FULGENT GENETICS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in this report and contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. We have omitted discussion of 2019 results where it would be redundant to the discussion previously included in Item 7 of our 2020 Annual Report on Form 10-
K. Forward-looking statements are statements other than historical facts and relate to future events or circumstances or our future performance, and they are based on our current assumptions, expectations and beliefs concerning future developments and their potential effect on our business. The forward-looking statements in this discussion and analysis include statements about, among other things, our future financial and operating performance, our future cash flows and liquidity and our growth strategies, as well as anticipated trends in our business and industry. These forward-looking statements are subject to a number of risks and uncertainties, including, among others, those described under "Item 1A. Risk Factors" in Part I of this report. Moreover, we operate in a competitive and rapidly evolving industry and new risks emerge from time to time. It is not possible for us to predict all of the risks we may face, nor can we assess the impact of all factors on our business or the extent to which any factor or combination of factors could cause actual results to differ from our expectations. In light of these risks and uncertainties, the forward-looking events and circumstances described in this discussion and analysis may not occur, and actual results could differ materially and adversely from those described in or implied by any forward-looking statements we make. Although we have based our forward-looking statements on assumptions and expectations we believe are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. As a result, forward-looking statements should not be relied on or viewed as predictions of future events, and this discussion and analysis should be read with the understanding that actual future results, levels of activity, performance and achievements may be materially different than our current expectations. The forward-looking statements in this discussion and analysis speak only as of the date of this report, and except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations. Overview We are a technology company offering large-scale COVID-19 testing services, molecular diagnostic testing services and comprehensive genetic testing designed to provide physicians and patients with clinically actionable diagnostic information to improve the quality of patient care. A cornerstone of our business is our ability to provide expansive options and flexibility for all clients' unique testing needs. To this end, we have developed a proprietary technology platform allowing us to offer a broad and flexible test menu and to continually expand and improve our proprietary genetic reference library, while maintaining accessible pricing, high accuracy and competitive turnaround times. Combining next generation sequencing, or NGS, with our technology platform, we perform full-gene sequencing with deletion/duplication analysis in single-gene tests; pre-established, multi-gene, disease-specific panels; and customized panels that can be tailored to meet specific customer needs. We have experienced rapid volume growth since our commercial launch in 2013, with approximately 10.0 million billable tests delivered in 2021, compared to 4.4 million billable tests delivered in 2020, and an aggregate of approximately 14.5 million billable tests delivered to over 1,800 customers from inception through December 31, 2021. Our technology platform, which integrates sophisticated data comparison and suppression algorithms, adaptive learning software, in comparison to our competitors advanced genetic diagnostics tools and integrated laboratory processes, allows us to offer a test menu with expansive genetic coverage. We believe the comprehensive data output and high detection rates of our tests, both made possible by this expansive genetic coverage, provide physicians with information they can readily incorporate into treatment decisions for their patients, which we refer to as clinical actionability. In addition, our technology platform facilitates our ability to perform customized genetic tests using our expansive library of genes, and we believe this flexibility increases the utility of the genetic data we produce. Further, our technology platform provides us with operating efficiencies that help lower our internal costs, which allows us to offer our tests at accessible price points. As a result, our efforts to build and continually enhance our technology platform allow us to deliver comprehensive, adaptable, clinically actionable and affordable genetic analysis while maintaining a low cost per billable test, enabling us to efficiently meet the needs of our growing base of customers. We offer tests at competitive prices, averaging approximately $100per billable test delivered in 2021, and at a low cost to us, averaging approximately $22per billable test delivered in 2021. Our volume has grown rapidly since our commercial launch in 2013, with approximately 10.0 million billable tests delivered in 2021, 4.4 million billable tests delivered in 2020, and an aggregate of approximately 14.5 million billable tests delivered to over 1,800 customers from inception through December 31, 2021. We have experienced compound quarterly growth of 111.0% in the number of billable tests delivered in our last eight completed fiscal quarters. We recorded revenue and income from operations of $992.6 millionand $507.4 million, respectively, in 2021, compared to revenue and income from operations of $421.7 millionand $214.3 million, respectively, in 2020. We achieved profitability in the first quarter 50
of 2017, and in the second and the third quarter of 2019, the second, third and
fourth quarters of 2020, and all the quarters of 2021, but we have recorded
losses in all other periods since our inception.
