PART I [Business](index=5&type=section&id=Item%201.%20Business) Fulgent Genetics offers comprehensive genetic and large-scale COVID-19 testing services, leveraging a proprietary platform for significant 2020 growth [Overview](index=5&type=section&id=Overview) The company provides comprehensive genetic and large-scale COVID-19 testing services, achieving dramatic growth in 2020 with 4.4 million billable tests - The company offers a broad genetic test menu with over **18,000 single-gene tests** and more than **900 panels**, covering over **5,700 genetic conditions**[14](index=14&type=chunk) - Since March 2020, Fulgent has offered COVID-19 testing services, processing orders for governmental bodies, municipalities, and large corporations, including operating testing sites for the County of Los Angeles and the New York City public school system[16](index=16&type=chunk) Billable Test Volume Growth | Year | Billable Tests Delivered | | :--- | :--- | | 2020 | 4.4 million | | 2019 | 59,000 | [Our Technology Platform and Solution](index=6&type=section&id=Our%20Technology%20Platform%20and%20Solution) Fulgent's proprietary technology platform integrates gene probes, algorithms, and LIMS, driving operational efficiencies and a low internal cost per test - The company's proprietary technology platform integrates proprietary gene probes, advanced data comparison and suppression algorithms, adaptive learning software, and integrated laboratory information management systems (LIMS)[25](index=25&type=chunk)[26](index=26&type=chunk)[28](index=28&type=chunk) 2020 Key Operating Metrics | Metric | Value | | :--- | :--- | | Average Internal Cost per Billable Test | ~$20 | | Average Price per Billable Test | ~$96 | [Our Genetic Tests and COVID-19 Tests](index=8&type=section&id=Our%20Genetic%20Tests%20and%20COVID-19%20Tests) The company offers diverse genetic tests, including single-gene and whole exome sequencing, alongside COVID-19 tests with FDA Emergency Use Authorization and at-home collection kits - Test offerings include single-gene tests, over **900 pre-established panels**, whole exome/genome sequencing, and specialized tests like Solid Tumor Molecular Profiling and Rapid Whole Genome for NICU/PICU patients[36](index=36&type=chunk)[37](index=37&type=chunk) - The company launched **'Picture Genetics' in 2019**, a patient-initiated genetic testing service advertised directly to consumers[36](index=36&type=chunk) - Fulgent received an **FDA Emergency Use Authorization (EUA)** for its RT-PCR-based COVID-19 test, which includes an at-home specimen collection service through Picture Genetics, with labs capable of thousands of samples per day and a **24-48 hour turnaround time**[39](index=39&type=chunk) [Our Customers](index=9&type=section&id=Our%20Customers) Fulgent's customer base expanded to include governmental bodies for COVID-19 testing, with the County of Los Angeles and San Bernardino County representing **28% and 10% of 2020 revenue**, respectively Customer Concentration (2020 Revenue) | Customer | Percentage of Total Revenue | | :--- | :--- | | County of Los Angeles | 28% | | San Bernardino County | 10% | - The company classifies customers into three payor types: Insurance, Institutional (hospitals, labs, government bodies, corporations), and Patients (direct pay)[43](index=43&type=chunk) [Competition](index=11&type=section&id=Competition) Fulgent competes with numerous molecular genetic testing and COVID-19 diagnostic providers, leveraging its broad content and pricing, despite facing larger, more established competitors - Principal competitors include Ambry Genetics, Baylor Genetics, GeneDx, Laboratory Corporation of America Holdings, Myriad Genetics, Inc., and Quest Diagnostics Incorporated[57](index=57&type=chunk) - Key competitive factors in the market include breadth of genetic content, test customization, price, quality of results, turnaround time, and reimbursement arrangements[59](index=59&type=chunk) [Regulation](index=12&type=section&id=Regulation) Operating in a heavily regulated environment, the company's CLIA-certified labs offer LDTs, facing potential FDA oversight, complex reimbursement rules, and stringent privacy and fraud laws - The company's laboratories in California and Texas are certified under the Clinical Laboratory Improvement Amendments (CLIA) and accredited by the College of American Pathologists (CAP)[69](index=69&type=chunk) - Fulgent's genetic tests are considered Laboratory Developed Tests (LDTs), historically not subject to FDA premarket review, but future regulation like the proposed VALID Act could change this[83](index=83&type=chunk)[85](index=85&type=chunk) - The company is subject to various fraud and abuse laws, including the federal Anti-Kickback Statute, the Stark Law, and the False Claims Act, which carry severe penalties for non-compliance[113](index=113&type=chunk)[118](index=118&type=chunk)[121](index=121&type=chunk) - Compliance with data privacy laws such as HIPAA, HITECH, the California Consumer Privacy Act (CCPA), and the EU's General Data Protection Regulation (GDPR) is critical to operations[98](index=98&type=chunk)[104](index=104&type=chunk)[107](index=107&type=chunk) [Risk Factors](index=23&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from operational fluctuations, reliance on COVID-19 testing, intense competition, customer concentration, sole suppliers, evolving regulations, and stock price volatility [Business and Strategy Risks](index=24&type=section&id=Business%20and%20Strategy%20Risks) Key business risks include fluctuating operating results, reliance on temporary COVID-19 testing, a history of losses, intense competition, customer concentration, and sole supplier dependency - The expansion of the COVID-19 testing business has led to rapid growth but presents management challenges and is expected to decrease as vaccines become widely deployed[152](index=152&type=chunk)[156](index=156&type=chunk) - The company has a history of losses and may not be able to sustain the profitability achieved in 2020[157](index=157&type=chunk) - Revenue is concentrated, with two customers (County of Los Angeles and San Bernardino County) accounting for **28% and 10% of total revenue in 2020**, respectively[163](index=163&type=chunk) - The company relies on **Illumina as the sole supplier** for its next-generation sequencers and associated reagents, creating a significant supply chain risk[210](index=210&type=chunk) [Regulatory Risks](index=39&type=section&id=Regulatory%20Risks) Regulatory risks include potential FDA oversight of LDTs, the need to maintain CLIA and state licenses, and compliance with complex healthcare laws like