FULGENT GENETICS, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included in this report. Additionally, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K promulgated by theSecurities and Exchange Commission in preparing this discussion and analysis, we presume that readers have access to and have read the discussion and analysis of our financial condition and results of operations included in our annual report on Form 10-K for our fiscal year endedDecember 31, 2020 filed with theSEC onMarch 8, 2021 , or the 2020 Annual Report. As used in this discussion and analysis and elsewhere in this report, unless the context otherwise requires, the terms "Fulgent," the "Company," "we," "us" and "our" refer toFulgent Genetics, Inc. and its consolidated subsidiaries. Forward-Looking Statements The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the 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 II 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 We are a technology company offering large-scale COVID-19 testing services and comprehensive genetic testing to provide physicians with clinically actionable diagnostic information they can use to improve the quality of patient care. We have developed a proprietary technology platform that allows us to offer a broad and flexible test menu and continually expand and improve our proprietary genetic reference library, while maintaining accessible pricing, high accuracy and competitive turnaround times. Combining NGS with our technology platform, we perform full-gene sequencing with deletion/duplication analysis in single-gene tests; pre-established, multi-gene, disease-specific panels; and customized panels that can be tailored to meet specific customer needs. We believe our test menu offers more genes for testing than our competitors in today's market, which enables us to provide expansive options for test customization and clinically actionable results. Our technology platform, which integrates sophisticated data comparison and suppression algorithms, adaptive learning software, in comparison to our competitors advanced genetic diagnostics tools and integrated laboratory processes, allows us to offer a test menu with expansive genetic coverage. We believe the comprehensive data output and high detection rates of our tests, both made possible by this expansive genetic coverage, provide physicians with information they can readily incorporate into treatment decisions for their patients, which we refer to as clinical actionability. 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. 25 -------------------------------------------------------------------------------- SinceMarch 2020 , we have offered several tests for the detection of SARS-CoV-2, the virus that causes COVID-19, including NGS and RT-PCR-based tests. To date, we have processed orders for our COVID-19 tests from a variety of customers, including governmental bodies, municipalities, and large corporations. In 2020, we established and operated COVID-19 testing sites for certain municipal customers, including theCounty of Los Angeles and theNew York City public school system. We also offer at-home COVID-19 testing services through our Picture Genetics platform to both individuals and large organizations, including the New York City Test and Trace program. InMay 2021 , we entered into a restructuring agreement with Xilong Scientific and FJIP, resulting in the Company indirectly acquiring a controlling financial interest in FF Gene Biotech. FF Gene Biotech was founded to bring our NGS capabilities to the Chinese genetic testing market. This joint venture has enabled us to have an operational presence on the ground inChina as we seek to capitalize on the large and growing genetic testing opportunity in that country. As a result of the acquisition, we seek to be more strategically aligned with its geographic expansion strategy. It also expects to reduce costs through economies of scale. InAugust 2021 , we acquired CSI, aGeorgia corporation, to expand our presence and capabilities in somatic molecular diagnostics and cancer testing. We plan to leverage our established technology platform, NGS expertise, lab operations, and sales infrastructure in conjunction with CSI's extensive cancer testing menu to establish a differentiated foothold in oncologic testing inthe United States . Through our acquisition of CSI, we have added the following types of testing services to our test menu:
• Flow Cytometry - a sophisticated cell analysis technique providing
diagnosis, prognosis, and monitoring of malignancies with a relatively
small sample size. It provides the ability to identify emerging
abnormalities and perform rare event analysis of patient-specific
aberrant immunophenotypes, or cells expressing abnormal proteins unique
to a specific patient.
• Fluorescence In-Situ Hybridization, or FISH - a laboratory technique for
detecting and locating a specific DNA sequence on a chromosome, FISH
probe panels and individual probes are able to precisely isolate andidentify genetic alterations in solid tumor and hematological neoplasms,
or abnormal cells located in the blood and blood forming tissues, such
as bone marrow and lymphatic tissue. FISH cancer testing is a diagnostic
tool that can detect and confirm chromosome abnormalities such as
deletions, duplications, translocations and other numerical or
structural aberrations to diagnose and help predict the best therapeutic
approach for cancer patients.
