UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 or ☐ 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 81-2621304 ( State or other jurisdic ...

Fulgent Genetics, Inc. (NASDAQ:FLGT) Q1 2020 Earnings Conference Call May 4, 2020 4:30 PM ET Company Participants Nicole Borsje - Head, IR Ming Hsieh - CEO Paul Kim - CFO Brandon Perthuis - Chief Commercial Officer Conference Call Participants Erin Wright - Credit Suisse Steven Mah - Piper Sandler Operator Good afternoon ladies and gentlemen, and welcome to the Q1 2020 Fulgent Genetics Earnings Conference Call. [Operator Instructions] As a reminder this call is being recorded. I would now like to hand the c ...

[Cautionary Note Regarding Forward-Looking Statements](index=3&type=section&id=Cautionary%20Note%20Regarding%20Forward-Looking%20Statements) This report contains forward-looking statements about future events, circumstances, or company performance, subject to risks and uncertainties - This report contains forward-looking statements identified by words like "believe," "may," "will," and "expect," relating to future events, circumstances, or company performance[5](index=5&type=chunk) - Topics covered include industry trends, strategic plans, operating performance, market acceptance, competition, test expansion, pricing, customer growth, supplier reliance, facility use, global presence, sales/marketing, technology advancements, regulatory compliance, reimbursement, personnel, intellectual property, expenses, capital requirements, and stock price[6](index=6&type=chunk)[7](index=7&type=chunk) - These statements are subject to risks and uncertainties, including those in Item 1A, and actual results may differ materially; they should not be relied upon as predictions of future events[8](index=8&type=chunk) [PART I](index=5&type=section&id=PART%20I) [Item 1. Business](index=5&type=section&id=Item%201.%20Business) Fulgent Genetics provides comprehensive genetic testing to physicians using a proprietary technology platform for diverse, accurate, and affordable tests [Overview](index=5&type=section&id=Overview) Fulgent is a growing technology company offering comprehensive genetic testing with a proprietary platform for broad, flexible, accurate, and affordable tests - Fulgent is a growing technology company offering comprehensive genetic testing, providing physicians with clinically actionable diagnostic information[16](index=16&type=chunk) - The company's proprietary technology platform enables a broad and flexible test menu, continuous expansion of its genetic reference library, accessible pricing, high accuracy, and competitive turnaround times[16](index=16&type=chunk) | Metric | 2019 | 2018 | | :----- | :--- | :--- | | Billable tests delivered | 58,573 | 22,298 | | Aggregate billable tests (inception-2019) | >117,774 | | | Aggregate customers (inception-2019) | ~1,100 | | [Genetic Testing Industry](index=5&type=section&id=Genetic%20Testing%20Industry) The genetic testing industry, driven by NGS advancements, diagnoses diseases and predicts treatment, facing challenges like high costs and complex interpretation - Genetic testing identifies gene mutations or chromosomal abnormalities for disease diagnosis, prediction, and treatment selection[20](index=20&type=chunk) - The industry has seen significant growth due to advancements in Next Generation Sequencing (NGS) technology, which has lowered costs and improved quality[21](index=21&type=chunk) - Challenges include high test prices, inadequate reimbursement, limited scope of some analyses, inefficient processes, and complex interpretation of results[23](index=23&type=chunk) [Our Technology Platform](index=6&type=section&id=Our%20Technology%20Platform) The company's platform integrates proprietary gene probes, advanced algorithms, and adaptive learning software to enhance genetic sequencing and data curation - The platform integrates proprietary gene probes, advanced database algorithms, adaptive learning software, and proprietary Laboratory Information Management Systems (LIMS)[25](index=25&type=chunk)[26](index=26&type=chunk)[27](index=27&type=chunk)[29](index=29&type=chunk) - Proprietary gene probes enable sequencing of difficult DNA regions and improve detection rates, supporting rapid incorporation of new genes[25](index=25&type=chunk) - Advanced data comparison and suppression algorithms enhance curation efficiency by rapidly detecting pathogenic mutations and reducing irrelevant data noise[26](index=26&type=chunk) [Our Solution](index=7&type=section&id=Our%20Solution) The company's platform achieves low internal costs, enabling affordable pricing and offering a broad, customizable test menu with an expanding genetic library - The technology platform results in a low internal cost per billable test, averaging **$241** in 2019, allowing for affordable pricing (average **$555** in 2019)[31](index=31&type=chunk) - Offers a broad and flexible test menu with approximately **18,000** single-gene tests and over **900** pre-established, multi-gene panels, which are customizable[32](index=32&type=chunk) - Maintains an expansive and growing proprietary genetic library, continuously curated by adaptive learning software and professionals, enhancing data reliability and accelerating reporting[35](index=35&type=chunk) [Our Genetic Tests](index=8&type=section&id=Our%20Genetic%20Tests) The company offers a wide range of customizable genetic tests, including single-gene, multi-gene panels, exome, and genome testing, with new patient-initiated services - Offers a wide variety of customizable tests, including single-gene, multi-gene panels (e.g., oncology, carrier screening), whole exome, clinical exome, and whole genome testing[37](index=37&type=chunk)[38](index=38&type=chunk)[39](index=39&type=chunk) - New test offerings in 2019 included Picture Genetics, a patient-initiated genetic testing service advertised directly to consumers[37](index=37&type=chunk) - Plans to expand reproductive testing options, including preimplantation genetic testing (PGT) and preimplantation genetic diagnosis (PGD)[37](index=37&type=chunk) [Our Customers](index=9&type=section&id=Our%20Customers) Serving primarily hospitals and medical institutions, the company is expanding its customer base to include individual physicians, research institutions, and international markets - Since inception, the company has served approximately **1,100** customers, primarily hospitals and medical institutions[42](index=42&type=chunk)[43](index=43&type=chunk) | Customer | 2019 Revenue Contribution | 2018 Revenue Contribution | | :------- | :------------------------ | :------------------------ | | One key customer | 28% | 13% | - Expanding customer base to include individual physicians, research institutions, national clinical laboratories, and government agencies, and has enrolled with Medicare and some state Medicaid programs[44](index=44&type=chunk) - Non-U.S. revenue was **$7.5 million** in 2019 and **$8.8 million** in 2018, with a joint venture (FF Gene Biotech) established in the People's Republic of China (PRC)[45](index=45&type=chunk) [Sales and Marketing](index=10&type=section&id=Sales%20and%20Marketing) Sales and marketing efforts focus on expanding brand awareness, customer base, and existing relationships through education, conferences, and new initiatives like Picture Genetics - Sales and marketing efforts focus on expanding brand awareness, growing the customer base, and deepening existing relationships through education and targeted initiatives[51](index=51&type=chunk)[52](index=52&type=chunk) - Marketing activities include working with medical professional societies, presenting at conferences, email campaigns, social media, and offering comprehensive customer service[52](index=52&type=chunk)[53](index=53&type=chunk) - In 2019, partnered with the Parkinson's Foundation on a genetic testing initiative for Parkinson's Disease and launched Picture Genetics for patient-initiated testing[52](index=52&type=chunk)[54](index=54&type=chunk) [Our Suppliers](index=10&type=section&id=Our%20Suppliers) The company relies on a limited number of suppliers, including Illumina for sequencers, posing risks of operational disruption from supply chain issues - The company relies on a limited number of suppliers for laboratory reagents, sequencers, and other equipment[56](index=56&type=chunk) - Illumina, Inc. is the sole supplier for next-generation sequencers, associated reagents, and maintenance/repair services[56](index=56&type=chunk) - Disruptions from these limited or sole suppliers could interrupt laboratory operations and materially harm the business[56](index=56&type=chunk) [Competition](index=11&type=section&id=Competition) The clinical genetic testing market is highly competitive, with numerous factors influencing success, and many competitors possessing greater resources and experience - The clinical genetic testing market is highly competitive, with competitors including specialty and reference laboratories, and emerging healthcare/IT companies[59](index=59&type=chunk) - Principal competitive factors include breadth of genetic content, test customization, price, quality, accessibility, reimbursement, turnaround time, customer service, and brand recognition[61](index=61&type=chunk) - Many competitors have longer operating histories, larger customer bases, greater financial/technological resources, and more experience with third-party payors[62](index=62&type=chunk) [Research and Development](index=11&type=section&id=Research%20and%20Development) R&D activities, conducted by an expert internal team, focus on developing and curating the genetic information library and expanding the technology platform - Research and development activities are conducted by a highly-qualified internal team with expertise in bioinformatics, genetics, software engineering, and laboratory management[64](index=64&type=chunk) - R&D efforts focus on developing and curating the expansive genetic information library and further expanding the technology platform[64](index=64&type=chunk) [Intellectual Property](index=12&type=section&id=Intellectual%20Property) The company protects its core technology and intellectual property through trade secrets, trademarks, and contractual agreements, rather than patents - The company relies on trade secrets, trademarks, and contractual protections to safeguard its core technology and intellectual property[67](index=67&type=chunk) - Significant elements of genetic tests and testing procedures, including bioinformatics algorithms and adaptive learning software, are based on unpatented trade secrets and know-how[68](index=68&type=chunk) - Protects proprietary information through confidentiality agreements with employees, consultants, and third parties[68](index=68&type=chunk) [Regulation](index=12&type=section&id=Regulation) The company's operations are subject to extensive federal, state, and foreign regulations covering laboratory licensure, FDA oversight, privacy, fraud, and environmental compliance [CLIA](index=12&type=section&id=CLIA) As a clinical laboratory, the company must maintain CLIA certification and CAP accreditation, adhering to quality standards and facing sanctions for non-compliance - As a clinical laboratory, the company must hold federal licenses, certifications, and permits, including CLIA certification, and is accredited by the College of American Pathologists (CAP)[71](index=71&type=chunk)[74](index=74&type=chunk) - CLIA establishes quality standards for laboratory testing, and compliance is a prerequisite for billing government and many private payors[71](index=71&type=chunk)[72](index=72&type=chunk) - Subject to biennial surveys and unannounced inspections; non-compliance can lead to sanctions like certificate suspension or civil monetary penalties[73](index=73&type=chunk) [State and Foreign Laboratory Licensure](index=12&type=section&id=State%20and%20Foreign%20Laboratory%20Licensure) The company must maintain state-specific licenses and test approvals, with international expansion increasing regulatory complexity and potential restrictions - Required to maintain licenses in California, Maryland, Rhode Island, and Pennsylvania, and test-specific approval from the New York State Department of Health[75](index=75&type=chunk)[77](index=77&type=chunk) - Subject to regulation in foreign jurisdictions, which is expected to increase with international expansion, potentially requiring test modifications or imposing transport restrictions[78](index=78&type=chunk) [FDA](index=13&type=section&id=FDA) The FDA has jurisdiction over medical devices, but historically exercised discretion for LDTs; future changes could impose stringent premarket requirements - The FDA has jurisdiction over medical devices, including in vitro diagnostic products (IVDs), but has historically exercised enforcement discretion for Laboratory Developed Tests (LDTs), which the company believes its tests are[79](index=79&type=chunk)[82](index=82&type=chunk) - Future regulatory changes, such as the proposed VALID Act, could subject LDTs to more stringent requirements, including premarket clearance or approval, significantly increasing development costs and delaying market access[84](index=84&type=chunk)[85](index=85&type=chunk) - Failure to comply with any applicable FDA requirements could trigger a range of enforcement actions, including warning letters, civil penalties, injunctions, and criminal prosecution[81](index=81&type=chunk)[87](index=87&type=chunk)[89](index=89&type=chunk) [Advertising of Laboratory Services or LDTs](index=15&type=section&id=Advertising%20of%20Laboratory%20Services%20or%20LDTs) Advertising for laboratory services and LDTs is subject to federal and state truth-in-advertising laws, with non-compliance leading to administrative or judicial penalties - Advertising for laboratory services and LDTs is subject to federal truth-in-advertising laws enforced by the Federal Trade Commission (FTC) and comparable state consumer protection laws[90](index=90&type=chunk) - Non-compliance can result in administrative or judicial penalties, including civil penalties, injunctions, or criminal prosecution[90](index=90&type=chunk) [Reimbursement](index=15&type=section&id=Reimbursement) Reimbursement for genetic testing is complex, involving CPT codes and PAMA regulations, which impact Medicare payment rates and require extensive documentation [CPT Codes](index=15&type=section&id=CPT%20Codes) The company uses CPT codes for billing, but multi-gene panels often require miscellaneous codes, leading to complex negotiations and delayed reimbursement - The company bills third-party payors using Current Procedural Terminology (CPT) codes, but multi-gene panels often require miscellaneous codes for unlisted