PAMA, HIPAA, and anti-fraud statutes - Potential changes in FDA enforcement discretion for Laboratory Developed Tests (LDTs), including possible legislation like the VALID Act, could subject the company's tests to premarket clearance or approval, increasing costs and delaying market access[252](index=252&type=chunk)[257](index=257&type=chunk) - Failure to comply with federal (CLIA) and state laboratory licensing requirements could result in the loss of ability to perform tests and significant business disruption[264](index=264&type=chunk)[270](index=270&type=chunk) - The marketing of COVID-19 tests under an Emergency Use Authorization (EUA) is subject to specific limitations, and the EUA can be terminated or revoked by the government[298](index=298&type=chunk)[300](index=300&type=chunk) - Changes in healthcare policy, such as the Affordable Care Act (ACA) and the Protecting Access to Medicare Act (PAMA), could negatively impact reimbursement rates and financial results[286](index=286&type=chunk)[288](index=288&type=chunk) [Intellectual Property Risks](index=47&type=section&id=Intellectual%20Property%20Risks) Intellectual property risks stem from reliance on trade secrets over patents, which may offer inadequate protection, and the potential for costly third-party infringement litigation - The company primarily relies on trade secret protection rather than patents, which may not be effective if confidential information is disclosed or independently developed by competitors[316](index=316&type=chunk)[317](index=317&type=chunk) - The company faces the risk of litigation from third parties claiming infringement of their intellectual property, which could result in substantial damages and prevent the sale of its tests[320](index=320&type=chunk)[321](index=321&type=chunk) [Common Stock Risks](index=50&type=section&id=Common%20Stock%20Risks) Common stock risks include high price volatility, limited liquidity due to concentrated ownership (CEO owning **28%**), and no anticipated dividends, with returns dependent on stock price appreciation - The trading price of the company's common stock has been and may continue to be highly volatile[334](index=334&type=chunk) - As of December 31, 2020, executive officers, directors, and 5%+ beneficial owners collectively owned approximately **32%** of the company's voting equity, with the founder and CEO alone owning **28%**, allowing for significant control over stockholder matters[338](index=338&type=chunk) - The company does not intend to pay dividends in the foreseeable future, limiting investor returns to potential stock price appreciation[343](index=343&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=54&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Fulgent Genetics' common stock trades on Nasdaq under 'FLGT' since 2016, with no anticipated dividends, and proceeds from equity offerings funding operations and a joint venture - The company's common stock has been listed on the Nasdaq Global Market under the symbol **"FLGT" since September 29, 2016**[366](index=366&type=chunk) - The company does not anticipate paying any cash dividends in the foreseeable future, planning to retain future earnings to finance business growth[370](index=370&type=chunk) - The company has raised significant capital through multiple equity offerings, including its **2016 IPO** and several equity distribution agreements and underwritten offerings in **2019 and 2020**[372](index=372&type=chunk)[374](index=374&type=chunk)[375](index=375&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=56&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Fulgent's 2020 financial performance was transformed by COVID-19 testing, with revenue surging to **$421.7 million**, net income of **$214.3 million**, and significantly strengthened liquidity from operations and equity offerings [Results of Operations](index=62&type=section&id=Results%20of%20Operations) In 2020, revenue surged **1196% to $421.7 million** due to COVID-19 testing, driving gross profit up **1702% to $331.9 million** and resulting in a net income of **$214.3 million** Financial Performance Comparison (2020 vs. 2019) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $421.7M | $32.5M | 1196% | | Gross Profit | $331.9M | $18.4M | 1702% | | Operating Income (Loss) | $290.2M | ($0.4M) | 67894% | | Net Income (Loss) | $214.3M | ($0.4M) | 52244% | | Billable Tests Delivered | 4.4M | 59K | 7373% | | Avg. Price per Test | $96 | $555 | (83)% | | Cost per Test | $20 | $241 | (92)% | - The dramatic increase in revenue was primarily due to the volume of COVID-19 tests, which have a lower price point than the company's traditional genetic tests, leading to a substantial decline in the average selling price per test[440](index=440&type=chunk)[441](index=441&type=chunk) - Cost of revenue increased primarily due to higher reagent and supply expenses (**$49.9 million**), consulting/labor (**$10.6 million**), and personnel costs (**$8.1 million**) needed to support the massive increase in test volume[445](index=445&type=chunk) [Liquidity and Capital Resources](index=64&type=section&id=Liquidity%20and%20Capital%20Resources) As of December 31, 2020, the company reported a strong liquidity position with **$87.4 million** in cash and **$344.4 million** in marketable securities, driven by operations and equity offerings Cash and Marketable Securities (Year-End, million) | Item | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $87.4 | $12.0 | | Marketable Securities | $344.4 | $58.3 | Summary of Cash Flows (Year Ended Dec 31, million) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operations | $140.6 | $5.5 | | Net Cash used in Investing | ($326.4) | ($29.0) | | Net Cash from Financing | $261.3 | $28.8 | - The company raised a total of **$261.3 million** from financing activities in 2020, primarily through sales of common stock via various equity distribution agreements[476](index=476&type=chunk) [Controls and Procedures](index=69&type=section&id=Item%209A.