• Immunohistochemistry, or IHC - an imaging technique used to visualize
antigens in cells. IHC antibodies and histochemical stains are used to
detect the presence, relative quantity, and localization of specific
proteins to aid in determining differentiation in abnormal cells with
similar structures. In addition to other applications, IHC is used to
provide prognostic or therapeutic information.
• Cytogenetics - analyzes the entire chromosome set for numerical and
structural abnormalities such as chromosome additions, deletions andtranslocations. Identification of each abnormality may aid diagnosis and
treatment decisions for cancer patients.
• Molecular Testing - includes both hematopoietic and solid tumormolecular assays for qualitative and quantitative analysis. Advanced
single gene testing, targeted profile molecular assays, and
broad-spectrum tumor testing yield clinically actionable data for
precise diagnosis and appropriate therapy selection.
We offer tests at competitive prices, averaging approximately $99 per billable
test delivered in the nine months ended September 30, 2021 , and at a lower cost
to us than many of our competitors, averaging approximately $20 per billable
test delivered in the nine months ended September 30, 2021 . Our volume has grown
rapidly since our commercial launch, with 2.2 million and 7.5 million billable
tests delivered in the three and nine months ended September 30, 2021 ,
respectively, compared to 1.0 million and 1.2 million billable tests delivered
in the three and nine months ended September 30, 2020 , respectively. As of
September 30, 2021 , an aggregate of approximately 12.0 million billable tests
have been delivered to over 1,700 customers since launching our first commercial
genetic tests in 2013. We have experienced compound quarterly growth of 94% in
the number of billable tests delivered in our last eight completed fiscal
quarters. We recorded revenue and net income of $227.9 million and $122.5
million , respectively, in the three months ended September 30, 2021 , compared to
revenue and net income of $101.7 million and $46.6 million , respectively, in the
three months ended September 30, 2020 . We recorded revenue and net income of
$740.9 million and $403.0 million , respectively, in the nine
months ended September 30, 2021 , compared to revenue and net income of $126.7
million and $48.0 million , respectively, in the nine months ended September 30,
2020 . We achieved profitability in the first half of 2017, the second and third
quarters of 2019, the second, third and fourth quarters of 2020, and the first
three quarters of 2021, but we have recorded losses in all other periods since
our inception.
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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, circumstances regarding the emergence and prevalence of
COVID-19 variants, the success of vaccination campaigns (both in the United
States and internationally), the actions taken to contain COVID-19 or treat it
and related impacts on local, regional, national and international markets and
supply chains.
During the nine months ended September 30, 2021 , and for the entirety of the
COVID-19 pandemic to this point, we continued to operate as an essential
business in response to COVID-19. In the three and nine months ended September
30, 2021 , the COVID-19 pandemic has not had a negative impact on our
consolidated operating results. Rather, we have recognized significant revenue
growth in connection with sales of our COVID-19 tests. Our ability to continue
to operate as currently planned, including our ability to continue to offer our
COVID19 tests with competitive results and turn-around times without any
significant negative operational impact from the COVID-19 pandemic will depend
in part on our, and any of our thirdparty 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/or supply chain.
The COVID-19 pandemic has not negatively impacted the Company's liquidity
position as of September 30, 2021 . We have not incurred any material impairments
of our assets or a significant change in the fair value of our assets due to the
COVID-19 pandemic as of September 30, 2021 .
For additional information on risk factors related to the COVID-19 pandemic or other risks that could impact our results, please refer to "Item 1A. Risk Factors" in Part II of this Form 10-Q.
Business Risks and Uncertainties and Other Factors Affecting Our Performance
Our business and prospects are exposed to numerous risks and uncertainties. For more information, see "Item 1A. Risk Factors" in Part II of this report. In addition, our performance in any period is affected by a number of other factors. See the description of some of the material factors affecting our performance in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2020 Annual Report.
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Results of Operations
The table below summarizes our results of operations for the periods indicated.
For a financial overview relating to our results of operations, including
general descriptions of the make-up of material line items of our statement of
operations data, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the 2020 Annual Report.
