the 15% cut scheduled to take effect on January 1, 2021, for one year.
We cannot predict whether or when these or other recently enacted healthcare initiatives will be implemented at the federal or
state level or how any such legislation or regulation may affect us. For instance, the payment reductions imposed by the ACA and the
changes to reimbursement amounts paid by Medicare for tests such as ours based on the procedure set forth in PAMA, could limit the
prices we will be able to charge or the amount of available reimbursement for our tests, which would reduce our revenue.
Additionally, these healthcare policy changes could be amended or additional healthcare initiatives could be implemented in the
future. For instance, there is uncertainty regarding the continued effect of the ACA in its current form and in light of the policies of the
certain members of Congress, who have threatened to repeal, replace or change the ACA. During his term in office, President Trump
signed Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise
circumvent some of the requirements for health insurance mandated by the ACA. Although Congress has not passed comprehensive
repeal legislation, at least two bills affecting the implementation of certain taxes under the ACA have been signed into law. For
example, the Tax Cuts and Jobs Act of 2017 repealed the tax-based shared responsibility payment imposed by the ACA on certain
individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual
mandate.” In December 2019, the Fifth Circuit Court of Appeals upheld a district court’s finding that the individual mandate in the
ACA is unconstitutional following removal of the penalty provision from the law. However, the Fifth Circuit reversed and remanded
the case to the district court to determine if other reforms enacted as part of the ACA but not specifically related to the individual
mandate or health insurance could be severed from the rest of the ACA so as not to have the law declared invalid in its entirety. On
March 2, 2020, the Supreme Court granted the petitions for writs of certiorari to review this case and allocated one hour for oral
arguments, which occurred on November 10, 2020. A decision from the Supreme Court is expected to be issued in spring 2021. It is
unclear how this litigation and other efforts to repeal and replace the ACA will affect the implementation of that law and our business.
However, the new Democrat-led presidential administration has been taking steps to strengthen the ACA and the 117th Congress is not
expected to have the same interest in repealing the law, in part due to the healthcare economic impacts of the ongoing COVID-19
pandemic on many subsets of the U.S. population. Following his inauguration on January 20, 2021, President Biden also took
immediate steps to order a regulatory freeze on all pending substantive executive actions taken by the previous administration, in order
to permit incoming department and agency heads to review whether questions of fact, policy, and law may be implicated and to
determine how to proceed.
Further, the impact on our business of the expansion of the federal and state governments’ role in the U.S. healthcare industry
generally, including the social, governmental and other pressures to reduce healthcare costs while expanding individual benefits, is
uncertain. Any future changes or initiatives could have a materially adverse effect on our business, financial condition, results of
operations and cash flows.
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Changes in laws and regulations, or in their application, may adversely affect our business, financial condition and results of
operations.
The clinical laboratory testing industry is highly regulated, and failure to comply with applicable regulatory, supervisory,
accreditation, registration or licensing requirements may adversely affect our business, financial condition and results of operations. In
particular, the laws and regulations governing the marketing and research of clinical diagnostic testing are extremely complex, and in
many instances there are no clear regulatory or judicial interpretations of these laws and regulations, increasing the risk that we may
be found to be in violation of these laws.
Furthermore, the genetic testing industry as a whole is a growing industry and regulatory agencies such as HHS or FDA may
apply heightened scrutiny to new developments in the field, or the U.S. Congress may do so. Since 2017, Congress has been working
on legislation to create an LDT and IVD regulatory framework that would be separate and distinct from the existing medical device
regulatory framework. On March 5, 2020, U.S. Representatives Diana DeGette (D-CO) and Dr. Larry Bucshon (R-IN) formally
introduced the VALID Act in the House and an identical version of the bill was introduced in the U.S. Senate by Senators Michael
Bennet (D-CO) and Richard Burr (R-NC). As anticipated from a discussion draft of the legislation released for stakeholder comment
in December 2018, the VALID Act would codify into law the term “in vitro clinical test” to create a new medical product category
separate from medical devices, and bring all such products within the scope of FDA’s oversight. It is unclear whether the VALID Act
would be passed by Congress in its current form or signed into law by President Trump.
In addition, there has been a recent trend of increased U.S. federal and state regulation, scrutiny and enforcement relating to
payments made to referral sources, which are governed by laws and regulations including the Stark law, the federal Anti-Kickback
Statute, the federal False Claims Act, as well as state equivalents of such laws. For example, EKRA, was passed in October 2018 as
part of the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act.
Similar to the federal Anti-Kickback Statute, EKRA imposes criminal penalties for knowing or willful payment or offer, or solicitation
or receipt, of any remuneration, whether directly or indirectly, overtly or covertly, in cash or in kind, in exchange for the referral or
inducement of laboratory testing (among other health care services) unless a specific exception applies. However, unlike the federal
Anti-Kickback Statute, EKRA is not limited to services covered by federal or state health care programs but applies more broadly to
services covered by “health care benefit programs,” including commercial insurers. Additionally, because EKRA’s exceptions are not
identical to the federal Anti-Kickback Statute’s safe harbors, compliance with a federal Anti-Kickback Statute safe harbor does not
guarantee protection under EKRA. As currently drafted, EKRA potentially expands the universe of arrangements that could be subject
to government enforcement under federal fraud and abuse laws. Because EKRA is a new law, there is no agency guidance or court
precedent to indicate how and to what extent it will be applied and enforced. We cannot assure you that our relationships with
physicians, sales representatives, hospitals, customers, or any other party will not be subject to scrutiny or will survive regulatory
challenge under such laws. If imposed for any reason, sanctions under the EKRA could have a negative effect on our business.
Marketing of our COVID-19 tests under the EUA from FDA is subject to certain limitations and we are required to maintain
compliance with the terms of the EUA, among other things, and the continuance of our EUA is subject to government
discretion.
Since March 2020, we have commercially launched several molecular tests for the detection of SARS-CoV-2, the virus that
causes COVID-19, including NGS and RT-PCR-based tests as well as related antibody testing options. In May 2020, we were granted
an EUA for our RT-PCR-based test for the detection of SARS-CoV-2 using upper and lower respiratory specimens (nasal,
nasopharyngeal, and oropharyngeal swabs). In June 2020, we received an amendment to the EUA to add our at-home testing solution
for COVID-19 through Picture Genetics.
Although there are certain regulatory requirements the FDA has waived for the duration of the EUA, we remain subject to
specific conditions of the authorizations. As with other FDA-regulated tests, issues could emerge during the course of the marketing
and use of our test under an EUA that could impact our ability to continue the sale and distribution of the authorized test or home
collection kit. Factors that may be out of the Company’s control, such as the availability of supplies and key personnel, may impact
the Company’s ability to maintain testing capacity and test result delivery, and its other responses to the COVID-19 pandemic, and
may have an adverse impact on the Company’s operations. Our EUA remains effective only until the HHS declaration is terminated or
revoked, and FDA also may revoke an EUA if it determines the criteria for issuance are no longer met or other circumstances make
such revocation appropriate to protect the public health or safety.
However, on August 19, 2020, HHS published a policy announcement that FDA must go through the formal notice-and-
comment rulemaking process before requiring pre-market review (including emergency use authorization) of LDTs rather than
making such changes through guidance documents, compliance manuals, or other informal policy statements. Based on HHS’s policy
announcement, which specifically states that LDT developers are not required to obtain an EUA or other marketing authorization from
FDA prior to commercialization, we believe we may continue to market our COVID-19 tests even if our EUA is terminated or
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revoked. FDA may seek to establish a new regulation through notice-and-comment rulemaking requiring pre-market review and
authorization of LDTs, and if that were to occur and if our EUA is either terminated or revoked, then in order to continue marketing
our COVID-19 tests, we could be required to obtain the necessary regulatory clearances or approvals and be subject to the full and
usual regulatory obligations. It is currently unclear whether the Biden Administration, which assumed control of the executive branch
on January 20, 2021, would take the same position as the former administration or seek to revoke or revise the HHS policy
announcement from August 2020.
If the hazardous materials we use in our operations cause contamination or injury, we could be liable for resulting damages.
Our operations require the use of regulated medical waste, hazardous waste and biohazardous waste, including chemicals,
biological agents and compounds and blood and other tissue specimens. We are subject on an ongoing basis to federal, state and local
laws and regulations governing the use, storage, handling and disposal of these hazardous materials and other specified waste
products. Although we typically use licensed or otherwise qualified outside vendors to dispose of this waste, applicable laws and
regulations could hold us liable for damages and fines if our, or others’, business operations or other actions result in contamination to
the environment or personal injury due to exposure to hazardous materials. We cannot eliminate the risk of contamination or injury,
and any liability imposed on us for any resulting damages or injury could exceed our resources or any applicable insurance coverage.
The cost to secure such insurance coverage and to comply with these laws and regulations could become more significant in the
future, and any failure to comply could result in substantial costs and other business and reputational consequences, any of which
could negatively affect our operating results.
If we were deemed to be an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act,
applicable restrictions could make it impractical for us to continue our business as currently conducted and could have a
material adverse effect on our business, financial condition and results of operations.
Under the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (1) it
is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading
in securities or (2) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities
and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of
U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as
such term is defined in either of those sections of the 1940 Act, and we intend to conduct our operations so that we will not be deemed
an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including
limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business
as it is currently being conducted and could have a material adverse effect on our business, financial condition and results of
operations.
Our partnerships in China subject us to risks and uncertainties relating to the laws and regulations of China and the changes
in relations between the United States and China.
Under its current leadership, the government of China has been pursuing economic reform policies, including by encouraging
foreign trade and investment. However, there is no assurance that the Chinese government will continue to pursue such policies, that
such policies will be successfully implemented, that such policies will not be significantly altered, or that such policies will be
beneficial to our partnerships in China. China’s system of laws can be unpredictable, especially with respect to foreign investment and
foreign trade. The United States government has called for substantial changes to foreign trade policy with China and has raised, and
has proposed to further raise in the future, tariffs on several Chinese goods. China has retaliated with increased tariffs on United States
goods. Moreover, China’s legislature has recently adopted a national security law to substantially change the way Hong Kong has
been governed since the territory was handed over by the United Kingdom to China in 1997. This law increases the power of the
central government in Beijing over Hong Kong, limits the civil liberties of residents of Hong Kong and could restrict the ability of
businesses in Hong Kong to continue to conduct business or to continue to with business as previously conducted. The U.S. State
Department has indicated that the United States no longer considers Hong Kong to have significant autonomy from China. The U.S.
State Department has recently enacted sanctions related to China’s governing of Hong Kong. Any further changes in United States
trade policy could trigger retaliatory actions by affected countries, including China, resulting in trade wars. Any regulatory changes
and changes in United States and China relations may have a material adverse effect on our partnerships in China which could
materially harm our business and financial condition.
We could be adversely affected by violations of the FCPA and other anti-bribery laws.
Our international operations are subject to various anti-bribery laws, including the FCPA and similar anti-bribery laws in the
non-U.S. jurisdictions in which we operate. The FCPA prohibits companies and their intermediaries from offering, making, or
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authorizing improper payments to non-U.S. or foreign officials for the purpose of obtaining or retaining business or securing any other
improper advantage. These laws are complex and far-reaching in nature, and we may be required in the future to alter one or more of
our practices to be in compliance with these laws or any changes to these laws or their interpretation.
We currently engage in significant business outside the United States, and we plan to increase our international operations in the
future. These operations could involve dealings with governments, foreign officials and state-owned entities, such as government
hospitals, outside the United States. In addition, we may engage distributors, other commercial partners or third-party intermediaries,
such as representatives or contractors, or establish joint ventures or other arrangements to manage or assist with promotion and sale of
our tests abroad and obtaining necessary permits, licenses and other regulatory approvals. Any such third parties could be deemed to
be our agents and we could be held responsible for any corrupt or other illegal activities of our employees or these third parties, even
if we do not explicitly authorize or have actual knowledge of such activities. We have instituted policies, procedures, and internal
controls reasonably designed to promote compliance with the FCPA and other anti-corruption laws and we exercise a high degree of
vigilance in maintaining, implementing and enforcing these policies and controls. However, these policies and controls could be
circumvented or ignored and they cannot guarantee compliance with these laws and regulations. Any violations of these laws or
allegations of such violations could disrupt our operations, involve significant management distraction, involve significant costs and
expenses, including legal fees, and harm our reputation. Additionally, other U.S. companies in the medical device and pharmaceutical
fields have faced substantial fines and criminal penalties in the recent past for violating the FCPA, and we could also incur these types
of penalties, including criminal and civil penalties, disgorgement, and other remedial measures, if we violate the FCPA or other
applicable anti-bribery laws. Any of these outcomes could result in a material adverse effect on our business, prospects, financial
condition, or results of operations.
Our services present the potential for embezzlement, identity theft or other similar illegal behavior by our employees,
consultants, service providers or commercial partners.
Our operations involve the use and disclosure of personal and business information that could be used to impersonate third
parties or otherwise gain access to their data or funds. If any of our employees, consultants, service providers or commercial partners
takes, converts or misuses these funds or data, we could be liable for any resulting damages, which could harm our financial condition
and damage our business reputation.
We could be adversely affected by alleged violations of the FTC Act or other truth-in-advertising and consumer protection
laws.
Our advertising for laboratory services and tests is subject to federal truth-in-advertising laws enforced by the FTC, as well as
comparable state consumer protection laws. Under the FTC Act, the FTC is empowered, among other things, to (a) prevent unfair
methods of competition and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief
for conduct injurious to consumers; and (c) gather and compile information and conduct investigations relating to the organization,
business, practices, and management of entities engaged in commerce. The FTC has very broad enforcement authority, and failure to
abide by the substantive requirements of the FTC Act and other consumer protection laws can result in administrative or judicial
penalties, including civil penalties, injunctions affecting the manner in which we would be able to market services or products in the
future, or criminal prosecution. In conjunction with the recent launch of our Picture Genetics line of at-home genetic test offerings that
are initiated consumers, we plan to increase our advertising activities that would be subject to these federal and state truth-in-
advertising laws. Any actual or perceived non-compliance with those laws could lead to an investigation by the FTC or a comparable
state agency, or could lead to allegations of misleading advertising by private plaintiffs. Any such action against us would disrupt our
business operations, cause damage to our reputation, and result in a material adverse effects on our business.
Intellectual Property Risks
We primarily rely on trade secret protection, non-disclosure agreements and invention assignment agreements to protect our
proprietary information, which may not be effective.
We currently rely on trade secret protection, non-disclosure agreements and invention assignment agreements with our
employees, consultants and third-parties to protect our confidential and proprietary information. Although our competitors have
utilized and are expected to continue to utilize technologies and methods similar to ours and have aggregated and are expected to
continue to aggregate libraries of genetic information similar to ours, we believe our success will depend in part on our ability to
develop proprietary methods and libraries and to defend any advantages afforded to us by these methods and libraries relative to our
competitors. If we do not protect our intellectual property and other confidential information adequately, competitors may be able to
use our proprietary technologies and information and thereby erode any competitive advantages they provide us.
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We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent these rights are
effectively maintained as confidential. We expect to rely primarily on trade secret and contractual protections for our confidential and
proprietary information and we have taken security measures we believe are appropriate to protect this information. These measures,
however, may not provide adequate protection for our trade secrets, know-how or other confidential information. We seek to protect
our proprietary information by, among other things, entering into confidentiality agreements with employees, consultants and other
third parties. These confidentiality agreements may not sufficiently safeguard our trade secrets and other confidential information and
may not provide adequate remedies in the event of unauthorized use or disclosure of this information. Enforcing a claim that a party
illegally disclosed or misappropriated a trade secret or other proprietary information could be difficult, expensive and time-consuming
and the outcome could be unpredictable. In addition, trade secrets or other confidential information could otherwise become known or
be independently developed by others in a manner that could prevent legal recourse by us. If any of our trade secrets or other
confidential or proprietary information were disclosed or misappropriated or if any such information was independently developed by
a competitor, our competitive position could be harmed and our business could suffer.
Litigation or other proceedings or third-party claims of intellectual property infringement or misappropriation could require
us to spend significant time and money and prevent us from selling our tests.
We believe our ability to succeed will depend in part on our avoidance of infringement of patents and other proprietary rights
owned by third parties, including the intellectual property rights of competitors. There are numerous third-party-owned U.S. and
foreign patents, pending patent applications and other intellectual property rights that cover technologies relevant to genetic testing.
We may be unaware of patents or other intellectual property rights that a third-party might assert are infringed by our business, and
there may be pending patent applications that, if issued, could be asserted against us. As a result, our existing or future operations may
be alleged or found to infringe existing or future patents or other intellectual property rights of others. Moreover, as we continue to sell
our existing tests and if we launch new tests and enter new markets, competitors may claim that our tests infringe or misappropriate
their intellectual property rights as part of strategies designed to impede our existing operations or our entry into new markets.
If a patent infringement or misappropriation of intellectual property lawsuit was brought against us, we could be forced to
discontinue or delay our development or sales of any tests or other activities that are the subject of the lawsuit while it is pending, even
if it is not ultimately successful. In the event of a successful claim of infringement against us, we could be forced to pay substantial
damages, including treble damages and attorneys’ fees if we were found to have willfully infringed patents; obtain one or more
licenses, which may not be available on commercially reasonable terms when needed or at all; pay royalties, which may be
substantial; or redesign any infringing tests or other activities, which may be impossible or require substantial time and expense. In
addition, third parties making claims against us for infringement or misappropriation of their patents or other intellectual property
rights could seek and obtain injunctive or other equitable relief, which, if granted, could prohibit us from performing some or all of
our tests. Further, defense against these claims, regardless of their merit or success, could cause us to incur substantial expenses, be a
substantial diversion to our management and other employee resources and significantly harm our reputation. Any of these outcomes
could delay our introduction of new tests, significantly increase our costs or prevent us from conducting certain of our essential
activities, which could materially adversely affect our ability to operate and grow our business.
Developments in patent law could have a negative impact on our business.
From time to time, the Supreme Court, other federal courts, the U.S. Congress or the U.S. Patent and Trademark Office, or
USPTO, may change the standards of patentability, and any such changes could have a negative impact on our business.
Three cases involving diagnostic method claims and “gene patents” have been decided by the Supreme Court in recent years. In
March 2012, the Supreme Court issued a decision in Mayo Collaborative v. Prometheus Laboratories, or Prometheus, a case
involving patent claims directed to optimizing the amount of drug administered to a specific patient, holding that the applicable
patents’ claims failed to incorporate sufficient inventive content above and beyond mere underlying natural correlations to allow the
claimed processes to qualify as patent-eligible processes that apply natural laws. In June 2013, the Supreme Court decided Association
for Molecular Pathology v. Myriad Genetics, or Myriad, a case challenging the validity of patent claims relating to the breast cancer
susceptibility genes BRCA1 and BRCA2, holding that isolated genomic DNA that exists in nature, such as the DNA constituting the
BRCA1 and BRCA2 genes, is not patentable subject matter, but that cDNA, which is an artificial construct created from RNA
transcripts of genes, may be patent eligible. In June 2014, the Supreme Court decided Alice Corporation Pty. Ltd. v. CLS Bank
International, or Alice, which affirmed the Prometheus and Myriad decisions and provided additional interpretation.
If we make efforts to seek patent protection for our technologies and tests, these efforts may be negatively impacted by the
Prometheus, Myriad and Alice decisions, rulings in other cases or guidance or procedures issued by the USPTO. However, we cannot
fully predict the impact of the Prometheus, Myriad and Alice decisions on the ability of genetic testing, biopharmaceutical or other
companies to obtain or enforce patents relating to DNA, genes or genomic-related discoveries in the future, as the contours of when
claims reciting laws of nature, natural phenomena or abstract ideas may meet patent eligibility requirements are not clear and may take
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years to develop via interpretation at the USPTO and in the courts. There are many previously issued patents claiming nucleic acids
and diagnostic methods based on natural correlations that issued before these recent Supreme Court decisions and, although many of
these patents may be invalid under the standards set forth in these decisions, they are presumed valid and enforceable until they are
successfully challenged, and third parties holding these patents could allege that we infringe or request that we obtain a license under
such patents. Whether based on patents issued before or after these Supreme Court decisions, we could be forced to defend against
claims of patent infringement or obtain license rights, if available, under these patents. In particular, although the Supreme Court has
held in Myriad that isolated genomic DNA is not patent-eligible subject matter, third parties could allege that our activities infringe
other classes of gene-related patent claims. There are numerous risks associated with any patent infringement claim that may be
brought against us, as discussed above under “—Litigation or other proceedings or third-party claims of intellectual property
infringement or misappropriation could require us to spend significant time and money and prevent us from selling our tests.”