%20Controls%20and%20Procedures) As of December 31, 2020, management concluded that the company's disclosure controls and internal control over financial reporting were effective, with no material changes reported - Management concluded that the company's disclosure controls and procedures were **effective as of December 31, 2020**[498](index=498&type=chunk) - Management concluded that the company's internal control over financial reporting was **effective as of December 31, 2020**, based on the COSO 2013 framework[499](index=499&type=chunk) PART III [Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters](index=70&type=section&id=Items%2010-14) Information for Items 10-14, covering directors, executive officers, corporate governance, compensation, security ownership, and related transactions, is incorporated by reference from the 2021 proxy statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accounting Fees and Services (Item 14) is incorporated by reference from the registrant's definitive proxy statement for its 2021 annual meeting of stockholders[506](index=506&type=chunk)[507](index=507&type=chunk)[508](index=508&type=chunk)[509](index=509&type=chunk)[510](index=510&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=71&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) The consolidated financial statements are filed with this report, with other schedules omitted, and an index of all 10-K exhibits is included - The consolidated financial statements are filed with this report, and all other financial statement schedules have been omitted[514](index=514&type=chunk) [Financial Statements](index=77&type=section&id=Financial%20Statements) Audited consolidated financial statements for 2020 and 2019 show dramatic financial improvement, with total assets reaching **$700.5 million**, net income of **$214.3 million**, and diluted EPS of **$8.91** in 2020 Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $87,426 | $11,965 | | Marketable securities | $344,443 | $58,251 | | Trade accounts receivable, net | $183,857 | $6,555 | | **Total Assets** | **$700,461** | **$88,756** | | **Liabilities** | | | | Accounts payable | $26,488 | $1,581 | | Income tax payable | $53,319 | $24 | | **Total Liabilities** | **$131,074** | **$5,979** | | **Stockholders' Equity** | **$569,387** | **$82,777** | Consolidated Statement of Operations Data (in thousands) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Revenue | $421,712 | $32,528 | | Gross Profit | $331,905 | $18,421 | | Operating Income (Loss) | $290,158 | ($428) | | Net Income (Loss) | $214,310 | ($411) | | Diluted EPS | $8.91 | ($0.02) | - The company's revenue is disaggregated by payor type, with Insurance (**$257.6 million**) and Institutional (**$163.1 million**) customers being the primary sources of revenue in 2020[620](index=620&type=chunk)

Financial Data and Key Metrics Changes - The company reported fourth quarter revenue of $295 million, which is almost three times the revenue generated in the third quarter and more than 35 times the fourth quarter revenue of the previous year [11][47] - Non-GAAP income exceeded $6 per share in the fourth quarter and more than $9 per share for the full year, with $105.5 million in free cash flow [12][54] - Full year 2020 revenues totaled $422 million, up almost 1,200% year-over-year, with operating income of $290 million compared to an operating loss of $428,000 the previous year [54][55] Business Line Data and Key Metrics Changes - The company performed over 3 million tests in the fourth quarter and over 4.4 million tests for the year, compared to about 60,000 tests in all of 2019 [11][48] - The non-COVID-19 business grew approximately 43% year-over-year in the fourth quarter, with core business revenues reaching almost $37 million [24][48] - Next Generation Sequencing (NGS) tests volume increased from 59,000 in 2019 to 72,000 in 2020, with expectations for NGS revenue to grow above 92% year-over-year to $70 million in 2021 [18][60] Market Data and Key Metrics Changes - The company was recognized as the number one provider of COVID-19 tests in California, processing the highest volume of tests with over 90% of results returned within 24 hours [14] - The customer base diversified significantly, with direct agreements established with 11 counties and various large corporations, sports teams, and nursing homes [28][30] - The company expects to generate approximately $800 million in revenues for 2021, representing a growth of 90% year-over-year [58] Company Strategy and Development Direction - The company plans to invest in sales and marketing initiatives and explore international expansion, viewing M&A as a potential avenue for growth [20][63] - The company aims to leverage its technology platform to address larger markets and enhance its competitive position [19][22] - The introduction of new software products, such as the vaccine management platform and community testing software, is part of the strategy to expand service offerings [43][44] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's market share and positioning for 2021, despite potential fluctuations in COVID testing demand [67][68] - The company anticipates a more diverse mix of revenue drivers in 2021, with significant growth expected from both COVID-19 and non-COVID-19 testing [55][56] - Management highlighted the importance of maintaining high-quality service and turnaround times to differentiate from competitors [95][96] Other Important Information - The company donated $1 million to the National Academy of Engineering to support COVID-19 engineering solutions and made an initial donation of $250,000 to USC for cancer research initiatives [21][22] - The company ended the fourth quarter with $432 million in cash and cash equivalents, with a strong capital structure and minimal dilution to shareholders [53][63] Q&A Session Summary Question: What is the trend of revenue concentration in California for 2021? - Management acknowledged that a significant portion of revenue comes from California but emphasized ongoing diversification efforts within the state and other regions [65][66] Question: Can you provide details on the Department of Homeland Security contract? - The company is one of four labs in a $2 billion contract, with the ability to handle a meaningful portion of the testing demand driven by government task orders [70][72] Question: How does the company view the market for COVID variant characterization? - Management expressed optimism about the market for NGS testing related to COVID variants, highlighting the company's capabilities and existing contracts [75][76] Question: What is the expected revenue mix for 2022? - Management indicated that both NGS and non-NGS testing will contribute to revenue, with a focus on expanding NGS capabilities [90][91]

Fulgent Genetics, Inc. (NASDAQ:FLGT) Q3 2020 Results Earnings Conference Call November 9, 2020 4:30 PM ET Company Participants Nicole Borsje - Head, Investor Relations Ming Hsieh - Chief Executive Officer Paul Kim - Chief Financial Officer Brandon Perthuis - Chief Commercial Officer Conference Call Participants Rachel Vatnsdal - Piper Sandler Erin Wright - Credit Suisse Kevin DeGeeter - Oppenheimer Operator Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2020 Fulgent Genetics Earnings ...

