Fulgent Genetics(FLGT) - 2020 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION 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) 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 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 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) 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 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] - 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] Condensed Consolidated Statements of Cash Flows 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 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 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] - 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] Note 2. Summary of Significant Accounting Policies 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][33] - 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] 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] Note 3. Marketable Securities 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 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] - 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] - As of September 30, 2020, the company had no investments measured using unobservable (Level 3) inputs[56] 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 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] - 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] Note 6. Significant Balance Sheet Accounts 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] Note 7. Reporting Segment and Geographic Information 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] 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] Note 8. Commitments and Contingencies 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] - 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] Note 9. Leases 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] - During the three months ended September 30, 2020, the company opened a new CLIA-certified laboratory in Houston, Texas, to expand its capacity[68] Note 10. Equity-Based Compensation 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 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] - As of September 30, 2020, the company had $389 thousand in unrecognized income tax benefits related to federal and state R&D credits[79] Note 12. Income (Loss) per Share 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 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] - 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] - 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] Note 14. Equity Method Investments 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] - The company has a remaining contribution obligation of 29,700,000 RMB (approximately $4.4 million USD) to FF Gene Biotech[88] - 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][97] 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 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] - 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] Note 16. Subsequent Event 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][104] - 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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][125] 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 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] - 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] - The company expanded capacity by increasing shifts at its Temple City lab and establishing a new lab in Houston, Texas[114] - 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][120] - 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] Results of Operations 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] - Cost per billable test decreased significantly due to economies of scale from increased test volume and leveraging technology[134] - 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] Liquidity and Capital Resources 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] - The company raised $42.7 million in net proceeds from one Equity Distribution Agreement and $7.8 million from another in Q3 2020[153][156] - 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] Cash Flows 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] - Cash provided by financing activities in 2020 primarily represents net proceeds from the Equity Distribution Agreement and the 2020 Equity Distribution Agreement[166] Critical Accounting Policies and Use of Estimates 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] - 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] The JOBS Act 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] - The company has irrevocably elected to opt out of the extended transition period for complying with new or revised financial accounting standards[172][264] Off-Balance Sheet Arrangements 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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 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] Changes in Internal Control over Financial Reporting 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] Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting 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] PART II—OTHER INFORMATION This section addresses legal proceedings, comprehensive risk factors, details of unregistered equity sales, and a list of filed exhibits Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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 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] - 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] - The company has a history of losses and may not be able to achieve or sustain profitability, especially with continued investments in growth[192] - Intense competition from molecular genetic testing services and new COVID-19 test providers could lead to price declines or reduced market share[201][204] - 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] - 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][212] - 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] - Dependence on information technology systems for critical operations makes the company vulnerable to hardware/software malfunctions, delays, and cybersecurity breaches[252][254] Regulatory Risks 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][275][276] - 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][282][284] - 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][288][289][290] - 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][294][307] - 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] - International operations are subject to anti-bribery laws like the FCPA, and violations could lead to significant fines and reputational damage[314][315] Intellectual Property Risks 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][321] - 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][324] - 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][327] - Enforcing intellectual property rights outside the United States may be difficult due to varying legal protections in foreign countries[331] Common Stock Risks 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][337] - 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] - Future issuances of common stock or rights to purchase common stock could result in additional dilution to existing stockholders[342] - The company does not intend to pay dividends on its common stock, meaning returns will be limited to stock price appreciation[343] - 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][347] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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][357] - 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][360] - Net proceeds of approximately $27.6 million were received from an underwritten offering in November 2019[359] Item 6. Exhibits 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] - Certifications of the Principal Executive Officer and Principal Financial Officer are furnished with the report[364] 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]