May 2021, we entered into a restructuring agreement with Xilong Scientific and FJIP, resulting in the Company indirectly acquiring a controlling financial interest in FF Gene Biotech. FF Gene Biotech was founded as a joint venture to bring our NGS capabilities to the Chinese genetic testing market through entities separate from our U.S.operations, and FF Gene Biotech is pursuing this objective separate from our business elsewhere.
Acquisition of CSI
We completed the acquisition of CSI, a leading cancer testing laboratory, to expand our presence in somatic molecular diagnostics and cancer testing. CSI was founded to provide a client- and patient-focused model of cancer diagnostic testing for pathologists, community hospitals, and their patients. CSI offers approximately 400 unique tests with a focus on oncology and capabilities across flow cytometry, cytogenetic analysis, fluorescence in-situ hybridization, or FISH, immunohistochemistry, and molecular genetics. CSI's philosophy of providing expert diagnostic testing with speed, precision, and care, is highly complementary with our core value proposition of offering a broad menu of actionable diagnostic tests with quality results and rapid turnaround times. CSI is based in
Alpharetta, GAand expands our presence in the southeastern United States.
We made an investment in and entered into a strategic partnership with
Helio Health, an AI-biotechnology company developing blood-based early cancer detection tests, to commercialize Helio Health'sblood-based early cancer detection tests. In conjunction with the commercial strategic partnership whereby Helio Healthhas secured exclusive commercial rights for laboratory develop tests, or LDTs, in the U.S.and Canada. Under this partnership, we and Helio Healthcommercialized and co-branded HelioLiver, a cell-free DNA (cfDNA) methylation blood test that incorporates protein markers and demographics for the detection of hepatocellular carcinoma (HCC) - or liver cancer. COVID-19 Considerations The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, patients, communities and business operations, as well as the U.S.economy and financial markets. We are closely monitoring the impact of COVID-19 on all aspects of our business, including its impact on our customers, suppliers, third-party service providers, and our employees. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and its variants, the actions taken to contain it or treat it and the economic impact on local, regional, national and international markets and supply chains. During the year ended December 31, 2021, and for the entirety of the COVID-19 pandemic to such point, we continued to operate as an essential business in response to COVID-19. In years ended December 31, 2020and December 31, 2021, the COVID-19 pandemic did not have a negative impact on our consolidated operating results. Since the outbreak of the current COVID-19 pandemic there has been strong demand for accurate COVID-19 testing with rapid turn-around times as private businesses, municipalities and healthcare providers began to increasingly rely on diagnostic testing to continue operations and as a tool to aide containment efforts, and as result we have recognized significant revenue growth in connection with sales of our COVID-19 tests. While the duration of the ongoing COVID-19 pandemic and continuing market for COVID-19 diagnostic tests remains subject to a number of uncertainties, including uncertainties regarding the effectiveness of disease containment efforts, speed and effectiveness of global COVID-19 vaccine distributions, newly emerging viral variants, continuing government actions in response to the pandemic and regulatory requirements or preferences that may emerge following the pandemic, a robust market for COVID-19 diagnostic testing persists to present day. However, the responses of the federal, international, state and regional governments to the pandemic, including any shelter in place orders and the allocation of healthcare resources to treating those infected with the virus, previously caused a significant decline in the number of our traditional genetic tests ordered and, if repeated, may again cause the volume of our traditional genetic tests to decline. Even after the COVID-19 outbreak has subsided, we may experience materially adverse impacts on our financial condition and results of operations. Our ability to continue to operate as currently planned, including our ability to continue to offer our COVID19 tests with accurate results and competitive turn-around times without any significant negative operational impact from the COVID-19 pandemic will depend in part on our, and any of our thirdparty service providers' and suppliers' ability to protect our respective employees and supply chains. We have endeavored to follow the recommended actions of government and health authorities to protect our employees. We intend to continue to adhere to our employee safety measures to ensure that any 51 -------------------------------------------------------------------------------- disruptions to our operations remain minimal during the pandemic. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our, or our third-party service providers' and suppliers', workforce and supply chain. The COVID-19 pandemic has not negatively impacted the Company's liquidity position as of December 31, 2021. We have not incurred any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic as of December 31, 2021.
For additional information on risk factors related to the COVID-19 pandemic or
other risks that could impact our results, please refer to “Item 1A. Risk
Factors” in Part I of this Form 10-K.
