Fulgent Genetics(FLGT) - 2019 Q1 - Quarterly Report

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