In addition, the Leahy-Smith America Invents Act, or America Invents Act, which was signed into law in 2011, includes a
number of significant changes to U.S. patent law. These changes include a transition from a “first-to-invent” system to a “first-to-file”
system, changes to the way issued patents are challenged and changes to the way patent applications are disputed during the
examination process. These changes may favor larger and more established companies that have greater resources to devote to patent
application filing and prosecution. The USPTO has developed new regulations and procedures to govern the full implementation of
the America Invents Act, but the impact of the America Invents Act on the cost of prosecuting any patent applications we may file,
our ability to obtain patents based on our discoveries if we pursue them and our ability to enforce or defend any patents that may issue
remains uncertain.
These and other substantive changes to U.S. patent law could affect our susceptibility to patent infringement claims and our
ability to obtain any patents we may pursue and, if obtained, to enforce or defend them, any of which could have a material adverse
effect on our business.
We may not be able to enforce our intellectual property rights outside the United States.
The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and
many companies have encountered significant challenges in establishing and enforcing their proprietary rights outside the United
States. These challenges can be caused by the absence of rules and methods for the establishment and enforcement of intellectual
property rights in certain jurisdictions. In addition, the legal systems of some countries, particularly developing countries, do not favor
the enforcement of certain intellectual property protection, especially relating to healthcare. These aspects of many foreign legal
systems could make it difficult for us to prevent or stop the misappropriation of our intellectual property rights in these jurisdictions.
Moreover, changes in the law and legal decisions by courts in foreign countries could affect our ability to obtain adequate protection
for our technologies and enforce our intellectual property rights. As a result, our efforts to protect and enforce our intellectual property
rights outside the United States may prove inadequate, in which case our ability to remain competitive and grow our business and
revenue could be materially harmed.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or
misappropriated trade secrets.
We employ individuals who were previously employed at universities and biometric solution, genetic testing, diagnostic or other
healthcare companies, including our competitors or potential competitors. Further, we may become subject to ownership disputes in
the future arising from, for example, conflicting obligations of consultants or others who are involved in developing our and other
parties’ technologies and intellectual property rights. Although we try to ensure that our employees and consultants do not use the
proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees or
consultants have inadvertently or otherwise used or disclosed intellectual property rights, including trade secrets or other proprietary
information, of a former employer or other third-party. Litigation may be necessary to defend against these claims, should they arise.
If we fail in defending against any such claims, we could be subject to monetary damages and the loss of valuable intellectual property
rights or personnel. Even if we are successful in defending against any such claims, litigation could result in substantial costs, distract
management and other employees and damage our reputation.
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Common Stock Risks
An active, liquid trading market for our common stock may not be sustained, which could make it difficult for stockholders to
sell their shares of our common stock.
An active trading market for our common stock may not be sustained. Further, Mr. Hsieh, our founder, Chief Executive Officer
and Chairman of our board of directors, beneficially owns 28% of our outstanding voting equity as of December 31, 2020. As a result,
fewer shares are actively traded in the public market, which reduces the liquidity of our common stock. The lack of an active trading
market could impair our stockholders’ ability to sell their shares at the desired time or at a price considered reasonable. Further, an
inactive trading market may impair our ability to raise capital by selling shares of our common stock in the future, and may impair our
ability to enter into strategic relationships or acquire companies or technologies using shares of our common stock as consideration.
Our common stock is listed on the Nasdaq Global Market, or Nasdaq, under the symbol “FLGT.” If we fail to satisfy the
continued listing standards of Nasdaq, however, we could be de-listed, which would negatively impact the price and liquidity of our
common stock.
The price of our common stock may be volatile and you could lose all or part of your investment.
The trading price of our common stock has experienced, and may continue to experience, wide fluctuations and significant
volatility. This volatility may be exacerbated by the relatively small and illiquid market for our common stock. Other factors that may
contribute to this volatility include, among others:
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actual or anticipated fluctuations in our operating results;
competition from existing tests or new tests that may emerge, particularly if competitive factors in our industry,
including prices for genetic or other testing, become more acute;
failures to meet or exceed financial estimates and projections of the investment community or guidance we have
provided to the public;
issuance of new or updated research or reports by securities analysts or changed recommendations for our common
stock;
announcements by us or our competitors of significant acquisitions, investments, strategic relationships, joint ventures,
collaborations or capital commitments;
the timing and amount of our investments in our business and the market’s perception of these investments and their
impact on our prospects;
actual or anticipated changes in laws or regulations applicable to our business or our tests;
additions or departures of key management or other personnel;
changes in coverage and reimbursement by current or potential payors;
inability to obtain additional funding as and when needed on reasonable terms;
disputes or other developments with respect to our or others’ intellectual property rights;
product liability claims or other litigation;
sales of our common stock by us or our stockholders;
general economic, political, industry and market conditions, including factors not directly related to our operating
performance or the operating performance of our competitors, such as increased uncertainty in the U.S. regulatory
environment for healthcare, trade and tax-related matters;
events that affect, or have the potential to affect, general economic conditions, including but not limited to political
unrest, global trade wars, natural disasters, act of war, terrorism, or disease outbreaks (such as the global pandemic
related to COVID-19);
and the other risk factors discussed in this report.
In addition, the stock market in general, and the market for the stock of companies in the life sciences and technology industries
in particular, has experienced extreme price and volume fluctuations in recent years that have at times been unrelated or
disproportionate to the operating performance of specific companies. These broad market and industry factors may negatively affect
the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of
volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often
been instituted against such company. This type of litigation, if instituted against us, could result in substantial costs, a diversion of
our management’s attention and resources and could damage our reputation.
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Our principal stockholders and management own a significant percentage of our capital stock and are able to exert significant
control over matters subject to stockholder approval.
Our executive officers, directors, beneficial owners of 5% or more of our outstanding voting equity and their respective
affiliates collectively beneficially owns approximately 32% of our outstanding voting equity as of December 31, 2020, and of this,
Mr. Hsieh, our founder, Chief Executive Officer and Chairman of our board of directors, by himself beneficially owns 28% of our
outstanding voting equity as of December 31, 2020. As a result, these stockholders have the ability to control matters submitted to our
stockholders for approval, including elections of directors, amendments to our organizational documents or approval of any merger,
sale of assets or other major corporate transaction. This concentration of ownership may prevent or discourage unsolicited acquisition
proposals or offers to acquire our common stock that some of our stockholders feel are in their best interests, as the interests of these
stockholders may not coincide with the interests of our other stockholders and they may act in a manner that advances their best
interests and not necessarily those of all of our stockholders. Further, this concentration of ownership could adversely affect the
prevailing market price for our common stock.
Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales could
occur, could cause the price of our common stock to fall.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. Any such sales, or the
perception in the market that sales are pending or could occur, could reduce the market price of our common stock. All of the
outstanding shares of our common stock are freely tradable without restriction in the public market, subject to certain volume and
manner of sale limitations applicable to shares held by our affiliates, as that term is defined in the Securities Act. In addition, subject
to similar limitations and any other applicable legal and contractual limitations, all of the shares of our common stock subject to
outstanding equity-based awards or reserved for issuance pursuant to such awards we may grant in the future are registered under the
Securities Act or are otherwise eligible under applicable securities laws for free trading in the public market upon their issuance.
Future issuances of our common stock or rights to purchase our common stock, including pursuant to our equity incentive
plan, could result in additional dilution to the percentage ownership of our stockholders and could cause the price of our
common stock to fall.
To raise capital or for other strategic purposes, we may sell common stock, convertible securities or other equity securities in
one or more transactions at prices and in a manner we determine from time to time. In addition, in November 2020 we entered into an
Equity Distribution Agreement, or the November 2020 Equity Distribution Agreement, with Piper Sandler & Co. (f/k/a Piper Jaffray
& Co.), or Piper, Oppenheimer & Co. Inc., and BTIG LLC, as sales agents, pursuant to which we may, from time to time, sell through
Piper as our sales agent shares of our common stock with an aggregate purchase price of up to $175.0 million. 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. We also may issue common stock or grant other
equity awards for compensatory purposes under our equity incentive plan. If we issue common stock, convertible securities or other
equity securities, including shares pursuant to the November 2020 Equity Distribution Agreement or equity awards under our equity
incentive plan, our then-existing stockholders could be materially diluted by such issuances and, if we otherwise issue preferred stock,
new investors could gain rights, preferences and privileges senior to the holders of our common stock, any of which could cause the
price of our common stock to decline.
We do not intend to pay dividends on our common stock, so any returns will be limited to the value of our common stock.
We currently anticipate that we will retain any future earnings to finance the continued development, operation and expansion of
our business. As a result, we do not anticipate declaring or paying any cash dividends or other distributions in the foreseeable future.
Further, if we were to enter into a credit facility or issue debt securities or preferred stock in the future, we may become contractually
restricted from paying dividends. If we do not pay dividends, our common stock may be less valuable because stockholders must rely
on sales of their common stock after price appreciation, which may never occur, to realize any gains on their investment.
If securities or industry analysts do not publish research or reports about our business or if they issue an adverse or
misleading opinion regarding our common stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish
about us or our business. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could
lose visibility in the financial markets, which could cause the price and trading volume of our common stock to decline. Further, if any
of these analysts issues an adverse or misleading opinion regarding us, our business model, our industry or our stock performance or if
our operating results fail to meet analyst expectations, the price of our common stock could also decline.
47
Provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company
or changes in our management and depress the market price of our common stock.
Our certificate of incorporation and bylaws contain provisions that could depress the market price of our common stock by
acting to discourage, delay or prevent a change in control of our company or changes in our management that our stockholders may
deem advantageous. These provisions, among other things:
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authorize our board of directors to issue, without further action by our stockholders, up to 1.0 million shares of
undesignated or “blank check” preferred stock;
prohibit stockholder action by written consent, thus requiring all stockholder actions to be taken at a duly noticed and
held meeting of our stockholders;
specify that special meetings of our stockholders can be called only by our board of directors, the Chairman of our board
of directors or our President, thereby eliminating the ability of our stockholders to call special meetings;
permit only our board of directors to establish the number of directors and fill vacancies on the board of directors, except
as may be required by law;
permit our board of directors to amend our bylaws, subject to the power of our stockholders to repeal any such
amendment;
do not permit cumulative voting by our stockholders on the election of directors; and
establish advance notice requirements for stockholders to propose nominees for election as directors or matters to be
acted upon at annual meetings of stockholders.
In addition, we are subject to Section 203 of the Delaware General Corporation Law, or DGCL, which imposes certain
restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock.
Section 203 may have the effect of discouraging, delaying or preventing a change in control of our company.
Holders of our common stock could be adversely affected if we issue preferred stock.
Pursuant to our certificate of incorporation, our board of directors is authorized to issue up to 1.0 million shares of preferred
stock without any action by our stockholders. Our board of directors also has the power, without stockholder approval, to set the terms
of any series of preferred stock that may be issued, among others, including voting rights, dividend rights and preferences over our
common stock with respect to dividends or in the event of a dissolution, liquidation or winding up. If we issue preferred stock in the
future that has preferences over our common stock with respect to payment of dividends or upon a liquidation, dissolution or winding
up, or if we issue preferred stock that is convertible into our common stock at greater than a one-to-one ratio, the voting and other
rights of the holders of our common stock and the market price of our common stock could be adversely affected.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for
certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability
to obtain a judicial forum they consider favorable for disputes with us or our directors, officers or other employees.
Our certificate of incorporation and bylaws provide that, unless we consent in writing to the selection of an alternative forum,
the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for:
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any derivative action brought on our behalf;
any direct action brought by a stockholder against us or any of our directors, officers or other employees, alleging a
breach of a fiduciary duty;
any action brought by a stockholder against us or any of our directors, officers or other employees, alleging a violation of
the DGCL, our certificate of incorporation or our bylaws; and
any action brought by a stockholder against us or any of our directors, officers or other employees, asserting a claim
against us governed by the internal affairs doctrine.
We refer to the forgoing limitations as the Exclusive Forum Provisions. The Exclusive Forum Provisions do not apply to
(i) actions in which the Court of Chancery in the State of Delaware concludes that an indispensable party is not subject to the
jurisdiction of the Delaware courts, and (ii) actions in which a federal court has assumed exclusive jurisdiction of a proceeding.
Accordingly, the Exclusive Forum Provisions do not apply to actions brought to enforce a duty or liability created by the
Exchange Act or the rules and regulations thereunder, or Exchange Act Claims. Further, the clause in our certificate of incorporation
excepting “actions in which a federal court has assumed exclusive jurisdiction of a proceeding” from the Exclusive Forum Provisions
is not intended to mean that a federal court must take any actual or affirmative action to assume jurisdiction over an Exchange Act
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Claim, as Section 27 of the Exchange Act creates exclusive federal jurisdiction over all Exchange Act Claims, regardless of whether a
federal court takes any action. The Exclusive Forum Provisions also do not apply to federal and state suits brought to enforce any duty
or liability created by the Securities Act or the rules and regulations thereunder, or Securities Act Claims. To the extent applicable or
enforceable, the Exclusive Forum Provisions may limit a stockholder’s ability to bring a claim in a judicial forum it finds favorable for
disputes with us or our directors, officers or other employees, which may discourage these lawsuits. Alternatively, for Securities Act
Claims, Exchange Act Claims or claims for which a court were to find these Exclusive Forum Provisions inapplicable or
unenforceable for one or more of the specified types of actions or proceedings, we may incur additional costs associated with
resolving these matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
Our corporate headquarters and laboratory operations are located in Temple City, California, where we lease and occupy
approximately 12,000 square feet of office and laboratory space under leases that will expire in January 2023. We use these facilities
for laboratory testing and management activities and certain research and development, administrative and other functions.
We have another CLIA-certified laboratory located in Houston, Texas, where we lease and occupy approximately 12,000 square
feet under a lease that will expire in November 2023. We use these facilities for laboratory testing and certain administrative and other
functions.
In 2020, the Company purchased a real property located at 4399-4401 Santa Anita Avenue, El Monte, California, or the
Property, from 4401 Santa Anita Corporation, a California corporation, or the Seller. The Company paid an aggregate of $15.4 million
in exchange for the Property which consists of approximately 61,612 total square feet of building situated on 2.6 acres of land. We
believe our existing facilities are adequate for our current and expected near-term needs and additional space would be available on
commercially reasonable terms if required.
Item 3. Legal Proceedings.
From time to time, we may be involved in legal proceedings arising in the ordinary course of our business. We are not presently
a party, and our properties are not presently subject, to any legal proceedings that, in the opinion of management, would have a
material effect on our business. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement
costs, diversion of management resources, negative publicity and reputational harm, among other factors.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
On September 29, 2016, our common stock was listed for trading on Nasdaq under the symbol “FLGT.” There was no public
market for our common stock prior to September 29, 2016.
As of March 1, 2021, there were 9 holders of record of our common stock, plus an indeterminate number of additional
stockholders whose shares of our common stock are held on their behalf by brokerage firms or other agents.
Holders of Common Stock
Dividend Policy
We currently anticipate that we will retain any future earnings to finance the continued development, operation and expansion of
our business. As a result, we do not anticipate declaring or paying any cash dividends or other distributions in the foreseeable future.
Any determination to pay dividends would be at the discretion of our board of directors and would depend on our results of operation,
financial condition and other factors that our board of directors, in its discretion, considers relevant.
Use of Proceeds from Registered Securities
On October 4, 2016, we completed the initial public offering of our common stock, or the IPO, pursuant to an Underwriting
Agreement with Credit Suisse Securities (USA) LLC and Piper, as the representatives of the several underwriters, in which we issued
and sold an aggregate of 4.8 million shares of common stock (including 630,000 shares issued and sold on October 7, 2016 pursuant
to the underwriters’ exercise in full of their option to purchase additional shares) at a public offering price of $9.00 per share. We
received net proceeds of approximately $36.0 million, after deducting underwriting discounts and commissions and offering expenses
paid or payable by us of approximately $4.4 million. The shares issued and sold in the IPO were registered under the Securities Act on
a registration statement on Form S-1 (File No. 333-213469), as amended, and the final prospectus dated September 28, 2016 included
in such registration statement, or the Prospectus.
To date, we have used $28.8 million of the net proceeds from the IPO, of which, $4.5 million was used for contributions to our
joint venture, FF Gene Biotech in partial satisfaction of our contribution obligations under the joint venture cooperation agreement,
and $24.3 million was used to fund the Company’s operation. All other net proceeds from the IPO are invested in investment-grade,
interest-bearing securities, such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the
U.S. government. There has been no material change in the planned use of proceeds from the IPO from that described in the
Prospectus.
On August 30, 2019, we entered into an Equity Distribution Agreement, or the 2019 Equity Distribution Agreement, with Piper
as sales agent, which was amended on August 4, 2020. During the year ended December 31, 2019, we sold an aggregate of 104,000
shares of our common stock pursuant to the 2019 Equity Distribution Agreement 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, 2020, we sold an aggregate
of 1.1 million shares of our common stock pursuant to the 2019 Equity Distribution Agreement at a weighted-average net selling price
of $38.50 per share, which resulted in $42.7 million of net proceeds to the Company. Shares sold under the Equity Distribution
Agreement were offered and sold pursuant to our shelf registration statement on Form S-3 (File No. 333-233227) filed with the SEC
on August 12, 2019 and declared effective on August 23, 2019, and prospectus supplements and accompanying base prospectus filed
with the SEC on August 30, 2019, May 6, 2020 and August 5, 2020. There has been no material change in the planned use of proceeds
as described in the prospectus supplements and accompanying base prospectus.
On November 13, 2019, we entered into a purchase agreement with Piper, as representative of the several underwriters, pursuant
to which we sold 2,673,750 shares of our common stock at a price of $10.51875 per share, with a public offering price of $11.25 per
share. We received net proceeds of approximately $27.6 million, after deducting underwriting discounts and commissions and offering
expenses paid or payable by us of approximately $2.4 million. The shares issued and sold in the underwritten offering were registered
under the Securities Act and sold pursuant to our shelf registration statement on Form S-3 (File No. 333-233227), and a prospectus
supplement and accompanying base prospectus filed with the SEC on November 13, 2019. There has been no material change in the
planned use of proceeds as described in the prospectus supplement and accompanying base prospectus.
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On September 25, 2020, we entered into an Equity Distribution Agreement, or the September 2020 Equity Distribution
Agreement, with Piper as sales agent, pursuant to which we sold 2.8 million shares of our common stock pursuant to the 2020 Equity
Distribution Agreement 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. There has been no material change in the planned use of proceeds as described in the prospectus supplement
and accompanying base prospectus.
On November 20, 2020, we entered into the November 2020 Equity Distribution Agreement, with Piper, Oppenheimer & Co.
Inc., and BTIG LLC, as sales agents, pursuant to which we may offer and sell, from time to time through Piper, shares of our common
stock having an aggregate offering price of up to $175.0 million. Piper may receive a commission of up to 3% of the gross proceeds
received by the Company for sales pursuant to the November 2020 Equity Distribution Agreement. During the year ended December
31, 2020, the Company sold an aggregate of 2.0 million shares of our common stock pursuant to the November 2020 Equity
Distribution Agreement at a weighted-average net selling price of $48.70 per share, which resulted in $99.1 million of net proceeds to
the Company. Shares sold under the November 2020 Equity Distribution Agreement were offered and sold pursuant to the Company’s
registration statement on Form S-3 (File No. 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
November 20, 2020. There has been no material change in the planned use of proceeds as described in the prospectus supplement and
accompanying base prospectus.