molecular pathology procedures[91](index=91&type=chunk) - Billing under miscellaneous codes can lead to complex negotiations, delays in reimbursement, and the need for additional documentation or appeals[91](index=91&type=chunk) [PAMA](index=15&type=section&id=PAMA) PAMA mandates Medicare payment rates for clinical diagnostic laboratory tests based on private payor rates, with delayed reporting and capped reductions - The Protecting Access to Medicare Act of 2014 (PAMA) mandates that Medicare payment rates for clinical diagnostic laboratory tests (CDLTs) be based on the volume-weighted median of private payor rates[93](index=93&type=chunk)[95](index=95&type=chunk) - The Laboratory Access for Beneficiaries Act (LAB Act) delayed PAMA reporting for CDLTs (non-ADLTs) to 2021, with payment rate reductions capped at **10%** in 2020 and **15%** annually from 2021-2023[96](index=96&type=chunk)[97](index=97&type=chunk) [Privacy and Security Laws](index=16&type=section&id=Privacy%20and%20Security%20Laws) The company must comply with stringent federal, state, and foreign privacy laws like HIPAA, HITECH, GDPR, and CCPA, facing significant penalties for violations [HIPAA and HITECH](index=16&type=section&id=HIPAA%20and%20HITECH) The company must comply with HIPAA and HITECH regulations for PHI privacy and security, with violations leading to substantial fines and program exclusion - The company must comply with HIPAA and HITECH regulations, which establish uniform standards for protecting the privacy and security of Protected Health Information (PHI) and breach notification requirements[98](index=98&type=chunk)[99](index=99&type=chunk)[101](index=101&type=chunk) - Violations can lead to significant civil and criminal fines (up to **$1.5 million** per violation per year) and exclusion from Medicare/Medicaid programs[102](index=102&type=chunk) - State laws, such as the California Confidentiality of Medical Information Act and the California Consumer Privacy Act (CCPA), impose additional, often more stringent, privacy requirements and penalties[104](index=104&type=chunk) [Foreign Laws](index=17&type=section&id=Foreign%20Laws) International operations are subject to complex and costly foreign privacy laws like GDPR, imposing strict rules and significant fines for non-compliance - International operations are subject to foreign privacy laws, including the EU General Data Protection Regulation (GDPR), which imposes stricter rules on consent and security duties[107](index=107&type=chunk) - Compliance with evolving foreign laws is complex and costly, with potential for significant government-imposed fines (e.g., up to **$22 million** or **4%** of worldwide annual turnover under GDPR) and restrictions on data transfer[107](index=107&type=chunk)[110](index=110&type=chunk) [Fraud and Abuse Laws](index=18&type=section&id=Fraud%20and%20Abuse%20Laws) The company is subject to federal and state fraud and abuse laws, including Anti-Kickback, False Claims, and Stark Law, with severe penalties for non-compliance [Anti-Kickback and Fraud Statutes](index=18&type=section&id=Anti-Kickback%20and%20Fraud%20Statutes) Federal Anti-Kickback Statute and EKRA prohibit remuneration for referrals, with other laws targeting healthcare fraud, leading to severe penalties - The federal Anti-Kickback Statute prohibits offering or receiving remuneration to induce referrals for federal healthcare programs, with severe penalties including imprisonment, fines, and exclusion[113](index=113&type=chunk) - The Eliminating Kickbacks in Recovery Act of 2018 (EKRA) extends anti-kickback prohibitions to all payors, including commercial insurers, with broad language and uncertain application[114](index=114&type=chunk)[116](index=116&type=chunk) - Other federal laws prohibit healthcare fraud and false statements, with violations leading to felony charges, fines, imprisonment, or exclusion from government programs[117](index=117&type=chunk) [False Claims Act](index=19&type=section&id=False%20Claims%20Act) The False Claims Act imposes liability for knowingly presenting false claims to the government, with whistleblower provisions and requirements for overpayment returns - The federal False Claims Act imposes liability for knowingly presenting false or fraudulent claims to the federal government, with penalties up to three times actual damages plus civil penalties[118](index=118&type=chunk) - Includes "whistleblower" or "qui tam" provisions allowing private individuals to bring actions and share in recoveries[118](index=118&type=chunk) - Requires providers to report and return overpayments from Medicare and Medicaid within **60 days** of identification to avoid False Claims Act liability[118](index=118&type=chunk) [Civil Monetary Penalties Law](index=19&type=section&id=Civil%20Monetary%20Penalties%20Law) The CMP Law prohibits offering remuneration to beneficiaries and other fraudulent activities, with penalties including program exclusion and substantial fines - The federal Civil Monetary Penalties Law (CMP Law) prohibits offering remuneration to Medicare/state healthcare beneficiaries to influence provider selection[120](index=120&type=chunk) - Also prohibits employing excluded individuals, billing for services requested by unlicensed/excluded providers, and billing for medically unnecessary services[120](index=120&type=chunk) - Penalties include exclusion from federal programs, substantial fines, and payment of up to three times the amount billed[120](index=120&type=chunk) [Physician Referral Prohibitions](index=19&type=section&id=Physician%20Referral%20Prohibitions) The Stark Law prohibits physician referrals to entities with financial ties for designated health services, imposing strict liability and severe penalties - The Stark Law prohibits physicians from referring designated health services (including laboratory services) covered by Medicare to entities with which they or family members have a financial relationship, unless an exception applies[121](index=121&type=chunk) - It is a strict liability statute; violations result in payment denial, civil monetary penalties (up to **$23,372** per service), and potential exclusion from federal healthcare programs[121](index=121&type=chunk) [Physician Sunshine Laws](index=21&type=section&id=Physician%20Sunshine%20Laws) The Physician Payments Sunshine Act imposes reporting requirements on manufacturers for payments to physicians, with potential applicability if FDA regulation changes - The Physician Payments Sunshine Act imposes reporting requirements on manufacturers for payments and transfers of value to physicians and teaching hospitals[124](index=124&type=chunk) - The company believes it is exempt for its Laboratory Developed Tests (LDTs) but may become subject if the FDA requires premarket clearance or approval for its tests[124](index=124&type=chunk) [Anti-Bribery Laws](index=21&type=section&id=Anti-Bribery%20Laws) The company is subject to U.S. FCPA and similar foreign anti-bribery laws, requiring vigilance in international operations to avoid substantial penalties [FCPA](index=21&type=section&id=FCPA) The U.S. Foreign Corrupt Practices Act (FCPA) prohibits payments to non-U.S. government officials, requiring high vigilance in international operations to avoid penalties - Subject to the U.S. Foreign Corrupt Practices Act (FCPA), which prohibits payments to non-U.S. government officials to obtain or retain business[125](index=125&type=chunk) - International operations require high vigilance; violations can lead to substantial monetary fines and criminal penalties[125](index=125&type=chunk) [Foreign Laws](index=21&type=section&id=Foreign%20Laws) The company is also subject to similar anti-bribery laws in foreign jurisdictions, such as the UK Bribery Act 2010, which imposes severe criminal penalties - Also subject to similar anti-bribery laws in foreign jurisdictions, such as the UK Bribery Act 2010, which imposes severe criminal penalties and significant fines[126](index=126&type=chunk) [Healthcare Policy Laws](index=21&type=section&id=Healthcare%20Policy%20Laws) The Affordable Care Act (ACA) has significantly changed healthcare financing, and its uncertain future could materially impact the company's business - The Affordable Care Act (ACA) made substantial changes to healthcare financing, and its future remains uncertain due to ongoing judicial and congressional challenges[127](index=127&type=chunk)[128](index=128&type=chunk) - Uncertainty regarding the ACA's continued effect and potential repeal or replacement could materially adversely affect the business[128](index=128&type=chunk) [Corporate Practice of Medicine](index=22&type=section&id=Corporate%20Practice%20of%20Medicine) Numerous states prohibit business corporations from practicing medicine or employing physicians, with violations leading to civil or criminal fines - Numerous states prohibit business corporations from practicing medicine or employing physicians, to prevent interference in medical decision-making[130](index=130&type=chunk) - Violations can result in civil or criminal fines and sanctions against the corporation and/or professionals[130](index=130&type=chunk) [Environmental and Other Regulatory Requirements](index=22&type=section&id=Environmental%20and%20Other%20Regulatory%20Requirements) Laboratory operations are subject to federal, state, and local laws governing waste handling and workplace safety, with strict liability for contamination - Laboratory operations are subject to federal, state, and local laws governing the use, storage, handling, and disposal of regulated medical, hazardous, and biohazardous waste[131](index=131&type=chunk) - Also subject to OSHA requirements for workplace safety, including protecting workers from blood-borne pathogens[132](index=132&type=chunk) - Strict liability provisions mean the company could be held liable for damages and fines if operations result in environmental contamination or personal injury[131](index=131&type=chunk) [Employees](index=22&type=section&id=Employees) As of March 1, 2020, the company had **139** full-time employees across various functions, none of whom are unionized | Metric | Value (as of March 1, 2020) | | :----- | :-------------------------- | | Full-time employees | 139 | - Employees are engaged in bioinformatics, genetics, software engineering, laboratory management, sales and marketing, and corporate/administrative activities[134](index=134&type=chunk) - None of the employees are represented by a labor union or covered by collective bargaining agreements[134](index=134&type=chunk) [Corporate Information](index=22&type=section&id=Corporate%20Information) Incorporated in Delaware in 2016, the company began genetic testing in 2013 and qualifies as an emerging growth company under the JOBS Act - Incorporated in Delaware on May 13, 2016, as the holding company for Fulgent LLC, which commenced genetic testing in 2013[136](index=136&type=chunk)[137](index=137&type=chunk) - The former pharmaceutical business was separated in April 2016, with its operating results reported as discontinued operations[137](index=137&type=chunk) - Qualifies as an emerging growth company under the JOBS Act, with reduced disclosure requirements until December 31, 2021, or earlier if certain thresholds are met[139](index=139&type=chunk) [Available Information](index=23&type=section&id=Available%20Information) The company files annual, quarterly, and current reports with the SEC, which are accessible free of charge on its website and the SEC's website - The company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy/information statements with the SEC[142](index=142&type=chunk) - These reports are available free of charge on the company's website and the SEC's website (www.sec.gov)[142](index=142&type=chunk) [Item 1A. Risk Factors](index=23&type=section&id=Item%201A.%20Risk%20Factors) Investing in Fulgent Genetics common stock involves high risks, including fluctuating results, competition, regulatory changes, and intellectual property disputes [Business and Strategy Risks](index=23&type=section&id=Business%20and%20Strategy%20Risks) Business risks include fluctuating operating results, a history of losses, intense competition, reliance on limited suppliers, and international operational complexities - Operating results may fluctuate significantly due to sales timing, pricing changes, customer mix, and collection rates, making predictions difficult[145](index=145&type=chunk) - The company has a history of losses and may not achieve or sustain profitability, especially with investments in growth[146](index=146&type=chunk) - Intense competition, rapidly changing technology, and reliance on a limited number of customers (one contributed **28%** of 2019 revenue) and a sole supplier (Illumina for NGS sequencers) pose significant risks[150](index=150&type=chunk)[156](index=156&type=chunk)[185](index=185&type=chunk) - International operations, including the FF Gene Biotech joint venture in China, expose the company to additional business, regulatory, political, operational, financial, and economic risks[177](index=177&type=chunk)[178](index=178&type=chunk)[181](index=181&type=chunk) - Other risks include product/professional liability claims, the inoperability of its sole laboratory facility, complex billing and collection processes, ethical concerns regarding genetic information, cybersecurity breaches, and dependence on key management and skilled personnel[182](index=182&type=chunk)[183](index=183&type=chunk)[188](index=188&type=chunk)[191](index=191&type=chunk)[192](index=192&type=chunk)[195](index=195&type=chunk)[196](index=196&type=chunk) [Regulatory Risks](index=36&type=section&id=Regulatory%20Risks) Regulatory risks include potential changes in FDA oversight for LDTs, non-compliance with licensing, and strict adherence to privacy and fraud laws - Changes in FDA enforcement discretion regarding Laboratory Developed Tests (LDTs), or new legislation like the VALID Act, could subject the company's tests to more onerous regulation, including premarket clearance/approval[217](index=217&type=chunk)[220](index=220&type=chunk)[221](index=221&type=chunk) - Failure to comply with federal, state, and foreign laboratory licensing requirements (CLIA, CAP, state-specific licenses) could result in loss of testing ability or business disruptions[224](index=224&type=chunk)[226](index=226&type=chunk)[227](index=227&type=chunk)[228](index=228&type=chunk)[229](index=229&type=chunk) - Strict compliance with privacy and security laws (HIPAA, HITECH, GDPR, CCPA) and fraud and abuse laws (Anti-Kickback Statute, False Claims Act, Stark Law, EKRA) is critical, with potential for harsh civil and criminal