Fulgent Genetics(FLGT) - 2019 Q4 - Annual Report

Cautionary Note Regarding Forward-Looking Statements 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] - 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][7] - 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] PART I Item 1. Business Fulgent Genetics provides comprehensive genetic testing to physicians using a proprietary technology platform for diverse, accurate, and affordable tests 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] - 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] | 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 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] - The industry has seen significant growth due to advancements in Next Generation Sequencing (NGS) technology, which has lowered costs and improved quality[21] - Challenges include high test prices, inadequate reimbursement, limited scope of some analyses, inefficient processes, and complex interpretation of results[23] Our Technology Platform 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][26][27][29] - Proprietary gene probes enable sequencing of difficult DNA regions and improve detection rates, supporting rapid incorporation of new genes[25] - Advanced data comparison and suppression algorithms enhance curation efficiency by rapidly detecting pathogenic mutations and reducing irrelevant data noise[26] Our Solution 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] - 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] - Maintains an expansive and growing proprietary genetic library, continuously curated by adaptive learning software and professionals, enhancing data reliability and accelerating reporting[35] Our Genetic Tests 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][38][39] - New test offerings in 2019 included Picture Genetics, a patient-initiated genetic testing service advertised directly to consumers[37] - Plans to expand reproductive testing options, including preimplantation genetic testing (PGT) and preimplantation genetic diagnosis (PGD)[37] Our Customers 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][43] | 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] - 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] Sales and Marketing 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][52] - Marketing activities include working with medical professional societies, presenting at conferences, email campaigns, social media, and offering comprehensive customer service[52][53] - 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][54] Our Suppliers 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] - Illumina, Inc. is the sole supplier for next-generation sequencers, associated reagents, and maintenance/repair services[56] - Disruptions from these limited or sole suppliers could interrupt laboratory operations and materially harm the business[56] 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] - Principal competitive factors include breadth of genetic content, test customization, price, quality, accessibility, reimbursement, turnaround time, customer service, and brand recognition[61] - Many competitors have longer operating histories, larger customer bases, greater financial/technological resources, and more experience with third-party payors[62] Research and Development 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] - R&D efforts focus on developing and curating the expansive genetic information library and further expanding the technology platform[64] Intellectual Property 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] - 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] - Protects proprietary information through confidentiality agreements with employees, consultants, and third parties[68] 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 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][74] - CLIA establishes quality standards for laboratory testing, and compliance is a prerequisite for billing government and many private payors[71][72] - Subject to biennial surveys and unannounced inspections; non-compliance can lead to sanctions like certificate suspension or civil monetary penalties[73] State and Foreign Laboratory Licensure 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][77] - Subject to regulation in foreign jurisdictions, which is expected to increase with international expansion, potentially requiring test modifications or imposing transport restrictions[78] 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][82] - 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][85] - 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][87][89] Advertising of Laboratory Services or LDTs 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] - Non-compliance can result in administrative or judicial penalties, including civil penalties, injunctions, or criminal prosecution[90] Reimbursement Reimbursement for genetic testing is complex, involving CPT codes and PAMA regulations, which impact Medicare payment rates and require extensive documentation CPT Codes 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] - Billing under miscellaneous codes can lead to complex negotiations, delays in reimbursement, and the need for additional documentation or appeals[91] 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][95] - 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][97] Privacy and Security Laws 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 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][99][101] - 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] - 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] Foreign Laws 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] - 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][110] Fraud and Abuse Laws 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 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] - 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][116] - Other federal laws prohibit healthcare fraud and false statements, with violations leading to felony charges, fines, imprisonment, or exclusion from government programs[117] False Claims Act 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] - Includes "whistleblower" or "qui tam" provisions allowing private individuals to bring actions and share in recoveries[118] - Requires providers to report and return overpayments from Medicare and Medicaid within 60 days of identification to avoid False Claims Act liability[118] Civil Monetary Penalties Law 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] - Also prohibits employing excluded individuals, billing for services requested by unlicensed/excluded providers, and billing for medically unnecessary services[120] - Penalties include exclusion from federal programs, substantial fines, and payment of up to three times the amount billed[120] Physician Referral Prohibitions 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] - 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] Physician Sunshine Laws 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] - 