Item 6. Selected Financial Data.
Not applicable.
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Item 7. 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
consolidated financial statements and related notes included in this report.
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. 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. The forward-looking statements in this discussion and
analysis include statements about, among other things, our future financial and operating performance, our future cash flows and
liquidity and our growth strategies, as well as anticipated trends in our business and industry. These forward-looking statements are
subject to a number of risks and uncertainties, including, among others, those described under “Item 1A. Risk Factors” in Part I of
this report. Moreover, we operate in a competitive and rapidly evolving industry and new risks emerge from time to time. It is not
possible for us to predict all of the risks we may face, nor can we assess the impact of all factors on our business or the extent to
which any factor or combination of factors could cause actual results to differ from our expectations. In light of these risks and
uncertainties, the forward-looking events and circumstances described in this discussion and analysis may not occur, and actual
results could differ materially and adversely from those described in or implied by any forward-looking statements we make. Although
we have based our forward-looking statements on assumptions and expectations we believe are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements or other future events. As a result, forward-looking statements should
not be relied on or viewed as predictions of future events, and this discussion and analysis should be read with the understanding that
actual future results, levels of activity, performance and achievements may be materially different than our current expectations. The
forward-looking statements in this discussion and analysis speak only as of the date of this report, and except as required by law, we
undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform
these statements to actual results or to changes in our expectations.
Overview
Fulgent is a technology company offering comprehensive genetic testing and providing physicians with clinically actionable
diagnostic information they can use to improve the quality of patient care. We have developed a proprietary technology platform that
allows us to offer a broad and flexible test menu and continually expand and improve our proprietary genetic reference library, while
maintaining accessible pricing, high accuracy and competitive turnaround times. Combining NGS with our technology platform, we
perform full-gene sequencing with deletion/duplication analysis in single-gene tests; pre-established, multi-gene, disease-specific
panels; and customized panels that can be tailored to meet specific customer needs. We believe our test menu offers more genes for
testing than our competitors in today’s market, which enables us to provide expansive options for test customization and clinically
actionable results. After launching our first commercial genetic tests in 2013, we have expanded our test menu to include more than
18,000 single-gene tests and more than 900 panels that collectively test for more than 5,700 genetic conditions, including various
cancers, cardiovascular diseases, neurological disorders and pediatric conditions. A cornerstone of our business is our ability to
provide expansive options and flexibility for all clients’ unique genetic testing needs.
Our technology platform, which integrates sophisticated data comparison and suppression algorithms, adaptive learning
software, advanced genetic diagnostics tools and integrated laboratory processes, allows us to offer a test menu with expansive genetic
coverage. We believe the comprehensive data output and high detection rates of our tests, both made possible by this expansive
genetic coverage, provide physicians with information they can readily incorporate into treatment decisions for their patients, which
we refer to as clinical actionability. In addition, our technology platform facilitates our ability to perform customized genetic tests
using our expansive library of genes, and we believe this flexibility increases the utility of the genetic data we produce. Further, our
technology platform provides us with operating efficiencies that help lower our internal costs, which allows us to offer our tests at
accessible price points. As a result, our efforts to build and continually enhance our technology platform allow us to deliver
comprehensive, adaptable, clinically actionable and affordable genetic analysis while maintaining a low cost per billable test, enabling
us to efficiently meet the needs of our growing base of customers.
Since March 2020, we have also commercially launched several tests for the detection of SARS-CoV-2, the virus that causes
COVID-19, including NGS and RT-PCR-based tests. To date, we have processed orders for our COVID-19 tests from a variety of
customers, including governmental bodies, municipalities, and large corporations.
We have experienced rapid volume growth since our commercial launch, with 4.4 million billable tests delivered in 2020,
compared to 59,000 billable tests delivered in 2019, and an aggregate of over 4.5 million billable tests delivered to over 1,300
customers from inception through December 31, 2020.
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We offer tests at competitive prices, averaging approximately $96 per billable test delivered in 2020, and at a lower cost to us
than many of our competitors, averaging approximately $20 per billable test delivered in 2020. Our volume has grown rapidly since
our commercial launch, with 4.4 million billable tests delivered in 2020, 59,000 billable tests delivered in 2019, and an aggregate of
over 4.5 million billable tests delivered to over 1,300 customers from inception through December 31, 2020. We have experienced
compound quarterly growth of 137.2% in the number of billable tests delivered in our last eight completed fiscal quarters. We
recorded revenue and 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 2019, and the second, third and fourth quarters of 2020, 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.
2019 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.
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Expanded Reproductive Testing Options Including Preimplantation Genetic Testing, or PGT
In 2019, we expanded our reproductive testing options, including Preimplantation Genetic Testing, or PGT. PGT is appropriate
for anyone undergoing IVF treatment, and is especially helpful for women over 35, women who have previously experienced
miscarriages, women who want to reduce the likelihood of having multiples, couples experiencing infertility (male or female), and
those who have experienced IVF failure in the past. The information gained from these tests will allow for purposeful selection of
chromosomally normal embryos for implantation which will expand the prospects of a successful IVF treatment and a healthy
pregnancy.
COVID-19 Considerations
The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is
affecting our employees, patients, communities and business operations, as well as the U.S. economy and financial markets. We are
closely monitoring the impact of COVID-19 on all aspects of our business, including its impact on our customers, suppliers, third-
party service providers, and our employees. The full extent to which the COVID-19 pandemic will directly or indirectly impact our
business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be
accurately predicted, including new information that may emerge concerning COVID-19 and its variants, the actions taken to contain
it or treat it and the economic impact on local, regional, national and international markets and supply chains.
During the year ended December 31, 2020, and for the entirety of the COVID-19 pandemic to such point, we continued to
operate as an essential business in response to COVID-19. In year ended December 31, 2020, the COVID-19 pandemic did not have a
negative impact on our consolidated operating results. Since the outbreak of the current COVID-19 pandemic there has been strong
demand for accurate COVID-19 testing with rapid turn-around times as private businesses, municipalities and healthcare providers
began to increasingly rely on diagnostic testing to continue operations and as a tool to aide containment efforts, and as result we have
recognized significant revenue growth in connection with sales of our COVID-19 tests. While the duration of the ongoing COVID-19
pandemic and continuing market for COVID-19 diagnostic tests remains subject to a number of uncertainties, including uncertainties
regarding the effectiveness of disease containment efforts, speed and effectiveness of global COVID-19 vaccine distributions, newly
emerging viral variants, continuing government actions in response to the pandemic and regulatory requirements or preferences that
may emerge following the pandemic, a robust market for COVID-19 diagnostic testing persists to present day. However, the
responses of the federal, international, state and regional governments to the pandemic, including any shelter in place orders and the
allocation of healthcare resources to treating those infected with the virus, previously caused a significant decline in the number of our
traditional genetic tests ordered, which may impact our future revenues for these tests. Even after the COVID-19 outbreak has
subsided, we may experience materially adverse impacts on our financial condition and results of operations. Our ability to continue to
operate as currently planned, including our ability to continue to offer our COVID-19 tests with accurate results and competitive turn-
around times without any significant negative operational impact from the COVID-19 pandemic will depend in part on our, and any of
our third-party service providers’ and suppliers’ ability to protect our respective employees and supply chains. We have endeavored to
follow the recommended actions of government and health authorities to protect our employees. We intend to continue to adhere to
our employee safety measures to ensure that any disruptions to our operations remain minimal during the pandemic. However, the
uncertainty resulting from the pandemic could result in an unforeseen disruption to our, or our third-party service providers’ and
suppliers’, workforce and supply chain.
The COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of December 31, 2020. We have not
incurred any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic
as of December 31, 2020.
For additional information on risk factors related to the COVID-19 pandemic or other risks that could impact our results, please refer
to “Item 1A. Risk Factors” in Part I of this Form 10-K.
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Factors Affecting Our Performance
Market and Industry Trends
Genetic testing has experienced significant growth in recent years. If this growth trend continues, we believe genetic testing
could become a more accepted part of standard medical care and the knowledge of a person’s unique genetic makeup could begin to
play a more important role in the practice of medicine. The advent of NGS technology, a relatively new genetic testing technique that
enables millions of DNA fragments to be sequenced in parallel, has dramatically lowered the cost and improved the quality of genetic
testing, contributing to increased adoption generally and increased volumes for our tests.
The growth of genetic testing in recent years has caused increased competition in our industry. This increased competition, as
well as cost-saving initiatives on the part of government entities and other third-party payors, has resulted in downward pressure on
the price for genetic analysis and interpretation, which could intensify in future periods if adoption of genetic testing becomes more
widespread. We have reduced the prices for certain of our tests in recent periods to maintain our competitive position, and increased
downward pricing pressure could harm our revenue and margins and our ability to achieve and sustain profitability. The impact of this
pricing pressure has been and may continue to be intensified if we continue to incur increased expenses in order to meet customer
demands and make investments in our business.
While adoption of genetic testing has increased in recent years, we believe widespread utilization has been tempered because of
certain challenges and barriers to adoption that exist in today’s market. Among these industry challenges are that genetic testing can
be prohibitively expensive, only a limited number of genetic tests are currently reimbursable, certain genetic conditions cannot be
diagnosed due to the limited scope of some genetic analysis, genetic testing can be an inefficient process and the interpretation of
genetic results can be cumbersome and time-consuming. We have approached these competitive and operational industry challenges
by building and continually advancing a multi-faceted technology platform that we believe will facilitate our ability to address many
of these challenges.
Launch of 2020 COVID-19 Testing Services
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. Most of the growth in our testing volume has resulted from COVID-19 tests
that we conduct for certain counties and states including the County of Los Angeles and San Bernardino County. The expansion of our
COVID-19 testing business has resulted in a substantial change in our business that presents important challenges to our ability to
manage our rapidly expanding business, and we anticipate that this business will eventually decrease after the development and
widespread deployment of an effective vaccine.
Number and Mix of Billable Tests Delivered
Our performance is closely correlated with the number of tests for which we bill our customers, which we refer to as billable
tests. The number of billable tests we deliver in any period depends on a number of factors, including the other factors affecting our
performance described in this discussion and analysis. We believe the number of billable tests that we deliver is an important indicator
of the performance of our business.
In addition, we offer our tests at different price points, and we incur different amounts and types of costs, depending on the
nature and level of complexity and customization of the test and the specific terms we have negotiated for the tests, which can vary
from customer to customer. As a result, the mix of billable tests delivered in any period, and the customers that order these tests,
impacts our financial results for the period.
Mix of Customers
Through December 31, 2020, we have sold our tests to over 1,300 total customers. We consider each single billing and paying
unit to be an individual customer, even though a unit may represent multiple physicians and healthcare providers ordering tests. The
composition and concentration of our customer base can fluctuate from period to period, and in certain prior periods, a small number
of customers has accounted for a significant portion of our revenue. Generally, we do not have long-term purchase agreements with
any of our customers, including these key customers, and, as result, any or all of them could decide at any time to increase, accelerate,
decrease, delay or discontinue their orders from us. Although we believe some of these fluctuations in customer demand may be
attributable in part to the nature of our business, in which our customers can experience significant volatility in their testing demand
from period to period in the ordinary course of their operations, these demand fluctuations, particularly for our key customers, can
have a significant impact on our period-to-period performance regardless of their cause.
55
We currently classify our customers into three payor types: (i) Insurance, (ii) Institutional, including hospitals, medical
institutions, other laboratories, governmental bodies, municipalities and large corporations or (iii) Patients who pay directly. Typically,
we bill our Institutional customers for our tests and they are responsible for paying us directly and billing their patients separately or
obtaining reimbursement from third-party payors in connection with a patient’s DRG. A small percentage of our customers are
patients, who elect to pay for tests themselves with out-of-pocket payments after their physicians have ordered our tests.
We are making efforts to diversify our customer market, including building relationships with research institutions and other
similar institutional customers, national clinical laboratories, governmental bodies, municipalities and large corporations in need of
regular COVID-19 testing for large populations and various other organizations to facilitate access to physicians, practitioners and
other new customer groups, including certain U.S. government agencies. We are also pursuing relationships with payors, including
Medicare, some state Medicaid programs and commercial payors, in an effort to obtain coverage and reimbursement for our tests to
make them accessible to more individual physicians. Generally, when we establish these new customer relationships, we agree with
the applicable payor, laboratory or other customer to provide certain of our tests at negotiated rates, but, subject to limited exceptions,
most of these relationships do not obligate any party to order our tests at any agreed volume or frequency or at all. Further, any
relationships we may develop with any government agencies are subject to unique risks associated with government contracts,
including cancellation if adequate appropriations for subsequent performance periods are not made and modification or termination at
the government’s convenience without prior notice. Our efforts to pursue individual consumers under our Picture Genetics platform,
new payor or institutional customers, new COVID-19 testing customers or other new customer markets could fail, and even if we are
able to develop relationships with new customers in these or any other new customer groups, these relationships may not lead to
meaningful or any increases in our customer base, the number of billable tests we deliver or our revenue, and may not improve our
ability to achieve or sustain profitability.
Ability to Maintain Our Broad and Flexible Test Menu
We believe the large number of genes we incorporate into our test menu provides a meaningful competitive advantage. We
believe the breadth of genes in our portfolio allows us to provide more comprehensive genetic information and improves our variant
detection rate, which can increase the clinical actionability of the data we produce. The breadth of genes in our portfolio also allows us
to offer hundreds of pre-established, multi-gene panels that focus on specified genetic conditions, including our Focus and
Comprehensive oncology panels and Beacon carrier screening panels and somatic cancer panels. In addition, all of our panel tests can
be adjusted up or down to include more or fewer genes, or customers can design their own panels to their exact specifications,
resulting in a flexible and customizable test menu. We believe our ability to continue to offer more genes and more ordering flexibility
than our competitors could be a key contributor to the long-term growth of our business.
Ability to Maintain Low Internal Costs
We have developed various proprietary technologies that improve our laboratory efficiency and reduce the costs we incur to
perform our tests, including our proprietary gene probes, data algorithms, adaptive learning software and genetic reference library.
This technology platform enables us to perform each test and deliver its results at a lower cost to us than many of our competitors, and
this low cost per billable test allows us to maintain affordable and competitive pricing for our customers, which we believe encourages
repeat ordering from existing customers and attracts new customers. We believe this low internal cost is a key factor in our ability to
grow our business and obtain margins on our sales that allow us to drive toward sustained profitability.
We calculate our cost per billable test by dividing the number of billable tests delivered in any given period by our cost of
revenue in the same period. Investments in our operational capabilities could increase our cost of revenue, but these investments could
also, on a near-term and/or long-term basis, increase our operating efficiencies and lead to cost of revenue decreases. 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.
Ability to Obtain Reimbursement
In today’s market, third-party payors generally restrict the reimbursement of genetic testing to only a narrow subset of genetic
tests and certain patients who meet specific criteria. The lack of widespread favorable reimbursement policies has presented a
challenge for genetic testing companies in building sustainable business models. As part of our business plan for future growth, we
intend to pursue coverage and reimbursement from third-party payors at a level adequate for us to achieve profitability with this payor
group. 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
56
have agreed with these payors to provide certain of our tests at negotiated rates. Although this does not guarantee that we will receive
reimbursement for our tests from these or any other payors at adequate levels, we believe our low cost per billable test could enhance
our ability to compete effectively in the third-party payor market and our flexibility in establishing relationships with additional third-
party payors in the future. Our level of success in obtaining and maintaining adequate coverage and reimbursement from third-party
payors for our testing services will, we believe, be a key factor in the rate and level of growth of our business over the long term.
Foreign Currency Exchange Rate Fluctuations
Some of our business to date has been from non-U.S. customers, and we may record increasing revenue levels from non-U.S.
sources as we focus on growing our international customer base. These revenue sources expose us to fluctuations in our results
associated with changes in foreign currency exchange rates depending on the value of the U.S. dollar compared to the foreign
currencies in which we record revenue. During all periods covered by this report, we consider the estimated effect on our revenue of
foreign currency exchange rate fluctuations to be immaterial; however, the impact of foreign currency exchange rate fluctuations may
increase in future periods as we pursue continued international expansion.
Our business and prospects are exposed to numerous risks and uncertainties. For more information, see “Item 1A. Risk Factors”
Business Risks and Uncertainties
in this report.
Revenue
Financial Overview
We generate revenue from sales of our COVID-19 tests and genetic tests. We recognize revenue upon delivery of a report to the
ordering physician or other customer based on the established billing rate, less contractual and other adjustments, to arrive at the
amount we expect to collect. We 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: costs of laboratory supplies, including collection kits, personnel costs, including salaries, employee benefit costs, bonuses
and equity-based compensation expenses; depreciation of laboratory equipment; amortization of leasehold improvements; and
allocated overhead expenses, including rent and utilities. Costs associated with performing tests are recorded as tests are processed.
We expect cost of revenue to generally increase as we increase the number of billable tests we deliver.
Operating Expenses
Our operating expenses are classified into three categories: research and development; selling and marketing; and general and
administrative. For each category, the largest component is personnel costs, which include salaries, employee benefit costs, bonuses
and equity-based compensation expenses.
Research and Development Expenses
Research and development expenses represent costs incurred to develop our technology and future tests. 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 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.
Selling and Marketing Expenses
Selling and marketing expenses consist of personnel costs, customer service expenses, direct marketing expenses, educational
and promotional expenses, market research and analysis and allocated overhead expenses, including rent and utilities. We expense all
selling and marketing costs as incurred. We expect our selling and marketing expenses will continue to increase in absolute dollars,
primarily driven by our increased investment in sales and marketing in recent periods, including developing and expanding our sales
team, creating and implementing new sales and marketing strategies and increasing the overall scope of our marketing efforts.
57
General and Administrative Expenses
General and administrative expenses include executive, finance, accounting, legal and human resources functions. These
expenses consist of personnel costs, audit and legal expenses, consulting costs and allocated overhead expenses, including rent and
utilities. We expense all general and administrative costs as incurred. We expect our general and administrative expenses will continue
to increase in absolute dollars as we seek to continue to scale our operations. We also expect to continue to incur increased general and
administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and
regulations of the 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 consists of U.S. federal and state income taxes. A deferred tax liability is recognized for all taxable
temporary differences, and a deferred tax asset is recognized for all deductible temporary differences, operating losses and tax credit
carryforwards. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will
not be realized.
The factors that most significantly impact our effective tax rate include the levels of net earnings and certain deductions,
including those related to equity-based compensation, the effect of state income taxes, return to provision adjustments, and foreign tax
rate differential. We expect that these factors could cause our consolidated effective tax rate to differ significantly from the U.S.
federal income tax rate in future periods.
The table below summarizes the results of our continuing operations for each of the periods presented. Historical results are not
indicative of the results to be expected in the current period or any future period.
Results of Operations
Statement of Operations Data:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Total operating expenses
Operating income (loss)
Interest and other income, net
Income before income taxes and equity loss in
investee and impairment loss
Provision for income taxes
Income before equity loss in investee and impairment
loss
Equity loss in investee
Impairment loss in equity-method investment
Net income (loss)
Other Operating Data:
Billable tests delivered(1)
Average price per billable test delivered(2)
Cost per billable test delivered(3)
* Percentage not meaningful.
Year Ended December 31,
2020
2019
$
Change
%
Change
(dollars and billable tests in thousands, except per billable test data)
$
$
$
$
421,712 $
89,807
331,905
11,580
14,952
15,215
41,747
290,158
1,526
291,684
72,532
219,152
(488)
(4,354)
214,310 $
4,409
96 $
20 $
32,528 $
14,107
18,421
6,537
5,898
6,414
18,849
(428)
837
409
43
366
(777)
—
(411) $
59
555 $
241 $
389,184
75,700
313,484
5,043
9,054
8,801
22,898
290,586
689
1196%
537%
1702%
77%
154%
137%
121%
67894%
82%
291,275
72,489
71216%
168579%
218,786
289
(4,354)
214,721
59778%
37%
*
52244%
4,350
(459)
(221)
7373%
(83)%
(92)%
(1) 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.