penalties[230](index=230&type=chunk)[232](index=232&type=chunk)[233](index=233&type=chunk)[234](index=234&type=chunk)[235](index=235&type=chunk)[237](index=237&type=chunk)[240](index=240&type=chunk)[241](index=241&type=chunk)[251](index=251&type=chunk) - Healthcare policy changes (e.g., Affordable Care Act, PAMA) and anti-bribery laws (FCPA) also pose significant risks to reimbursement, operations, and financial condition[244](index=244&type=chunk)[245](index=245&type=chunk)[246](index=246&type=chunk)[254](index=254&type=chunk)[255](index=255&type=chunk) [Intellectual Property Risks](index=43&type=section&id=Intellectual%20Property%20Risks) Intellectual property risks include reliance on trade secrets without patents, potential infringement claims, and adverse changes in patent law affecting genetic discoveries - The company currently owns no patents and relies on trade secret protection, non-disclosure agreements, and invention assignment agreements, which may not be effective against competitors[259](index=259&type=chunk)[262](index=262&type=chunk) - Litigation or third-party claims of intellectual property infringement or misappropriation could be costly, time-consuming, and prevent the sale of tests[263](index=263&type=chunk)[264](index=264&type=chunk) - Developments in patent law, such as Supreme Court decisions (Prometheus, Myriad, Alice), could negatively impact the ability to obtain or enforce patents related to genetic discoveries[265](index=265&type=chunk)[266](index=266&type=chunk)[268](index=268&type=chunk) - Enforcing intellectual property rights outside the United States is challenging due to varying legal protections and enforcement mechanisms in foreign countries[270](index=270&type=chunk) [Common Stock Risks](index=47&type=section&id=Common%20Stock%20Risks) Common stock risks include potential for illiquid trading, price volatility, dilution from future issuances, and anti-takeover provisions in charter documents - An active, liquid trading market for common stock may not be sustained, exacerbated by concentrated ownership (CEO owns over one-third of voting equity)[274](index=274&type=chunk)[279](index=279&type=chunk) - The stock price may be volatile due to fluctuations in operating results, competition, analyst reports, and general economic/market conditions[276](index=276&type=chunk)[277](index=277&type=chunk) - Future issuances of common stock or rights to purchase common stock could dilute existing stockholders' ownership, and the company does not intend to pay dividends[281](index=281&type=chunk)[282](index=282&type=chunk) - Provisions in charter documents and Delaware law could discourage, delay, or prevent a change in control or management, potentially depressing the stock price[285](index=285&type=chunk)[286](index=286&type=chunk) [Item 1B. Unresolved Staff Comments](index=50&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) This item indicates that there are no unresolved staff comments from the SEC regarding the company's previous filings - There are no unresolved staff comments[291](index=291&type=chunk) [Item 2. Properties](index=50&type=section&id=Item%202.%20Properties) The company's headquarters and laboratory are in Temple City, California, with additional offices in Atlanta and El Monte, all deemed adequate for current needs - Corporate headquarters and laboratory operations are in Temple City, California, leasing approximately **12,000 square feet**[292](index=292&type=chunk) - Leases for the Temple City facility expire in January 2021, with options for three-year renewals[292](index=292&type=chunk) - Additional office space is leased in Atlanta, Georgia (**2,200 sq ft**) and El Monte, California (**11,600 sq ft**) for R&D, customer service, and administrative functions, with no laboratory activities at these locations[292](index=292&type=chunk) [Item 3. Legal Proceedings](index=50&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently involved in material legal proceedings, but any litigation could adversely impact the business due to costs and resource diversion - The company is not currently a party to any legal proceedings that would materially affect its business[293](index=293&type=chunk) - Litigation, regardless of outcome, can have an adverse impact due to defense/settlement costs, diversion of management, and reputational harm[293](index=293&type=chunk) [Item 4. Mine Safety Disclosures](index=50&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company, as it is not involved in mining operations - This item is not applicable[294](index=294&type=chunk) [PART II](index=51&type=section&id=PART%20II) [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=51&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq, with **5** record holders as of March 2020; no dividends are anticipated, with earnings retained for development [Market Information](index=51&type=section&id=Market%20Information) The company's common stock began trading on the Nasdaq Global Market under "FLGT" on September 29, 2016, with no prior public market - The company's common stock was listed for trading on the Nasdaq Global Market under the symbol "FLGT" on September 29, 2016[297](index=297&type=chunk) - There was no public market for the common stock prior to September 29, 2016[297](index=297&type=chunk) [Holders of Common Stock](index=51&type=section&id=Holders%20of%20Common%20Stock) As of March 1, 2020, there were **5** holders of record for the company's **21,564,971** outstanding common stock shares | Metric | Value (as of March 1, 2020) | | :----- | :-------------------------- | | Holders of record | 5 | - As of March 1, 2020, there were **21,564,971** outstanding shares of common stock[1](index=1&type=chunk) [Dividend Policy](index=51&type=section&id=Dividend%20Policy) The company plans to retain all future earnings for business development and expansion, thus not anticipating cash dividends in the foreseeable future - The company anticipates retaining any future earnings to finance continued business development, operation, and expansion[301](index=301&type=chunk) - As a result, the company does not anticipate declaring or paying any cash dividends or other distributions in the foreseeable future[301](index=301&type=chunk) [Use of Proceeds from Registered Securities](index=51&type=section&id=Use%20of%20Proceeds%20from%20Registered%20Securities) In 2019, the company raised **$0.979 million** and **$27.6 million** net from equity offerings for general corporate purposes, following a **$36.0 million** IPO in 2016 | Offering | Date | Net Proceeds | Use of Proceeds | | :------- | :--- | :----------- | :-------------- | | IPO | Oct 2016 | $36.0M | $3.1M to FF Gene Biotech, $4.0M for operations, rest in securities | | Equity Distribution Agreement | Aug 2019 | $0.979M | General corporate purposes | | Underwritten Offering | Nov 2019 | $27.6M | General corporate purposes | - The company completed its initial public offering (IPO) on October 4, 2016, raising approximately **$36.0 million** in net proceeds[303](index=303&type=chunk) - In 2019, the company sold **104,390** shares for **$979,000** net proceeds via an Equity Distribution Agreement and **2,673,750** shares for **$27.6 million** net proceeds via an underwritten offering[305](index=305&type=chunk)[306](index=306&type=chunk) [Item 6. Selected Financial Data](index=51&type=section&id=Item%206.%20Selected%20Financial%20Data) This item is not applicable to the report, meaning selected financial data is not presented in a separate, summarized format here - This item is not applicable[307](index=307&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=52&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes Fulgent Genetics' financial condition and operating results for 2019 and 2018, covering revenue, costs, expenses, and liquidity [Forward-Looking Statements](index=52&type=section&id=Forward-Looking%20Statements) This discussion contains forward-looking statements about future financial performance and strategies, subject to risks detailed in Item 1A - This discussion and analysis contains forward-looking statements about future financial and operating performance, cash flows, liquidity, and growth strategies[311](index=311&type=chunk) - These statements are subject to risks and uncertainties detailed in Item 1A, and actual results could differ materially from expectations[311](index=311&type=chunk) - Forward-looking statements should not be relied upon as predictions of future events, and the company undertakes no obligation to update them[311](index=311&type=chunk) [Overview](index=52&type=section&id=Overview) Fulgent is a growing genetic testing company leveraging a proprietary platform to provide actionable diagnostic information, expanding customer groups including patient-initiated testing - Fulgent is a growing technology company focused on comprehensive genetic testing, providing clinically actionable diagnostic information through a proprietary platform[313](index=313&type=chunk) - The company primarily serves hospitals and medical institutions, but is expanding to new customer groups, including patient-initiated testing (Picture Genetics) launched in 2019[314](index=314&type=chunk) | Metric | 2019 (in thousands) | 2018 (in thousands) | | :----- | :------------------ | :------------------ | | Revenue | $32,528 | $21,351 | | Operating loss | $(428) | $(5,070) | | Net loss | $(411) | $(5,607) | | Billable tests delivered | 58,573 | 22,298 | | Average price per billable test | $555 | $958 | | Cost per billable test | $241 | $480 | [2018 Developments](index=53&type=section&id=2018%20Developments) In 2018, the company partnered with Columbia University Irving Medical Center to offer on-site expanded carrier screening, leveraging expertise in genetic testing - Partnered with Columbia University Irving Medical Center (CUIMC) to make on-site expanded carrier screening (ECS) available to Columbia patients[318](index=318&type=chunk) - This collaboration leverages expertise in laboratory management, bioinformatics, clinical genetics, and next-generation sequencing[318](index=318&type=chunk) - ECS tests for mutations causing hundreds of genetic disorders, regardless of patient ethnicity, addressing limitations of traditional screening[320](index=320&type=chunk) [2019 Developments](index=53&type=section&id=2019%20Developments) In 2019, the company partnered with the Parkinson's Foundation for a genetic testing initiative and launched Picture Genetics for patient-initiated testing - Partnered with the Parkinson's Foundation on PD GENEration, a genetic testing initiative for individuals with Parkinson's Disease, analyzing seven relevant genes[322](index=322&type=chunk)[323](index=323&type=chunk) - Launched Picture Genetics, a patient-initiated at-home genetic testing offering with options like Picture Parenting, Picture Newborn, and Picture Wellness, including physician review and genetic counseling[324](index=324&type=chunk) - Expanded reproductive testing options, including Preimplantation Genetic Testing (PGT), to improve IVF success and healthy pregnancies[326](index=326&type=chunk) [Factors Affecting Our Performance](index=54&type=section&id=Factors%20Affecting%20Our%20Performance) Company performance is influenced by market trends, test volume and mix, customer diversification, maintaining a broad test menu, low internal costs, and reimbursement challenges [Market and Industry Trends](index=54&type=section&id=Market%20and%20Industry%20Trends) The genetic testing market is growing due to NGS technology, but faces price pressure from competition and payor cost-saving initiatives - The genetic testing market is experiencing significant growth, driven by Next Generation Sequencing (NGS) technology, which lowers costs and improves quality[328](index=328&type=chunk) - Increased competition and cost-saving initiatives from payors are creating downward pressure on prices for genetic analysis, potentially harming revenue and margins[329](index=329&type=chunk) - The company addresses industry challenges (high costs, limited reimbursement, inefficient processes) through its continually advancing multi-faceted technology platform[330](index=330&type=chunk) [Number and Mix of Billable Tests Delivered](index=54&type=section&id=Number%20and%20Mix%20of%20Billable%20Tests%20Delivered) Company performance correlates with the number of billable tests delivered, with the mix of tests and customers impacting financial results due to varying prices and costs - Company performance is closely correlated with the number of billable tests delivered[331](index=331&type=chunk) - The mix of billable tests and ordering customers impacts financial results, as prices and costs vary based on test complexity and negotiated terms[332](index=332&type=chunk) [Mix of Customers](index=54&type=section&id=Mix%20of%20Customers) The customer base, primarily institutional, is diversifying to include individual physicians and patient-initiated testing, aiming for improved collection rates and third-party payor relationships - The customer base, primarily hospitals and medical institutions, can fluctuate, with a small number of customers sometimes accounting for a significant portion of revenue[333](index=333&type=chunk) - Institutional customers generally offer more attainable billing collection rates (**87%** in 2019)[335](index=335&type=chunk) - Efforts are underway to diversify the customer market to include individual physicians, research institutions, and patient-initiated testing (Picture Genetics), and to establish relationships with third-party payors[336](index=336&type=chunk) [Ability to Maintain Our Broad and Flexible Test Menu](index=55&type=section&id=Ability%20to%20Maintain%20Our%20Broad%20and%20Flexible%20Test%20Menu) The company's extensive and customizable test menu, incorporating a large number of genes, provides a significant competitive advantage and drives long-term growth - The extensive test menu, incorporating a large number of genes and customizable multi-gene panels, is a meaningful competitive advantage[337](index=337&type=chunk) - This breadth and flexibility provide comprehensive genetic information and are key contributors to long-term business growth[337](index=337&type=chunk) [Ability to Maintain Low Internal Costs](index=55&type=section&id=Ability%20to%20Maintain%20Low%20Internal%20Costs) Proprietary technologies enable low internal costs, averaging **$241** per billable test in 2019, supporting affordable pricing and business growth - Proprietary technologies improve laboratory efficiency and reduce internal costs, averaging **$241** per billable test in 2019[338](index=338&type=chunk) - Low internal costs enable affordable and competitive pricing (average **$555** per billable test in 2019), encouraging repeat orders and attracting new