[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 accompanying notes, reflecting significant growth in revenue, net income, assets, and equity, primarily driven by the COVID-19 testing business [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section provides the unaudited condensed consolidated financial statements and notes, detailing the company's financial position, performance, and cash flows, significantly impacted by COVID-19 testing [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This statement presents the company's financial position, detailing assets, liabilities, and equity at specific points in time | Metric | September 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------- | :-------------------------------- | :------------------------------- | | Total Assets | $247,311 | $88,756 | | Total Current Assets | $195,615 | $37,079 | | Cash and cash equivalents | $53,031 | $11,965 | | Trade accounts receivable, net | $90,680 | $6,555 | | Total Liabilities | $60,356 | $5,979 | | Total Stockholders' Equity | $186,955 | $82,777 | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This statement reports the company's revenues, expenses, and net income or loss over specific periods | Metric (in thousands, except per share data) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $101,716 | $10,347 | $126,734 | $24,141 | | Net Income (Loss) | $46,638 | $1,462 | $48,003 | $(115) | | Basic Net Income (Loss) per common share | $2.11 | $0.08 | $2.20 | $(0.01) | | Diluted Net Income (Loss) per common share | $1.98 | $0.08 | $2.07 | $(0.01) | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) This statement presents net income or loss and other comprehensive income or loss, providing a complete view of changes in equity from non-owner sources | Metric (in thousands) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) | $46,638 | $1,462 | $48,003 | $(115) | | Comprehensive income | $46,196 | $1,438 | $48,464 | $99 | [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This statement details changes in stockholders' equity, including net income, stock issuances, and other comprehensive income, over specific periods | Metric (in thousands) | Balance at Dec 31, 2019 | Balance at Sep 30, 2020 | | :-------------------- | :---------------------- | :---------------------- | | Total Equity | $82,777 | $186,955 | - Issuance of common stock at an average of **$38.50 per share**, net, contributed **$42,655 thousand** to additional paid-in capital during the nine months ended September 30, 2020[19](index=19&type=chunk) - Issuance of common stock at an average of **$39.24 per share**, net, contributed **$7,849 thousand** to additional paid-in capital during the nine months ended September 30, 2020[19](index=19&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement reports the cash generated and used by operating, investing, and financing activities over specific periods | Cash Flow Activity (in thousands) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $6,372 | $5,633 | | Net cash (used in) provided by investing activities | $(7,671) | $7,033 | | Net cash provided by financing activities | $42,348 | $1,136 | | Net increase in cash and cash equivalents | $41,066 | $13,786 | | Cash and cash equivalents at end of period | $53,031 | $20,522 | [Notes to the Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) These notes provide additional detail and context to the financial statements, explaining accounting policies, significant transactions, and other relevant information [Note 1. Overview and Basis of Presentation](index=9&type=section&id=Note%201.%20Overview%20and%20Basis%20of%20Presentation) The company is a technology firm specializing in comprehensive genetic testing, utilizing a proprietary platform for a broad test menu. Since March 2020, it has launched SARS-CoV-2 detection tests, including NGS and RT-PCR-based tests, which have received FDA Emergency Use Authorizations (EUAs) - Fulgent Genetics, Inc. is a technology company offering comprehensive genetic testing, providing clinically actionable diagnostic information[28](index=28&type=chunk) - The company launched SARS-CoV-2 detection tests (NGS and RT-PCR-based) in March 2020, receiving FDA EUAs for RT-PCR-based tests and an at-home testing service[28](index=28&type=chunk) [Note 2. Summary of Significant Accounting Policies](index=10&type=section&id=Note%202.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines key accounting policies, including the use of estimates, foreign currency translation, and lease accounting. It highlights significant customer concentration, with one customer contributing 37% and 35% of revenue for the three and nine months ended September 30, 2020, respectively. Contract liabilities also saw a substantial increase - Management's estimates, particularly for revenue recognition, accounts receivable, fixed asset useful lives, tax liabilities, and equity method investments, are subject to potential impacts from the COVID-19 pandemic[32](index=32&type=chunk)[33](index=33&type=chunk) - One customer accounted for **37% of revenue** for the three months ended September 30, 2020, and **35%** for the nine months ended September 30, 2020[37](index=37&type=chunk) Revenue from Contracts with Customers by Payor Type (in thousands) | Payor Type | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | | :------------ | :------------------------------ | :----------------------------- | | Institutional | $34,527 | $58,459 | | Patient | $1,078 | $1,339 | | Insurance | $66,111 | $66,936 | | Total Revenue | $101,716 | $126,734 | - Contract liabilities increased from **$365 thousand** as of December 31, 2019, to **$18.5 million** as of September 30, 2020[42](index=42&type=chunk) [Note 3. Marketable Securities](index=12&type=section&id=Note%203.%20Marketable%20Securities) The company's marketable securities primarily consist of corporate debt securities and U.S. government agency securities. Total marketable securities decreased slightly from December 2019 to September 2020 Marketable Securities (Aggregate Fair Value, in thousands) | Category | September 30, 2020 | December 31, 2019 | | :------------------------ | :----------------- | :---------------- | | Total marketable securities | $50,939 | $58,251 | Marketable Securities Composition (September 30, 2020, in thousands) | Category | Aggregate Fair Value | | :---------------------------- | :------------------- | | Corporate debt securities | $49,935 | | U.S. government agency securities | $1,004 | [Note 4. Fair Value Measurements](index=13&type=section&id=Note%204.%20Fair%20Value%20Measurements) The company measures financial assets at fair value using a three-tier hierarchy. As of September 30, 2020, most marketable securities were classified as Level 2 (observable inputs), with no Level 3 investments - Level 1 assets include money market instruments, valued based on observable market prices[56](index=56&type=chunk) - Level 2 assets consist of U.S. government agency securities and corporate debt securities, valued based on observable inputs like reported trades and broker/dealer quotes[56](index=56&type=chunk) - As of September 30, 2020, the company had no investments measured using unobservable (Level 3) inputs[56](index=56&type=chunk) Total Marketable Securities and Cash Equivalents (Fair Value, in thousands) | Date | Total Fair Value | | :------------------ | :--------------- | | September 30, 2020 | $89,040 | | December 31, 2019 | $64,650 | [Note 5. Fixed Assets](index=14&type=section&id=Note%205.