58
(2) We calculate the average price per billable test delivered by dividing the amount of revenue we recognized from the billable
tests delivered in a period by the number of billable tests delivered in the same period.
(3) 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
Revenue increased $389.2 million, or 1196%, from $32.5 million in 2019 to $421.7 million in 2020. The increase in revenue
between periods was primarily due to an 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.
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.
Cost of Revenue
Cost of revenue increased $75.7 million, or 537%, from $14.1 million in 2019 to $89.8 million in 2020. The increase was
primarily due to increases of $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.
Our gross profit increased $313.5 million, or 1702%, from $18.4 million in 2019 to $331.9 million in 2020. 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.
Research and Development
Research and development expenses increased $5.0 million, or 77%, from $6.5 million in 2019 to $11.6 million in 2020. The
increase was primarily due to increases of $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.
59
Selling and Marketing
Selling and marketing expenses increased $9.1 million, or 154%, from $5.9 million in 2019 to $15.0 million in 2020. The
increase was primarily due to increases of $4.4 million in personnel costs and equity-based compensation related to increased
commission expense and stock award granted to sales representative, $2.6 million in marketing supplies and shipping to potential
customers including kits related to the increased number of COVID-19 tests, and $1.7 million in consulting and outside labor expense
related to COVID-19 marketing projects in 2020.
General and Administrative
General and administrative expenses increased $8.8 million, or 137%, from $6.4 million in 2019 to $15.2 million in 2020. The
increase was primarily due to increases of $2.6 million in personnel costs and equity-based compensation related to increased
headcount and the market price of the Company’s stock, $2.8 million in software and licensing related to the increased number
COVID-19 tests, $981,000 in bad debt expenses related to additional reserve for doubtful accounts in the current period, $879,000 in
accounting fees, and $580,000 in other state tax.
Interest and Other Income, Net
Interest income, net was $1.5 million and $871,000 for 2020 and 2019, respectively. This income mainly related to interest
received on various investments in marketable securities.
Other income (expense) was not significant for 2020 or 2019. The primary components of other income (expense) for 2020 and
2019 were rental income net of rental expenses and foreign currency valuation gains (losses).
Provision for Income Taxes
We recorded income tax of $72.5 million and $43,000 for 2020 and 2019, respectively. Our effective income tax rate was 24.9%
and 10.5% of income before income taxes for 2020 and 2019, respectively. The increase in effective tax rates for 2020 relative to 2019
was primarily attributable to a significant increase in income for the year ended December 31, 2020, partially offset by a reduction in
the valuation allowance on deferred tax assets and increased windfall tax deductions related to stock-based compensation. The
decrease in the 2020 tax rate related to the reduction in the valuation allowance is due to management’s conclusion that, as of
December 31, 2020, the allowance is generally no longer appropriate given the Company’s increase in current and forecasted future
earnings, as well as other positive evidence.
See Note 11, Income Taxes, to our consolidated financial statements included in this report for more information regarding our
income taxes.
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.
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.
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.
60
Our primary uses of cash are to fund our operations as we continue to invest in and seek to grow our business. Cash used to fund
operating expenses is impacted by the timing of our expense payments, as reflected in the changes in our outstanding accounts payable
and accrued expenses. In addition, in April 2017, in connection with the establishment of FF Gene Biotech, we became obligated to
contribute to FF Gene Biotech genetic sequencing and other equipment with a total cost of 60.0 million renminbi, or RMB, over a
five-year period, previously three-year per original agreement and amended in April 2019. To date, we have purchased and
contributed to FF Gene Biotech equipment with an aggregate fair value of $4.5 million pursuant to these contribution obligations, of
which $1.4 million and $137,000 were contributed in 2020 and 2019, respectively. Depending on the performance of FF Gene
Biotech, this joint venture may never produce sufficient revenue to us to recover these capital and other investments and could cause
our revenue to decrease if any of our direct customers in Asia choose to order genetic tests from FF Gene Biotech instead of from us,
any of which could negatively affect our liquidity and cash flow. In addition, although we have in the past made cash distributions for
tax and other purposes to the equity holders of our predecessor, we do not expect to use our cash to make these or any other types of
distributions or dividends in the foreseeable future.
On August 30, 2019, we entered into an Equity Distribution Agreement, or the 2019 Equity Distribution Agreement, with Piper,
as sales agent, which was subsequently amended on August 4, 2020. Pursuant to the 2019 Equity Distribution Agreement, we offered
and sold an aggregate of 104,000 shares of our common stock at a weighted-average net selling price of $9.37 per share, which
resulted in $979,000 of net proceeds to the Company during the year ended December 31, 2019, and we sold an aggregate of 1.1
million shares of our common stock at a weighted-average net selling price of $38.50 per share, which resulted in $42.7 million of net
proceeds to the Company during the year ended December 31, 2020. Shares sold under the 2019 Equity Distribution Agreement are
offered and sold pursuant to the Company’s registration statement on Form S-3 (File No. 333-233227) filed with the SEC on August
12, 2019 and declared effective on August 23, 2019, and prospectus supplements and accompanying base prospectus filed with the
SEC on August 30, 2019, May 6, 2020 and August 5, 2020.
On November 13, 2019, we entered into a purchase agreement with Piper, as representative of the several underwriters, pursuant
to which we sold 2,673,750 shares of our common stock at a price of $10.52 per share, with a public offering price of $11.25 per
share. We received net proceeds of approximately $27.6 million, after deducting underwriting discounts and commissions and offering
expenses paid or payable by us of approximately $2.4 million. The shares issued and sold in the underwritten offering were sold
pursuant to the Company’s registration statement on Form S-3 (File No. 333-233227), and a prospectus supplement and
accompanying base prospectus filed with the SEC on November 13, 2019.
On September 25, 2020, we entered into the September 2020 Equity Distribution Agreement, with Piper as sales agent, pursuant
to which we offered and sold an aggregate of 2.8 million shares of our common stock at a weighted-average net selling price of $42.90
per share, which resulted in $122.1 million of net proceeds to the Company. Shares sold under the September 2020 Equity
Distribution Agreement were offered and sold pursuant to the Company’s registration statement on Form S-3 (File No. 333-239964)
filed with the SEC on July 21, 2020, as amended on August 5, 2020, and declared effective on August 12, 2020, and a prospectus
supplement and accompanying base prospectus filed with the SEC on September 25, 2020.
On November 20, 2020, we entered into the November 2020 Equity Distribution Agreement, with Piper, Oppenheimer & Co.
Inc., and BTIG LLC, as sales agents, pursuant to which we may offer and sell, from time to time through Piper, shares of our common
stock having an aggregate offering price of up to $175.0 million. Piper may receive a commission of up to 3% of the gross proceeds
received by the Company for sales pursuant to the November 2020 Equity Distribution Agreement. During the year ended December
31, 2020, the Company sold an aggregate of 2.0 million shares of our common stock pursuant to the November 2020 Equity
Distribution Agreement at a weighted-average net selling price of $48.70 per share, which resulted in $99.1 million of net proceeds to
the Company. Shares sold under the November 2020 Equity Distribution Agreement were offered and sold pursuant to the Company’s
registration statement on Form S-3 (File No. 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
November 20, 2020.
We believe our existing cash, cash equivalent, short-term marketable securities, along with cash from operations and proceeds
from our equity financings, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. Much of the
losses we have incurred in certain prior periods were attributable to a variety of non-cash charges, including equity-based
compensation expenses. As a result, in spite of the losses we recorded during these periods, cash provided by continuing operations
has been mostly positive since 2015 and has significantly contributed to our ability to meet our liquidity needs, including paying for
capital expenditures. Additionally, if our business continues to grow and we are able to achieve increased efficiencies and economies
of scale in line with this growth, we expect increased revenue levels would increase our ability to rely on cash from our operations to
support our business in future periods, even if our expenses also increase as a result of the growth of our business. Based on these
factors, we anticipate that cash from our operations will continue to play a meaningful role in our ability to meet our liquidity
requirements and pursue our business plans and strategies in the next 12 months and in the longer term.
61
However, our expectations regarding the cash that may be provided by our operations and our cash needs in future periods could
turn out to be wrong, in which case we may require additional financing to support our operations, as we do not presently have any
commitments for future capital. For instance, cash provided by our operations has in the past experienced fluctuations from period to
period, which we expect may continue in the future. These fluctuations can occur because of a variety of factors, including, among
others, factors relating to the ongoing COVID-19 pandemic, the amount and timing of sales of billable tests, the prices we charge for
our tests due to changes in product mix, customer mix, general price degradation for tests or other factors, the rate and timing of our
billing and collections cycles and the timing and amount of our commitments and other payments. Moreover, even if our liquidity
expectations are correct, we may still seek to raise additional capital through securities offerings, credit facilities or other debt
financings, asset sales or collaborations or licensing arrangements.
If we raise funds by issuing equity securities, our existing stockholders could experience substantial dilution. 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.
The terms of any debt securities we issue or borrowings we incur, if available, could impose significant restrictions on our operations,
such as limitations on our ability to incur additional debt or issue additional equity or other restrictions that could adversely affect our
ability to conduct our business, and would result in increased fixed payment obligations. If we seek to sell assets or enter into
collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms or relinquish or license to a
third party our rights to important or valuable technologies or tests we may otherwise seek to develop ourselves. Moreover, we may
incur substantial costs in pursuing future capital, including investment banking, legal and accounting fees, printing and distribution
expenses and other similar costs. Additional funding may not be available to us when needed, on acceptable terms or at all. For
example, the COVID-19 pandemic has recently caused extreme disruption and volatility in the global capital markets, which could
reduce our ability to access capital. If we are not able to secure funding if and when needed and on reasonable terms, we may be
forced to delay, reduce the scope of or eliminate one or more sales and marketing initiatives, research and development programs or
other growth plans or strategies. In addition, we may be forced to work with a partner on one or more aspects of our tests or market
development programs or initiatives, which could lower the economic value to us of these tests, programs or initiatives. Any such
outcome could significantly harm our business, performance and prospects.
Cash Flows
The following table summarizes cash flows from continuing operations for each of the periods presented:
Net cash provided by operations
Net cash used in investing activities
Net cash provided by financing activities
Operating Activities
Year Ended December 31,
2020
2019
(in thousands)
140,628
$
(326,438) $
$
261,251
5,517
(29,046)
28,775
$
$
$
Cash provided by operating activities in 2020 was $140.6 million. The difference between net income and cash provided by
operating activities for the period was primarily due to the effect of $8.2 million in equity-based compensation expenses, $4.4 million
in impairment loss from equity-method investments and $3.0 million in the depreciation of assets. Cash provided by operating
activities decreased between periods primarily due to the negative effect of increases of $178.5 million in accounts receivable mainly
due to the timing of collections from customers and $21.1 million in other current assets related to purchases of an increased amount
of reagents and supplies, partially offset by increases of $53.3 million in income tax payable due to a significant increase in income,
$32.7 million in accrued and other liabilities related to contract liabilities, and $22.6 million in accounts payable mainly due to timing
of payments.
Cash provided by operating activities in 2019 was $5.5 million. The difference between net loss and cash provided by operating
activities for the period was primarily due to the effect of $3.2 million in equity-based compensation expenses and $2.1 million in the
depreciation of assets. Cash provided by operating activities decreased between periods primarily due to the negative effect of a
$839,000 increase in accounts receivable mainly due to the timing of collections from customers.
62
Investing Activities
Cash used in investing activities in 2020 was $326.4 million, which primarily related to $324.4 million in purchases of
marketable securities, $35.1 million in purchases of fixed assets consisting mainly of medical laboratory equipment, real property
located in El Monte, California, a 2008 Cessna Citation Sovereign aircraft, computer hardware and building and land improvements,
$2.6 million in investment in BostonMolecules and direct costs associates with the investment, and purchase equipment with an
aggregate fair value of $1.4 million contributed to FF Gene Biotech, partially offset by maturities of $19.9 million of marketable debt
securities and proceeds of $17.1 million from sales of marketable securities.
Cash used in investing activities in 2019 was $29.0 million, which primarily related to $52.1 million in purchases of marketable
securities, $1.2 million in purchases of fixed assets consisting mainly of medical laboratory equipment, computer hardware and
leasehold improvements, and purchased equipment with an aggregate fair value of $137,000 contributed to FF Gene Biotech, partially
offset by maturities of $24.4 million of marketable securities.
Financing Activities
Cash provided by financing activities in 2020 was $261.3 million, which primarily represents net proceeds from sales of shares
of our common stock made pursuant to various equity distribution agreements with Piper and $15.0 million borrowed from a margin
loan collateralized by marketable debt securities held by the Company, to purchase real property located in El Monte, California.
Cash provided by financing activities in 2019 was $28.8 million, which primarily represents net proceeds from sales of shares of
our common stock pursuant to 2019 Equity Distribution Agreements with Piper and our underwritten offering in November 2019.
Material Cash Requirements and Contractual Obligations as of December 31, 2020
As of December 31, 2020, we have an outstanding balance of $15.0 million in our margin account.
The following summarizes our contractual obligations as of December 31, 2020:
Payments Due by Period
Total
Less than 1
year
1-3 years
(in thousands)
3-5 years
More than 5
years
Operating lease liabilities(1)
Purchase obligations(2)
Total contractual obligations
$
$
835 $
27,634
28,469 $
267 $
26,934
27,201 $
542 $
700
1,242 $
25 $
—
25 $
1
—
1
(1) Represents non-cancelable operating leases. For further information, refer to Note 9 to the Consolidated Financial Statements.
(2) Represents non-cancelable purchase obligations for medical lab equipment, reagents and other supplies.
Critical Accounting Policies and Use of Estimates
This discussion and analysis is based on our consolidated financial statements included in this report, which have been prepared
in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP. The preparation of consolidated financial
statements in accordance with U.S. GAAP requires management to make certain estimates, judgments and assumptions and decisions
that affect the reported amounts and related disclosures, including the selection of appropriate accounting principles and the
assumptions on which to base accounting estimates. In making these estimates and assumptions and reaching these decisions, we
apply judgment based on our understanding and analysis of the relevant circumstances, including historical data and experience
available at the date of the consolidated financial statements, as well as various other factors management believes to be reasonable
under the circumstances, including but not limited to the potential impacts arising from the recent global pandemic related to COVID-
19. As the extent and duration of the impacts from COVID-19 remain unclear, our estimates and assumptions may evolve as
conditions change. Actual results could differ from our estimates. We are committed to incorporating accounting principles,
assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting
information included in our consolidated financial statements.
While our significant accounting policies are described in more detail in the notes to the consolidated financial statements
included in this report, we believe the accounting policies discussed below used in the preparation of our consolidated financial
statements require the most significant estimates, judgments, assumptions and decisions.
63
Revenue Recognition
We generate revenue from sales of our COVID-19 tests and genetic tests. 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.
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. To determine revenue recognition for contracts with customers, the Company
performs the following steps: (1) identifies the contract with the customer, (2) identifies the performance obligations in the contract,
(3) determines the transaction price, (4) allocates the transaction price to the performance obligations in the contract, and (5)
recognizes revenue when (or as) the entity satisfies a performance obligation.
Our test results are primarily delivered electronically. We bill certain customers for shipping and handling fees incurred by us
associated with COVID-19 tests, and shipping 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.
See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in this report for
information about recent accounting pronouncements.
Recent Accounting Pronouncements
The JOBS Act
We qualify as an “emerging growth company” as defined in the JOBS Act. As an emerging growth company, we may take
advantage of specified reduced disclosure and other requirements that are otherwise applicable to public companies that are not
emerging growth companies, including an extended transition period to comply with new or revised accounting standards applicable
to public companies. 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
We did not have, and do not currently have, any off-balance sheet arrangements during the periods presented, as defined in the
rules and regulations of the SEC, that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is
material to investors.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
64
Item 8. 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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a company that are designed to ensure that information
required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its
principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, our management,
with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of
our disclosure controls and procedures as of December 31, 2020. Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our
company, as this term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. As required by Rules 13a-15(c) and 15d-
15(c) under the Exchange Act, our management, with the participation of our principal executive officer and principal financial
officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020, based on
the criteria set forth in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was
effective as of December 31, 2020.
This report does not include an attestation report of our independent registered public accounting firm regarding our internal
control over financial reporting, in accordance with applicable SEC rules that permit us to provide only management’s report in this
report.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2020, that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting
Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only
reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of
possible controls and procedures relative to their costs. Because of these inherent limitations, our disclosure and internal controls may
not prevent or detect all instances of fraud, misstatements or other control issues. In addition, projections of any evaluation of the
effectiveness of disclosure or internal controls to future periods are subject to risks, including, among others, that controls may
become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
Item 9B. Other Information.
On March 8, 2021, we entered into an Executive Employment Agreement and Severance Agreement with our Chief Operations
Officer, Jian Xie. Pursuant to the Employment Agreement, Mr. Xie will receive an annual base salary of $300,000 which may be
adjusted in the sole discretion of the Company and will be eligible to receive cash bonuses and equity awards under our equity
incentive plans at any time at the discretion of our board of directors or compensation committee. The Severance Agreement provides
that, subject to Mr. Xie’s execution and absence of revocation of a release in favor of us, Mr. Xie is entitled to one year of
continuation of his then-current annual base salary following a termination of his employment with us for any reason within one year
after a change in control of the Company or Fulgent Therapeutics LLC.
65
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this item is incorporated by reference to the definitive proxy statement for our 2021 annual meeting
of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year
ended December 31, 2020.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to the definitive proxy statement for our 2021 annual meeting
of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year
ended December 31, 2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference to the definitive proxy statement for our 2021 annual meeting
of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year
ended December 31, 2020.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to the definitive proxy statement for our 2021 annual meeting
of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year
ended December 31, 2020.
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference to the definitive proxy statement for our 2021 annual meeting
of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year
ended December 31, 2020.
66
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Consolidated Financial Statements.
PART IV
The following financial statements are included immediately following the signature page hereof and are filed as part of this
report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the Years Ended December 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-6
F-7
F-8
(a)(2) Financial Statement Schedules.
All financial statement schedules have been omitted, as they are not required, not applicable, or the required information is
otherwise included.
(a)(3) Exhibits.
The information required by this Item 15(a)(3) is set forth on the Exhibit Index immediately preceding the signature page of this
report and is incorporated herein by reference.
Item 16. Form 10-K Summary.
We have elected not to provide summary information.
67
Exhibit
Number
2.1
3.1
3.1.1
3.1.2
3.2
4.1
4.2
4.3
10.1#
10.2#
10.3#
10.4#
10.5#
10.6#
10.7#
10.8#
10.9#
Description
Agreement and Plan of Merger, dated
September 16, 2016, by and among the
registrant, Fulgent MergerSub, LLC and
Fulgent Therapeutics LLC.
Certificate of Incorporation of the
registrant, dated May 13, 2016.
Certificate of Amendment to Certificate of
Incorporation of the registrant, dated
August 2, 2016 .
Certificate of Amendment to Certificate of
Incorporation of the registrant, dated May
17, 2017.
Bylaws of the registrant.
Form of Certificate of Common Stock of
the registrant .
Investor’s Rights Agreement, dated May
17, 2016, by and between Fulgent
Therapeutics LLC and Xi Long USA, Inc..
Description of the registrant’s securities.
Form of Indemnification Agreement
between the registrant and each of its
officers and directors.
Amended and Restated 2015 Equity
Incentive Plan of Fulgent Therapeutics
LLC.
Form of Notice of Option Grant and
Option Agreement under the Amended
and Restated 2015 Equity Incentive Plan
of Fulgent Therapeutics LLC.
Form of Notice of Profits Interest Grant
and Profits Interest Agreement under the
Amended and Restated 2015 Equity
Incentive Plan of Fulgent Therapeutics
LLC.
Form of Notice of Restricted Share Unit
Grant and Restricted Share Unit
Agreement under the Amended and
Restated 2015 Equity Incentive Plan of
Fulgent Therapeutics LLC.
2016 Omnibus Incentive Plan of the
registrant.
Form of Notice of Stock Option Award
and Stock Option Award Agreement under
the 2016 Omnibus Incentive Plan of the
registrant.