customers[338](index=338&type=chunk) - This low cost is a key factor for business growth and achieving sustainable profitability[338](index=338&type=chunk) [Ability to Obtain Reimbursement](index=55&type=section&id=Ability%20to%20Obtain%20Reimbursement) Obtaining widespread favorable reimbursement for genetic testing is a challenging, unpredictable, and costly process, despite the company's low cost per test - Widespread favorable reimbursement for genetic testing is limited, posing a challenge for sustainable business models[340](index=340&type=chunk) - The company aims to secure adequate coverage and reimbursement from third-party payors, leveraging its low cost per billable test to compete effectively[340](index=340&type=chunk) - Obtaining and maintaining adequate reimbursement is an unpredictable, challenging, time-consuming, and costly process[172](index=172&type=chunk) [Impact of Certain Recent Accounting Pronouncements](index=56&type=section&id=Impact%20of%20Certain%20Recent%20Accounting%20Pronouncements) The company adopted ASC 606 in 2018, shifting revenue recognition for third-party payors to an accrual basis, resulting in a **$327,000** adjustment - Effective January 1, 2018, the company adopted a new revenue recognition standard (ASC 606), shifting third-party payor revenue recognition from a cash basis to an accrual basis upon test result delivery[343](index=343&type=chunk) - The adoption resulted in a **$327,000** adjustment to beginning accumulated deficit and accounts receivable[344](index=344&type=chunk) [Foreign Currency Exchange Rate Fluctuations](index=56&type=section&id=Foreign%20Currency%20Exchange%20Rate%20Fluctuations) Increasing non-U.S. revenue exposes the company to foreign currency fluctuations, which may become more material with international expansion and local currency billing - Increasing revenue from non-U.S. customers exposes the company to fluctuations in foreign currency exchange rates[345](index=345&type=chunk) - The impact, while historically immaterial, may increase with continued international expansion, local currency billing (e.g., Canadian dollar), and RMB payments from FF Gene Biotech[345](index=345&type=chunk) [Business Risks and Uncertainties](index=56&type=section&id=Business%20Risks%20and%20Uncertainties) The company's business and prospects are subject to numerous risks and uncertainties, as detailed comprehensively in Item 1A. Risk Factors - The company's business and prospects are exposed to numerous risks and uncertainties, as detailed in Item 1A. Risk Factors[347](index=347&type=chunk) [Financial Overview](index=56&type=section&id=Financial%20Overview) This section outlines the company's financial components, including revenue recognition, cost of revenue, and operating expenses (R&D, S&M, G&A), and income tax provisions [Revenue](index=56&type=section&id=Revenue) Revenue is generated from genetic test sales, recognized upon report delivery, reflecting expected collected amounts after adjustments, and billed to various entities - Revenue is generated from sales of genetic tests and recognized upon delivery of a report to the ordering physician or customer[349](index=349&type=chunk) - The recognized amount reflects the established billing rate, less contractual and other adjustments, based on the amount expected to be collected[349](index=349&type=chunk) - Billing is generally directed to hospitals, medical/research institutions, patients, third-party payors, or a combination[349](index=349&type=chunk) [Cost of Revenue](index=57&type=section&id=Cost%20of%20Revenue) Cost of revenue includes personnel, supplies, depreciation, amortization, and overhead, recorded as tests are processed, and expected to increase with test volume - Cost of revenue includes personnel costs, laboratory supplies, depreciation of laboratory equipment, amortization of leasehold improvements, and allocated overhead expenses[351](index=351&type=chunk) - Costs associated with performing tests are recorded as tests are processed[351](index=351&type=chunk) - Cost of revenue is expected to generally increase as the number of billable tests delivered increases[351](index=351&type=chunk) [Operating Expenses](index=57&type=section&id=Operating%20Expenses) Operating expenses are categorized into research and development, selling and marketing, and general and administrative, with personnel costs being the largest component - Operating expenses are classified into research and development, selling and marketing, and general and administrative categories[352](index=352&type=chunk) - Personnel costs (salaries, benefits, bonuses, equity-based compensation) are the largest component across all operating expense categories[352](index=352&type=chunk) [Research and Development Expenses](index=57&type=section&id=Research%20and%20Development%20Expenses) R&D expenses cover technology and test development, including personnel and supplies, are expensed as incurred, and are expected to increase in absolute dollars - Research and development expenses cover costs to develop technology and future tests, including personnel, laboratory supplies, and consulting[353](index=353&type=chunk) - All R&D costs are expensed in the periods incurred and are expected to continue increasing in absolute dollars[353](index=353&type=chunk) [Selling and Marketing Expenses](index=57&type=section&id=Selling%20and%20Marketing%20Expenses) Selling and marketing expenses, including personnel and promotional costs, are expensed as incurred and are expected to increase with investments in sales and marketing - Selling and marketing expenses include personnel, customer service, direct marketing, and promotional costs[354](index=354&type=chunk) - All S&M costs are expensed as incurred and are expected to increase due to investments in the sales team and marketing efforts[354](index=354&type=chunk) [General and Administrative Expenses](index=57&type=section&id=General%20and%20Administrative%20Expenses) G&A expenses cover executive, finance, legal, and HR functions, are expensed as incurred, and are expected to increase with scaling operations and public company compliance - General and administrative expenses cover executive, finance, accounting, legal, and human resources functions, including personnel, audit/legal fees, and consulting[355](index=355&type=chunk) - These expenses are expensed as incurred and are expected to increase with scaling operations and public company compliance requirements[355](index=355&type=chunk) [Provision for (Benefit from) Income Taxes](index=57&type=section&id=Provision%20for%20%28Benefit%20from%29%20Income%20Taxes) Income tax provision includes U.S. federal and state taxes, with a valuation allowance recorded against deferred tax assets when realization is uncertain - Provision for income taxes consists of U.S. federal and state income taxes[356](index=356&type=chunk) - A valuation allowance is recorded against deferred tax assets when realization is not more likely than not, impacting the effective tax rate[356](index=356&type=chunk) [Results of Operations](index=58&type=section&id=Results%20of%20Operations) In 2019, revenue increased by **52%** to **$32.5 million**, gross profit rose by **73%** to **$18.4 million**, and net loss significantly decreased by **93%** to **$(0.411) million** | Metric | 2019 (in thousands) | 2018 (in thousands) | Change ($ in thousands) | Change (%) | | :---------------------------------- | :------------------ | :------------------ | :---------------------- | :--------- | | Revenue | $32,528 | $21,351 | $11,177 | 52% | | Cost of revenue | $14,107 | $10,697 | $3,410 | 32% | | Gross profit | $18,421 | $10,654 | $7,767 | 73% | | Research and development | $6,537 | $5,534 | $1,003 | 18% | | Selling and marketing | $5,898 | $4,652 | $1,246 | 27% | | General and administrative | $6,414 | $5,538 | $876 | 16% | | Total operating expenses | $18,849 | $15,724 | $3,125 | 20% | | Operating loss | $(428) | $(5,070) | $4,642 | (92)% | | Interest and other income, net | $837 | $434 | $403 | 93% | | Income (loss) before income taxes and equity loss in investee | $409 | $(4,636) | $5,045 | (109)% | | Provision for income taxes | $43 | $36 | $7 | 19% | | Income (loss) before equity loss in investee | $366 | $(4,672) | $5,038 | (108)% | | Equity loss in investee | $(777) | $(935) | $158 | (17)% | | Net loss | $(411) | $(5,607) | $5,196 | (93)% | | Other Operating Data | 2019 | 2018 | Change | Change (%) | | :--------------------------- | :----- | :----- | :----- | :--------- | | Billable tests delivered | 58,573 | 22,298 | 36,275 | 163% | | Average price per billable test delivered | $555 | $958 | $(403) | (42)% | | Cost per billable test delivered | $241 | $480 | $(239) | (50)% | - Revenue increased **52%** to **$32.5 million** in 2019, primarily due to a **163%** increase in billable tests delivered, offset by a **42%** decline in average price per test[362](index=362&type=chunk)[363](index=363&type=chunk) - Gross profit increased **73%** to **$18.4 million** in 2019, with gross margin improving from **49.9%** to **56.6%**, driven by increased revenue and a **50%** decrease in cost per billable test due to economies of scale[368](index=368&type=chunk)[369](index=369&type=chunk) - Net loss significantly decreased by **93%** to **$(0.411) million** in 2019, compared to **$(5.607) million** in 2018[361](index=361&type=chunk) [Liquidity and Capital Resources](index=60&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is supported by cash, marketable securities, and equity financings, with management believing current resources are sufficient for the next **12 months** [Liquidity and Sources of Cash](index=60&type=section&id=Liquidity%20and%20Sources%20of%20Cash) Operations are financed by the founder, cash from operations, and equity financings, with **$12.0 million** in cash and **$58.3 million** in marketable securities as of December 31, 2019 | Metric | Dec 31, 2019 (in millions) | Dec 31, 2018 (in millions) | | :----- | :------------------------- | :------------------------- | | Cash and cash equivalents | $12.0 | $6.7 | | Marketable securities | $58.3 | $30.7 | - Operations are financed primarily by the founder, cash from operations, and equity financings[381](index=381&type=chunk) - In 2019, the company raised **$979,000** net from an at-the-market offering and **$27.6 million** net from an underwritten offering[383](index=383&type=chunk)[384](index=384&type=chunk) - Management believes existing cash, operations, and equity financings will be sufficient for at least the next **12 months**, but additional financing may be required[386](index=386&type=chunk)[387](index=387&type=chunk) [Cash Flows](index=61&type=section&id=Cash%20Flows) In 2019, cash from operations increased to **$5.5 million**, investing activities used **$29.0 million**, and financing activities provided **$28.8 million** from stock offerings | Cash Flow Activity | 2019 (in thousands) | 2018 (in thousands) | | :---------------------------------- | :------------------ | :------------------ | | Net cash provided by (used in) operations | $5,517 | $(675) | | Net cash (used in) provided by investing activities | $(29,046) | $950 | | Net cash provided by financing activities | $28,775 | $15 | - Cash provided by operating activities increased to **$5.5 million** in 2019, primarily due to non-cash equity-based compensation and depreciation[389](index=389&type=chunk) - Cash used in investing activities was **$29.0 million** in 2019, mainly for marketable securities purchases and fixed assets, partially offset by maturities[392](index=392&type=chunk) - Cash provided by financing activities was **$28.8 million** in 2019, primarily from public stock offerings[394](index=394&type=chunk) [Critical Accounting Policies and Use of Estimates](index=62&type=section&id=Critical%20Accounting%20Policies%20and%20Use%20of%20Estimates) This section details critical accounting policies, including revenue recognition under ASC 606, recent accounting pronouncements, and the company's status as an emerging growth company [Revenue Recognition](index=62&type=section&id=Revenue%20Recognition) Revenue is recognized based on expected consideration for services, with variable consideration estimated using historical data under ASC 606, adopted in 2018 - Revenue is recognized in an amount reflecting the consideration expected in exchange for transferring promised goods or services to customers[400](index=400&type=chunk) - For insurance contracts, variable consideration is estimated using the expected value method under a portfolio approach, based on historical reimbursement data and known trends[506](index=506&type=chunk)[509](index=509&type=chunk) - The company adopted ASC 606 on January 1, 2018, resulting in an accrual basis for third-party payor revenue recognition[504](index=504&type=chunk) [Recent Accounting Pronouncements](index=63&type=section&id=Recent%20Accounting%20Pronouncements) The company adopted ASU No. 2016-02 (Leases) in 2019 and is evaluating ASU No. 2019-12 (Income Taxes), while ASU No. 2016-13 (Credit Losses) is not expected to be material - Adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, recognizing operating lease right-of-use assets and liabilities on the balance sheet[535](index=535&type=chunk) - ASU No. 2016-13, Financial Instruments-Credit Losses, effective after December 15, 2019, is not expected to materially affect financial position or results[537](index=537&type=chunk) - ASU No. 2019-12, Simplifying the Accounting for Income Taxes, effective after December 15, 2020, is currently being evaluated for its impact[543](index=543&type=chunk) [The JOBS Act](index=63&type=section&id=The%20JOBS%20Act) The company qualifies as an "emerging growth company" under the JOBS Act, electing not to use the extended transition period for new accounting standards - The company qualifies as an "emerging growth company" under the JOBS Act[406](index=406&type=chunk) - It has irrevocably elected not to take advantage of the extended transition period for complying with new or revised accounting standards[406](index=406&type=chunk) - EGC status will continue until December 31, 2021, or earlier if revenue, non-convertible debt, or public float thresholds are met[406](index=406&type=chunk) [Off-Balance Sheet Arrangements](index=63&type=section&id=Off-Balance%20Sheet%20Arrangements) The company did not have any material off-balance sheet arrangements during the periods presented in the report - The company did not have any material off-balance sheet arrangements during the periods presented[408](index=408&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=63&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item is not applicable to the report, indicating that the company does