Three Months Ended Nine Months Ended
September 30, $ % September 30, $ %
2021 2020 Change Change 2021 2020 Change Change Statement of Operations Data:
(dollars and billable tests in thousands, except per billable test data)
Revenue $ 227,868 $ 101,716 $ 126,152 124 % $ 740,913 $ 126,734 $ 614,179 485 %
Cost of revenue 43,466 26,261 17,205 66 % 153,399 38,035 115,364 303 %
Gross profit 184,402 75,455 108,947 144 % 587,514 88,699 498,815 562 % Operating expenses: Research and development 6,021 3,177 2,844
90 % 16,755 7,004 9,751 139 % Selling and marketing
6,012 5,014 998 20 % 16,239 9,871 6,368 65 %
General and administrative 12,299 3,741 8,558 229 % 28,630 7,575 21,055 278 %
Amortization of
acquisition-related
intangible assets 797 - 797 * 797 - 797 *
Total operating expenses 25,129 11,932 13,197 111 % 62,421 24,450 37,971 155 %
Operating income 159,273 63,523 95,750 151 % 525,093 64,249 460,844 717 %
Interest and other income,
net 496 421 75 18 % 1,382 937 445 47 %
Income before income taxes,
gain
(loss) on equity method
investments
and equity loss in
investee 159,769 63,944 95,825 150 % 526,475 65,186 461,289 708 % Provision for income taxes 37,545 14,526 23,019 158 % 127,647 13,961 113,686 814 % Income before gain (loss) on
equity method investments
and equity loss in investee 122,224 49,418 72,806
147 % 398,828 51,225 347,603 679 % Gain (loss) on equity-method
investments - (2,591 ) 2,591
100 % 3,734 (2,591 ) 6,325 244 % Equity loss in investee
- (189 ) 189 100 % - (631 ) 631 100 %
Net income from consolidated
operations 122,224 46,638 75,586 162 % 402,562 48,003 354,559 739 % Net loss attributable to noncontrolling interests 298 - 298 * 463 - 463 * Net income attributable to Fulgent$ 122,522 $ 46,638 $ 75,884
163 %
Other Operating Data: Billable tests delivered(1) 2,177 1,035 1,142 110 % 7,510 1,229 6,281 511 % Average price per billable test delivered(2)$ 105 $ 98 $ 7 7 %$ 99 $ 103 $ (4 ) (4 %) Cost per billable test delivered(3)$ 20 $ 25 $ (5 ) (20 %)$ 20 $ 31 $ (11 ) (35 %)
* Percentage not meaningful.
(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.
(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.
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Revenue
Revenue increased$126.2 million , or 124%, from$101.7 million in the three months endedSeptember 30, 2020 to$227.9 million in the three months endedSeptember 30, 2021 , and increased$614.2 million , or 485%, from$126.7 million in the nine months endedSeptember 30, 2020 to$740.9 million in the nine months endedSeptember 30, 2021 . The increases in revenue between periods were primarily due to increases in the number of billable tests delivered, primarily related to the increased orders for our COVID-19 tests. The average price of the billable tests we delivered increased from$98 in the three months endedSeptember 30, 2020 to$105 in the three months endedSeptember 30, 2021 , and decreased from$103 in the nine months endedSeptember 30, 2020 to$99 in the nine months endedSeptember 30, 2021 . The increase in the three-month period was primarily due to the mix of tests delivered in the periods. The decrease in the nine-month period was due to (i) lower price-points for the mix of tests we delivered, including COVID-19 tests launched in 2020, (ii) the mix of customers ordering tests in these periods, who may order tests at different rates depending on the arrangements we have negotiated with them, and (iii) our reduction of prices for certain of our tests due to general price degradation for genetic tests and other competitive factors during the nine months endedSeptember 30, 2021 . Revenue from non-U.S. sources increased$2.7 million , or 180%, from$1.5 million in the three months endedSeptember 30, 2020 to$4.2 million in the three months endedSeptember 30, 2021 , and increased$5.1 million , or 108%, from$4.7 million in the nine months endedSeptember 30, 2020 to$9.8 million in the nine months endedSeptember 30, 2021 . The increases in revenue from non-U.S. sources between periods were primarily due to increased sales of our traditional genetic testing services to customers inChina through FF Gene Biotech. The number of billable tests we delivered increased 1.1 million, from 1.0 million in the three months endedSeptember 30, 2020 to 2.2 million in the three months endedSeptember 30, 2021 , and increased 6.3 million, from 1.2 million in the nine months endedSeptember 30, 2020 to 7.5 million in the nine months endedSeptember 30, 2021 . The increases were primarily attributable to the expansion of our test menu, including our COVID-19 tests launched in 2020, and increases in sales to certain of our existing and new customers. After aggregating customers that are under common control or are affiliates, two customers contributed 31% and 11% of the Company's revenue for the three months endedSeptember 30, 2021 , respectively, and one customer contributed 26% of the Company's revenue for the nine months endedSeptember 30, 2021 . One customer contributed 37% and 35% of the Company's revenue for the three and nine months endedSeptember 30, 2020 , respectively.