Form of Notice of Restricted Stock Unit
Award and Restricted Stock Unit
Agreement under the 2016 Omnibus
Incentive Plan of the registrant.
Form of Option Substitution Award under
the 2016 Omnibus Incentive Plan of the
registrant.
EXHIBIT INDEX
Form
S-1/A
File Number
333-213469
Incorporated by
Reference Exhibit
2.1
Filing Date
9/19/2016
Filed
Herewith
10-Q
001-37894
10-Q
001-37894
3.1
3.1.1
8/14/2017
8/14/2017
10-Q
001-37894
3.1.2
8/14/2017
S-1/A
S-1/A
333-213469
333-213469
S-1
333-213469
10-K
S-1
001-37894
333-213469
3.2
4.1
4.2
4.3
10.1
9/26/2016
9/19/2016
9/2/2016
3/13/2020
9/2/2016
S-1
333-213469
10.2
9/2/2016
S-1
333-213469
10.3
9/2/2016
S-1
333-213469
10.4
9/2/2016
S-1
333-213469
10.5
9/2/2016
S-1/A
333-213469
S-1
333-213469
10.6
10.7
9/26/2016
9/2/2016
10-K
001-37894
10.8
3/17/2017
S-1
333-213469
10.9
9/2/2016
68
Exhibit
Number
10.10#
10.11#
10.12#
10.13#
10.14#
10.15#
10.16#
10.17
10.18
10.19
10.20
10.21§
10.22§
Description
Form of Notice of Restricted Stock Unit
Substitution Award and Restricted Stock
Unit Agreement under the 2016 Omnibus
Incentive Plan of the registrant Form of
Notice of Restricted Stock Unit
Substitution Award and Restricted Stock
Unit Agreement under the 2016 Omnibus
Incentive Plan of the registrant.
Employment Agreement, dated May 25,
2016, by and among Fulgent Therapeutics
LLC, the registrant and Ming Hsieh.
Employment Agreement, dated May 25,
2016, by and among Fulgent Therapeutics
LLC, the registrant and Paul Kim.
Amended and Restated Employment
Agreement, dated May 25, 2016, by and
among Fulgent Therapeutics LLC, the
registrant and Han Lin Gao.
Severance Agreement, dated July 7, 2016,
by and among Fulgent Therapeutics LLC,
the registrant and Ming Hsieh.
Severance Agreement, dated July 7, 2016,
by and among Fulgent Therapeutics LLC,
the registrant and Paul Kim.
Severance Agreement, dated July 7, 2016,
by and among Fulgent Therapeutics LLC,
the registrant and Han Lin Gao.
Contribution and Allocation Agreement,
dated May 19, 2016, by and among
Fulgent Therapeutics LLC, Fulgent
Pharma LLC and Ming Hsieh.
Form of Fourth Amended and Restated
Operating Agreement of Fulgent
Therapeutics LLC, to be in effect upon
completion of the Reorganization.
Commercial Leases, dated April 14, 2015,
April 28, 2016, March 24, 2016 and
August 1, 2016, by and between E & E
Plaza LLC and Fulgent Therapeutics LLC.
Director Compensation Program of the
registrant, effective as of September 28,
2016 and amended November 2, 2017.
Cooperation Agreement on the
Establishment of Fujian Fujun Gene
Biotech Co., Ltd., dated April 25, 2017, by
and among Shenzhen Fujin Gene Science
& Technology Co., Ltd., Xilong Scientific
Co., Ltd. and Fuzhou Jinqiang Investment
Partnership (LP).
Supplemental Agreement to Cooperation
Agreement, dated April 10, 2019, by and
among Fulgent Genetics, Inc., Shenzhen
Fujin Gene Technology Co., Ltd., Xilong
Science Co., Ltd. and Fuzhou Jinqiang
Investment Partnership (Limited).
Form
S-1
File Number
333-213469
Incorporated by
Reference Exhibit
10.10
Filing Date
9/2/2016
Filed
Herewith
S-1
333-213469
10.11
9/2/2016
S-1
333-213469
10.12
9/2/2016
S-1
333-213469
10.13
9/2/2016
S-1
333-213469
10.14
9/2/2016
S-1
333-213469
10.15
9/2/2016
S-1
333-213469
10.16
9/2/2016
S-1
333-213469
10.17
9/2/2016
S-1/A
333-213469
2.1
9/19/2016
S-1
333-213469
10.19
9/2/2016
10-K
001-37894
10.20
3/20/2018
10-Q
001-37894
10.1
8/14/2017
10-Q
001-37894
10.1
8/12/2019
69
Exhibit
Number
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32^
10.33^
10.34
10.35
10.36
10.37#
10.38#
21.1
Description
Commercial Lease, dated January 31,
2019, by and between E & E Plaza LLC
and Fulgent Therapeutics LLC.
Commercial Lease, dated April 1, 2019,
by and between 4401 Santa Anita
Corporation and Fulgent Genetics, Inc.
Equity Distribution Agreement, dated
August 30, 2019, by and between Fulgent
Genetics, Inc. and Piper Jaffray & Co.
Purchase Agreement, dated as of
November 13, 2019, by and between
Fulgent Genetics, Inc. and Piper Jaffray &
Co.
Amendment No. 1 to Equity Distribution
Agreement, dated August 4, 2020, by and
between Fulgent Genetics, Inc. and Piper
Sandler & Co.
Equity Distribution Agreement, dated as
of September 24, 2020, by and between
Fulgent Genetics, Inc. and Piper Sandler &
Co.
Equity Distribution Agreement, dated as
of November 20, 2020, by and between
Fulgent Genetics, Inc. and Piper Sandler &
Co., BTIG, LLC, and Oppenheimer & Co.
Inc.
Fulgent Genetics, Inc. Amended and
Restated 2016 Omnibus Incentive Plan
Fulgent Genetics, Inc. Amended and
Restated 2016 Omnibus Incentive Plan
Agreement for Purchase and Sale of
Property, dated July 23, 2020
Aircraft Purchase Agreement, dated
August 18, 2020, by and between
ServiceMaster Acceptance Corporation
and the Company
Commercial Sublease Agreement, dated
July 1st, 2020, between Medscan
Laboratories Inc. and Fulgent Genetics,
Inc.; Commercial Lease Agreement, dated
June 17, 2020, by and between Medscan
Laboratories Inc. and Ten-Voss Ltd.
Commercial Lease, dated January 11,
2021 by and between Ten-Voss Ltd.,
Medscan Laboratories, Inc. and Fulgent
Genetics, Inc.
Commercial Lease Addendum, dated
February 1, 2021, by and between E & E
Plaza LLC and Fulgent Genetics, Inc.
Employment Agreement, dated March 8,
2021, by and among Fulgent Therapeutics,
LLC, Fulgent Genetics, Inc. and Jian Xie.
Severance Agreement, dated March 8,
2021, by and among Fulgent Therapeutics
LLC, Fulgent Genetics, Inc. and Jian Xie.
Subsidiaries of the registrant.
Form
10-K
File Number
001-37894
Incorporated by
Reference Exhibit
10.23
Filing Date
3/22/2020
Filed
Herewith
10-K
001-37894
10.24
3/22/2020
8-K
001-37894
8-K
001-37894
1.1
1.1
8/30/2019
11/14/2019
8-K
001-37894
1.1
8/5/2020
8-K
001-37894
1.1
9/25/2020
8-K
001-37894
1.1
11/20/2020
8-K
8-K
8-K
001-37894
001-37894
001-37894
10-Q
001-37894
10.1
10.1
2.1
10.2
5/21/2018
9/18/2020
10/21/2020
11/9/2020
X
X
X
X
X
10-K
001-37894
21.1
3/22/2020
70
Description
Form
File Number
Consent of Deloitte & Touche LLP,
independent registered public accounting
firm, relating to the financial statements of
the registrant.
Power of Attorney (included on the
signature page hereto)
Exhibit
Number
23.1
24.1
31.1
31.2
32.1*
Certification of Principal Executive
Officer pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange
Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Principal Financial Officer
pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of
1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive
Officer and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
Document
101.CAL XBRL Taxonomy Extension Calculation
Linkbase Document
101.DEF XBRL Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label
Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation
Linkbase Document
Incorporated by
Reference Exhibit
Filing Date
Filed
Herewith
X
X
X
X
X
X
X
X
X
X
X
*
#
§
This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and are not being filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any
filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation by reference
language in such filing.
Management contract or compensatory plan, contract or arrangement.
Confidential treatment has been granted with respect to portions of this exhibit pursuant to Rule 24b-2 under the Exchange Act,
and these confidential portions have been redacted from the version of this agreement that is incorporated by reference in this
report. A complete copy of this exhibit, including the redacted portions, has been separately furnished to the SEC.
71
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 8, 2021
FULGENT GENETICS, INC.
By:
/s/ Ming Hsieh
Ming Hsieh
President, Chief Executive Officer
POWER OF ATTORNEY
IN WITNESS WHEREOF, each person whose signature appears below constitutes and appoints Ming Hsieh and Paul Kim as
his true and lawful agent, proxy and attorney-in-fact, each acting alone, with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to (i) act on and sign any amendments to this report, with exhibits thereto and
other documents in connection therewith, (ii) act on and sign such certificates, instruments, agreements and other documents as may
be necessary or appropriate in connection therewith, and in each case file the same with the SEC, hereby approving, ratifying and
confirming all that such agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates indicated.
Name and Signature
Title
Date
/s/ Ming Hsieh
Ming Hsieh
/s/ Paul Kim
Paul Kim
/s/ John Bolger
John Bolger
/s/ Yun Yen
Yun Yen
/s/ Linda Marsh
Linda Marsh
President, Chief Executive Officer and Chairman of the Board
March 8, 2021
(principal executive officer)
Chief Financial Officer
(principal financial and accounting officer)
Director
Director
Director
March 8, 2021
March 8, 2021
March 8, 2021
March 8, 2021
72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Fulgent Genetics, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fulgent Genetics, Inc. and subsidiaries (the "Company") as of
December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity,
and cash flows, for the years ended December 31, 2020 and 2019, and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as
of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years ended December 31, 2020 and 2019,
in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no
such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 8, 2021
We have served as the Company's auditor since 2016.
F-2
CONSOLIDATED FINANCIAL STATEMENTS
FULGENT GENETICS, INC.
Consolidated Balance Sheets
(in thousands, except par value data)
Assets
Current assets
Cash and cash equivalents
Marketable securities
Trade accounts receivable, net of allowance for doubtful accounts of $1,898 and $751,
as of December 31, 2020 and 2019, respectively
Other current assets
Total current assets
Marketable securities, long-term
Equity method investments
Fixed assets, net
Operating lease right-of-use asset
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
Accrued liabilities
Income tax payable
Contract liabilities
Investment margin loan
Operating lease liabilities, short-term
Total current liabilities
Operating lease liabilities, long-term
Unrecognized tax benefits
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 8)
Stockholders’ equity
Common stock, $0.0001 par value per share, 50,000 shares authorized, 28,178 and
21,483 shares issued and outstanding at December 31, 2020 and 2019, respectively
Preferred stock, $0.0001 par value per share, 1,000 shares authorized, no shares issued
or outstanding at December 31, 2020 and 2019
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings (accumulated deficit)
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2020
2019
$
$
$
$
87,426
211,941
$
183,857
40,392
523,616
132,502
—
40,199
828
3,316
700,461
26,488
8,446
53,319
26,576
15,019
267
130,115
568
377
14
131,074
3
—
418,065
438
150,881
569,387
700,461
$
$
$
11,965
16,304
6,555
2,255
37,079
41,947
872
5,974
2,633
251
88,756
1,581
1,333
24
365
—
420
3,723
2,256
—
—
5,979
2
—
146,058
146
(63,429)
82,777
88,756
The accompanying notes are an integral part of these consolidated financial statements.
F-3
FULGENT GENETICS, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended December 31,
2020
2019
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Total operating expenses
Operating income (loss)
Interest and other income, net
Income before income taxes, equity loss in investee and impairment loss
Provision for income taxes
Income before equity loss in investee and impairment loss
Equity loss in investee
Impairment loss in equity-method investments
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted-average common shares:
Basic
Diluted
$
$
$
$
$
$
$
$
421,712
89,807
331,905
11,580
14,952
15,215
41,747
290,158
1,526
291,684
72,532
219,152
(488)
(4,354)
214,310
9.44
8.91
22,694
24,056
The accompanying notes are an integral part of these consolidated financial statements.
32,528
14,107
18,421
6,537
5,898
6,414
18,849
(428)
837
409
43
366
(777)
—
(411)
(0.02)
(0.02)
18,709
18,709
F-4
FULGENT GENETICS, INC.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Net income (loss)
Other comprehensive income (loss)
Foreign currency translation gain (loss)
Net unrealized gain on marketable debt securities, net of tax
Comprehensive income (loss)
Year Ended December 31,
2020
2019
$
$
214,310
$
20
272
214,602
$
(411)
(17)
198
(230)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
FULGENT GENETICS, INC.
Consolidated Statements of Stockholders’ Equity
(in thousands)
Stockholders' Equity
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Total
Equity
18,172 $
—
100
434
2 $
—
—
—
114,203 $
3,209
38
—
(35) $
—
—
—
(63,018) $
—
51,152
3,209
—
—
38
—
104
—
979
—
—
979
2,674
(1)
—
—
21,483
—
56
655
—
—
—
—
2
—
—
—
27,650
(21)
—
—
146,058
8,157
104
—
—
—
181
—
146
—
—
—
—
—
—
(411)
(63,429)
—
—
—
27,650
(21)
181
(411)
82,777
8,157
104
—
1,108
—
42,655
—
—
42,655
2,846
1
122,102
—
—
122,103
2,034
(4)
—
—
28,178 $
—
—
—
—
3 $
99,051
(62)
—
—
418,065 $
—
—
292
—
438 $
—
—
—
214,310
150,881 $
99,051
(62)
292
214,310
569,387
Balance at December 31, 2018
Equity-based compensation
Exercise of common stock
options
Restricted stock awards
Issuance of common stock at an
average
of $9.37 per share, net
Issuance of common stock at an
average of $10.34 per share,
net
Repurchases of capital stock
Other comprehensive gain, net
Net loss
Balance at December 31, 2019
Equity-based compensation
Exercise of common stock
options
Restricted stock awards
Issuance of common stock at an
average of $38.50 per share,
net
Issuance of common stock at an
average of $42.90 per share,
net
Issuance of common stock at an
average of $48.70 per share,
net
Repurchases of capital stock
Other comprehensive gain, net
Net income
Balance at December 31, 2020
The accompanying notes are an integral part of these consolidated financial statements.
F-6
FULGENT GENETICS, INC.
Consolidated Statements of Cash Flows
(in thousands)
Cash flow from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Equity-based compensation
Depreciation
Noncash lease expense
Loss on disposal of fixed asset
Amortization of premium of marketable securities
Provision for bad debt
Deferred taxes
Unrecognized tax benefits
Holding loss on equity securities
Equity loss in investee
Impairment loss in equity method investments
Other
Changes in operating assets and liabilities:
Accounts receivable
Other current and long-term assets
Accounts payable
Accrued liabilities and other liabilities
Income tax payable
Operating lease liabilities
Net cash provided by operations
Cash flow from investing activities:
Purchases of fixed assets
Proceeds from sale of fixed assets
Purchase of marketable securities
Maturities of marketable securities
Purchase of equipment contributed to equity-method investee
Proceeds from sale of marketable securities
Investment in equity method investee
Net cash used in investing activities
Cash flow from financing activities:
Proceeds from public offerings of common stock, net of issuance costs
Proceeds from exercise of stock options
Repurchases of capital stock
Borrowing under margin account
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Income taxes paid
Supplemental disclosures of non-cash investing and financing activities:
Purchases of fixed assets in accounts payable
Operating lease right-of-use assets obtained in exchange for lease liabilities
Operating lease liabilities removed due to purchasing of underlying assets
Public offerings proceeds in other receivable included in other current assets
Public offerings costs included in accounts payable
Year Ended December 31,
2020
2019
$
214,310
$
8,157
2,962
409
672
857
1,170
(1,775)
377
90
488
4,354
8
(178,480)
(21,149)
22,617
32,655
53,295
(389)
140,628
(35,130)
8
(324,359)
19,919
(1,380)
17,095
(2,591)
(326,438)
246,190
104
(62)
15,019
261,251
20
75,461
11,965
87,426
$
20,612
$
3,402
402
1,853
17,799
359
$
$
$
$
$
$
$
$
$
$
$
$
(411)
3,209
2,107
413
11
106
189
(21)
—
—
777
—
52
(839)
374
(329)
264
24
(409)
5,517
(1,182)
—
(52,077)
24,350
(137)
—
—
(29,046)
28,758
38
(21)
—
28,775
(17)
5,229
6,736
11,965
20
557
110
—
—
129
The accompanying notes are an integral part of these consolidated financial statements.
F-7
FULGENT GENETICS, INC.
Notes to Consolidated Financial Statements
Note 1. Overview and Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America, or U.S. GAAP. These financial statements include the assets, liabilities, revenues and
expenses of all wholly-owned subsidiaries and entities in which the Company has a controlling financial interest or is deemed to be
the primary beneficiary. In determining whether the Company is the primary beneficiary of an entity, the Company applies a
qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and
(ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity.
The Company uses the equity method to account for its investments in entities that it does not control, but in which it has the ability to
exercise significant influence over operating and financial policies. All significant intercompany accounts and transactions are
eliminated from the accompanying consolidated financial statements.
Nature of the Business
Fulgent Genetics, Inc., together with its subsidiaries, collectively referred to as the Company, unless otherwise noted or the
context otherwise requires, is a technology company offering comprehensive genetic testing providing physicians with clinically
actionable diagnostic information they can use to improve the quality of patient care. The Company has developed a proprietary
technology platform that allows it to offer a broad and flexible test menu and continually expand and improve its proprietary genetic
reference library, while maintaining accessible pricing, high accuracy and competitive turnaround times. Combining next generation
sequencing, or NGS, with its technology platform, the Company performs 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. In 2019, the Company launched its first patient-initiated product, Picture Genetics, a new line of at-home screening
tests that combines the Company’s advanced NGS solutions with actionable results and genetic counseling options for individuals.
Since March 2020, the Company has commercially launched several tests for the detection of SARS-CoV-2, the virus that causes the
novel coronavirus, or COVID-19, including NGS and reverse transcription polymerase chain reaction – based, or RT-PCR-based,
tests. The Company has received an Emergency Use Authorization, or EUA, from the U.S. Food and Drug Administration, or 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 the at-home testing service through Picture Genetics. The Company’s at-home testing service for
COVID-19 and RT-PCR-based test 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. The Company believes its test menu offers more genes for testing than its competitors in
today’s market, which enables it to provide expansive options for test customization and clinically actionable results. A cornerstone of
the Company’s business is its ability to provide expansive options and flexibility for all clients’ unique testing needs.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain
estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, judgments and assumptions are
based on historical data and experience available at the date of the accompanying 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. Actual results could differ significantly from these estimates.
On an on-going basis, management evaluates its estimates, primarily those related to: (i) revenue recognition criteria, (ii)
accounts receivable and allowances for doubtful accounts, (iii) the useful lives of fixed assets, (iv) estimates of tax liabilities and (v)
valuation of equity method investments.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
All intercompany transactions and balances have been eliminated in consolidation.
F-8
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to
be cash equivalents. Cash and cash equivalents include cash held in banks and money market accounts. Cash equivalents are stated at
fair value.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at the amount the Company expects to collect. The Company performs credit evaluations of its
customers and generally does not require collateral. The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other information that assists in management’s evaluation. The
Company writes off accounts receivable following a review by management and a determination that the receivable is uncollectible.