Factors Affecting Our Performance
Market and Industry Trends
Genetic testing has experienced significant growth in recent years. If this growth trend continues, we believe genetic testing could become a more accepted part of standard medical care and the knowledge of a person's unique genetic makeup could begin to play a more important role in the practice of medicine. The advent of NGS technology, a relatively new genetic testing technique that enables millions of DNA fragments to be sequenced in parallel, has dramatically lowered the cost and improved the quality of genetic testing, contributing to increased adoption generally and increased volumes for our tests. The growth of genetic testing in recent years has caused increased competition in our industry. This increased competition, as well as cost-saving initiatives on the part of government entities and other third-party payors, has resulted in downward pressure on the price for genetic analysis and interpretation, which could intensify in future periods if adoption of genetic testing becomes more widespread. We have reduced the prices for certain of our tests in recent periods to maintain our competitive position, and increased downward pricing pressure could harm our revenue and margins and our ability to achieve and sustain profitability. The impact of this pricing pressure has been and may continue to be intensified if we continue to incur increased expenses in order to meet customer demands and make investments in our business. While adoption of genetic testing has increased in recent years, we believe widespread utilization has been tempered because of certain challenges and barriers to adoption that exist in today's market. Among these industry challenges are that genetic testing can be prohibitively expensive, only a limited number of genetic tests are currently reimbursable, certain genetic conditions cannot be diagnosed due to the limited scope of some genetic analysis, genetic testing can be an inefficient process and the interpretation of genetic results can be cumbersome and time-consuming. We have approached these competitive and operational industry challenges by building and continually advancing a multi-faceted technology platform that we believe will facilitate our ability to address many of these challenges.
Launch of COVID-19 Testing Services
We have experienced rapid volume growth since our commercial launch in 2013, especially after the launch of our COVID-19 testing services, with approximately 10.0 million billable tests delivered in 2021, compared to 4.4 million billable tests delivered in 2020, and an aggregate of approximately 14.5 million billable tests delivered to over 1,800 customers from inception through
December 31, 2021. Most of the recent growth in our testing volume has resulted from COVID-19 tests that we conduct for certain counties, states and municipalities. The expansion of our COVID-19 testing business has resulted in a substantial change in our business that presents important challenges to our ability to manage our rapidly expanding business, and we anticipate that this business will eventually decrease after the development and widespread deployment of an effective vaccine.
Number and Mix of Billable Tests Delivered
Our performance is closely correlated with the number of tests for which we bill our customers, which we refer to as billable tests. The number of billable tests we deliver in any period depends on a number of factors, including the other factors affecting our performance described in this discussion and analysis. We believe the number of billable tests that we deliver is an important indicator of the performance of our business. In addition, we offer our tests at different price points, and we incur different amounts and types of costs, depending on the nature and level of complexity and customization of the test and the specific terms we have negotiated for the tests, which can vary from customer to customer. As a result, the mix of billable tests delivered in any period, and the customers that order these tests, impacts our financial results for the period. 52
Mix of Customers
December 31, 2021, we have sold our tests to over 1,800 total customers. We consider each single billing and paying unit to be an individual customer, even though a unit may represent multiple physicians and healthcare providers ordering tests. The composition and concentration of our customer base can fluctuate from period to period, and in certain prior periods, a small number of customers has accounted for a significant portion of our revenue. Generally, we do not have long-term purchase agreements with any of our customers, including these key customers, and, as result, any or all of them could decide at any time to increase, accelerate, decrease, delay or discontinue their orders from us. Although we believe some of these fluctuations in customer demand may be attributable in part to the nature of our business, in which our customers can experience significant volatility in their testing demand from period to period in the ordinary course of their operations, these demand fluctuations, particularly for our key customers, can have a significant impact on our period-to-period performance regardless of their cause. We currently classify our customers into three payor types: (i) Insurance, including claim reimbursement from HRSA for uninsured individuals, (ii) Institutional, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations or (iii) Patients who pay directly. Typically, we bill our Institutional customers for our tests and they are responsible for paying us directly and billing their patients separately or obtaining reimbursement from third-party payors in connection with a patient's diagnosis related group. A small percentage of our customers are patients, who elect to pay for tests themselves with out-of-pocket payments after their physicians have ordered our tests. We are making efforts to diversify our customer market, including building relationships with research institutions and other similar institutional customers, national clinical laboratories, governmental bodies, municipalities and large corporations in need of regular COVID-19 testing for large populations and various other organizations to facilitate access to physicians, practitioners and other new customer groups, including certain U.S.government agencies. We are also pursuing relationships with payors, including Medicare, some state Medicaid programs and commercial payors, in an effort to obtain coverage and reimbursement for our tests to make them accessible to more individual physicians. Generally, when we establish these new customer relationships, we agree with the applicable payor, laboratory or other customer to provide certain of our tests at negotiated rates, but, subject to limited exceptions, most of these relationships do not obligate any party to order our tests at any agreed volume or frequency or at all. Further, any relationships we may develop with any government agencies are subject to unique risks associated with government contracts, including cancellation if adequate appropriations for subsequent performance periods are not made and modification or termination at the government's convenience without prior notice. Our efforts to pursue individual consumers under our Picture Genetics platform, new payor or institutional customers, new COVID-19 testing customers or other new customer markets could fail, and even if we are able to develop relationships with new customers in these or any other new customer groups, these relationships may not lead to meaningful or any increases in our customer base, the number of billable tests we deliver or our revenue, and may not improve our ability to achieve or sustain profitability.