%20Fixed%20Assets) Net fixed assets significantly increased from December 2019 to September 2020, primarily due to investments in medical lab equipment and assets not yet placed in service Property and Equipment, Net (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :------------------------ | :----------------- | :---------------- | | Property and equipment, net | $17,385 | $5,974 | - Major increases in fixed assets include medical lab equipment (**$13,207 thousand** in 2020 vs **$10,493 thousand** in 2019) and assets not yet placed in service (**$9,485 thousand** in 2020 vs **$114 thousand** in 2019)[59](index=59&type=chunk) - Depreciation expense for the nine months ended September 30, 2020, was **$1.8 million**, up from **$1.5 million** in the same period of 2019[59](index=59&type=chunk) [Note 6. Significant Balance Sheet Accounts](index=14&type=section&id=Note%206.%20Significant%20Balance%20Sheet%20Accounts) Other current assets experienced a substantial increase, primarily driven by reagents and supplies, and other receivables related to public offerings of common stock Other Current Assets (in thousands) | Category | September 30, 2020 | December 31, 2019 | | :------------------------ | :----------------- | :---------------- | | Total Other Current Assets | $30,000 | $2,255 | | Reagents and supplies | $17,747 | $277 | | Other receivable | $8,414 | $16 | - Other receivable primarily consists of proceeds to be received from public offerings of the Company's common stock[60](index=60&type=chunk) [Note 7. Reporting Segment and Geographic Information](index=15&type=section&id=Note%207.%20Reporting%20Segment%20and%20Geographic%20Information) The company operates as a single reporting segment, with its long-lived assets predominantly located in the United States. U.S. revenue saw a significant increase, while foreign revenue experienced a decrease, mainly due to reduced traditional genetic testing sales in COVID-19 affected regions - The company views its operations and manages its business in one reporting segment[62](index=62&type=chunk) Revenue by Region (in thousands) | Region | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | $100,223 | $8,479 | $122,000 | $18,779 | | Foreign | $1,493 | $1,868 | $4,734 | $5,362 | - Decreases in foreign revenue were primarily due to decreased sales of traditional genetic testing services to customers in other countries adversely affected by the COVID-19 pandemic[129](index=129&type=chunk) [Note 8. Commitments and Contingencies](index=15&type=section&id=Note%208.%20Commitments%20and%20Contingencies) The company has non-cancelable purchase obligations totaling $13.1 million, payable within twelve months, for computer and medical lab equipment, reagents, and other supplies. Legal proceedings are not expected to have a material effect on the company's financial position - Non-cancelable purchase obligations of **$13.1 million** are payable within twelve months for computer equipment, medical lab equipment, reagents, and other supplies[64](index=64&type=chunk) - Legal proceedings and claims arising in the ordinary course of business are not expected to have a material effect on the company's consolidated financial position, results of operations, or cash flows[65](index=65&type=chunk) [Note 9. Leases](index=15&type=section&id=Note%209.%20Leases) The company holds various non-cancelable operating leases, primarily for office space, with a weighted-average remaining lease term of 5.0 years and a discount rate of 5.87%. Total lease costs increased in 2020, and a new CLIA-certified laboratory was opened in Houston, Texas, during the third quarter to expand capacity Operating Lease Liabilities (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :------------------------------------ | :----------------- | :---------------- | | Operating lease right-of-use asset | $2,680 | $2,633 | | Operating lease liabilities, short-term | $512 | $420 | | Operating lease liabilities, long-term | $2,231 | $2,256 | Total Lease Cost (in thousands) | Period | 2020 | 2019 | | :-------------------- | :--- | :--- | | Three months ended Sep 30 | $223 | $146 | | Nine months ended Sep 30 | $527 | $438 | - The weighted-average remaining lease term for operating leases is **5.0 years**, with a weighted-average discount rate of **5.87%**[73](index=73&type=chunk) - During the three months ended September 30, 2020, the company opened a new CLIA-certified laboratory in Houston, Texas, to expand its capacity[68](index=68&type=chunk) [Note 10. Equity-Based Compensation](index=17&type=section&id=Note%2010.%20Equity-Based%20Compensation) Equity-based compensation expense significantly increased across all categories (cost of revenue, R&D, selling & marketing, G&A) for both the three and nine months ended September 30, 2020, reflecting increased headcount and stock price Equity-Based Compensation Expense (in thousands) | Category | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of revenue | $428 | $174 | $929 | $483 | | Research and development | $887 | $279 | $1,563 | $690 | | Selling and marketing | $1,184 | $332 | $1,577 | $643 | | General and administrative | $651 | $166 | $1,085 | $455 | | Total | $3,150 | $951 | $5,154 | $2,271 | [Note 11. Income Taxes](index=17&type=section&id=Note%2011.%20Income%20Taxes) The provision for income taxes increased substantially in 2020, driven by a significant increase in income. The effective tax rate also rose, partially offset by a reduction in the valuation allowance on deferred tax assets and increased windfall tax deductions Provision for Income Taxes (in thousands) | Period | 2020 | 2019 | | :-------------------- | :--- | :--- | | Three months ended Sep 30 | $14,526 | $61 | | Nine months ended Sep 30 | $13,961 | $81 | Effective Tax Rates | Period | 2020 | 2019 | | :-------------------- | :---- | :--- | | Three months ended Sep 30 | 23% | 4% | | Nine months ended Sep 30 | 21% | 14% | - The change in effective tax rates was primarily due to a significant increase in income, partially offset by a reduction in the valuation allowance on deferred tax assets and increased windfall tax deductions related to stock-based compensation[80](index=80&type=chunk) - As of September 30, 2020, the company had **$389 thousand** in unrecognized income tax benefits related to federal and state R&D credits[79](index=79&type=chunk) [Note 12. Income (Loss) per Share](index=18&type=section&id=Note%2012.%20Income%20(Loss)%20per%20Share) Basic and diluted income per share increased substantially for both the three and nine months ended September 30, 2020, reflecting the company's improved net income Net Income (Loss) per Common Share | Metric (per share) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic | $2.11 | $0.08 | $2.20 | $(0.01) | | Diluted | $1.98 | $0.08 | $2.07 | $(0.01) | [Note 13. Related Parties](index=18&type=section&id=Note%2013.%20Related%20Parties) The company engaged in transactions with related parties, including genetic testing services for AHMC Healthcare Inc. (an entity where a board member is a senior executive) and purchases of office furniture from JEM Enterprise (owned by the CEO's spouse). It also has a joint venture, FF Gene Biotech, with entities related to its CSO and a former significant stockholder - The company recognized **$1.3 million** in revenue from genetic testing services for AHMC Healthcare Inc. (where a board member is a Senior Executive VP) for both the three and nine months ended September 30, 2020[84](index=84&type=chunk) - The company purchased **$200 thousand** of office furniture and supplies from JEM Enterprise (owned by the CEO's spouse) in the three months ended September 30, 2020[85](index=85&type=chunk) - The company formed a joint venture, FF Gene Biotech, with Xilong Scientific Co., Ltd. (an affiliate of a former >10% stockholder) and Fuzhou Jinqiang Investment Partnership (LP), which includes the company's Chief Scientific Officer and a large stockholder[86](index=86&type=chunk) [Note 14. Equity Method Investments](index=19&type=section&id=Note%2014.