A roll-forward of the activity in the Company’s allowance for doubtful accounts is as follows:
Allowance for doubtful accounts at beginning of year
Bad debt expense
Write-offs
Allowance for doubtful accounts at end of year
Marketable Securities
December 31,
2020
2019
(in thousands)
751 $
1,170
(23)
1,898
$
590
189
(28)
751
$
$
All marketable debt securities, which consist of corporate debt securities, U.S. government agency debt securities, and Yankee
debt securities issued by foreign governments or entities and denominated in U.S. dollars, have been classified as “available for sale”
and are carried at fair value. Unrealized gains and losses, net of any related tax effects, are excluded from earnings and are included in
other comprehensive income (loss) and reported as a separate component of stockholders’ equity until realized. Realized gains and
losses and declines in value judged to be other than temporary, if any, on marketable debt securities are included in interest and other
income, net, in the accompanying Consolidated Statements of Operations. The cost of any marketable debt securities sold is based on
the specific-identification method. The amortized cost of marketable debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Interest on marketable debt securities is included in interest and other income, net. In accordance
with the Company’s investment policy, management invests to diversify credit risk and only invests in securities with high credit
quality, including U.S. government securities, and the maximum final maturity from the date of purchase is three years.
The Company’s investments in marketable equity securities are measured at fair value with the related gains and losses, realized
and unrealized, recognized in interest and other income, net, in the accompanying Consolidated Statements of Operations. The cost of
any marketable equity securities sold is based on the specific-identification method.
The Company regularly evaluates whether declines in the fair value of its investments below their cost are other than temporary.
The evaluation includes consideration of the cause of the impairment, including the creditworthiness of the security issuers, the
number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether the Company has the
intent to sell the securities, and whether it is more likely than not that the Company will be required to sell the securities before the
recovery of their amortized cost basis. If the Company determines that the decline in fair value of an investment is below its
accounting basis and this decline is other than temporary, the Company would reduce the carrying value of the security it holds and
record a loss for the amount of such decline. The Company has not recorded any realized losses or declines in value judged to be other
than temporary on its investments.
Fair Value of Financial Instruments
The Company's financial instruments consist principally of cash and cash equivalents, marketable securities, accounts
receivable, accounts payable and investment margin loan. The carrying amounts of certain of these financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and investment margin loan, approximate fair value due to their
short maturities. Fair value of marketable securities is disclosed in Note 4, Fair Value Measurements, to the accompanying
consolidated financial statements.
F-9
Concentrations of Credit Risk, Customers and Suppliers
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash
and cash equivalents, accounts receivable and marketable securities, which consist of debt securities and equity securities. As of
December 31, 2020, substantially all of the Company’s cash and cash equivalents were deposited in accounts at financial institutions,
and amounts may exceed federally insured limits. Management believes that the Company is not exposed to significant credit risk due
to the financial strength of the depository institutions in which its cash and cash equivalents are held.
In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue. Aggregating
customers that are under common control or are affiliates, two customers comprised 28% and 10% of total revenue in the year ended
December 31, 2020, and one customer comprised 28% of total revenue in the year ended December 31, 2019. No customer comprised
at least 10% of total accounts receivable as of December 31, 2020 and 2019.
Revenue from the U.S. government was less than 10% of total revenue in each of the years ended December 31, 2020 and 2019.
The Company relies on a limited number of suppliers for its test collection kits and certain laboratory substances used in the
chemical reactions incorporated into its processes, referred to as reagents, as well as for the sequencers and various other equipment
and materials it uses in its laboratory operations. In particular, the Company relies on a sole supplier for the next generation
sequencers and associated reagents it uses to perform its genetic tests and as the sole provider of maintenance and repair services for
these sequencers. The Company’s laboratory operations would be interrupted if it encountered delays or difficulties securing these test
collection kits, reagents, sequencers, other equipment or materials or maintenance and repair services, which could occur for a variety
of reasons, including if the Company needs a replacement or temporary substitute for any of its limited or sole suppliers and is not
able to locate and make arrangements with an acceptable replacement or temporary substitute. The Company believes there are
currently only a few other manufacturers that are capable of supplying and servicing some of the equipment and other materials
necessary for its laboratory operations, including collection kits, sequencers and various associated reagents.
Equity Method Investments
The Company uses the equity method to account for investments in entities that it does not control, but in which it has the ability
to exercise significant influence over operating and financial policies. The Company's proportionate share of the net income or loss of
these companies is included in consolidated net earnings. Judgments regarding the level of influence over each equity method
investment include consideration of key factors such as the Company's ownership interest, representation on the board of directors or
other management body and participation in policy-making decisions.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate
that a decline in value has occurred that is other than temporary. Evidence considered in this evaluation includes, but would not
necessarily be limited to, the financial condition and near-term prospects of the investee, recent operating trends and forecasted
performance of the investee, market conditions in the geographic area or industry in which the investee operates and the Company’s
strategic plans for holding the investment in relation to the period of time expected for an anticipated recovery of its carrying value. If
the investments is determined to have a decline in value deemed to be other than temporary it is written down to estimated fair value.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included as operating lease right-of-use,
or ROU, assets, operating lease liabilities, short-term, and operating lease liabilities, long-term, on the Company’s Consolidated
Balance Sheets.
ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the
Company’s obligation to make lease payments arising from the lease. Operating ROU lease assets and liabilities are recognized at the
commencement date based on the present value of lease payments over the lease term, including options to extend the lease when it is
reasonably certain that the Company will exercise that option. The Company uses its incremental borrowing rate based on the
information available at the commencement date in determining the present value of lease payments since its leases do not provide an
implicit rate. The ROU lease asset includes any base rent payments made and excludes lease incentives and variable operating
expenses. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company leases out space in buildings it owns in El Monte, California, to third-party tenants under noncancelable operating
leases and has leased out such space since the Company purchased such buildings. The Company determines whether a lease exists at
inception. The Company recognizes lease payments as income over the lease terms on a straight-line basis and recognizes variable
lease payments as income in the period in which the changes in facts and circumstances on which the variable lease payment are based
F-10
occur. The net rental income is included in the interest and other income, net, in the accompanying Consolidated Statement of
Operations.
Fixed Assets
Fixed assets are recorded at cost, net of accumulated depreciation and amortization. Depreciation is recorded using the straight-
line method over the estimated useful lives of the assets, which is generally between three and thirty-nine years. Leasehold
improvements are capitalized and amortized over the shorter of their expected lives or the applicable lease term, including renewal
options, if available. Major replacements and improvements are capitalized, while general repairs and maintenance are expensed as
incurred.
Software for Internal Use
The Company capitalizes certain costs incurred to purchase computer software for internal use. These costs include purchased
software packages for Company use. Capitalized computer software costs are amortized over the estimated useful life of the computer
software, which is generally three years. Internally developed software costs are capitalized after management has committed to
funding the project, it is probable that the project will be completed and the software will be used for its intended function. Costs that
do not meet that criteria and costs incurred on projects in the preliminary and post-implementation phases are expensed as incurred.
Impairment of Long-Lived Assets
The Company evaluates the carrying amount of its long-lived assets whenever events or changes in circumstances indicate that
the assets may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from
the use of an asset and its eventual disposition is less than the carrying amount of the asset. To date, there have been no such
impairment losses.
Reporting Segment and Geographic Information
Reporting segments are identified as components of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing
performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company views its operations and
manages its business in one reporting segment.
Revenue Recognition
The Company generates revenue from sales of its COVID-19 and genetic tests. The Company currently receives payments from
primarily three different customer types: insurance customers, institutional customers, including hospitals, medical institutions, other
laboratories, governmental bodies, municipalities and large corporations, and patients who pay directly.
The Company’s test results are primarily delivered electronically. The Company bills certain customers for shipping and
handling fees incurred by the Company associated with COVID-19 tests, and shipping and handlings 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.
Performance Obligations
COVID-19 and Genetic Testing Services
Institutional and Patient Direct Pay
The Company’s institutional contracts for COVID-19 and genetic testing services typically have a single performance obligation
to deliver COVID-19 or genetic testing services to the ordering facility or patient. Some arrangements involve the delivery of genetic
testing services to research institutions, which the Company refers to as “sequencing as a service.” In arrangements with institutions,
including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, and patients
who pay directly, the transaction price is stated within the contract and is therefore fixed consideration. For most of the Company’s
testing volume, the Company identified the institutions, including hospitals, medical institutions, other laboratories, governmental
bodies, municipalities and large corporations, and patients as the customer in Step 1 of the model and have determined a contract
exists with those customers in Step 1. As these contracts typically have a single performance obligation, no allocation of the
transaction price is required in Step 4 of the model. Control over COVID-19 or genetic testing services is transferred to the
F-11
Company’s ordering facility at a point in time. Specifically, the Company determined the customer obtains control of the promised
service upon delivery of test results.
Insurance
The Company’s insurance contracts for COVID-19 and genetic testing services typically have a single performance obligation
to deliver COVID-19 or genetic testing services to the ordering facility or patient. For most of the Company’s insurance volume, the
Company identified the patient as the customer in Step 1 of the model and have determined a contract exists with the patient in Step 1.
In arrangements with insurance patients, the transaction price is typically stated within the contract, however, the Company may
accept payments from third-party payors that are less than the contractually stated price and is therefore variable consideration. In
developing the estimate of variable consideration, the Company utilizes the expected value method under a portfolio approach. The
Company’s 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 in Step 4 of the model. Control over COVID-19 and genetic testing services is transferred to the Company’s ordering
physicians at a point in time. Specifically, the Company determined the customer obtains control of the promised service upon
delivery of the test results.
Certain incremental costs pertaining to both insurance and institutional, such as commissions, are incurred in obtaining
contracts. Historically contract costs have not been significant to the financial statements.
Significant Judgments and Contract Estimates
COVID-19 and Genetic Testing Services
Accounting for insurance contracts includes estimation of the transaction price, defined as the amount the Company expects to
be entitled to receive in exchange for providing the services under the contract. Due to the Company’s out-of-network status with the
majority of payors, estimation of the transaction price represents variable consideration. In order to estimate variable consideration,
the Company utilizes a portfolio approach in which payors with similar reimbursement experience are grouped into portfolios. The
Company’s estimates of variable consideration are based primarily on historical reimbursement data. Certain assumptions will also be
adjusted based on known and anticipated factors not reflected in the historical reimbursement data. The Company monitors these
accrual estimates at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is
required. Both the initial accrual estimate and any subsequent revision to the estimate contain uncertainty and require the use of
judgment in the estimation of the transaction price and application of the constraint for variable consideration. If actual results in the
future vary from the Company’s estimates, the Company will adjust these estimates, which would affect revenue and earnings in the
period such variances become known.
Contract Liabilities
Contract liabilities are recorded when the Company receives payment or bills prior to completing its obligation to transfer goods
or services to a customer, and the Company subsequently recognizes contract liabilities as revenue in the period in which the
applicable revenue recognition criteria, as described above, are met.
Overhead Expenses
The Company allocates overhead expenses, such as rent and utilities, to cost of revenue and operating expense categories based
on headcount. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category.
Cost of Revenue
Cost of revenue reflects the aggregate costs incurred in delivering test results and consists of: personnel costs, including salaries,
employee benefit costs, bonuses and equity-based compensation expenses; costs of laboratory supplies; depreciation of laboratory
equipment; amortization of leasehold and building improvements and allocated overhead. Costs associated with performing tests are
recorded as tests are processed.
Research and Development Expenses
Research and development expenses represent costs incurred to develop the Company’s technology and future tests. These costs
consist of: personnel costs, including salaries, employee benefit costs, bonuses and equity-based compensation expenses; laboratory
supplies; consulting costs and allocated overhead. The Company expenses all research and development costs in the periods in which
they are incurred.
F-12
Selling and Marketing Expenses
Selling and marketing expenses consist of: personnel costs, including salaries, employee benefit costs, bonuses and equity-based
compensation expenses; customer service expenses; direct marketing expenses; educational and promotional expenses; market
research and analysis and allocated overhead. The Company expenses all selling and marketing costs as incurred.
General and Administrative Expenses
General and administrative expenses include executive, finance and accounting, legal and human resources functions. These
expenses consist of: personnel costs, including salaries, employee benefit costs, bonuses and equity-based compensation expenses;
audit and legal expenses; consulting costs and allocated overhead. The Company expenses all general and administrative expenses as
incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method. The Company provides for federal, state and foreign
income taxes currently payable, as well as for taxes deferred due to timing differences between reporting income and expenses for
financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax
rates is recognized as income or expense in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained.
Recognized income tax positions are measured at the largest amount with a greater than 50% likelihood of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs. For income tax positions where it is
not more likely than not that a tax benefit will be sustained, the Company does not recognize a tax benefit in its consolidated financial
statements. The Company records interest and penalties related to uncertain tax positions, if applicable, as a component of income tax
expense.
Equity-Based Compensation
The Company grants various types of equity-based awards to its employees, consultants and non-employee directors. Equity-
based compensation costs are reflected in the accompanying Consolidated Statements of Operations based upon each award
recipient’s role with the Company. The Company primarily grants to its employees restricted stock unit, or RSU, awards that generally
vest over a specified period of time upon the satisfaction of service-based conditions. The Company measures compensation expense
for equity-based awards granted to employees based on the fair value of the award on the grant date of the award. Compensation
expense for employee RSU awards with a service-based vesting condition is recognized ratably over the vesting period of the award.
Foreign Currency Translation and Foreign Currency Transactions
The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using
exchange rates in effect at the end of each period. Expenses for these subsidiaries are translated using average rates in effect during the
period. Gains and losses from these translations are recognized in foreign currency translation included in other comprehensive
income (loss) as a component in the accompanying Consolidated Statements of Stockholders’ Equity. The Company’s subsidiaries
that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of
each period, and inventories, property and nonmonetary assets and liabilities at historical rates. Gains and losses resulting from the
remeasurements are included in interest and other income, net in the accompanying Consolidated Statements of Operations. Gains and
losses from these remeasurements were not significant in the year ended December 31, 2020.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive
income (loss) consists of unrealized gain or loss on marketable debt securities and foreign currency translation adjustments from its
subsidiaries not using the U.S. dollar as their functional currency. The Company did not have reclassifications from other
comprehensive income (loss) to net loss during the year ended December 31, 2020. The tax effects related to unrealized holding gains
on marketable debt securities were $147,000 in 2020. The tax effects related to unrealized gain was insignificant in 2019 due to
valuation allowance.
F-13
Basic and Diluted Net Income or Loss per Share
Basic net income or loss per common share is computed by dividing the net income or loss attributable to common stockholders
by the weighted-average number of common shares outstanding during the period. Diluted net income or loss per common share is
computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and
dilutive common share equivalents outstanding during the period.
Emerging Growth Company
Pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, a company constituting an “emerging growth
company” is, among other things, entitled to rely upon certain reduced reporting requirements. The Company is an emerging growth
company, but has irrevocably elected not to take advantage of the extended transition period afforded by the JOBS Act for the
implementation of new or revised accounting standards. As a result, the Company will comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth
companies.
Disaggregation of Revenue
The Company classifies its 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, as the
Company believes this best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by
economic factors. The following table summarizes revenue from contracts with customers by payor type for the years ended
December 31, 2020 and 2019.
Testing Services by payor
Insurance
Institutional
Patient
Total Revenue
Year Ended December 31,
2020
2019
(in thousands)
$
$
$
257,587
163,083
1,042
421,712 $
705
31,284
539
32,528
There was no material variable consideration recognized in the current period that relates to performance obligations that were
completed in the prior period.
Contract Balances
Receivables from contracts with customers - As of December 31, 2020 and 2019, receivables from contracts with customers
were approximately $183.9 million and $6.6 million, respectively, and are included within Trade accounts receivable on the
Consolidated Balance Sheets.
Contracts assets and liabilities - As of December 31, 2020 and 2019, contract assets from contracts with customers were $1.4
million and $150,000, respectively, associated with contract execution and certain costs to fulfill a contract, which is included in other
current assets in the accompanying Consolidated Balance Sheets. Contract liabilities are recorded when the Company receives
payment prior to completing its obligation to transfer goods or services to a customer. The Company had $26.6 million and $365,000
of contract liabilities as of December 31, 2020 and 2019, respectively. Revenues of $257,000 and $59,000 for the years ended
December 31, 2020 and 2019, respectively, related to contract liabilities at the beginning of the respective periods were recognized.
Transaction Price Allocated to Future Performance Obligations
The Accounting Standards Codification, or ASC, 606, Revenue from Contracts with Customers, issued by the Financial
Accounting Standards Board, or FASB, requires that the Company disclose the aggregate amount of transaction price that is allocated
to performance obligations that have not yet been satisfied as December 31, 2020. ASC 606 provides certain practical expedients that
limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations.
The Company applied the practical expedient to not disclose the amount of transaction price allocated to unsatisfied
performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or
F-14
less. The Company does not have material future obligations associated with COVID 19 or genetic testing Services that extend beyond
one year.
Recent Accounting Pronouncements
The Company evaluates all Accounting Standards Updates, or ASUs, issued by FASB for consideration of their applicability.
ASUs not included in the Company’s disclosures were assessed and determined to be either not applicable or are not expected to have
a material impact on the Company’s consolidated financial statements or disclosures.
ASU No. 2016-13
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on
Financial Instruments. ASU No. 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a
methodology that reflects expected credit losses. The update is intended to provide financial statement users with more decision-useful
information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting
entity at each reporting date. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of
the beginning of the first reporting period in which the guidance is effective. The standard will be effective for annual reporting
periods beginning after December 15, 2019, including interim periods within those reporting periods for public business entities that
meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC. For all other
entities, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods
within those fiscal years. Early application of the amendments is permitted. The Company does not expect the adoption of the new
guidance under the standard to materially affect its financial position or results of operations and plans to adopt during fiscal year
2021.
ASU No. 2018-15
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which
provides new guidance on the accounting for implementation, set-up, and other upfront costs incurred in a hosted cloud computing
arrangement. Under the new guidance, entities will apply the same criteria for capitalizing implementation costs as they would for an
internal-use software license arrangement. This guidance is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. This ASU can be adopted prospectively to eligible costs incurred on or after the date of adoption
or retrospectively. The adoption of this update did not have a material impact on the Company’s consolidated financial statements or
disclosures.
ASU No. 2019-12
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which is
intended to reduce the complexity of accounting standards while maintaining or enhancing the helpfulness of information provided to
financial statement users. The amendment in this update simplifies the accounting for income taxes by removing some exceptions
including the incremental approach for intraperiod tax allocation, the requirement to recognize a deferred tax liability for equity
method investments, the ability not to recognize a deferred tax liability for a foreign subsidiary, and the general methodology for
calculating income taxes in an interim period. Other changes include requiring entities to recognize franchise tax that is partially based
on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, evaluate tax basis
step-up in goodwill obtained in a transaction that is not a business combination, and reflect the effect of an enacted change in tax laws
or rates in the annual effective tax rate computation in the interim period that includes the enactment date, making minor codification
improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects
accounted for using the equity method, and specifying that an entity is not required to allocate the consolidated current and deferred
tax expense to a legal entity that is not subject to tax in its separate financial statements. This amendment is effective for public
business entities beginning after December 15, 2020 with early adoption permitted. The Company does not expect the adoption of the
new guidance under the standard to materially affect its financial position or results of operations and plans to adopt during fiscal year
2021.
F-15
Note 3. Marketable Securities
The Company’s marketable securities consisted of the following:
Amortized
Cost Basis
December 31, 2020
Unrealized
Gains
Unrealized
Losses
(in thousands)
Aggregate
Fair Value
Marketable securities:
Short-term
Equity securities
Bond fund
Exchange traded funds
$
153,269 $
17,614
Available-for-sale debt securities
Money market accounts
Corporate debt securities
Less: Cash equivalents
Total short-term marketable securities
Long-term
Corporate debt securities
U.S. government agency debt securities
Yankee debt securities
Total long-term marketable securities
Total marketable securities
$
47,461
41,061
(47,461)
211,944
124,989
1,000
6,054
132,043
343,987 $
67 $
—
—
101
—
168
580
2
4
586
754 $
(151) $
(5)
—
(15)
—
(171)
(117)
—
(10)
(127)
(298) $
153,185
17,609
47,461
41,147
(47,461)
211,941
125,452
1,002
6,048
132,502
344,443
Amortized
Cost Basis
December 31, 2019
Unrealized
Gains
Unrealized
Losses
(in thousands)
Aggregate
Fair Value
Marketable securities:
Short-term
Money market accounts
Corporate debt securities
Less: Cash equivalents
$
Total short-term marketable securities
Long-term
Corporate debt securities
Total long-term marketable securities
Total marketable securities
$
4,700 $
17,962
(6,399)
16,263
41,861
41,861
58,124 $
— $
43
—
43
116
116
159 $
— $
(2)
—
(2)
(30)
(30)
(32) $
4,700
18,003
(6,399)
16,304
41,947
41,947
58,251
Management determined that the gross unrealized losses of $298,000 on the Company’s marketable securities as of December
31, 2020 were temporary in nature. Gross unrealized losses on the Company’s marketable securities were $32,000 as of December 31,
2019. The Company currently does not intend to sell the debt securities prior to maturity and does not consider these investments to be
other-than-temporarily impaired as of December 31, 2020.