Ability to Maintain Our Broad and Flexible Test Menu
We believe the large number of genes we incorporate into our test menu provides a meaningful competitive advantage. We believe the breadth of genes in our portfolio allows us to provide more comprehensive genetic information and improves our variant detection rate, which can increase the clinical actionability of the data we produce. The breadth of genes in our portfolio also allows us to offer hundreds of pre-established, multi-gene panels that focus on specified genetic conditions, including our Focus and Comprehensive oncology panels and Beacon carrier screening panels and somatic cancer panels. In addition, all of our panel tests can be adjusted up or down to include more or fewer genes, or customers can design their own panels to their exact specifications, resulting in a flexible and customizable test menu. We believe our ability to continue to offer more genes and more ordering flexibility than our competitors could be a key contributor to the long-term growth of our business.
Ability to Maintain Low Internal Costs
We have developed various proprietary technologies that improve our laboratory efficiency and reduce the costs we incur to perform our tests, including our proprietary gene probes, data algorithms, adaptive learning software and genetic reference library. This technology platform enables us to perform each test and deliver its results at a lower cost to us than many of our competitors, and this low cost per billable test allows us to maintain affordable and competitive pricing for our customers, which we believe encourages repeat ordering from existing customers and attracts new customers. We believe this low internal cost is a key factor in our ability to grow our business and obtain margins on our sales that allow us to drive toward sustained profitability. We calculate our cost per billable test by dividing the number of billable tests delivered in any given period by our cost of revenue in the same period. Investments in our operational capabilities could increase our cost of revenue, but these investments could also, on a near-term and/or long-term basis, increase our operating efficiencies and lead to cost of revenue decreases. As a result, the amount, timing, nature and success of these investments, as well as other influences on our cost of revenue from period to period, can impact the amount of our cost per billable test. Moreover, changes in our other operating expenses, due to investments in these aspects 53 -------------------------------------------------------------------------------- of our business or other factors, are not taken into account in the calculation of this measure but impact our overall results, which can limit the utility of cost per billable test as an overall cost measurement tool.
Ability to Obtain Reimbursement
In today's market, third-party payors generally restrict the reimbursement of genetic testing to only a narrow subset of genetic tests and certain patients who meet specific criteria. The lack of widespread favorable reimbursement policies has presented a challenge for genetic testing companies in building sustainable business models. As part of our business plan for future growth, we intend to pursue coverage and reimbursement from third-party payors at a level adequate for us to achieve profitability with this payor group. However, we cannot predict whether, under what circumstances, or at what payment levels payors will cover and reimburse for our tests, and even if we are successful, we believe it could take several years to achieve coverage and adequate contracted reimbursement with third-party payors. To date, we have contracted directly with national health insurance companies to become an in-network provider and enrolled as a supplier with the Medicare program and some state Medicaid programs, which means that we have agreed with these payors to provide certain of our tests at negotiated rates. Although this does not guarantee that we will receive reimbursement for our tests from these or any other payors at adequate levels, we believe our low cost per billable test could enhance our ability to compete effectively in the third-party payor market and our flexibility in establishing relationships with additional third-party payors in the future. Our level of success in obtaining and maintaining adequate coverage and reimbursement from third-party payors for our testing services will, we believe, be a key factor in the rate and level of growth of our business over the long term.