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] Anti-Bribery Laws The company is subject to U.S. FCPA and similar foreign anti-bribery laws, requiring vigilance in international operations to avoid substantial penalties 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] - International operations require high vigilance; violations can lead to substantial monetary fines and criminal penalties[125] Foreign Laws 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] Healthcare Policy Laws 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][128] - Uncertainty regarding the ACA's continued effect and potential repeal or replacement could materially adversely affect the business[128] Corporate Practice of Medicine 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] - Violations can result in civil or criminal fines and sanctions against the corporation and/or professionals[130] Environmental and Other Regulatory Requirements 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] - Also subject to OSHA requirements for workplace safety, including protecting workers from blood-borne pathogens[132] - Strict liability provisions mean the company could be held liable for damages and fines if operations result in environmental contamination or personal injury[131] 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] - None of the employees are represented by a labor union or covered by collective bargaining agreements[134] Corporate Information 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][137] - The former pharmaceutical business was separated in April 2016, with its operating results reported as discontinued operations[137] - 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] Available Information 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] - 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 Investing in Fulgent Genetics common stock involves high risks, including fluctuating results, competition, regulatory changes, and intellectual property disputes Business and Strategy Risks 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] - The company has a history of losses and may not achieve or sustain profitability, especially with investments in growth[146] - 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][156][185] - 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][178][181] - 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][183][188][191][192][195][196] Regulatory Risks 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][220][221] - 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][226][227][228][229] - 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][232][233][234][235][237][240][241][251] - 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][245][246][254][255] Intellectual Property Risks 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][262] - Litigation or third-party claims of intellectual property infringement or misappropriation could be costly, time-consuming, and prevent the sale of tests[263][264] - 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][266][268] - Enforcing intellectual property rights outside the United States is challenging due to varying legal protections and enforcement mechanisms in foreign countries[270] Common Stock Risks 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][279] - The stock price may be volatile due to fluctuations in operating results, competition, analyst reports, and general economic/market conditions[276][277] - 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][282] - Provisions in charter documents and Delaware law could discourage, delay, or prevent a change in control or management, potentially depressing the stock price[285][286] Item 1B. Unresolved Staff Comments 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] Item 2. Properties 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] - Leases for the Temple City facility expire in January 2021, with options for three-year renewals[292] - 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] Item 3. Legal Proceedings 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] - Litigation, regardless of outcome, can have an adverse impact due to defense/settlement costs, diversion of management, and reputational harm[293] Item 4. Mine Safety Disclosures This item is not applicable to the company, as it is not involved in mining operations - This item is not applicable[294] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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 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] - There was no public market for the common stock prior to September 29, 2016[297] Holders of Common Stock 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] Dividend Policy 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] - As a result, the company does not anticipate declaring or paying any cash dividends or other distributions in the foreseeable future[301] Use of Proceeds from Registered Securities 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] - 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][306] Item 6. Selected Financial Data 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] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Fulgent Genetics' financial condition and operating results for 2019 and 2018, covering revenue, costs, expenses, and liquidity Forward-Looking Statements 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] - These statements are subject to risks and uncertainties detailed in Item 1A, and actual results could differ materially from expectations[311] - Forward-looking statements should not be relied upon as predictions of future events, and the company undertakes no obligation to update them[311] 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] - 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] | 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 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] - This collaboration leverages expertise in laboratory management, bioinformatics, clinical genetics, and next-generation sequencing[318] - ECS tests for mutations causing hundreds of genetic disorders, regardless of patient ethnicity, addressing limitations of traditional screening[320] 2019 Developments 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][323] - 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] - Expanded reproductive testing options, including Preimplantation Genetic Testing (PGT), to improve IVF success and healthy pregnancies[326] Factors Affecting Our Performance 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 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] - Increased competition and cost-saving initiatives from payors are creating downward pressure on prices for genetic analysis, potentially harming revenue and margins[329] - The company addresses industry challenges (high costs, limited reimbursement, inefficient processes) through its continually advancing multi-faceted technology platform[330] Number and Mix of Billable Tests Delivered 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] - The mix of