The proceeds and gross realized gains from sale of available-for-sale securities for the year ended December 31, 2020 were $8.1
million and $131,000, respectively. The proceeds and gross realized gains from sale of equity securities for the year ended December
31, 2020 were $9.0 million and $24,000, respectively. The Company did not sell any marketable securities in 2019. The net unrealized
loss related to equity securities still held at December 31, 2020 was $89,000. The Company did not hold any equity securities in 2019.
The Company’s available-for-sale debt securities of $221.1 million are used as collateral for an outstanding margin account
borrowing. As of December 31, 2020, the Company had an outstanding borrowing of $15.0 million under its margin account. Margin
account borrowings were used for the purchase of real property located in El Monte, California.
F-16
Note 4. Fair Value Measurements
The authoritative guidance on fair value measurements establishes a framework with respect to measuring assets and liabilities
at fair value on a recurring basis and non-recurring basis. Under the framework, fair value is defined as the exit price, or the amount
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as of the
measurement date. The framework also establishes a three-tier hierarchy for inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on
market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s
assumptions about the factors market participants would use in valuing the asset or liability and are developed based on the best
information available in the circumstances. The hierarchy consists of the following three levels:
Level 1:
Level 2:
Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can
access at the measurement date.
Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly.
Level 3:
Inputs are unobservable inputs for the asset or liability.
The following tables present information about the Company’s financial assets measured at fair value on a recurring basis, based
on the three-tier fair value hierarchy:
Total
Level 1
Level 2
Level 3
December 31, 2020
(in thousands)
Marketable securities and cash equivalents:
Bond Fund
Exchange traded funds
Corporate debt securities
U.S. government agency debt securities
Yankee debt securities
Money market accounts
$
Total marketable securities and cash equivalents
$
153,185 $
17,609
166,599
1,002
6,048
47,461
391,904 $
153,185 $
17,609
—
—
—
47,461
218,255 $
— $
—
166,599
1,002
6,048
—
173,649 $
Total
Level 1
Level 2
Level 3
December 31, 2019
(in thousands)
Marketable securities and cash equivalents:
Corporate debt securities
Money market accounts
Total marketable securities and cash equivalents
$
$
59,950 $
4,700
64,650 $
— $
4,700
4,700 $
59,950 $
—
59,950 $
—
—
—
—
—
—
—
—
—
—
The Company’s Level 1 assets include marketable equity securities and money market instruments and are valued based upon
observable market prices. Level 2 assets consist of U.S. government agency debt securities, corporate debt securities and Yankee debt
securities. Level 2 securities are valued based upon observable inputs that include reported trades, broker/dealer quotes, bids and
offers. As of December 31, 2020 and 2019, the Company had no investments that were measured using unobservable (Level 3) inputs.
There were no transfers between fair value measurement levels during the years ended December 31, 2020 and 2019.
There were no gross unrealized losses for cash equivalents as of December 31, 2020, and gross unrealized losses for marketable
securities as of December 31, 2020 were not material. There were no unrealized losses for securities in an unrealized loss position for
more than 12 months. During the years ended December 31, 2020 and 2019, the Company did not recognize other-than-temporary
impairment losses related to its marketable securities.
F-17
Note 5. Fixed Assets
Major classes of fixed assets consisted of the following:
Medical lab equipment
Building
Aircraft
Computer hardware
Leasehold improvements
Building improvements
Computer software
Furniture and fixtures
Land improvements
Automobile
General equipment
Land
Assets not yet placed in service
Total
Less: Accumulated depreciation
Property and equipment, net
Useful Lives
5 Years
39 Years
7 Years
3 Years
Shorter of lease term or estimated useful life
6 months to 5 Years
3 Years
5 Years
5 to 15 Years
5 Years
5 Years
December 31,
2020
2019
(in thousands)
$
$
20,849
6,731
6,503
3,699
1,580
707
541
454
403
53
44
7,500
2,055
51,119
(10,920)
40,199
$
$
10,493
—
—
1,705
876
—
541
235
—
—
—
—
114
13,964
(7,990)
5,974
Depreciation expense on fixed assets totaled $3.0 million and $2.1 million for the years ended December 31, 2020 and 2019,
respectively.
Note 6. Other Current Assets
Other current assets consisted of the following:
Other receivable
Reagents and supplies
Prepaid expenses
Contract assets
Marketable securities interest receivable
Prepaid income taxes
Total
2020
December 31,
(in thousands)
2019
$
$
17,810
16,491
3,682
1,379
1,016
14
40,392
$
$
16
277
1,288
150
478
46
2,255
Reagents and supplies include reagents and consumables used for DNA sequencing applications in the Company’s DNA
sequencing equipment and collection kits for COVID-19 tests. Other receivable primarily consists of proceeds to be received from
public offerings of the Company’s common stock.
F-18
Note 7. Reporting Segment and Geographic Information
The Company views its operations and manages its business in one reporting segment. All long-lived assets were located in the
United States as of December 31, 2020 and 2019 with an insignificant amount located in Canada. Revenue by region for the years
ended December 31, 2020 and 2019 were as follows:
Revenue:
United States
Foreign:
Canada
Other Countries
Total
Note 8. Debt, Commitments and Contingencies
Debt
Year Ended December 31,
2020
2019
(in thousands)
$
$
415,334 $
1,725
4,653
421,712 $
25,014
2,245
5,269
32,528
In 2020, the Company purchased a real property located at 4399 - 4401 Santa Anita Avenue, El Monte, California, or the
Property, from 4401 Santa Anita Corporation, a California corporation, or the Seller. The Company paid an aggregate of $15.4 million
in exchange for the Property, or the Property Purchase Agreement, which consists of approximately 61,612 total square feet of
building situated on 2.6 acres of land. In connection with the signing of the Property Purchase Agreement, the Company provided a
refundable $350,000 deposit to the Seller. In connection with the closing of escrow, the Company paid the remaining amount owed
pursuant to the Property Purchase Agreement of approximately $15.0 million to the Seller. The $15.0 million paid in connection with
the close of escrow was financed using a margin loan with the custodian of the Company’s marketable debt security investment
account. The marketable securities in the brokerage account were used as collateral for the margin loan. The custodian can issue a
margin call at any time. The interest rate on the margin loan was the effective federal funds rate, or EFFR, plus a spread, and the
EFFR and/or the spread can be changed by Bank of New York at any time. The interest was 1% at the time of withdrawal of $15.0
million from the margin account, and the interest rate at December 31, 2020 was 0.78%. The Company did not make any other
withdrawals from the margin account, and the outstanding balance of $15.0 million is included in the accompanying Consolidated
Balance Sheets. The related interest expenses for the year ended December 31, 2020 was $20,000.
Operating Leases
See Note 9, Leases, for further information.
Gene Biotech
See Note 15, Equity Method Investments, for a description of the Company’s commitments related to its joint venture, FF Gene
Biotech, as defined in Note 15.
Purchase Obligations
As of December 31, 2020, the Company had non-cancelable purchase obligations of $27.6 million, of which, $23.6 million for
reagents and other supplies and $3.3 million for medical lab equipment are payable within twelve months, and $700,000 for medical
lab equipment is payable within the next twenty-four months.
Contingencies
From time to time, the Company may be subject to legal proceedings and claims arising in the ordinary course of business.
Management does not believe that the outcome of any of these matters will have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
F-19
Note 9. Leases
Lessee
The Company has various non-cancelable operating leases with varying terms through October 2025 primarily for office space
and equipment. The Company has options to renew some of these leases for three years after their expiration. The Company considers
these options, which may be elected at the Company’s sole discretion, in determining the lease term on a lease-by-lease basis. The
Company does not have any finance leases or leases with variable lease payments.
The determination of whether an arrangement contains a lease is made at inception by evaluating whether the arrangement
conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has
the ability to direct the use of the asset.
The Company’s headquarters is located in Temple City, California, which is comprised of various corporate offices and a
laboratory certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, accredited by the College of
American Pathologists and licensed by the State of California Department of Public Health. Additional offices are located in El
Monte, California, and in 2020, the Company purchased the real property from the landlord. The Company paid an aggregate of $15.4
million in exchange for the real property which consists of approximately 61,612 total square feet of building situated on 2.6 acres of
land. Additional offices are located in Atlanta, Georgia and are used for certain report generation functions. During the year ended
December 31, 2020, the Company opened another CLIA-certified laboratory in Houston, Texas to expand its capacity.
The Company adopted new accounting standard ASC 842, Leases, on January 1, 2019, including the practical expedient on not
separating lease components from nonlease components for all operating leases. Upon adoption, the Company recorded ROU assets of
$3.0 million and short-term and long-term lease liabilities of $384,000 and $2.6 million, respectively. The difference between the
ROU asset and liability is due to the existing balance of deferred rent at the date of adoption. There was no impact to retained earnings
upon adoption. The Company entered into three operating leases with an existing landlord during the year. Upon entering into the
leases, the Company recorded ROU assets of $393,000 and short-term and long-term lease liabilities of $58,000 and $335,000,
respectively. These three leases along with other leases for the office spaces in El Monte were terminated due to the Company’s
purchase of the buildings from the landlord. The difference between the carrying amount of ROU assets and lease liabilities
immediately before the purchase was recorded as an adjustment to the carrying amount of the buildings. The Company entered an
operating lease for a copier during the year. Upon entering into the lease, the Company recorded ROU assets of $9,000 and short-term
and long-term lease liabilities of $1,000 and $8,000, respectively. The Company also entered into fifteen short-term leases during the
year ended December 31, 2020 and elected short-term lease recognition exemption for such leases.
As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on information
available at the commencement date in determining the discount rate used to calculate present value lease payment. The Company
determined its incremental borrowing rate based on inquiries with its bank. The Company’s lease agreements do not contain any
residual value guarantees, material restrictive covenants, bargain purchase options or asset retirement obligations. Lease expense for
the Company’s operating leases is recognized on a straight-line basis over the lease term. The Company’s leases do not contain
variable lease payments.
The following was operating lease expense:
Operating lease cost
Short-term lease cost
Total lease cost
Supplemental cash flow information related to leases was the following:
Cash paid for amounts included in the measurement of lease liabilities
Noncash lease expense
Right-of-assets obtained in exchange for new operating lease liabilities
F-20
Year Ended December 31,
2020
2019
(in thousands)
566 $
142
708 $
Year Ended December 31,
2020
2019
(in thousands)
801 $
409 $
402 $
587
—
587
535
413
110
$
$
$
$
$
Supplemental information related to leases was the following:
Weighted average remaining lease term - operating leases
Weighted average discount rate - operating leases
December 31, 2020
3.0 years
6.22%
The following is a maturity analysis of operating lease liabilities using undiscounted cash flows on an annual basis with renewal
periods included:
Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less imputed interest
Total
Lessor
Operating Leases
(in thousands)
311
309
270
24
2
1
917
(82)
835
$
$
The Company leases out space in buildings it owns to third-party tenants under noncancelable operating leases and has leased
out such space since the Company purchased such buildings in October 2020. The Company determines whether a lease exists at
inception. The remaining terms left after purchasing the buildings are from 2 months to 4 years including renewal options and may
include rent escalation clauses. Lease income primarily represents fixed lease payments from tenants recognized on a straight-line
basis over the application lease term. Variable lease income represents tenant payments for real estate taxes, insurance and
maintenance.
The lease income was $145,000 for 2020, which was included in interest and other income, net, in the accompanying
Consolidated Statements of Operations. There was no lease income in 2019. Total lease income for 2020 was as follows:
Lease income
Variable lease income
Total lease income
Year Ended
December 31, 2020
(in thousands)
$
$
Future fixed lease payments from tenants for all noncancelable operating leases as of December 31, 2020 are as follows:
Year Ending December 31,
2021
2022
2023
2024
Total
Lease Payments
from Tenants
(in thousands)
$
$
144
1
145
335
190
95
61
681
F-21
Note 10. Equity-Based Compensation
The Company has included equity-based compensation expense as part of cost of revenue and operating expenses in the
accompanying Consolidated Statements of Operations as follows:
Year Ended December 31,
2020
2019
Cost of revenue
Research and development
Selling and marketing
General and administrative
Total
Award Activity
Option Awards
$
$
$
(in thousands)
1,452
2,693
2,092
1,920
8,157
$
676
1,024
845
664
3,209
The following table summarizes activity for options to acquire shares of the Company’s common stock in the years ended
December 31, 2020 and 2019:
Number
of Shares
Subject to
Options
(in thousands)
$
417
30
$
(100) $
(6) $
$
341
10
$
(56) $
(8) $
$
$
287
258
Weighted-
Average
Exercise Price
0.64
6.98
0.38
0.38
1.27
15.82
1.86
4.18
1.59
0.65
Weighted-
Average
Grant Date
Fair Value
$
$
$
$
$
$
4.58
5.36
7.10
11.45
5.04
4.68
Weighted-
Average
Remaining
Contractual
Life
(in years)
Aggregate
Intrinsic
Value
(in thousands)
(1)
7.1
$
1,116
6.4
$
3,960
5.5
5.1
$
$
14,484
13,274
Balance at December 31, 2018
Granted
Exercised
Canceled
Balance at December 31, 2019
Granted
Exercised
Canceled
Balance at December 31, 2020
Exercisable as of December 31, 2020
(1) Aggregate intrinsic value is calculated as the difference between (i) the exercise price of options and (ii) the market value of the
Company’s common stock as of the applicable date.
The total fair value of options that vested during the years ended December 31, 2020 and 2019 was $223,000 and $549,000,
respectively. As of December 31, 2020, the remaining unrecognized compensation expense related to all outstanding option awards
was $178,000 and is expected to be recognized over a weighted-average period of 3.0 year.
RSU Awards
RSUs are awards that entitle the holder to receive shares of the Company’s common stock upon satisfaction of vesting
conditions. Each RSU represents the contingent right to receive one share of the Company’s common stock upon vesting and
settlement.
F-22
The following table summarizes activity for RSUs relating to shares of the Company’s common stock in the years ended
December 31, 2020 and 2019:
Balance at December 31, 2018
Granted
Vested and settled
Forfeited
Balance at December 31, 2019
Granted
Vested and settled
Forfeited
Balance at December 31, 2020
Number of
Shares
(in thousands)
Weighted-Average
Grant Date
Fair Value
1,086 $
982 $
(434) $
(123) $
1,511 $
1,389 $
(655) $
(160) $
2,085 $
5.94
7.00
6.39
5.38
6.54
24.86
7.97
11.17
17.93
The RSU awards granted in the years ended December 31, 2020 and 2019 will result in aggregate equity-based compensation
expense of $34.5 million and $6.9 million, respectively, to be recognized over the vesting periods from the grant date of each award
granted in the period. As of December 31, 2020, the remaining unrecognized compensation expense related to all outstanding RSU
awards was $33.5 million and is expected to be recognized over a weighted-average period of 3.4 years. As of December 31, 2019, the
remaining unrecognized compensation expense related to all outstanding RSU awards was $8.7 million and was expected to be
recognized over a weighted-average period of 2.9 years.
Fair Value Assumptions for Option Awards
The Company uses the Black-Scholes option-pricing model to measure the fair value of option awards. The Black-Scholes
option-pricing model requires the input of various assumptions, each of which is subjective and requires significant judgment. These
assumptions include the following:
•
•
•
•
•
Expected Term. The expected term represents the period that the Company’s equity-based awards are expected to be
outstanding. The Company determines the expected term assumption based on the vesting terms, exercise terms and
contractual terms of the options.
Risk-Free Interest Rate. The Company determines the risk-free interest rate by using the equivalent to the expected term
based on the U.S. Treasury yield curve in effect as of the date of grant.
Dividend Yield. The assumed dividend yield is based on the Company’s expectation that it will not pay dividends in the
foreseeable future, which is consistent with its history of not paying dividends.
Expected Volatility. The Company calculates expected volatility based on historical volatility data of its stock that is
publicly traded.
Forfeiture Rate. The Company accounts for forfeitures as they occur.
Awards to Employees
The table below sets forth the weighted-average assumptions used in the Black-Scholes option-pricing model to estimate the fair
value of options to acquire shares of the Company’s common stock granted to employees during the year ended December 31, 2020
and 2019.
Expected term (in years)
Risk-free interest rates
Dividend yield
Expected volatility
Year Ended December 31,
2020
2019
6.1
0.4%
—
87.5%
6.1
1.8%
—
73.6%
F-23
Determination of Fair Value on Grant Dates
The fair value of the shares of the Company’s common stock underlying option and RSU awards is determined by the
Company’s board of directors or the compensation committee thereof based on the closing sales price of the Company’s common
stock on the date of grant as reported by the Nasdaq Global Market.
Note 11. Income Taxes
Provision for income taxes consists of U.S. federal and state income taxes. A deferred tax liability is recognized for all taxable temporary
differences, and a deferred tax asset is recognized for all deductible temporary differences, operating losses and tax credit carryforwards. A
valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The following table summarizes income (loss) before income taxes, equity loss in investee and impairment loss in equity-
method investments:
U.S. income before income taxes, equity loss in investee and impairment loss
Foreign loss before income taxes and equity loss in investee
Income before income taxes, equity loss in investee and impairment loss
$
$
Income tax expense (benefit) consisted of the following:
Year Ended December 31,
2020
2019
(in thousands)
291,739 $
(55)
291,684 $
Year Ended December 31,
2020
2019
(in thousands)
Current:
Federal
State
Total Current
Deferred:
Federal
State
Change in valuation allowance
Total Deferred
Total income tax expense
$
$
53,794 $
20,513
74,307
(248)
(14)
(1,513)
(1,775)
72,532 $
679
(270)
409
5
38
43
(249)
(280)
529
—
43
Reconciliation of the difference between the federal statutory income tax rate and the effective income tax rate is as follows:
Tax provision at federal statutory rate
State taxes
Foreign tax rate differential
Uncertain Tax Positions
Stock based compensation
Return to provision
Other permanent differences
Other
Change in valuation allowance
Tax provision
Year Ended December 31,
2020
2019
21.00%
5.68%
0.00%
0.13%
-0.92%
-0.11%
0.02%
-0.41%
-0.52%
24.87%
21.00%
-46.76%
13.83%
0.00%
-53.53%
-57.11%
3.87%
0.01%
129.22%
10.53%
F-24
The following table summarizes the elements of the deferred tax assets (liabilities):
Deferred tax assets
Accrued vacation and other accrued expenses
Provision for bad debts
Net operating losses
Stock based compensation
State income taxes
Foreign
Credits
Lease liability
Equity loss in investment
Other
Gross deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities
Depreciation
Right of use asset
Other
Total deferred tax liabilities
Net deferred tax assets
Year Ended December 31,
2020
2019
(in thousands)
166 $
513
206
1,424
4,306
1,220
—
226
700
89
8,850
(2,021)
6,829
4,830
224
147
5,201
1,628 $
97
180
445
609
8
545
680
643
—
—
3,207
(2,125)
1,082
419
633
30
1,082
—
$
$
As of December 31, 2020, the Company has no estimated federal net operating loss, or NOL, carryforwards and estimated state
NOL carryforwards of $1.9 million. The Company’s state NOLs are scheduled to expire from 2022 through 2042. The Company also
has foreign NOL carryforwards of $405,000 which are scheduled to expire from 2021 through 2025.