Foreign Currency Exchange Rate Fluctuations
Some of our business to date has been from non-
U.S.customers, and we may record increasing revenue levels from non- U.S.sources as we focus on growing our international customer base. These revenue sources expose us to fluctuations in our results associated with changes in foreign currency exchange rates depending on the value of the U.S.dollar compared to the foreign currencies in which we record revenue. During all periods covered by this report, we consider the estimated effect on our revenue of foreign currency exchange rate fluctuations to be immaterial; however, the impact of foreign currency exchange rate fluctuations may increase in future periods as we pursue continued international expansion. Business Risks and Uncertainties
Our business and prospects are exposed to numerous risks and uncertainties. For
more information, see “Item 1A. Risk Factors” in this report.
We generate revenue from sales of our COVID-19 tests and genetic tests. We
recognize revenue upon delivery of a report to the ordering physician or other
customer based on the established billing rate, less contractual and other
adjustments, to arrive at the amount we expect to collect.
Cost of Revenue
Cost of revenue reflects the aggregate costs incurred in delivering test results, including "sequencing as a service", and consists of: costs of laboratory supplies, including collection kits, personnel costs, including salaries, employee benefit costs, bonuses and equity-based compensation expenses; depreciation of laboratory equipment; amortization of leasehold improvements; and allocated overhead expenses, including rent and utilities. Costs associated with performing tests are recorded as tests are processed. We expect cost of revenue to generally increase as we increase the number of billable tests we deliver.
Our operating expenses are classified into three categories: research and
development; selling and marketing; and general and administrative. For each
category, the largest component is personnel costs, which include salaries,
employee benefit costs, bonuses and equity-based compensation expenses.
Research and Development Expenses
Research and development expenses represent costs incurred to develop our technology and future tests. These costs consist of personnel costs, laboratory supplies, consulting costs and allocated overhead expenses, including rent and utilities. We expense all 54 -------------------------------------------------------------------------------- research and development costs in the periods in which they are incurred. We expect our research and development expenses will continue to increase in absolute dollars as we expect to continue to invest in research and development activities.
Selling and Marketing Expenses
Selling and marketing expenses consist of personnel costs, customer service expenses, direct marketing expenses, educational and promotional expenses, market research and analysis and allocated overhead expenses, including rent and utilities. We expense all selling and marketing costs as incurred. We expect our selling and marketing expenses will continue to increase in absolute dollars, primarily driven by our increased investment in sales and marketing in recent periods, including developing and expanding our sales team, creating and implementing new sales and marketing strategies and increasing the overall scope of our marketing efforts.
General and Administrative Expenses
General and administrative expenses include executive, finance, accounting, legal and human resources functions. These expenses consist of personnel costs, audit and legal expenses, consulting costs and allocated overhead expenses, including rent and utilities. We expense all general and administrative costs as incurred. We expect our general and administrative expenses will continue to increase in absolute dollars as we seek to continue to scale our operations. We also expect to continue to incur increased general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the
SEC, and the Nasdaq Stock Market, additional insurance expenses, investor relations activities and other administrative and professional services.
Provision for Income Taxes
Provision for income taxes consists of
U.S.federal and state income taxes. A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences, operating losses and tax credit carryforwards. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The factors that most significantly impact our effective tax rate include the levels of net earnings and certain deductions, including those related to equity-based compensation, the effect of state income taxes, return to provision adjustments, and foreign tax rate differential. We expect that these factors could cause our consolidated effective tax rate to differ significantly from the U.S.federal income tax rate in future periods. 55 -------------------------------------------------------------------------------- Results of Operations The table below summarizes the results of our continuing operations for each of the periods presented. Historical results are not indicative of the results to be expected in the current period or any future period. Year Ended December 31, $ % 2021 2020 Change Change Statement of Operations Data: (dollars and billable tests in thousands, except per billable test data) Revenue $ 992,584 $ 421,712 $ 570,872135% Cost of revenue 215,533 89,807 125,726 140% Gross profit 777,051 331,905 445,146 134% Operating expenses: Research and development 24,219 11,580 12,639 109% Selling and marketing 24,439 14,952 9,487 63% General and administrative 50,732 15,215 35,517 233% Amortization of intangible assets 1,708 - 1,708 * Total operating expenses 101,098 41,747 59,351 142% Operating income 675,953 290,158 385,795 133% Interest and other income, net 1,347 1,526 (179 ) (12)% Income before income taxes, equity loss in investee and gain (loss) on equity-method investments 677,300 291,684 385,616 132% Provision for income taxes 174,795 72,532 102,263 141% Income before equity loss in investee and gain (loss) on equity-method investments 502,505 219,152 283,353 129% Equity loss in investee - (488 ) 488 100% Gain (loss) on equity-method investments 3,734 (4,354 ) 8,088 186% Net income from consolidated operations 506,239 214,310 291,929 136% Net loss attributable to noncontrolling interests 1,125 - 1,125 * Net income attributable to Fulgent $ 507,364 $ 214,310 $ 293,054137% Other Operating Data: Billable tests delivered(1) 9,962 4,409 5,553 126% Average price per billable test delivered(2) $ 100 $ 96 $ 4 4% Cost per billable test delivered(3) $ 22 $ 20 $ 2 10% * Percentage not meaningful.