Cost of Revenue
Cost of revenue increased$17.2 million , or 66%, from$26.3 million in the three months endedSeptember 30, 2020 to$43.5 million in the three months endedSeptember 30, 2021 . The increase was primarily due to increases of$4.5 million in consulting and outside labor costs related to increased outside labor for production,$4.0 million in personnel costs including equity-based compensation expense related to increased headcount and market price of the Company's stock,$3.0 million in reagent and supply expenses related to increased billable tests delivered,$2.0 million in shipping and handling expense related to delivery of collection kits for of COVID-19 tests,$1.7 million in software expense related to usage of COVID-19 testing software, and$1.6 million in depreciation expenses related to medical lab equipment purchased. Cost of revenue increased$115.4 million , or 303%, from$38.0 million in the nine months endedSeptember 30, 2020 to$153.4 million in the nine months endedSeptember 30, 2021 . The increase was primarily due to increases of$45.8 million in reagent and supply expenses related to increased billable tests delivered,$29.2 million in consulting and outside labor costs related to increased outside labor for production,$13.1 million in personnel costs including equity-based compensation expense related to increased headcount and market price of the Company's stock,$10.9 million in shipping and handling expense related to delivery of collection kits for of COVID-19 tests,$7.9 million in software expense related to usage of COVID-19 testing software,$4.5 million in depreciation expenses related to medical lab equipment purchased, and$2.1 million in facilities primarily related to certain modifications made to our mini vans used for our COVID-19 business. Cost per billable test delivered decreased$5 , or 20%, from$25 in the three months endedSeptember 30, 2020 to$20 in the three months endedSeptember 30, 2021 , cost per billable test delivered decreased$11 , or 35%, from$31 in the nine months endedSeptember 30, 2020 to$20 in the nine months endedSeptember 30, 2021 . 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 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. 29 -------------------------------------------------------------------------------- Our gross profit increased$108.9 million , from$75.5 million in the three months endedSeptember 30, 2020 to$184.4 million in the three months endedSeptember 30, 2021 , and increased$498.8 million , from$88.7 million in the nine months endedSeptember 30, 2020 to$587.5 million in the nine months endedSeptember 30, 2021 . Our gross profit as a percentage of revenue, or gross margin, increased from 74.2% to 80.9% between three months endedSeptember 30, 2020 and 2021, and increased from 70.0% to 79.3% between nine months endedSeptember 30, 2020 and 2021, due in part to the increase in revenue and the decrease in our cost per billable test described above.
Research and Development
Research and development expenses increased$2.8 million , or 90%, from$3.2 million in the three months endedSeptember 30, 2020 to$6.0 million in the three months endedSeptember 30, 2021 . The increase was primarily due to increases of$2.0 million in personnel costs including equity-based compensation expense related to increased headcount and market price of the Company's stock and$630,000 in reagent and supply expenses related to increased reagent usage for COVID-19 research. Research and development expenses increased$9.8 million , or 139%, from$7.0 million in the nine months endedSeptember 30, 2020 to$16.8 million in the nine months endedSeptember 30, 2021 . The increase was primarily due to increases of$6.3 million in personnel costs including equity-based compensation expense related to increased headcount and market price of the Company's stock,$1.9 million in reagent and supply expenses related to increased reagent usage for COVID-19 research, and$510,000 in consulting and outside labor costs for increased outside labor used.