FASB ASC 740 requires that deferred income tax assets be reduced by a valuation allowance if it is more likely than not that
some or all of the deferred income tax assets will not be realized. The Company has evaluated the realizability of its deferred tax
assets and has concluded that it is more likely than not that the Company may not realize the benefit of certain deferred tax assets.
These deferred tax assets consist primarily of equity losses in joint ventures and foreign net operating loss carryforwards; accordingly,
a valuation allowance of $2.0 million has been recorded on these deferred tax assets as of December 31, 2020. At December 31, 2019,
the Company concluded that it was more likely than not that the Company may not realize the benefit of its deferred tax assets,
primarily as a result of operating losses in recent years and, accordingly, provided a full valuation allowance of $2.1 million. The
decrease in the valuation allowance of $104,000 for the year ended December 31, 2020 was primarily due to current and expected
future operating profits.
During 2020 and 2019 the Company recorded deferred tax assets related to its equity method investment in FF Gene Biotech.
When realized, the asset will generate a capital loss which may only be used to offset capital gain income. The Company does not
currently have any capital gain income and has therefore recorded a full valuation allowance against this asset. During 2020, the
Company recorded a deferred tax asset related to the impairment of its investment in BostonMolecules, Inc. When realized, the asset
will generate a capital loss which may only be used to offset capital gain income; therefore, the Company has recorded a full valuation
allowance against this asset. The net deferred assets are included in other long-term assets in the accompanying Consolidated Balance
Sheets.
Uncertain Tax Positions
The Company is subject to income taxation by the United States government and certain states in which the Company's
activities give rise to an income tax filing requirement. The Company does not have any significant income tax filing requirements in
any foreign jurisdiction. As of December 31, 2020, there were no pending tax audits in any jurisdiction. The tax returns are subject to
statutes of limitations that vary by jurisdiction. At December 31, 2020, the Company remains subject to income tax examinations in
the U.S. and various states for tax years 2017 through 2020. However, due to the Company’s NOL carryforwards in various
jurisdictions, tax authorities have the ability to adjust carryforwards related to closed years until the statute expires on the year(s) in
which the NOL carryforwards are utilized.
F-25
A reconciliation of the Company’s gross unrecognized tax benefits is as follows:
Balance at beginning of year
Increases to prior positions
Increases for current year positions
Balance at end of year
Year Ended December 31,
2020
2019
(in thousands)
— $
141
236
377 $
—
—
—
—
$
$
As of December 31, 2020, the Company has $377,000 of gross unrecognized tax benefits, related to research and experimental
tax credits. The Company has $377,000 of unrecognized tax benefits as of December 31, 2020, which, if recognized, would affect the
annual effective tax rate. The Company has no accrual for interest or penalties at December 31, 2020 or 2019, and has not recognized
interest or penalties during the years ended December 31, 2020 and 2019. Although it is possible that the amount of unrecognized
benefits with respect to our uncertain tax positions will increase or decrease in the next twelve months, the Company does not expect
material changes.
While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could differ
from the Company's accrued positions. Accordingly, additional provisions on federal, state and foreign tax-related matters could be
recorded in future periods as revised estimates are settled or otherwise resolved.
Note 12. Income (Loss) per Share
The following is a reconciliation of the basic and diluted income (loss) per share computations:
Net income (loss)
Weighted-average common shares - outstanding, basic
Weighted-average common shares - outstanding, diluted
Net income (loss) per common share, basic
Net income (loss) per common share, diluted
Year Ended December 31,
2020
2019
(in thousands, except per share data)
$
$
$
214,310
22,694
24,056
9.44
8.91
$
$
$
(411)
18,709
18,709
(0.02)
(0.02)
The following securities have been excluded from the calculation of diluted loss per share for all periods presented because their
effect would have been anti-dilutive:
Options
RSUs
Year Ended December 31,
2020
2019
(in thousands)
10
347
36
161
The anti-dilutive shares described above were calculated using the treasury stock method. During the year ended December 31,
2019, the Company had outstanding options and RSUs that were excluded from the weighted-average share calculation for continuing
operations due to the Company’s net loss positions.
F-26
Note 13. Retirement Plans
The Company offers a 401(k) retirement savings plan, or the 401 (k) Plan, for its employees, including its executive officers,
who satisfy certain eligibility requirements. The Internal Revenue Code of 1986, as amended, allows eligible employees to defer a
portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) Plan. The Company
matches contributions to the 401(k) Plan based on the amount of salary deferral contributions the participant makes to the 401(k) Plan.
The Company will match up to 3% of an employee’s compensation that the employee contributes to his or her 401(k) Plan account.
Total Company matching contributions to the 401(k) Plan were $422,000 and $237,000 in the years ended December 31, 2020 and
2019, respectively.
Note 14. Related Party
Linda Marsh, who is a member of the Company’s board of directors, is currently the Senior Executive Vice President of AHMC
Healthcare Inc., or AHMC. The Company performs genetic testing and other testing services, on an arms-length basis, for AHMC,
and the Company recognized $3.1 million in revenue in the year ended December 31, 2020. As of December 31, 2020, $1.8 million
was owed to the Company by AHMC, which is included in trade accounts receivable, net, in the accompanying Consolidated Balance
Sheets, in connection with this relationship.
The Spouse of the Company’s founder, Chief Executive Officer and Chairman of the Company’s board of directors, Ming
Hsieh, is the owner of JEM Enterprise, or JEM. In the year ended December 31, 2020, the Company purchased $200,000 of office
furniture and supplies from JEM. The Company believed $200,000 was a fair market price for the furniture purchased. As of
December 31, 2020, zero was owed to JEM by the Company in connection with this relationship.
The Chief Executive Officer and Chairman of the Company’s board of directors, Ming Hsieh, is the owner of PTJ Associates
Inc., or PTJ. PTJ provides flight services to the Company on an arms-length basis. In the year ended December 31, 2020, the
Company incurred $343,000 in expenses for flights between California and Texas to transport employees and supplies. As of
December 31, 2020, $94,000 was owed to PTJ by the Company, which is included in accounts payable in the accompanying
Consolidated Balance Sheets, in connection with this relationship.
As more fully described in Note 15, Equity Method Investments, in April 2017, the Company, through an affiliated company
formed for the purpose of the relationship, entered into a cooperation agreement, or JV Agreement, with Xilong Scientific Co., Ltd., or
Xilong Scientific, and Fuzhou Jinqiang Investment Partnership (LP), or FJIP, to form a joint venture under the laws of the People’s
Republic of China, or China, called Fujian Fujun Gene Biotech Co., Ltd., or FF Gene Biotech. Xilong Scientific is an affiliate of Xi
Long USA, Inc., a company which at one point owned greater than 10% of the Company’s common stock. XiLong USA, Inc. has
since reported beneficial ownership of 4.92% of the Company’s common stock in a Schedule 13G filed with the SEC on June 12,
2020. FJIP is owned by key management of FF Gene Biotech, including Dr. Han Lin Gao, the Chief Scientific Officer and a large
stockholder of the Company and the owner of approximately 25% of FJIP.
The Company and Fulgent Pharma LLC, the Company’s former subsidiary, are party to shared services arrangements where
research and development and administrative services and office space and equipment are provided between the companies, on an
arms-length basis. Ming Hsieh is the Manager and a member of Fulgent Pharma LLC. During the year ended December 31, 2020, the
research development service rendered by Fulgent Pharma LLC was $427,000 and costs allocated to Fulgent Pharma, LLC were
$52,000. Costs allocated to Fulgent Pharma LLC were not significant during the year ended December 31, 2019. As of December 31,
2020, $409,000 was owed to Fulgent Pharma LLC by the Company, which is included in accrued liabilities in the accompanying
Consolidated Balance Sheets, and as of December 31, 2019, $26,000 was owed to the Company by Fulgent Pharma, which is recorded
in other receivable in other current assets in the accompanying Consolidated Balance Sheet, in connection with these relationships.
Note 15. Equity Method Investments
In April 2017, the Company, through an affiliated company formed for the purpose of the relationship, entered into the JV
Agreement with Xilong Scientific and FJIP to form FF Gene Biotech, a joint venture formed under the laws of China to offer genetic
testing services to customers in China. Pursuant to the terms of the JV Agreement, the Company has agreed 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 for a 30%
ownership interest in FF Gene Biotech, previously three-year per original agreement and amended in April 2019. Xilong Scientific has
agreed to contribute to FF Gene Biotech 102.0 million RMB over a five-year period for a 51% ownership interest in the FF Gene
Biotech, previously three-year per original agreement and amended in April 2019. FJIP has agreed to contribute to FF Gene Biotech
19.0 million RMB over a ten-year period for a 19% ownership interest in FF Gene Biotech, previously five-year per original
agreement and amended in April 2019. The Company’s maximum exposure to fund losses of FF Gene Biotech as a result of its
minority ownership of this entity is equal to its contribution obligation under the JV Agreement as described above. As of December
31, 2020, 29.7 million RMB (or approximately $4.5 million U.S. dollars) remained to be contributed to FF Gene Biotech by the
F-27
Company under the terms of the JV Agreement, and the Company has purchased and contributed equipment with an aggregate fair
value of $4.5 million pursuant to its contribution commitment under the JV Agreement, of which, $1.4 million and $137,000 were
contributed in the year ended December 31, 2020 and 2019, respectively. The Company accounted for this contribution in accordance
with ASC 845, Nonmonetary Transactions, and recorded an investment based on the fair value of the contributed equipment, which is
the same as carryover basis. In the year ended December 31, 2020, the Company recorded an impairment loss of $1.8 million from the
investment on FF Gene Biotech as the decline in the fair value of the investment compared to the pro forma carrying value is more
than the current carrying value, and the Company believes the decline is other-than-temporary.
The Company concluded FF Gene Biotech is a variable interest entity as FF Gene Biotech lacks sufficient capital to operate
independently. The Company concluded that it alone does not have the power to direct the most significant activities of FF Gene
Biotech and therefore is not the primary beneficiary of the entity. Judgment regarding the level of influence over FF Gene Biotech
includes consideration of key factors such as the Company's ownership interest, representation on the board of directors or other
management body and participation in policy-making decisions.
The Company accounts for its 30% interest in FF Gene Biotech using the equity method of accounting. The Company recorded
its proportionate share of the losses of FF Gene Biotech for the year ended December 31, 2020 and 2019 in the accompanying
Consolidated Statements of Operations, and recorded its contribution during the period, net of its proportionate share in the
accumulated losses and impairment loss of FF Gene Biotech, in the accompanying Consolidated Balance Sheet as of December 31,
2020 and 2019. FF Gene Biotech provided curation services, on an arms-length basis, for the Company, the cost of such services was
insignificant for the year ended December 31, 2020 and 2019.
Summary Financial Information
In the year ended December 31, 2020, FF Gene did not constitute 10 percent or more of the Company’s consolidated assets,
equity or income from continuing operation, thus the results of operations of FF Gene were not significant to the Company.
Summarized financial information for FF Gene Biotech for 2019 is as follows.
Consolidated Balance Sheet Data:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Minority interest
Stockholders' equity
Consolidated Statement of Operations Data:
Net sales
Gross profit
Net loss
Share of loss from investments accounted for using the equity method
BostonMolecules, Inc.
December 31,
2019
(in thousands)
3,007
4,457
3,748
889
(426)
3,253
$
$
$
$
$
$
Year Ended December 31,
2019
(in thousands)
$
$
$
$
4,055
1,354
(3,009)
(777)
In September 2020, the Company entered into a Series A Preferred Stock Purchase Agreement, or the Series A Purchase
Agreement, with BostonMolecules, Inc., or BostonMolecules, a Delaware corporation, pursuant to which the Company purchased 333
shares of Series A Preferred Stock of BostonMolecules, $0.0001 par value per share, or the BostonMolecules Shares, at a purchase
price of $7,500 per share and an aggregate purchase price of $2.5 million. The BostonMolecules Shares represent an approximate 25%
ownership interest in BostonMolecules. In connection with its purchase of the BostonMolecules Shares, the Company was granted the
right to designate a member of BostonMolecules board of directors and the Company has designated Ming Hsieh to hold this position.
F-28
The Company concluded that it has the ability to exercise significant influence over the operating and financial policies of
BostonMolecules and therefore concluded the purchase is an equity-method investment. Judgment regarding the level of influence
over BostonMolecules includes consideration of key factors such as the Company's ownership interest and representation on the board
of directors.
The Company initially accounted for its 25% interest in BostonMolecules using the equity method of accounting. The primary
purpose of the investment was to gain access to certain technologies and products BostonMolecules was developing, however, after
the investment was made, similar products became available in the market, and the development of BostonMolecules’ products was
delayed. Since the current expected performance of BostonMolecules is significantly worse than anticipated when the investment was
initially made and recoverability of the Company's investment is not expected, the Company determined its investment has been fully
impaired. Total investment and direct costs associated with the investment were $2.6 million for the year ended December 31, 2020.
The Company recorded the impairment loss using the equity method in the accompanying Consolidated Statements of Operations.
The Company also entered into a distribution agreement with BostonMolecules in June 2020, or the Distribution Agreement,
and upon the closing of the aforementioned investment, the Distribution Agreement was amended and restated, as amended and
restated, the Amended Distribution Agreement. Pursuant to the Amended Distribution Agreement, the Company will purchase, use
and distribute COVID-19 test kits from BostonMolecules and offer a testing service using these test kits for its customers within the
United States and Canada. Pursuant to the Amended Distribution Agreement, the Company may purchase the COVID-19 test kits
from BostonMolecules at a price that is no less favorable than the lowest price charged by BostonMolecules to any third party in the
United States and Canada for these test kits or their substantial equivalent during the same calendar year. The Company did not
purchase any test kits from BostonMolecules in the year ended December 31, 2020.
Equity method investments as of December 31, 2020 and 2019 consisted of the following:
Carrying
Value
(in thousands)
2020
—
—
—
December 31,
Ownership
Percentage
Carrying
Value
(in thousands)
2019
Ownership
Percentage
30% $
25%
$
872
—
872
30%
0%
FF Gene Biotech
BostonMolecules
Total equity method investments
$
$
Note 16. Equity Distribution Agreements
In August 2019, the Company entered into an Equity Distribution Agreement, or the 2019 Equity Distribution Agreement, with
Piper Jaffray & Co., or Piper, as sales agent, which was amended on August 4, 2020. During the year ended December 31, 2019, the
Company sold an aggregate of 104,000 shares of its common stock pursuant to the 2019 Equity Distribution Agreement 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, 2020, the Company sold an aggregate of 1.1 million shares of its common stock pursuant to the 2019 Equity
Distribution Agreement at a weighted-average net selling price of $38.50 per share, which resulted in $42.7 million of net proceeds to
the Company. Shares sold under the 2019 Equity Distribution Agreement were offered and sold pursuant to the Company’s shelf
registration statement on Form S-3 (File No. 333-233227) filed with the SEC on August 12, 2019 and declared effective on August 23,
2019, and prospectus supplements and accompanying base prospectus filed with the SEC on August 30, 2019, May 6, 2020 and
August 5, 2020.
In September 2020, the Company entered into an Equity Distribution Agreement, or the September 2020 Equity Distribution
Agreement, with Piper as sales agent, pursuant to which the Company sold an aggregate of 2.8 million shares of its 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.
In November 2020, the Company entered into an Equity Distribution Agreement, or the November 2020 Equity Distribution
Agreement, with Piper, Oppenheimer & Co. Inc., and BTIG LLC, as sales agents, pursuant to which the Company may offer and sell,
from time to time through Piper, shares of its common stock having an aggregate offering price of up to $175.0 million. Piper may
receive a commission of up to 3% of the gross proceeds received by the Company for sales pursuant to the November 2020 Equity
Distribution Agreement. During the year ended December 31, 2020, the Company sold an aggregate of 2.0 million shares of its
F-29
common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $48.70 per
share, which resulted in $99.1 million of net proceeds to the Company. Shares sold under the November 2020 Equity Distribution
Agreement were offered and sold pursuant to the Company’s registration statement on Form S-3 (File No. 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 November 20, 2020.
Note 17. Underwriting Agreement
On November 13, 2019, the Company entered into a purchase agreement with Piper as representative of the several
underwriters, pursuant to which the Company sold 2,673,750 shares of its common stock at a price of $10.51875 per share, with a
public offering price of $11.25 per share. The Company received net proceeds of approximately $27.6 million, after deducting
underwriting discounts and commissions and offering expenses paid or payable by us of approximately $2.4 million. The shares issued
and sold in the underwritten offering were sold pursuant to a shelf registration statement registered under the Securities Act on a
registration statement on Form S-3 (File No. 333-233227), as amended, and a prospectus supplement and accompanying base
prospectus filed with the SEC on November 13, 2019.
Note 18. Subsequent Event
Subsequent to December 31, 2020, the Company sold an aggregate of 582,650 shares of its common stock pursuant to the
November 2020 Equity Distribution Agreement at a weighted-average selling price of $53.15 per share, which resulted in
approximately $31.0 million of gross 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. 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 November 20, 2020.
F-30
Note 19. Selected Quarterly Financial Data (Unaudited)
The tables below set forth the Company’s quarterly Consolidated Statements of Operations data for the eight quarters ended
December 31, 2020. In the opinion of management, this quarterly data has been prepared on the same basis as the accompanying
consolidated financial statements and includes all adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the results of operations for the periods presented. See Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” in the report in which these consolidated financial statements are included for descriptions of
the effects of any extraordinary, unusual or infrequently occurring items recognized in any of the periods covered by this data. The
results for any one quarter are not indicative of the results to be expected in the current period or any future period.
Dec. 31,
Sept. 30,
June 30,
Three Months Ended
Dec. 31,
Mar. 31,
Sept. 30,
June 30,
2020
2020
2020
2020
2019
2019
2019
Mar. 31,
2019
(dollars in thousands, except per share data)
$294,978 $101,716 $ 17,265 $ 7,753 $ 8,387 $ 10,347 $ 8,424 $ 5,370
2,968
51,772 26,261
2,402
243,206 75,455
3,885
6,462
7,717
9,548
3,620
4,804
4,057
3,696
3,634
4,753
Statement of Operations Data:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Selling and marketing
General and administrative
Total operating expenses
4,576
5,081
7,640
3,177
5,014
3,741
17,297 11,932
225,909 63,523
421
589
Operating income (loss)
Interest and other income, net
Income (loss) before income taxes,
equity earnings (loss) in investee
and impairment loss
Provision for (benefit from) income
taxes
Income (loss) before equity earnings
(loss) in investee and impairment loss 167,927 49,418
(189)
Equity earnings (loss) in investee
Impairment loss in equity-method
investment
Net income (loss)
226,498 63,944
58,571 14,526
143
1,849
3,260
1,799
6,908
2,640
275
1,978
1,597
2,035
5,610
(1,914)
241
1,795
1,635
1,732
5,162
(409)
249
1,744
1,687
1,522
4,953
1,509
189
1,574
1,304
1,631
4,509
295
192
1,424
1,272
1,529
4,225
(1,823)
207
2,915
(1,673)
(160)
1,698
487
(1,616)
(599)
34
(38)
61
7
13
3,514
(193)
(1,707)
(249)
(122)
(174)
1,637
(175)
480
(149)
(1,629)
(279)
(1,763)
—
$166,307 $ 46,638 $ 3,321 $ (1,956) $
(2,591)
—
—
—
(296) $ 1,462 $
—
—
331 $ (1,908)
Net income (loss) per common share:
Basic
Diluted
$
$
6.55 $
6.16 $
2.11 $
1.98 $
0.15 $
0.14 $
(0.09) $
(0.09) $
(0.01) $
(0.01) $
0.08 $
0.08 $
0.02 $
0.02 $
(0.10)
(0.10)
F-31
T R A N S F O R M I N G G E N E T I C DATA I N TO AC T I O N A B L E PAT I E N T C A R E
Fulgent Genetics is a clinical
genetic testing company
that believes in customer
centricity and the power of
building new solutions from
the ground up.