(1) We determine the number of billable tests delivered in a period by counting
the number of tests which are delivered to our customers and for which we
bill our customers and recognize some amount of revenue in the period.
(2) We calculate the average price per billable test delivered by dividing the
amount of revenue we recognized from the billable tests delivered in a period
by the number of billable tests delivered in the same period.
(3) We calculate cost per billable test delivered by dividing our cost of revenue
in a period by the number of billable tests delivered in the same period.
Revenue Revenue increased
$570.9 million, or 135%, from $421.7 millionin 2020 to $992.6 millionin 2021. The increase in revenue between periods was primarily due to an increase in the number of COVID-19 billable tests delivered, as well as a higher average price per billable test. The average price of the billable tests we delivered increased $4, or 4%, from $96in 2020 to $100in 2021. The increase was due to the mix of tests we delivered in 2021 and the mix of customers ordering tests in these periods, who may order tests at different rates depending on the arrangements we have negotiated with them. Revenue from non- U.S.sources increased $7.2 million, or 113%, from $6.4 millionin 2020 to $13.6 millionin 2021. The increase in revenue from non- U.S.sources between periods were primarily due to increased sales of our traditional genetic testing services to customers in Chinathrough FF Gene Biotech which contributed $6.6 millionin total revenue in 2021. 56 -------------------------------------------------------------------------------- The number of billable tests we delivered in 2021 increased approximately 5.6 million, from 4.4 million in 2020 to 10.0 million. The increases were primarily attributable to the expansion of our test menu, including our COVID-19 tests launched in 2020, and increase in sales to certain of our existing and new customers. Aggregating customers that are under common control, one customer, the County of Los Angeles, contributed 26% of our revenue in 2021, and two customers, the County of Los Angelesand San Bernardino County, contributed 28% and 10% of our revenue in 2020. respectively.
Cost of Revenue
Cost of revenue increased
$125.7 million, or 140%, from $89.8 millionin 2020 to $215.5 millionin 2021. The increase was primarily due to increases of $43.3 millionin reagent and supply expenses related to increased billable tests delivered, $35.9 millionin consulting and outside labor expense related to increase of outside labor for production 2021, $18.0 millionin personnel costs and equity-based compensation related to increased headcount and the market price of the Company's stock, $11.6 millionin shipping and handling costs related to delivery of collection kits for of COVID-19 tests, $6.8 millionin software expense related to usage of COVID-19 testing software, $5.8 millionin depreciation related to medical lab equipment purchased, and $2.6 millionin facilities primarily related to certain modifications made to our mini vans used for our COVID-19 business. Cost per billable test delivered increased $2, or 10% from $20in 2020 to $22in 2021 as the increase in our cost of revenue was greater than in the number of billable tests we delivered primarily due to increased shipping and handling costs for our at-home COVID-19 testing services and increased outside labor related to testing site operations. Our gross profit increased $445.1 million, or 134%, from $331.9 millionin 2020 to $777.1 millionin 2021. The increase in gross profit was primarily due to the increase in revenue from our COVID-19 tests that exceeded the increase in cost of revenue described above. Our gross profit as a percentage of revenue, or gross margin, decreased from 78.7% to 78.3% due to the increased cost per billable test delivered for reasons stated above.