Selling and Marketing
Selling and marketing expenses increased$1.0 million , or 20% from$5.0 million in the three months endedSeptember 30, 2020 to$6.0 million in the three months endedSeptember 30, 2021 . The increase was primarily due to an increase of$1.4 million in personnel costs including equity-based compensation expense related to increased commission expense and market price of the Company's stock, and partially offset by a decrease of$581,000 in shipping and handling related to marketing supplies shipped to potential customers in 2020. Selling and marketing expenses increased$6.4 million , or 65% from$9.9 million in the nine months endedSeptember 30, 2020 to$16.2 million in the nine months endedSeptember 30, 2021 . The increase was primarily due to increases of$6.1 million in personnel costs including equity-based compensation expense related to increased commission expense and market price of the Company's stock, and$1.7 million in consulting and outside labor costs for increased outside labor used, and partially offset by a decrease of$1.6 million in marketing supplies, including kits to potential customers in 2020.
General and Administrative
General and administrative expenses increased$8.6 million , or 229% from$3.7 million in the three months endedSeptember 30, 2020 to$12.3 million in the three months endedSeptember 30, 2021 . The increase was primarily due to increases of$2.4 million in consulting costs and$545,000 in legal and professional fees primarily related to the FF Gene Biotech Acquisition andCSI Acquisition ,$2.2 million in personnel costs including equity-based compensation expense related to increased headcount and market price of the Company's stock,$1.1 million software expense and licensing related to increased number of billings,$1.0 million in bad debt expense related to additional provision for credit losses, and$603,000 in accounting fees related to financial statement and internal control audits and reviews. General and administrative expenses increased$21.1 million , or 278% from$7.6 million in the nine months endedSeptember 30, 2020 to$28.6 million in the nine months endedSeptember 30, 2021 . The increase was primarily due to increases of$4.8 million in personnel costs including equity-based compensation related to increased headcount and market price of the Company's stock,$4.1 million in bad debt expense related to additional provision for credit losses,$3.8 million in software and licensing related to increased number of billings,$2.7 million in consulting costs and$1.4 million in legal and professional fees primarily related to the FF Gene Biotech Acquisition andCSI Acquisition , and$961,000 in accounting fees related to financial statement and internal control audit and reviews.
Interest and Other Income, net
Interest income was$443,000 and$424,000 in the three months endedSeptember 30, 2021 and 2020, respectively, and$1.2 million and$999,000 in the nine months endedSeptember 30, 2021 and 2020, respectively. This income related to interest earned on various investments in marketable securities including holding gain or loss on marketable equity securities. Other income (expense) was not significant in the three or nine months endedSeptember 30, 2021 and 2020, respectively. The primary components of other income (expense) were rental income net of rental expenses and foreign currency exchange gain (loss). 30
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Provision for Income Taxes
Provision for income taxes were$37.5 million and$127.6 million for the three and nine months endedSeptember 30, 2021 , respectively, and$14.5 million and$14.0 million for the three and nine months endedSeptember 30, 2020 , respectively. The effective tax rate was 23% for the three months endedSeptember 30, 2021 compared with 23% for the three months endedSeptember 30, 2020 . The effective tax rate was 24% for the nine months endedSeptember 30, 2021 compared with 21% for the nine months endedSeptember 30, 2020 . The change in the effective tax rate for the nine-month period of 2021, relative to 2020, was primarily attributable to a significant increase in the Company's pre-tax income in 2021, partially offset by increased windfall tax deductions related to stock-based compensation.
Gain (Loss) on Equity Method Investments
The Company recognized a gain of$3.7 million in the nine months endedSeptember 30, 2021 related to the preexisting equity interest at FF Gene Biotech as a result of remeasuring to fair value its 30% equity interest held before the FF Gene Biotech Acquisition. The fair value of the preexisting equity interest was determined based on the characteristics before consummating the FF Gene Biotech Acquisition and estimated by applying income approach and utilized the discounted cash flow method. There was no such gain on equity method investment in the three and nine months endedSeptember 30, 2020 .