not have material quantitative and qualitative disclosures about market risk to present separately - This item is not applicable[409](index=409&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=64&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This item incorporates by reference the consolidated financial statements and supplementary data, including the auditor's report, balance sheets, and cash flow statements - The required financial statements and supplementary data are incorporated by reference and follow the signature page[411](index=411&type=chunk) - Included documents are the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Loss, Stockholders' Equity, Cash Flows, and Notes to Consolidated Financial Statements[427](index=427&type=chunk) [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=64&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) This item states that there have been no changes in or disagreements with accountants on accounting and financial disclosure matters - There have been no changes in or disagreements with accountants on accounting and financial disclosure[411](index=411&type=chunk) [Item 9A. Controls and Procedures](index=64&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes [Evaluation of Disclosure Controls and Procedures](index=64&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management, with the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2019 - Management, with the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of December 31, 2019[412](index=412&type=chunk) - Based on this evaluation, they concluded that the disclosure controls and procedures were effective[412](index=412&type=chunk) [Management's Annual Report on Internal Control over Financial Reporting](index=64&type=section&id=Management%27s%20Annual%20Report%20on%20Internal%20Control%20over%20Financial%20Reporting) Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[413](index=413&type=chunk) - An attestation report from the independent registered public accounting firm regarding internal control over financial reporting is not included, as permitted by SEC rules for emerging growth companies[414](index=414&type=chunk) [Changes in Internal Control over Financial Reporting](index=64&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) There were no material changes in internal control over financial reporting during the quarter ended December 31, 2019 - There has been no material change in internal control over financial reporting during the quarter ended December 31, 2019[415](index=415&type=chunk) [Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting](index=64&type=section&id=Inherent%20Limitations%20on%20Disclosure%20Controls%20and%20Procedures%20and%20Internal%20Control%20over%20Financial%20Reporting) Management acknowledges that all control systems have inherent limitations, providing only reasonable assurance due to potential for errors or circumvention - Management acknowledges that any controls and procedures, no matter how well-designed, can provide only reasonable assurance of achieving their objectives[416](index=416&type=chunk) - Inherent limitations include faulty judgments, simple errors, mistakes, and circumvention by individual acts or collusion[416](index=416&type=chunk) [Item 9B. Other Information](index=64&type=section&id=Item%209B.%20Other%20Information) This item states that there is no other information required to be reported - No other information is required to be reported under this item[417](index=417&type=chunk) [PART III](index=65&type=section&id=PART%20III) [Item 10. Directors, Executive Officers and Corporate Governance](index=65&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 annual meeting proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2020 annual meeting proxy statement[420](index=420&type=chunk) [Item 11. Executive Compensation](index=65&type=section&id=Item%2011.%20Executive%20Compensation) Information on executive compensation is incorporated by reference from the company's definitive proxy statement for its 2020 annual meeting of stockholders - Information regarding executive compensation is incorporated by reference from the 2020 annual meeting proxy statement[421](ind

Financial Data and Key Metrics Changes - The company achieved a revenue growth of 52% year-over-year for the full year 2019, totaling $32.5 million, with a net GAAP loss of $411,000 compared to a loss of $5.6 million in the previous year [32] - For Q4 2019, revenue grew 48% year-over-year to $8.4 million, with adjusted EBITDA of $1.1 million compared to $37,000 in Q4 2018 [30][32] - Non-GAAP gross margin in Q4 was 59%, up six percentage points year-over-year, while GAAP loss was $296,000 [9][30] Business Line Data and Key Metrics Changes - The traditional clinical business remains a significant contributor, representing approximately half of the revenue, with strong demand in pediatric rare disease and reproductive health [11] - The sequencing as a service business generated approximately $4 million in revenue in 2019, with expectations for continued high growth in 2020 [12] - The China joint venture posted revenue of $4.1 million, an increase of 223% from 2018, with losses decreasing to less than $200,000 [14] Market Data and Key Metrics Changes - Revenue from the US grew 79% year-over-year in Q4, representing 74% of total revenue, down from 82% in Q3 [25] - The company anticipates growth in international markets, particularly in Europe and the Middle East, as part of its expansion strategy [14][18] Company Strategy and Development Direction - The company is focused on expanding its commercial vision strategy, including international expansion and enhancing its sequencing as a service business [18] - There is a commitment to invest in research and development and sales and marketing to drive sustainable growth [34] - The company is exploring acquisition opportunities to expand its reach and capabilities in genetic testing [17] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving $40 million in revenue for 2020, representing a growth rate of approximately 23% [33] - The company is not factoring any revenue from coronavirus testing into its guidance but is actively developing a more accurate test method [38][39] - Management noted that the overall approach to growth is based on leveraging its technology platform and differentiating its services in a competitive market [20] Other Important Information - The company completed a primary stock equity offering, adding approximately $20 million to its cash position, ending Q4 with $70.2 million in cash and no debt [31] - The company has made key international hires to support its growth strategy and penetrate new markets [23] Q&A Session Summary Question: Guidance related to coronavirus and supply chain exposure - The company has zero revenue built into its guidance related to coronavirus opportunities [37] Question: Impact of coronavirus on hospital volumes and testing - Management indicated that they do not expect disruption to patient flow or access to services [40] Question: Update on international and local sales team expansion - The company is halfway through its hiring process and expects to complete it by early summer [42] Question: Key drivers for volume in oncology and reproductive health - The company has diversified its offerings beyond pediatric and rare diseases, with strong performance in oncology and reproductive health [44] Question: Recent collaborations and their contributions - The company obtained approval to operate in New York State and continues partnerships with organizations like the Parkinson's Foundation [48]

Revenue Growth - Revenue increased by $4.7 million, or 84%, from $5.6 million in Q3 2018 to $10.3 million in Q3 2019[113] - Revenue for the nine months ended September 30, 2019, was $24.1 million, an increase of $8.5 million, or 54%, from $15.7 million in the same period in 2018[113] - Revenue from a group of affiliated customers contributed 40% and 33% of total revenues in Q3 2019 and the nine months ended September 30, 2019, respectively[117] Test Delivery Metrics - The number of billable tests delivered increased to 20,697 in Q3 2019, a 272% increase from 5,569 in Q3 2018[111] - The number of billable tests delivered increased by 15,128, from 5,569 in Q3 2018 to 20,697 in Q3 2019, and increased by 28,706, from 15,890 in the nine months ended September 30, 2018 to 44,596 in the same period of 2019[116] - Compound quarterly growth of 26% in the number of billable tests delivered over the last eight completed fiscal quarters[106] Pricing and Cost Efficiency - Average price per billable test delivered decreased from $1,010 in Q3 2018 to $500 in Q3 2019, a 50% decline[114] - Cost per billable test delivered decreased from $469 in Q3 2018 to $188 in Q3 2019, a 60% reduction[111] - Cost per billable test delivered decreased by $281, or 60%, from $469 in Q3 2018 to $188 in Q3 2019, and decreased by $264, or 53%, from $499 to $235 in the nine months ended September 30, 2018 and 2019, respectively[120] Profitability - Gross profit for Q3 2019 was $6.5 million, a 114% increase from $3.0 million in Q3 2018[111] - Net income for Q3 2019 was $1.5 million, compared to a net loss of $595,000 in Q3 2018[111] - The company achieved profitability in Q2 and Q3 of 2019, but recorded losses in all other periods since inception[106] Cost of Revenue - Cost of revenue increased by $1.3 million, or 49%, from $2.6 million in Q3 2018 to $3.9 million in Q3 2019, and increased by $2.5 million, or 32%, from $7.9 million in the nine months ended September 30, 2018 to $10.5 million in the same period of 2019[118][119] Operating Expenses - Research and development expenses increased by $306,000, or 21%, from $1.4 million in Q3 2018 to $1.7 million in Q3 2019, and increased by $634,000, or 15%, from $4.1 million to $4.7 million in the nine months ended September 30, 2018 and 2019, respectively[123][124] - Selling and marketing expenses increased by $572,000, or 51%, from $1.1 million in Q3 2018 to $1.7 million in Q3 2019, and increased by $739,000, or 21%, from $3.5 million to $4.3 million in the nine months ended September 30, 2018 and 2019, respectively[125][126] - General and administrative expenses increased by $216,000, or 17%, from $1.3 million in Q3 2018 to $1.5 million in Q3 2019, and increased by $523,000, or 13%, from $4.2 million to $4.7 million in the nine months ended September 30, 2018 and 2019, respectively[127][128] Cash Flow and Financial Position - Cash provided by operating activities for the nine months ended September 30, 2019 was $5.6 million, an increase from a cash used of $1.5 million in the same period of 2018[143][144] - Cash provided by investing activities in the nine months ended September 30, 2019 was $7.0 million, compared to $3.5 million in the same period of 2018[145][146] - Cash provided by financing activities for the nine months ended September 30, 2019 was $1.1 million, while financing activities in the same period of 2018 were minimal[147][149] - As of September 30, 2019, the company had $6.7 million in cash and cash equivalents and $30.7 million in marketable securities[135] Accounting and Compliance - The company has opted out of the extended transition period under the JOBS Act, committing to comply with new accounting standards as they are adopted[154] - There were no significant changes to critical accounting policies and estimates from the 2018 Annual Report[152] - The company currently has no off-balance sheet arrangements that could materially affect its financial condition[156]

Financial Data and Key Metrics Changes - Revenue growth of 84% year-over-year to a record $10.3 million in Q3 2019 [10][28] - Billable tests increased by 272% year-over-year to a new record high of 20,697 [11][29] - Non-GAAP gross margin improved to 64%, up approximately 8 percentage points year-over-year [11][30] - GAAP income was $1.5 million, while non-GAAP income was $2.6 million, with non-GAAP earnings per share at $0.14 [12][34] - Cash provided by operating activities was approximately $3.9 million, compared to $675,000 in the previous quarter [35][36] Business Line Data and Key Metrics Changes - Strong demand for oncology tests and reproductive health business, particularly hereditary cancer panels [13] - Increased demand for sequencing service business from channel partners in genomics [14] - New test offerings, including a reproductive health test for IVF, contributing to growth [26] Market Data and Key Metrics Changes - U.S. business revenue grew 159% year-over-year, representing 82% of total revenue [28][29] - ASP remained flat at $500 per test, with cost per test improving to $179 [11][29] - The company anticipates fluctuations in short-term demand as it diversifies its business [16] Company Strategy and Development Direction - Focus on commercialization strategy, including international growth and collaborations with key medical institutions [41] - Emphasis on maintaining a sustainable business model while driving down costs [56] - Introduction of Picture Genetics, a consumer genetic testing offering, aimed at expanding market reach [22][24] Management's Comments on Operating Environment and Future Outlook - Management remains optimistic about market position and growth opportunities despite potential fluctuations in demand [15][37] - Anticipation of approximately $8 million in revenue for Q4, leading to a full-year revenue estimate of $32 million, representing a 50% growth rate [39] - Confidence in the company's ability to sustain growth and manage operational efficiencies [70] Other Important Information - The company has no debt and ended the quarter with $43.6 million in cash and equivalents [36] - Continued investment in research and development to enhance test offerings [26] Q&A Session Summary Question: Key drivers of volume growth and outlook for Q4 - Management noted that growth was driven by new test introductions and strong demand in oncology and reproductive health [44][45] Question: Pricing environment and ASP dynamics - Management acknowledged competitive pricing pressures but emphasized maintaining a sustainable business model with strong gross margins [56][58] Question: Product mix and payer network dynamics - Management indicated strong demand for carrier screening tests and noted ongoing relationships with cancer research institutions [61][63] Question: Volume growth drivers and operational capabilities - Management highlighted the impact of technology investments and operational efficiencies in handling increased volume [66][70]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2019 or ☐ 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 81-2621304 ( State or other jurisdict ...