Research and Development
Research and development expenses increased
$12.6 million, or 109%, from $11.6 millionin 2020 to $24.2 millionin 2021. The increase was primarily due to increases of $8.8 millionin personnel costs and equity-based compensation related to increased headcount and the market price of the Company's stock and $2.0 millionin reagent and supply expenses related to increased reagent usage for COVID-19 research. Selling and Marketing Selling and marketing expenses increased $9.5 million, or 63%, from $15.0 millionin 2020 to $24.4 millionin 2021. The increase was primarily due to increases of $8.8 millionin personnel costs and equity-based compensation related to increased commission expense and market price of the Company's stock, $2.4 millionin consulting and outside labor costs for increased outside labor used, partially offset by a decrease of $2.4 millionin marketing supplies and related shipping costs. General and Administrative General and administrative expenses increased $35.5 million, or 233%, from $15.2 millionin 2020 to $50.7 millionin 2021. The increase was primarily due to increases of $13.4 millionin personnel costs and equity-based compensation related to increased bonus accrued for executive officers, increased headcount and the market price of the Company's stock, $7.8 millionadditional provision for credit losses, $3.2 millionin software and licensing related to increased number of billings, $2.9 millionin consulting and $2.6 millionin legal expenses related to business acquisitions and internal control compliance, $1.5 millionin accounting expenses related to financial statement and internal control audit and reviews, $1.1 millionin facility repair and maintenance, and $1.0 millionin business insurance expenses. 57
Amortization of Intangible Assets
Amortization of intangible assets represents amortization expenses on the
intangible assets arose from the business combinations and a patent purchased in
Interest and Other Income, Net
Interest income, net was
respectively. This income mainly related to interest received on various
investments in marketable securities and holding gain or loss on marketable
Other income (expense) was not significant for 2021 or 2020. The primary
components of other income (expense) for 2021 and 2020 were rental income net of
rental expenses and foreign currency exchange gains (losses).
Provision for Income Taxes
Provision for income taxes were
$174.8 millionand $72.5 millionin 2021 and 2020, respectively. The effective income tax rate was 25.8% and 24.9% of income before income taxes for 2021 and 2020, respectively. The increase in tax expense for 2021 relative to 2020 was primarily attributable to a significant increase in income for the year ended December 31, 2021.
See Note 11, Income Taxes, to our consolidated financial statements included in
this report for more information regarding our income taxes.
Gain (Loss) on Equity-Method Investments
We recognized a gain of
$3.7 millionin 2021 related to our preexisting equity interest at FF Gene Biotech as a result of remeasuring to fair value our 30% equity interest held before the FF Gene Biotech Acquisition. The fair value of the preexisting equity interest was determined based on the characteristics before consummating the FF Gene Biotech Acquisition and estimated by applying income approach and utilizing the discounted cash flow method.
Impairment loss in equity-method investments was
our 30% ownership interest in FF Gene Biotech and 25% ownership interest in
Equity Loss in Investee
Equity loss in investee was
interest in FF Gene Biotech. There was no such loss in 2021.
Net Loss Attributable to Noncontrolling Interest
Net loss attributable to noncontrolling interest represents net loss of FF Gene
Biotech attributable to the minority shareholders, Xilong Scientific and FJIP.
58 -------------------------------------------------------------------------------- Liquidity and Capital Resources
Liquidity and Sources of Cash
marketable securities as of
marketable securities primarily consist of equity securities and corporate
bonds, municipal bonds, and
Initially after commencing operations in
May 2012, our operations were financed primarily by our founder, Chief Executive Officer and Chairman of our board of directors, Ming Hsieh, and in more recent periods, by cash from our operations and equity financings. Our primary uses of cash are to fund our operations as we continue to invest in and seek to grow our business. Cash used to fund operating expenses is impacted by the timing of our expense payments, as reflected in the changes in our outstanding accounts payable and accrued expenses. On August 30, 2019, we entered into an Equity Distribution Agreement, or the 2019 Equity Distribution Agreement, with Piper, as sales agent, which was subsequently amended on August 4, 2020. Pursuant to the 2019 Equity Distribution Agreement, we offered and sold an aggregate of 104,000 shares of our common stock at a weighted-average net selling price of $9.37per share, which resulted in $979,000of net proceeds to the Company during the year ended December 31, 2019, and we sold an aggregate of 1.1 million shares of our common stock at a weighted-average net selling price of $38.50per share, which resulted in $42.7 millionof net proceeds to the Company during the year ended December 31, 2020. Shares sold under the 2019 Equity Distribution Agreement were offered and sold pursuant to the Company's registration statement on Form S-3 (File No. 333-233227) filed with the SECon August 12, 2019and declared effective on August 23, 2019, and prospectus supplements and accompanying base prospectus filed with the SECon August 30, 2019, May 6, 2020and August 5, 2020. On November 13, 2019, we entered into a purchase agreement with Piper, as representative of the several underwriters, pursuant to which we sold 2.7 million shares of our common stock at a price of $10.52per share, with a public offering price of $11.25per share. We received net proceeds of approximately $27.6 million, after deducting underwriting discounts