billable tests and ordering customers impacts financial results, as prices and costs vary based on test complexity and negotiated terms[332] Mix of Customers 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] - Institutional customers generally offer more attainable billing collection rates (87% in 2019)[335] - 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] Ability to Maintain Our Broad and Flexible Test Menu 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] - This breadth and flexibility provide comprehensive genetic information and are key contributors to long-term business growth[337] Ability to Maintain Low Internal Costs 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] - Low internal costs enable affordable and competitive pricing (average $555 per billable test in 2019), encouraging repeat orders and attracting new customers[338] - This low cost is a key factor for business growth and achieving sustainable profitability[338] Ability to Obtain Reimbursement 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] - The company aims to secure adequate coverage and reimbursement from third-party payors, leveraging its low cost per billable test to compete effectively[340] - Obtaining and maintaining adequate reimbursement is an unpredictable, challenging, time-consuming, and costly process[172] Impact of Certain Recent Accounting Pronouncements 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] - The adoption resulted in a $327,000 adjustment to beginning accumulated deficit and accounts receivable[344] Foreign Currency Exchange Rate Fluctuations 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] - 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] Business Risks and Uncertainties 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] Financial Overview 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 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] - The recognized amount reflects the established billing rate, less contractual and other adjustments, based on the amount expected to be collected[349] - Billing is generally directed to hospitals, medical/research institutions, patients, third-party payors, or a combination[349] Cost of Revenue 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] - Costs associated with performing tests are recorded as tests are processed[351] - Cost of revenue is expected to generally increase as the number of billable tests delivered increases[351] Operating Expenses 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] - Personnel costs (salaries, benefits, bonuses, equity-based compensation) are the largest component across all operating expense categories[352] Research and Development Expenses 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] - All R&D costs are expensed in the periods incurred and are expected to continue increasing in absolute dollars[353] Selling and Marketing Expenses 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] - All S&M costs are expensed as incurred and are expected to increase due to investments in the sales team and marketing efforts[354] General and Administrative Expenses 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] - These expenses are expensed as incurred and are expected to increase with scaling operations and public company compliance requirements[355] Provision for (Benefit from) Income Taxes 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] - A valuation allowance is recorded against deferred tax assets when realization is not more likely than not, impacting the effective tax rate[356] Results of Operations 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][363] - 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][369] - Net loss significantly decreased by 93% to $(0.411) million in 2019, compared to $(5.607) million in 2018[361] Liquidity and Capital Resources 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 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] - In 2019, the company raised $979,000 net from an at-the-market offering and $27.6 million net from an underwritten offering[383][384] - 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][387] Cash Flows 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] - Cash used in investing activities was $29.0 million in 2019, mainly for marketable securities purchases and fixed assets, partially offset by maturities[392] - Cash provided by financing activities was $28.8 million in 2019, primarily from public stock offerings[394] Critical Accounting Policies and Use of Estimates 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 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] - 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][509] - The company adopted ASC 606 on January 1, 2018, resulting in an accrual basis for third-party payor revenue recognition[504] Recent Accounting Pronouncements 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] - ASU No. 2016-13, Financial Instruments-Credit Losses, effective after December 15, 2019, is not expected to materially affect financial position or results[537] - ASU No. 2019-12, Simplifying the Accounting for Income Taxes, effective after December 15, 2020, is currently being evaluated for its impact[543] The JOBS Act 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] - It has irrevocably elected not to take advantage of the extended transition period for complying with new or revised accounting standards[406] - EGC status will continue until December 31, 2021, or earlier if revenue, non-convertible debt, or public float thresholds are met[406] Off-Balance Sheet Arrangements 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] Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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] Item 8. Financial Statements and Supplementary Data 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] - 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] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 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] Item 9A. Controls and Procedures 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 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] - Based on this evaluation, they concluded that the disclosure controls and procedures were effective[412] Management's Annual Report on Internal Control over Financial Reporting 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] - 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] Changes in Internal Control over Financial Reporting 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] Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting 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] - Inherent limitations include faulty judgments, simple errors, mistakes, and circumvention by individual acts or collusion[416] Item 9B. Other Information 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] PART III Item 10. Directors, Executive Officers and Corporate Governance 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] Item 11. Executive Compensation 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