%20Equity%20Method%20Investments) The company holds a 30% equity interest in FF Gene Biotech, a genetic testing joint venture in the PRC, with a remaining contribution obligation of approximately $4.4 million. A 25% investment in BostonMolecules, Inc. was fully impaired in September 2020 due to product development delays and market changes - The company has a **30% ownership interest** in FF Gene Biotech, a joint venture in the PRC, with a carrying value of **$1,621 thousand** as of September 30, 2020[99](index=99&type=chunk) - The company has a remaining contribution obligation of **29,700,000 RMB** (approximately **$4.4 million USD**) to FF Gene Biotech[88](index=88&type=chunk) - A **$2.5 million** investment in BostonMolecules, Inc. (**25% ownership**) was fully impaired in September 2020 due to delayed product development and the availability of similar products in the market[95](index=95&type=chunk)[97](index=97&type=chunk) Equity Loss and Impairment (in thousands) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------------- | :----------------------------- | :----------------------------- | | Equity loss in investee | $(631) | $(603) | | Impairment loss in equity-method investment | $(2,591) | — | [Note 15. Equity Distribution Agreements](index=20&type=section&id=Note%2015.%20Equity%20Distribution%20Agreements) The company utilized equity distribution agreements to sell common stock, generating significant net proceeds. In Q3 2020, $42.7 million net proceeds were raised from one agreement and $7.8 million from another, with a new agreement allowing for up to $125.0 million in future sales - During the three months ended September 30, 2020, the company sold **1,107,884 shares** of common stock under an Equity Distribution Agreement, resulting in **$42.7 million** of net proceeds[100](index=100&type=chunk) - In September 2020, the company entered into a new Equity Distribution Agreement, selling **200,000 shares** for **$7.8 million** net proceeds in Q3 2020, with an aggregate offering price of up to **$125.0 million**[102](index=102&type=chunk) [Note 16. Subsequent Event](index=21&type=section&id=Note%2016.%20Subsequent%20Event) Subsequent to September 30, 2020, the company purchased real property for $15.4 million, financed by a margin loan. Additionally, it sold 940,018 shares of common stock, generating $40.9 million in gross proceeds - On October 20, 2020, the company closed escrow on a **$15.4 million** real property purchase, financed using a margin loan collateralized by marketable securities[103](index=103&type=chunk)[104](index=104&type=chunk) - Subsequent to September 30, 2020, the company sold **940,018 shares** of common stock for **$40.9 million** in gross proceeds under the 2020 Equity Distribution Agreement[105](index=105&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, highlighting the significant impact of the COVID-19 testing business on revenue growth, profitability, and operational expansion. It also discusses liquidity, capital resources, and critical accounting policies [Overview](index=22&type=section&id=Overview) This overview describes the company's business as a genetic testing technology firm and highlights its rapid growth in billable tests, primarily driven by COVID-19 testing - Fulgent Genetics is a technology company offering comprehensive genetic testing, leveraging a proprietary platform for a broad, flexible, and competitively priced test menu[111](index=111&type=chunk) - The company experienced rapid growth in 2020, with billable tests delivered increasing by **4,829%** in the three months and **2,631%** in the nine months ended September 30, 2020, primarily due to COVID-19 tests[113](index=113&type=chunk)[125](index=125&type=chunk) Key Financial and Operational Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $101,716 | $10,347 | $126,734 | $24,141 | | Net Income (Loss) | $46,638 | $1,462 | $48,003 | $(115) | | Billable tests delivered | 1,035 | 21 | 1,229 | 45 | [Impact of COVID-19 Testing Business](index=23&type=section&id=Impact%20of%20COVID-19%20Testing%20Business) This section details how the COVID-19 testing business significantly expanded operations, increased headcount, shifted revenue sources, and boosted overall financial performance, despite anticipated future demand decreases - The launch of COVID-19 tests in March 2020 led to rapid business expansion, increasing total headcount from **154 to 473** by September 2020 and daily test volume by over **6,000%**[114](index=114&type=chunk) - The majority of COVID-19 testing revenue comes from third-party payors (insurance, Medicare), a shift from the direct payments typical of traditional genetic testing[114](index=114&type=chunk) - The company expanded capacity by increasing shifts at its Temple City lab and establishing a new lab in Houston, Texas[114](index=114&type=chunk) - The COVID-19 pandemic did not negatively impact consolidated operating results or liquidity as of September 30, 2020, but rather resulted in significant revenue growth[119](index=119&type=chunk)[120](index=120&type=chunk) - While demand for COVID-19 tests is anticipated to decrease post-vaccine, the company continues to invest in expanding capacity for the next two quarters[114](index=114&type=chunk) [Results of Operations](index=25&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, highlighting substantial revenue and gross profit growth driven by increased billable tests, alongside significant changes in average pricing and costs per test Consolidated Results of Operations (in thousands, except per billable test data) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | % Change (YoY) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | % Change (YoY) | | :----------------------------------- | :------------------------------ | :------------------------------ | :------------- | :----------------------------- | :----------------------------- | :------------- | | Revenue | $101,716 | $10,347 | 883% | $126,734 | $24,141 | 425% | | Gross profit | $75,455 | $6,462 | 1,068% | $88,699 | $13,668 | 549% | | Operating income (loss) | $63,523 | $1,509 | 4,110% | $64,249 | $(19) | 338,253% | | Net income (loss) | $46,638 | $1,462 | 3,090% | $48,003 | $(115) | 41,842% | | Average price per billable test delivered | $98 | $493 | (80%) | $103 | $536 | (81%) | | Cost per billable test delivered | $25 | $185 | (86%) | $31 | $233 | (87%) | | Research and development | $3,177 | $1,744 | 82% | $7,004 | $4,742 | 48% | | Selling and marketing | $5,014 | $1,687 | 197% | $9,871 | $4,263 | 132% | | General and administrative | $3,741 | $1,522 | 146% | $7,575 | $4,682 | 62% | - Revenue growth was primarily due to an increase in billable tests delivered, mainly COVID-19 tests, offset by a substantial decline in average selling price per test[127](index=127&type=chunk) - Cost per billable test decreased significantly due to economies of scale from increased test volume and leveraging technology[134](index=134&type=chunk) - Gross margin increased from **62.5% to 74.2%** for the three months and from **56.6% to 70.0%** for the nine months ended September 30, 2020[136](index=136&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet short-term and long-term obligations, detailing its cash position, marketable securities, and reliance on operating cash flow and equity financings Liquidity