Fulgent Genetics, Inc. (NASDAQ:FLGT) Q2 2019 Earnings Conference Call August 5, 2019 4:30 PM ET Company Participants Nicole Borsje - Head, IR Ming Hsieh - CEO Paul Kim - CFO Conference Call Participants Operator Good day, ladies and gentlemen, and welcome to the Q2 2019 Fulgent Genetics Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Ms. Nicole Borsje from Investor Relations. Ma'am, please go ah ...

Fulgent Genetics, Inc. (NASDAQ:FLGT) Q1 2019 Results Earnings Conference Call May 7, 2019 4:30 PM ET Company Participants Nicole Borsje - Head of Investor Relations Ming Hsieh - Chief Executive Officer Paul Kim - Chief Financial Officer Conference Call Participants Operator Good day, ladies and gentlemen, and welcome to the Q1 2019 Fulgent Genetics Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce your host for conference cal ...

[PART I—FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for Q1 2019 [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20%28Unaudited%29) This section presents the unaudited condensed consolidated financial statements for Q1 2019, including balance sheets, operations, cash flows, and detailed notes [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position at specific dates, detailing assets, liabilities, and equity Balance Sheet Summary | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | |:----------------------------|:------------------------------|:---------------------------------| | Total Current Assets | $36,301 | $39,543 | | Total Assets | $55,652 | $53,904 | | Total Current Liabilities | $3,203 | $2,738 | | Total Liabilities | $5,691 | $2,752 | | Total Stockholders' Equity | $49,961 | $51,152 | - Total assets increased by **$1.748 million** from December 31, 2018, to March 31, 2019, primarily driven by an increase in long-term marketable securities and the recognition of operating lease right-of-use assets[8](index=8&type=chunk) - Total liabilities significantly increased by **$2.939 million**, mainly due to the adoption of the new lease standard (ASC 842), which resulted in the recognition of operating lease liabilities[8](index=8&type=chunk) [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section presents the company's financial performance over a period, detailing revenues, expenses, and net loss Statements of Operations Summary | Metric (in thousands, except per share data) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |:---------------------------------------------|:----------------------------------|:----------------------------------| | Revenue | $5,370 | $4,653 | | Cost of revenue | $2,968 | $2,772 | | Gross profit | $2,402 | $1,881 | | Total operating expenses | $4,225 | $4,075 | | Operating loss | $(1,823) | $(2,194) | | Net loss | $(1,908) | $(1,910) | | Net loss per common share (Basic & Diluted) | $(0.10) | $(0.11) | - Revenue increased by **15.4% year-over-year**, from **$4.653 million** in Q1 2018 to **$5.370 million** in Q1 2019[10](index=10&type=chunk) - Operating loss improved by **16.9% year-over-year**, from **$(2.194) million** in Q1 2018 to **$(1.823) million** in Q1 2019[10](index=10&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20%28Loss%29) This section details the company's comprehensive income or loss, including net loss and other comprehensive income items Comprehensive Income (Loss) Summary | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |:----------------------------------------------------|:----------------------------------|:----------------------------------| | Net loss | $(1,908) | $(1,910) | | Foreign currency translation gain | $15 | $22 | | Net unrealized gain (loss) on marketable securities | $115 | $(65) | | Comprehensive loss | $(1,778) | $(1,953) | - The company reported a comprehensive loss of **$(1.778) million** in Q1 2019, an improvement from **$(1.953) million** in Q1 2018, primarily due to a net unrealized gain on marketable securities[13](index=13&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) This section outlines changes in the company's equity accounts over a period, including net loss and equity-based compensation Stockholders' Equity Summary | Metric (in thousands) | Balance at Dec 31, 2018 | Equity-based Compensation | Exercise of Stock Options | Restricted Stock Awards | Other Comprehensive Loss, Net | Net Loss | Balance at Mar 31, 2019 | |:----------------------------------|:------------------------|:--------------------------|:--------------------------|:------------------------|:------------------------------|:-----------|:------------------------| | Common Stock Amount | $2 | — | — | — | — | — | $2 | | Additional Paid-In Capital | $114,203 | $583 | $4 | — | — | — | $114,790 | | Accumulated Other Comprehensive | $(35) | — | — | — | $130 | — | $95 | | Accumulated Deficit | $(63,018) | — | — | — | — | $(1,908) | $(64,926) | | Total Equity | $51,152 | $583 | $4 | — | $130 | $(1,908) | $49,961 | - Total stockholders' equity decreased from **$51.152 million** at December 31, 2018, to **$49.961 million** at March 31, 2019, primarily due to the net loss, partially offset by equity-based compensation and other comprehensive income[16](index=16&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section reports the cash generated and used by the company across operating, investing, and financing activities Cash Flow Summary | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |:----------------------------------------------------|:----------------------------------|:----------------------------------| | Net cash provided by (used in) operating activities | $1,055 | $(1,291) | | Net cash (used in) provided by investing activities | $(2,522) | $51 | | Net cash provided by financing activities | $4 | $2 | | Net decrease in cash | $(1,448) | $(1,216) | | Cash balance at end of period | $5,288 | $5,274 | - Operating activities generated **$1.055 million** in cash in Q1 2019, a significant improvement from cash used of **$(1.291) million** in Q1 2018[20](index=20&type=chunk) - Investing activities used **$(2.522) million** in Q1 2019, primarily due to purchases of marketable securities, compared to cash provided of **$51 thousand** in Q1 2018[20](index=20&type=chunk) [Notes to the Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements [Note 1. Overview and Basis of Presentation](index=8&type=section&id=Note%201.%20Overview%20and%20Basis%20of%20Presentation) This note describes the company's business and the foundational principles for preparing its financial statements - Fulgent Genetics, Inc. is a technology company focused on comprehensive genetic testing, utilizing a proprietary platform combining next-generation sequencing (NGS) with a genetic reference library to provide clinically actionable diagnostic information[23](index=23&type=chunk) - The financial statements are prepared in accordance with U.S. GAAP and include wholly-owned subsidiaries and entities where the Company has a controlling financial interest or is the primary beneficiary, using the equity method for significant influence without control[22](index=22&type=chunk) [Note 2. Summary of Significant Accounting Policies](index=8&type=section&id=Note%202.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the key accounting principles and methods applied in the financial statements, including recent standard adoptions - The Company adopted ASU No. 2016-02 (Leases) on January 1, 2019, using a modified retrospective approach, resulting in the recognition of approximately **$3.0 million** in operating lease liabilities and corresponding right-of-use assets, with no impact on retained earnings[39](index=39&type=chunk) - In Q1 2019, two customers accounted for **20%** and **11%** of total revenue, while in Q1 2018, one customer contributed **13%** of revenue, indicating a concentration of customers[32](index=32&type=chunk) Revenue Disaggregation by Payor | Genetic Testing Services by Payor (in thousands) | 2019 | 2018 | |:-------------------------------------------------|:------|:-----| | Institutional | $5,119 | $4,477 | | Patient | $102 | $103 | | Insurance | $149 | $73 | | Total Revenue | $5,370 | $4,653 | [Note 3. Marketable Securities](index=11&type=section&id=Note%203.%20Marketable%20Securities) This note details the company's marketable securities, including their fair values and unrealized gains or losses Marketable Securities Fair Value | Marketable Securities (in thousands) | March 31, 2019 Fair Value | December 31, 2018 Fair Value | |:-------------------------------------|:--------------------------|:-----------------------------| | Total short-term marketable securities | $24,139 | $24,298 | | Total long-term marketable securities | $8,983 | $6,386 | | Total marketable securities | $33,122 | $30,684 | - The Company's marketable securities increased from **$30.684 million** at December 31, 2018, to **$33.122 million** at March 31, 2019, with long-term securities showing a notable increase[46](index=46&type=chunk) - Gross unrealized losses on marketable securities decreased from **$104,000** at December 31, 2018, to **$44,000** at March 31, 2019, and were determined to be temporary in nature[47](index=47&type=chunk) [Note 4. Fair Value Measurements](index=12&type=section&id=Note%204.%20Fair%20Value%20Measurements) This note provides information on the fair value hierarchy used for valuing financial instruments, particularly marketable securities Fair Value Measurement Hierarchy | Marketable Securities (in thousands) | March 31, 2019 Total Fair Value | Level 1 | Level 2 | Level 3 | |:-------------------------------------|:--------------------------------|:--------|:--------|:--------| | Corporate debt securities | $31,333 | — | $31,333 | — | | United States Treasury | $995 | — | $995 | — | | U.S. government agency securities | $794 | — | $794 | — | | Money market accounts | $500 | $500 | — | — | | Total marketable securities | $33,622 | $500 | $33,122 | — | - The majority of the Company's marketable securities are classified as Level 2 assets, valued based on observable inputs like reported trades and broker/dealer quotes, with no Level 3 investments as of March 31, 2019[49](index=49&type=chunk) [Note 5. Fixed Assets](index=13&type=section&id=Note%205.%20Fixed%20Assets) This note presents the company's fixed assets, including computer hardware, lab equipment, and accumulated depreciation Net Fixed Assets by Class | Fixed Asset Class (in thousands) | March 31, 2019 Net | December 31, 2018 Net | |:---------------------------------|:-------------------|:----------------------| | Computer hardware | $1,683 | $1,579 | | Medical lab equipment | $8,136 | $8,136 | | Assets not yet placed in service | $1,117 | $1,087 | | Total Fixed Assets, Net | $6,046 | $6,446 | - Net fixed assets decreased from **$6.446 million** at December 31, 2018, to **$6.046 million** at March 31, 2019, primarily due to accumulated depreciation[53](index=53&type=chunk) - Depreciation expense for Q1 2019 was **$535,000**, an increase from **$516,000** in Q1 2018[53](index=53&type=chunk) [Note 6. Significant Balance Sheet Accounts](index=13&type=section&id=Note%206.%20Significant%20Balance%20Sheet%20Accounts) This note provides a breakdown of other current assets, including reagents, prepaid expenses, and interest receivable Other Current Assets Breakdown | Other Current Assets (in thousands) | March 31, 2019 | December 31, 2018 | |:------------------------------------|:---------------|:------------------| | Reagents | $423 | $314 | | Prepaid expenses | $987 | $706 | | Prepaid income taxes | $596 | $1,251 | | Marketable securities interest receivable | $288 | $220 | | Total | $2,311 | $2,561 | - Total other current assets decreased from **$2.561 million** at December 31, 2018, to **$2.311 million** at March 31, 2019, mainly due to a decrease in prepaid income taxes[54](index=54&type=chunk) [Note 7. Reporting Segment and Geographic Information](index=13&type=section&id=Note%207.%20Reporting%20Segment%20and%20Geographic%20Information) This note details the company's single operating segment and disaggregates revenue by geographic region - The Company operates as a single reporting segment, with all long-lived assets located in the United States[55](index=55&type=chunk) Geographic Revenue Breakdown | Revenue by Region (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |:---------------------------------|:----------------------------------|:----------------------------------| | United States | $3,614 | $2,527 | | Canada | $538 | $970 | | Other Countries | $1,219 | $1,156 | | Total Revenue | $5,370 | $4,653 | - U.S. revenue increased by **43% year-over-year**, while Canadian revenue decreased by **44.6%** in Q1 2019[55](index=55&type=chunk) [Note 8. Commitments and Contingencies](index=14&type=section&id=Note%208.