Loss in equity-method investment in the three months and nine months ended
Equity Loss in Investee
There was no equity loss in investee in the three and nine months endedSeptember 30, 2021 . Equity loss in investee was$189,000 and$631,000 in the three and nine months endedSeptember 30, 2020 , respectively. Equity loss in investee in 2020 related to our preexisting 30% ownership interest in FF Gene Biotech prior to the FF Gene Biotech Acquisition.
Net Loss Attributable to Noncontrolling Interest
Net loss attributable to noncontrolling interest represents net loss of FF Gene Biotech attributable to the minority shareholders, Xilong Scientific and FJIP, which was$298,000 and$463,000 in the three and nine months endedSeptember 30, 2021 , respectively. Liquidity and Capital Resources
Liquidity and Sources of Cash
We had$214.9 million in cash and cash equivalents and$662.4 million in marketable securities, consisting of equity securities, corporate bonds, municipal bonds, andU.S. government andU.S. agency debt securities, as ofSeptember 30, 2021 . We had$87.4 million in cash and cash equivalents and$344.4 million in marketable securities, consisting of equity securities and corporate bonds, as ofDecember 31, 2020 . Initially after commencing operations inMay 2012 , our operations were financed primarily by our founder, Chief Executive Officer and Chairman of our board of directors,Ming Hsieh , and in more recent periods, by cash from our operations and equity financings. Our primary uses of cash are to fund our operations as we continue to invest in and seek to grow our business. Cash used to fund operating expenses is impacted by the timing of our expense payments, as reflected in the changes in our outstanding accounts payable and accrued expenses. OnAugust 30, 2019 , we entered into an Equity Distribution Agreement, or the 2019 Equity Distribution Agreement, with Piper, as sales agent, which was subsequently amended onAugust 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 endedDecember 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 endedDecember 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 theSEC onAugust 12, 2019 and declared effective onAugust 23, 2019 , and prospectus supplements and accompanying base prospectus filed with theSEC onAugust 30, 2019 ,May 6, 2020 andAugust 5, 2020 . 31 -------------------------------------------------------------------------------- OnNovember 13, 2019 , we entered into a Purchase Agreement with Piper, as representative of the several underwriters, pursuant to which we sold 2.7 million shares of our common stock at a price of$10.52 per share, with a public offering price of$11.25 per share. We received net proceeds of approximately$27.6 million , after deducting underwriting discounts and commissions and offering expenses paid or payable by us of approximately$2.4 million . 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 theSEC onNovember 13, 2019 . OnSeptember 25, 2020 , we entered into theSeptember 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 theSeptember 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 theSEC onJuly 21, 2020 , as amended onAugust 5, 2020 , and declared effective onAugust 12, 2020 , and a prospectus supplement and accompanying base prospectus filed with theSEC onSeptember 25, 2020 . OnNovember 20, 2020 , we entered into theNovember 2020 Equity Distribution Agreement, withPiper, Oppenheimer & Co. Inc., andBTIG 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 theNovember 2020 Equity Distribution Agreement. During the year endedDecember 31, 2020 , we sold an aggregate of 2.0 million shares of our common stock pursuant to theNovember 2020 Equity Distribution Agreement at a weighted-average net selling price of$48.70 per share, which resulted in$99.1 million of net proceeds to the Company. During the three months endedSeptember 30, 2021 , the Company did not sell any shares of its common stock pursuant to theNovember 2020 Equity Distribution Agreement. During the nine months endedSeptember 30, 2021 , the Company sold approximately 961,000 shares of its common stock pursuant to theNovember 2020 Equity Distribution Agreement at a weighted-average net selling price of$60.56 , which resulted in$58.2 million of net proceeds to the Company. Shares sold under theNovember 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 theSEC onJuly 21, 2020 , as amended onAugust 5, 2020 , and declared effective onAugust 12, 2020 , and a prospectus supplement and accompanying base prospectus filed with theSEC onNovember 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 during the next 12 months and in the longer term. However, our expectations regarding the cash that may be provided by our operations and our cash needs in future periods could turn out to be wrong, in which case we may require additional financing to support our operations, as we do not presently have any commitments for future capital. 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 additional funds by issuing equity securities, our existing stockholders could experience substantial dilution. Additionally, any preferred stock we issue could provide for rights, preferences or privileges senior to those of our common stock, and our issuance of any additional equity securities, or the possibility of such an issuance, could cause the market price of our common stock to decline. 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 caused disruption and volatility in the global capital markets, which could reduce 32 -------------------------------------------------------------------------------- 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 our cash flows for each of the periods indicated:
Nine Months Ended September 30,
2021 2020
(in thousands)
Net cash provided by operating activities $ 461,491 $ 6,372
Net cash used in investing activities $ (406,289 ) $ (7,671 )
Net cash provided by financing activities $ 72,251 $ 42,348
Operating Activities
Cash provided by operating activities in the nine months ended September 30,
2021 was $461.5 million . The difference between net income and cash provided by
operating activities for the period was primarily due to the effects of $10.9
million in equity-based compensation expenses and $7.5 million in the
depreciation and amortization. Cash provided by operating activities increased
between periods primarily due to a decrease of $65.0 million in trade receivable
due to timing of payments, an increase of $40.9 million in customer deposit due
to payments received from customer in excess of their outstanding trade accounts
receivable balances, partially offset by the negative impact of decreases of
$35.4 million in income tax payable due to the estimated tax payments made
during the current period, $18.7 million in contract liabilities due to the
timing of payments, $9.0 million in accounts payable due to the timing of
payments, and an increase of $2.1 million in other current and long-term assets
related to additions in reagents and supplies.
Cash provided by operating activities in the nine months ended September 30,
2020 was $6.4 million . The difference between net income and cash provided by
operating activities for the period and the increase between periods of cash
provided by operating activities was primarily due to increases of $84.6 million
in accounts receivable mainly due to timing of collections from customers and
increased revenue and $19.2 million in other current assets related to purchases
of an increased amount of reagents and supplies, $1.1 million in deferred tax
related to the reduction in the valuation allowance, partially offset by
increases of $22.2 million in accrued and other liabilities related to contract
liabilities, $14.7 million in accounts payable due to the timing of payments,
$14.6 million in income tax payable related to increased net income, and the
effects of $5.2 million in equity-based compensation expenses, $2.6 million in
impairment loss in equity-method investment related to BostonMolecules, $1.8
million in the depreciation of assets, and $631,000 in equity loss in investee.
Investing Activities
Cash used in investing activities in the nine months endedSeptember 30, 2021 was$406.3 million , which primarily related to purchases of$523.9 million of marketable securities,$61.9 million related to business acquisitions, and the purchase of$17.8 million of fixed assets consisting mainly of medical laboratory equipment and building construction, partially offset by proceeds of$155.8 million related to sales of marketable securities and$61.5 million related to maturities of marketable securities. Cash used in investing activities in the nine months endedSeptember 30, 2020 was$7.7 million , which is primarily related to purchases of$13.6 million of marketable securities and$11.3 million of fixed assets consisting mainly of a 2008 Cessna Citation Sovereign aircraft, medical laboratory equipment, leasehold improvements, and computer hardware,$2.6 million in investment in BostonMolecules and direct costs associates with the investment, purchase of$1.4 million of equipment contributed to FF Gene, partially offset by proceeds of$13.1 million related to maturities of marketable securities and$8.1 million related to sales of marketable securities.
Financing Activities
Cash provided by financing activities in the nine months ended
Cash provided by financing activities in the nine months endedSeptember 30, 2020 was$42.3 million , which primarily represents net proceeds from the 2019 Equity Distribution Agreement and theSeptember 2020 Equity Distribution Agreement. 33 -------------------------------------------------------------------------------- Critical Accounting Policies and Use of Estimates This discussion and analysis is based on our condensed consolidated financial statements included in this report, which have been prepared in accordance withU.S. GAAP. The preparation of consolidated financial statements in accordance withU.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. Except as set forth in Note 2 (Summary of Significant Accounting Policies) to our condensed consolidated financial statements included in this report, there have been no significant changes to our critical accounting policies and estimates as described in the 2020 Annual Report. The JOBS Act 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 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 expect to remain an emerging growth company untilDecember 31, 2021 , unless we issue more than$1.0 billion of non-convertible debt in any three-year period before that date. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC , 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. 34
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