Position (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :---------------------- | :----------------- | :---------------- | | Cash and cash equivalents | $53,000 | $12,000 | | Marketable securities | $50,900 | $58,300 | - Operations are primarily financed by cash from operations and equity financings[151](index=151&type=chunk) - The company raised **$42.7 million** in net proceeds from one Equity Distribution Agreement and **$7.8 million** from another in Q3 2020[153](index=153&type=chunk)[156](index=156&type=chunk) - Existing cash and proceeds from equity financings are expected to be sufficient to meet anticipated cash requirements for at least the next 12 months[157](index=157&type=chunk) [Cash Flows](index=30&type=section&id=Cash%20Flows) This section analyzes the sources and uses of cash from operating, investing, and financing activities, highlighting significant investments in marketable securities and fixed assets, and proceeds from equity offerings Summary of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $6,372 | $5,633 | | Net cash (used in) provided by investing activities | $(7,671) | $7,033 | | Net cash provided by financing activities | $42,348 | $1,136 | - Cash used in investing activities in 2020 was primarily due to purchases of marketable securities (**$13.6 million**), fixed assets (**$11.3 million**), investment in BostonMolecules (**$2.6 million**), and equipment for FF Gene (**$1.4 million**)[164](index=164&type=chunk) - Cash provided by financing activities in 2020 primarily represents net proceeds from the Equity Distribution Agreement and the 2020 Equity Distribution Agreement[166](index=166&type=chunk) [Critical Accounting Policies and Use of Estimates](index=31&type=section&id=Critical%20Accounting%20Policies%20and%20Use%20of%20Estimates) This section discusses the significant accounting policies and estimates that require management's judgment, particularly those influenced by the COVID-19 pandemic, and confirms no material changes since the 2019 Annual Report - The preparation of financial statements requires management to make estimates, judgments, and assumptions, particularly influenced by the potential impacts of the COVID-19 pandemic[169](index=169&type=chunk) - There have been no significant changes to critical accounting policies and estimates as described in the 2019 Annual Report, except as set forth in Note 2[170](index=170&type=chunk) [The JOBS Act](index=31&type=section&id=The%20JOBS%20Act) This section explains the company's status as an 'emerging growth company' and 'smaller reporting company' under the JOBS Act, which allows for reduced disclosure requirements, and its election to opt out of the extended transition period for new accounting standards - The company qualifies as an 'emerging growth company' and 'smaller reporting company,' allowing for reduced disclosure requirements[172](index=172&type=chunk) - The company has irrevocably elected to opt out of the extended transition period for complying with new or revised financial accounting standards[172](index=172&type=chunk)[264](index=264&type=chunk) [Off-Balance Sheet Arrangements](index=31&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms that the company does not have any material off-balance sheet arrangements - The company did not have, and does not currently have, any material off-balance sheet arrangements[174](index=174&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=32&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that the information required for Quantitative and Qualitative Disclosures About Market Risk is not applicable to the company for this report - This item is not applicable[176](index=176&type=chunk) [Item 4. Controls and Procedures](index=32&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the evaluation of the company's disclosure controls and procedures, concluding their effectiveness as of September 30, 2020. It also confirms no material changes in internal control over financial reporting during the quarter and acknowledges the inherent limitations of such controls [Evaluation of Disclosure Controls and Procedures](index=32&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section details management's evaluation of the effectiveness of the company's disclosure controls and procedures as of September 30, 2020 - Management, with the participation of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[179](index=179&type=chunk) [Changes in Internal Control over Financial Reporting](index=32&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section confirms that there were no material changes in the company's internal control over financial reporting during the three months ended September 30, 2020 - There have been no material changes in internal control over financial reporting during the three months ended September 30, 2020[181](index=181&type=chunk) [Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting](index=32&type=section&id=Inherent%20Limitations%20on%20Disclosure%20Controls%20and%20Procedures%20and%20Internal%20Control%20over%20Financial%20Reporting) This section acknowledges that controls and procedures, despite their design, are subject to inherent limitations such as human error, circumvention, and deterioration, providing only reasonable assurance - Management recognizes that controls and procedures can only provide reasonable assurance and are subject to inherent limitations, including faulty judgment, simple errors, circumvention, and deterioration[182](index=182&type=chunk) [PART II—OTHER INFORMATION](index=33&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) This section addresses legal proceedings, comprehensive risk factors, details of unregistered equity sales, and a list of filed exhibits [Item 1. Legal Proceedings](index=33&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently involved in any legal proceedings that management believes would have a material effect on its business, financial condition, results of operations, or cash flows - The company is not presently a party to any legal proceedings that, in the opinion of management, would have a material effect on its business[185](index=185&type=chunk) [Item 1A. Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) This section outlines significant risks associated with investing in the company's common stock, categorized into business and strategy, regulatory, intellectual property, and common stock risks. Key concerns include the volatility of operating results due to COVID-19 testing, intense competition, regulatory changes for diagnostic products, reliance on trade secrets, and potential stock price fluctuations [Business and Strategy Risks](index=33&type=section&id=Business%20and%20Strategy%20Risks) This section highlights risks related to the company's operations and strategic direction, including volatile operating results, management challenges from rapid growth, competition, supplier dependence, and IT system vulnerabilities - Operating results may fluctuate significantly due to factors like sales timing, pricing changes, and global health crises (e.g., COVID-19), making predictions difficult[188](index=188&type=chunk) - The rapid expansion of the COVID-19 testing business presents management challenges, and demand is anticipated to decrease once an effective vaccine is widely deployed[191](index=191&type=chunk) - The company has a history of losses and may not be able to achieve or sustain profitability, especially with continued investments in growth[192](index=192&type=chunk) - Intense competition from molecular genetic testing services and new COVID-19 test providers could