%20Commitments%20and%20Contingencies) This note outlines the company's non-cancelable purchase obligations and potential impacts from legal proceedings - As of March 31, 2019, the Company had non-cancelable purchase obligations of **$5.0 million** for reagents, with **$4.1 million** payable within the next twenty-four months[59](index=59&type=chunk) - The Company is subject to legal proceedings in the ordinary course of business but management does not believe the outcome of any current matters will have a material effect on its financial position[60](index=60&type=chunk) [Note 9. Leases](index=14&type=section&id=Note%209.%20Leases) This note details the impact of adopting the new lease accounting standard, including right-of-use assets and lease liabilities - Upon adopting ASC 842 on January 1, 2019, the Company recognized **$3.0 million** in ROU assets and **$384,000** in short-term and **$2.6 million** in long-term operating lease liabilities[64](index=64&type=chunk) - The weighted-average remaining lease term for operating leases is **6.3 years**, with a weighted-average discount rate of **6.25%** as of March 31, 2019[67](index=67&type=chunk) Operating Lease Maturity Analysis | Operating Lease Liabilities Maturity Analysis (in thousands) | |:-------------------------------------------------------------| | Year Ending December 31, 2019 (remaining 9 months) | $421 | | 2020 | $559 | | 2021 | $550 | | 2022 | $558 | | 2023 | $567 | | 2024 | $330 | | Thereafter | $532 | | Total lease payments | $3,517 | | Less imputed interest | $(636) | | Total | $2,881 | [Note 10. Equity-Based Compensation](index=15&type=section&id=Note%2010.%20Equity-Based%20Compensation) This note presents the breakdown of equity-based compensation expense across various functional areas Equity-Based Compensation Expense Summary | Equity-Based Compensation Expense (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |:-------------------------------------------------|:----------------------------------|:----------------------------------| | Cost of revenue | $142 | $124 | | Research and development | $178 | $132 | | Selling and marketing | $125 | $108 | | General and administrative | $138 | $181 | | Total | $583 | $545 | - Total equity-based compensation expense increased by **$38,000**, or **7%**, from **$545,000** in Q1 2018 to **$583,000** in Q1 2019[68](index=68&type=chunk) [Note 11. Income Taxes](index=16&type=section&id=Note%2011.%20Income%20Taxes) This note explains the company's income tax provision and the factors influencing its effective tax rate - The effective tax rate for Q1 2019 was **-1%**, a significant change from **21%** in Q1 2018, primarily due to a full valuation allowance[72](index=72&type=chunk) - Provision for income taxes was **$13,000** in Q1 2019, compared to a benefit of **$(434,000)** in Q1 2018[72](index=72&type=chunk)[114](index=114&type=chunk) [Note 12. Loss per Share](index=16&type=section&id=Note%2012.%20Loss%20per%20Share) This note details the calculation of basic and diluted net loss per common share, including anti-dilutive securities Loss per Share Calculation | Loss per Share (in thousands, except per share data) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |:-----------------------------------------------------|:----------------------------------|:----------------------------------| | Net loss | $(1,908) | $(1,910) | | Weighted-average common shares—outstanding, basic | 18,228 | 17,864 | | Weighted-average common shares—outstanding, diluted | 18,228 | 17,864 | | Net loss per common share, basic | $(0.10) | $(0.11) | | Net loss per common share, diluted | $(0.10) | $(0.11) | - Basic and diluted net loss per common share improved slightly from **$(0.11)** in Q1 2018 to **$(0.10)** in Q1 2019[73](index=73&type=chunk) - Outstanding stock options (**400k**) and RSUs (**1,068k**) were excluded from diluted EPS calculation in Q1 2019 due to the Company's net loss position, making them anti-dilutive[73](index=73&type=chunk) [Note 13. Related Party](index=16&type=section&id=Note%2013.%20Related%20Party) This note discloses transactions and relationships with related parties, including a joint venture and service agreements - The Company performs genetic sequencing services for Taipei Medical University, recognizing **$13,000** in revenue in Q1 2019 (vs. **$9,000** in Q1 2018), with **$63,000** owed by the University as of March 31, 2019[77](index=77&type=chunk) - The Company has a joint venture, FF Gene Biotech, with Xilong Scientific Co., Ltd. (a large stockholder) and Fuzhou Jinqiang Investment Partnership (LP), formed to offer genetic testing in the PRC[78](index=78&type=chunk) - Fulgent Pharma, a related entity, reimburses the Company for facility rent, with **$17,000** due from Fulgent Pharma as of March 31, 2019[79](index=79&type=chunk) [Note 14. Equity Method Investments](index=17&type=section&id=Note%2014.%20Equity%20Method%20Investments) This note describes the company's investment in its joint venture, accounted for using the equity method - The Company holds a **30%** ownership interest in FF Gene Biotech, a joint venture in the PRC, and accounts for it using the equity method[80](index=80&type=chunk)[82](index=82&type=chunk)[86](index=86&type=chunk) - As of March 31, 2019, **$6.0 million** (**40.3 million RMB**) remains to be contributed to FF Gene Biotech under the JV agreement, with **$3.0 million** already contributed in equipment[80](index=80&type=chunk) - The Company recorded an equity loss in investee of **$279,000** in Q1 2019, reflecting its proportionate share of FF Gene Biotech's losses[82](index=82&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of Q1 2019 financial condition and results, covering revenue, liquidity, and critical accounting policies [Overview](index=19&type=section&id=Overview) This section provides a high-level summary of the company's business model, strategic focus, and key financial highlights for the period - Fulgent Genetics is a growing technology company focused on comprehensive genetic testing, leveraging a proprietary platform for broad test menus, accessible pricing, high accuracy, and competitive turnaround times[92](index=92&type=chunk) - The Company delivered **7,530 billable tests** in Q1 2019, a **63% increase** from **4,621 tests** in Q1 2018, with a compound quarterly growth of **10%** over the last eight quarters[94](index=94&type=chunk)[99](index=99&type=chunk) Key Operating Metrics Summary | Metric (Q1 2019 vs Q1 2018) | Q1 2019 (in millions) | Q1 2018 (in millions) | |:----------------------------|:----------------------|:----------------------| | Revenue | $5.4 | $4.7 | | Net Loss | $(1.9) | $(1.9) | [Business Risks and Uncertainties and Other Factors Affecting Our Performance](index=20&type=section&id=Business%20Risks%20and%20Uncertainties%20and%20Other%20Factors%20Affecting%20Our%20Performance) This section highlights the various risks and external factors that could impact the company's operational and financial performance - The Company's business and prospects are exposed to numerous risks and uncertainties, detailed in 'Item 1A. Risk Factors' in Part II of this report[96](index=96&type=chunk) [Results of Operations](index=20&type=section&id=Results%20of%20Operations) This section provides a detailed analysis of the company's financial performance, examining revenue, expenses, and profitability trends Key Operating Metrics Summary | Statement of Operations Data (in thousands) | March 31, 2019 | March 31, 2018 | $ Change | % Change | |:--------------------------------------------|:---------------|:---------------|:---------|:---------| | Revenue | $5,370 | $4,653 | $717 | 15% | | Cost of revenue | $2,968 | $2,772 | $196 | 7% | | Gross profit | $2,402 | $1,881 | $521 | 28% | | Total operating expenses | $4,225 | $4,075 | $150 | 4% | | Operating loss | $(1,823) | $(2,194) | $371 | (17)% | | Net loss | $(1,908) | $(1,910) | $2 | (0)% | | Billable tests delivered | 7,530 | 4,621 | | 63% | | Average price per billable test delivered | $713 | $1,007 | | (29)% | | Cost per billable test delivered | $394 | $600 | | (34)% | [Revenue](index=20&type=section&id=Revenue) This section analyzes the drivers of revenue growth, including changes in test volume, pricing, and customer mix - Revenue increased by **$717,000** (**15%**) to **$5.4 million** in Q1 2019, primarily due to a **63% increase** in billable tests delivered (**7,530** in Q1 2019 vs. **4,621** in Q1 2018)[99](index=99&type=chunk)[100](index=100&type=chunk)[104](index=104&type=chunk) - The average price per billable test decreased by **29%** to **$713** in Q1 2019, attributed to a shift towards lower price-point tests (e.g., sequencing as a service), price reductions due to competition, and changes in customer mix[99](index=99&type=chunk)[101](index=101&type=chunk) - Non-U.S. revenue decreased by **$369,000** (**17%**) to **$1.8 million**, mainly due to a **$432,000** decrease in sales to Canadian customers, partially offset by increased sales in other countries[103](index=103&type=chunk) [Cost of Revenue](index=21&type=section&id=Cost%20of%20Revenue) This section examines the factors influencing the cost of delivering services and its impact on gross profit and margin - Cost of revenue increased by **$196,000** (**7%**) to **$3.0 million** in Q1 2019, primarily due to a **$187,000** increase in personnel costs[106](index=106&type=chunk) - Cost per billable test delivered decreased by **34%** to **$394** in Q1 2019, as the increase in test volume outpaced the increase in cost of revenue, leading to improved gross margin[99](index=99&type=chunk)[107](index=107&type=chunk)[108](index=108&type=chunk) - Gross profit increased by **$521,000**, and gross margin improved from **40.4%** in Q1 2018 to **44.7%** in Q1 2019[108](index=108&type=chunk) [Research and Development](index=21&type=section&id=Research%20and%20Development) This section details expenses related to innovation and product development, including personnel and supply costs - Research and development expenses decreased by **$34,000** (**2%**) to **$1.4 million** in Q1 2019, mainly due to a **$319,000** decrease in reagent and supply expenses[109](index=109&type=chunk) - This decrease was partially offset by increases in personnel costs (**$136,000**), stock-based compensation (**$46,000**), and depreciation costs (**$69,000**) related to headcount and technology investments[109](index=109&type=chunk) [Selling and Marketing](index=21&type=section&id=Selling%20and%20Marketing) This section analyzes expenses incurred to promote and sell the company's services, including personnel and marketing initiatives - Selling and marketing expenses increased by **$142,000** (**13%**) to **$1.3 million** in Q1 2019, primarily driven by a **$225,000** increase in personnel costs due to increased headcount[110](index=110&type=chunk) - This increase was partially offset by a **$93,000** decrease in marketing costs from initiatives in the prior period that did not recur[110](index=110&type=chunk) [General and Administrative](index=21&type=section&id=General%20and%20Administrative) This section reviews overhead expenses supporting overall business operations, such as personnel and accounting fees - General and administrative expenses remained relatively consistent at **$1.5 million** in Q1 2019 and Q1 2018[111](index=111&type=chunk) - Slight changes included increases in personnel costs (**$68,000**) and accounting fees (**$53,000**), offset by a decrease in equity-based compensation (**$43,000**) due to employee forfeitures[111](index=111&type=chunk) [Interest and Other Income](index=21&type=section&id=Interest%20and%20Other%20Income) This section reports income generated from investments and other non-operating sources, such as foreign currency gains - Interest income increased by **$88,000** to **$214,000** in Q1 2019 (vs. **$126,000** in Q1 2018), primarily from investments in marketable securities[112](index=112&type=chunk) - Other income was not significant in both periods, with foreign currency valuation gains/losses being the primary component[112](index=112&type=chunk) [Provision for (Benefit from) Income Taxes](index=22&type=section&id=Provision%20for%20%28Benefit%20from%29%20Income%20Taxes) This section discusses the company's income tax expense or benefit and the factors affecting its effective tax rate - The Company recorded a provision for income taxes of **$13,000** in Q1 2019, compared to a benefit of **$(434,000)** in Q1 2018[114](index=114&type=chunk) - The effective tax rate changed from **21%** in Q1 2018 to **-1%** in Q1 2019, primarily due to the application of a full valuation allowance[114](index=114&type=chunk) [Equity Loss in Investee](index=22&type=section&id=Equity%20Loss%20in%20Investee) This section details the company's share of losses from its equity method investment in a joint venture - Equity loss in investee increased by **$34,000** (**14%**) to **$279,000** in Q1 2019 (vs. **$245,000** in Q1 2018), related to the Company's **30%** ownership in the FF Gene Biotech joint venture[115](index=115&type=chunk) [Liquidity and Capital Resources](index=22&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet its short-term and long-term financial obligations and fund operations - The Company believes its existing cash, cash from operations, and equity financings will be sufficient to meet anticipated cash requirements for at least the next 12 months[119](index=119&type=chunk) - Cash provided by operating activities has been mostly positive since 2015, significantly contributing to liquidity despite recorded losses, which are often attributable to non-cash charges[119](index=119&type=chunk) - The Company may require additional financing if cash from operations fluctuates or is insufficient, potentially leading to dilution, debt restrictions, or delays in growth plans[120](index=120&type=chunk)[123](index=123&type=chunk) [Liquidity and Sources of Cash](index=22&type=section&id=Liquidity%20and%20Sources%20of%20Cash) This section identifies the primary sources of funding and the company's overall cash position and marketable securities Liquidity Position | Metric (in millions) | March 31, 2019 | December 31, 2018 | |:--------------------------|:---------------|:------------------| | Cash and cash equivalents | $5.3 | $6.7 | | Marketable securities | $33.1 | $30.7 | - The Company's operations have been financed primarily by its founder and, more recently, by cash from operations and equity financings[117](index=117&type=chunk) - The Company has a remaining obligation of approximately **$6.0 million** (**40.3 million RMB**) to contribute equipment to its FF Gene Biotech joint venture[118](index=118&type=chunk) [Cash Flows](index=24&type=section&id=Cash%20Flows) This section summarizes the cash generated or used across operating, investing, and financing activities Cash Flow Summary by Activity | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |:--------------------------------------------|:----------------------------------|:----------------------------------| | Cash provided by (used in) operations | $1,055 | $(1,291) | | Cash (used in) provided by investing activities | $(2,522) | $51 | | Cash provided by financing activities | $4 | $2 | [Operating Activities](index=24&type=section&id=Operating%20Activities) This section analyzes cash generated or used from the company's core business operations, including changes in working capital - Cash provided by operating activities was **$1.1 million** in Q1 2019, a significant increase from cash used of **$1.3 million** in Q1 2018[125](index=125&type=chunk)[126](index=126&type=chunk) - The improvement in Q1 2019 was primarily due to a **$1.4 million** decrease in accounts receivable, mainly from improved collection timing[125](index=125&type=chunk) - Adjustments reconciling net loss to operating cash flow included **$583,000** in equity-based compensation and **$535,000** in depreciation in Q1 2019[125](index=125&type=chunk) [Investing Activities](index=24&type=section&id=Investing%20Activities) This section details cash flows related to the purchase and sale of long-term assets and marketable securities - Cash used in investing activities was **$2.5 million** in Q1 2019, primarily for purchasing **$6.0 million** in marketable securities and **$134,000** in fixed assets, partially offset by **$3.6 million** from marketable securities maturities[127](index=127&type=chunk) - In contrast, Q1 2018 saw **$51,000** cash provided by investing activities, mainly from **$5.9 million** in marketable securities maturities, offset by **$4.7 million** in purchases and **$1.1 million** in fixed asset purchases[128](index=128&type=chunk) [Financing Activities](index=24&type=section&id=Financing%20Activities) This section reports cash flows from debt and equity transactions, including stock issuances and repayments - Cash provided by financing activities was minimal in both Q1 2019 (**$4,000**) and Q1 2018 (**$2,000**)[129](index=129&type=chunk) [Critical Accounting Policies and Use of Estimates](index=24&type=section&id=Critical%20Accounting%20Policies%20and%20Use%20of%20Estimates) This section discusses accounting policies requiring significant judgment and estimation, which could materially impact financial results - The preparation of financial statements requires management to make estimates and judgments, which are based on historical data and experience, and actual results may differ[131](index=131&type=chunk) - There have been no significant changes to critical accounting policies and estimates from those described in the 2018 Annual Report, except for recent accounting pronouncements detailed in Note 2[133](index=133&type=chunk) [The JOBS Act](index=25&type=section&id=The%20JOBS%20Act) This section explains the company's status as an emerging growth company and its implications for disclosure requirements - The Company qualifies as an 'emerging growth company' under the JOBS Act, allowing for reduced disclosure requirements until December 31, 2021, or until certain revenue/debt/market capitalization thresholds are met[135](index=135&type=chunk) - The Company has irrevocably opted out of the extended transition period for complying with new or revised accounting standards, meaning it will comply at the same time as other public companies[135](index=135&type=chunk) [Off-Balance Sheet Arrangements](index=25&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the absence of material off-balance sheet arrangements that could affect the company's financial condition - The Company did not have any material off-balance sheet arrangements during the periods presented, nor does it currently have any that are reasonably likely to have a material effect on its financial condition or results of operations[137](index=137&type=chunk) [PART II—OTHER INFORMATION](index=26&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) This section provides additional disclosures beyond financial statements, including legal proceedings, risk factors, and equity sales [Item 1. Legal Proceedings](index=26&type=section&id=Item%201.%20Legal%20Proceedings) This section states the company is not currently involved in legal proceedings expected to materially affect its business or financial condition - The Company is not currently involved in any legal proceedings that management believes would have a material effect on its business[147](index=147&type=chunk) - Litigation, regardless of outcome, can adversely impact the Company due to defense and settlement costs, diversion of management resources, and reputational harm[147](index=147&type=chunk) [Item 1A. Risk Factors](index=26&type=section&id=Item%201A.%20Risk%20Factors) This section outlines significant business, regulatory, IP, and common stock risks that could adversely affect the company's financial condition and stock price - Investing in the Company's common stock involves a high degree of risk, and potential investors should carefully consider all risks described[148](index=148&type=chunk) - The occurrence of any identified risk could harm the Company's business, financial condition, results of operations, prospects, and reputation, potentially causing the common stock price to decline[148](index=148&type=chunk) [Business and Strategy Risks](index=26&type=section&id=Business%20and%20Strategy%20Risks) This section outlines operational and strategic challenges that could impact the company's growth, profitability, and market position - The Company's results of operations may fluctuate significantly due to factors like sales timing, pricing changes, and billing/collection rates, making predictions difficult[150](index=150&type=chunk) - The Company has a history of losses and may not achieve or sustain profitability, with future losses expected due to investments in business growth[151](index=151&type=chunk) - Intense and increasing competition in the genetic testing market, coupled with potential price degradation, could hinder revenue growth and profitability[161](index=161&type=chunk)[164](index=164&type=chunk) - Failure to grow and diversify its customer base beyond hospitals and medical institutions, or to increase demand from existing customers, could limit growth potential[156](index=156&type=chunk) - International operations, including the FF Gene Biotech joint venture in China, expose the Company to additional business, regulatory, political, operational, financial, and economic risks[181](index=181&type=chunk)[182](index=182&type=chunk)[185](index=185&type=chunk) [Regulatory Risks](index=37&type=section&id=Regulatory%20Risks) This section details potential impacts from evolving healthcare regulations, licensing requirements, and data privacy laws - The FDA has historically exercised enforcement discretion for Laboratory Developed Tests (LDTs), but any future changes in FDA policy could subject the Company's tests to premarket clearance/approval, increasing costs and delaying sales[214](index=214&type=chunk)[215](index=215&type=chunk)[217](index=217&type=chunk) - Failure to comply with federal, state, local, and foreign laboratory licensing requirements (e.g., CLIA, CAP) could result in license suspension, penalties, and exclusion from healthcare programs[220](index=220&type=chunk)[222](index=222&type=chunk)[224](index=224&type=chunk) - The Company is subject to broad privacy and security laws (HIPAA, HITECH, GDPR), and non-compliance or data breaches could lead to significant penalties, reputational damage, and operational disruption[225](index=225&type=chunk)[226](index=226&type=chunk)[227](index=227&type=chunk) - Healthcare policy changes, including the Affordable Care Act (ACA) and Protecting Access to Medicare Act (PAMA), could limit reimbursement rates and negatively impact revenue[234](index=234&type=chunk)[235](index=235&type=chunk)[236](index=236&type=chunk) [Intellectual Property Risks](index=42&type=section&id=Intellectual%20Property%20Risks) This section addresses challenges related to protecting proprietary technology and potential infringement claims - The Company currently owns no patents and relies on trade secret protection, non-disclosure, and invention assignment agreements, which may not be effective in preventing competitors from using proprietary information[243](index=243&type=chunk)[245](index=245&type=chunk) - Litigation or third-party claims of intellectual property infringement or misappropriation could be costly, time-consuming, divert management resources, and potentially prevent the Company from selling its tests[246](index=246&type=chunk)[247](index=247&type=chunk) - Changes in patent law, particularly recent Supreme Court decisions (Prometheus, Myriad, Alice), could negatively impact the Company's ability to obtain or enforce patents related to genetic testing[248](index=248&type=chunk)[249](index=249&type=chunk)[251](index=251&type=chunk) [Common Stock Risks](index=46&type=section&id=Common%20Stock%20Risks) This section highlights factors that could affect the company's stock price, liquidity, and shareholder returns - An active, liquid trading market for the common stock may not develop or be sustained, exacerbated by the significant ownership stake of the founder, which could impair stockholders' ability to sell shares[263](index=263&type=chunk) - The price of the common stock may be volatile due to various factors, including operating results, competition, analyst reports, and general market conditions, potentially leading to loss of investment[265](index=265&type=chunk)[267](index=267&type=chunk) - Future issuances of common stock or rights to purchase common stock could result in additional dilution to existing stockholders and cause the stock price to fall[270](index=270&type=chunk) - The Company does not intend to pay dividends on its common stock, meaning returns will be limited to stock price appreciation, which may not occur[271](index=271&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=49&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the allocation of $36.0 million net IPO proceeds, used for a joint venture and operations, with remaining funds in short-term securities - The Company received approximately **$36.0 million** in net proceeds from its IPO completed on October 4, 2016[282](index=282&type=chunk) - Of the IPO proceeds, **$5.9 million** has been used: **$3.0 million** for contributions to the FF Gene Biotech joint venture and **$2.9 million** to fund the Company's operations[283](index=283&type=chunk) - The remaining net proceeds are invested in short-term, investment-grade, interest-bearing securities, and there has been no material change in the planned use of proceeds[283](index=283&type=chunk) [Item 6. Exhibits](index=49&type=section&id=Item%206.%20Exhibits) This section provides an index of exhibits filed with the Form 10-Q, including officer certifications and XBRL documents - The Exhibit Index lists certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1) and various XBRL documents (Exhibits 101.INS, SCH, CAL, DEF, LAB, PRE)[287](index=287&type=chunk)[288](index=288&type=chunk)[289](index=289&type=chunk)[290](index=290&type=chunk)