lead to price declines or reduced market share[201](index=201&type=chunk)[204](index=204&type=chunk) - Growth depends on diversifying the customer base beyond hospitals and medical institutions to include governmental bodies, municipalities, and large corporations for COVID-19 testing, as well as individual physicians[197](index=197&type=chunk) - Substantial investments are required to expand infrastructure (testing capacity, IT systems) and hire skilled personnel to support desired growth, and failure to manage this effectively could jeopardize the business[210](index=210&type=chunk)[212](index=212&type=chunk) - The company relies on a limited number of suppliers, including Illumina as the sole supplier for next-generation sequencers and associated reagents, posing risks of disruption[233](index=233&type=chunk) - Dependence on information technology systems for critical operations makes the company vulnerable to hardware/software malfunctions, delays, and cybersecurity breaches[252](index=252&type=chunk)[254](index=254&type=chunk) [Regulatory Risks](index=50&type=section&id=Regulatory%20Risks) This section details regulatory compliance risks, including potential changes in FDA oversight for laboratory developed tests, the need to adhere to federal, state, and foreign licensing, and the complexities of privacy, security, fraud, and abuse laws - Changes in FDA enforcement discretion or new regulations (e.g., VALID Act) could subject the company's laboratory developed tests (LDTs) to premarket review, increasing costs and delays[269](index=269&type=chunk)[275](index=275&type=chunk)[276](index=276&type=chunk) - Failure to comply with federal (CLIA), state (California, New York), and foreign laboratory licensing requirements could result in loss of testing ability or business disruptions[279](index=279&type=chunk)[282](index=282&type=chunk)[284](index=284&type=chunk) - The company is subject to broad privacy and security laws (HIPAA, HITECH, GDPR, CCPA); non-compliance could lead to harsh penalties, reputational damage, and business harm[285](index=285&type=chunk)[288](index=288&type=chunk)[289](index=289&type=chunk)[290](index=290&type=chunk) - Compliance with federal and state fraud and abuse laws (Anti-Kickback Statute, Stark Law, False Claims Act, EKRA) is complex, and violations could result in substantial penalties and exclusion from healthcare programs[293](index=293&type=chunk)[294](index=294&type=chunk)[307](index=307&type=chunk) - Marketing COVID-19 tests under Emergency Use Authorizations (EUAs) is subject to limitations and government discretion; termination or revocation of EUAs could require full FDA clearance[312](index=312&type=chunk) - International operations are subject to anti-bribery laws like the FCPA, and violations could lead to significant fines and reputational damage[314](index=314&type=chunk)[315](index=315&type=chunk) [Intellectual Property Risks](index=59&type=section&id=Intellectual%20Property%20Risks) This section addresses risks related to intellectual property, including the company's reliance on trade secrets without patents, potential infringement claims, and the impact of evolving patent law on 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 fully effective against competitors[320](index=320&type=chunk)[321](index=321&type=chunk) - Litigation or third-party claims of intellectual property infringement or misappropriation could be costly, time-consuming, and prevent the company from selling its tests[323](index=323&type=chunk)[324](index=324&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[325](index=325&type=chunk)[327](index=327&type=chunk) - Enforcing intellectual property rights outside the United States may be difficult due to varying legal protections in foreign countries[331](index=331&type=chunk) [Common Stock Risks](index=61&type=section&id=Common%20Stock%20Risks) This section covers risks associated with the company's common stock, including potential price volatility, significant control by principal stockholders, dilution from future stock issuances, lack of dividends, and anti-takeover provisions - An active, liquid trading market for common stock may not be sustained, and the price may be volatile due to various factors, including operating results, competition, and market conditions[334](index=334&type=chunk)[337](index=337&type=chunk) - Principal stockholders and management own a significant percentage (approximately **39%**) of voting equity, allowing them to exert significant control over matters subject to stockholder approval[340](index=340&type=chunk) - Future issuances of common stock or rights to purchase common stock could result in additional dilution to existing stockholders[342](index=342&type=chunk) - The company does not intend to pay dividends on its common stock, meaning returns will be limited to stock price appreciation[343](index=343&type=chunk) - Provisions in the company's charter documents and Delaware law (Section 203 DGCL) could discourage, delay, or prevent a change in control or changes in management[346](index=346&type=chunk)[347](index=347&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=66&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the use of proceeds from the company's initial public offering (IPO) and subsequent registered equity offerings. Proceeds have been used for contributions to a joint venture, funding operations, and investing in interest-bearing securities - Net proceeds from the October 2016 IPO were approximately **$36.0 million**; **$28.8 million** has been used, including **$4.5 million** for FF Gene Biotech and **$24.3 million** for operations[356](index=356&type=chunk)[357](index=357&type=chunk) - The company received **$42.7 million** in net proceeds from an Equity Distribution Agreement in Q3 2020 and **$7.8 million** from the 2020 Equity Distribution Agreement in Q3 2020[358](index=358&type=chunk)[360](index=360&type=chunk) - Net proceeds of approximately **$27.6 million** were received from an underwritten offering in November 2019[359](index=359&type=chunk) [Item 6. Exhibits](index=66&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including key agreements such as the Amended and Restated 2016 Omnibus Incentive Plan, Aircraft Purchase Agreement, and Agreement for Purchase and Sale of Property, along with various certifications - The exhibit index includes the Amended and Restated 2016 Omnibus Incentive Plan, Aircraft Purchase Agreement, and Agreement for Purchase and Sale of Property[364](index=364&type=chunk) - Certifications of the Principal Executive Officer and Principal Financial Officer are furnished with the report[364](index=364&type=chunk) [Signatures](index=68&type=section&id=Signatures) This section contains the official signatures certifying the accuracy and submission of the report - The report was signed on November 9, 2020, by Ming Hsieh, President and Chief Executive Officer, and Paul Kim, Chief Financial Officer[367](index=367&type=chunk)

Fulgent Genetics, Inc. (NASDAQ:FLGT) Q2 2020 Earnings Conference Call August 4, 2020 4:30 PM ET Company Participants Nicole Borsje - Head, IR Ming Hsieh - Chief Executive Officer Paul Kim - Chief Commercial Officer Brandon Perthuis - Chief Commercial Officer Conference Call Participants Sung Ji Nam - BTIG Steven Mah - Piper Sandler Operator Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Fulgent Genetics Earnings Conference Call. At this time all participants are in listen-only m ...

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, 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 jurisdict ...

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]