and commissions and offering expenses paid or payable by us of approximately $2.4 million. The shares issued and sold in the underwritten offering were sold pursuant to the Company's registration statement on Form S-3 (File No. 333-233227), and a prospectus supplement and accompanying base prospectus filed with the SECon November 13, 2019. On September 25, 2020, we entered into the September 2020Equity Distribution Agreement, with Piper as sales agent, pursuant to which we offered and sold an aggregate of 2.8 million shares of our common stock at a weighted-average net selling price of $42.90per share, which resulted in $122.1 millionof net proceeds to the Company. Shares sold under the September 2020Equity Distribution Agreement were offered and sold pursuant to the Company's registration statement on Form S-3 (File No. 333-239964) filed with the SECon July 21, 2020, as amended on August 5, 2020, and declared effective on August 12, 2020, and a prospectus supplement and accompanying base prospectus filed with the SECon September 25, 2020. On November 20, 2020, we entered into the November 2020Equity Distribution Agreement, with Piper, Oppenheimer & Co.Inc., and BTIG LLC, as sales agents, pursuant to which we may offer and sell, from time to time through Piper, shares of our common stock having an aggregate offering price of up to $175.0 million. Piper may receive a commission of up to 3% of the gross proceeds received by the Company for sales pursuant to the November 2020Equity Distribution Agreement. During the year ended December 31, 2020, the Company sold an aggregate of 2.0 million shares of our common stock pursuant to the November 2020Equity Distribution Agreement at a weighted-average net selling price of $48.70per share, which resulted in $99.1 millionof net proceeds to the Company. During the year ended December 31, 2021, we sold approximately 1.1 million shares of our common stock pursuant to the November 2020Equity Distribution Agreement at a weighted-average net selling price of $64.83per share, which resulted in $72.0 millionof net proceeds to the Company. Shares sold under the November 2020Equity Distribution Agreement were offered and sold pursuant to the Company's registration statement on Form S-3 (File No. 333-239964) filed with the SECon July 21, 2020, as amended on August 5, 2020, and declared effective on August 12, 2020, and a prospectus supplement and accompanying base prospectus filed with the SECon November 20, 2020. We believe our existing cash, cash equivalent, short-term marketable securities, along with cash from operations and proceeds from our equity financings, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. Much of the losses we have incurred in certain prior periods were attributable to a variety of non-cash charges, including equity-based compensation expenses. As a result, in spite of the losses we recorded during these periods, cash provided by continuing operations has been mostly positive since 2015 and has significantly contributed to our ability to meet our liquidity needs, including paying for capital expenditures. Additionally, if our business continues to grow and we are able to achieve increased efficiencies and economies of scale in line with this growth, we expect increased revenue levels would increase our ability to rely on cash from our operations to 59 -------------------------------------------------------------------------------- support our business in future periods, even if our expenses also increase as a result of the growth of our business. Based on these factors, we anticipate that cash from our operations will continue to play a meaningful role in our ability to meet our liquidity requirements and pursue our business plans and strategies during the next 12 months and in the longer term. However, our expectations regarding the cash that may be provided by our operations and our cash needs in future periods could turn out to be wrong, in which case we may require additional financing to support our operations, as we do not presently have any commitments for future capital. For instance, cash provided by our operations has in the past experienced fluctuations from period to period, which we expect may continue in the future. These fluctuations can occur because of a variety of factors, including, among others, factors relating to the ongoing COVID-19 pandemic, the amount and timing of sales of billable tests, the prices we charge for our tests due to changes in product mix, customer mix, general price degradation for tests or other factors, the rate and timing of our billing and collections cycles and the timing and amount of our commitments and other payments. Moreover, even if our liquidity expectations are correct, we may still seek to raise additional capital through securities offerings, credit facilities or other debt financings, asset sales or collaborations or licensing arrangements. If we raise funds by issuing equity securities, our existing stockholders could experience substantial dilution. Additionally, any preferred stock we issue could provide for rights, preferences or privileges senior to those of our common stock, and our issuance of any additional equity securities, or the possibility of such an issuance, could cause the market price of our common stock to decline. The terms of any debt securities we issue or borrowings we incur, if available, could impose significant restrictions on our operations, such as limitations on our ability to incur additional debt or issue additional equity or other restrictions that could adversely affect our ability to conduct our business, and would result in increased fixed payment obligations. If we seek to sell assets or enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms or relinquish or license to a third party our rights to important or valuable technologies or tests we may otherwise seek to develop ourselves. Moreover, we may incur substantial costs in pursuing future capital, including investment banking, legal and accounting fees, printing and distribution expenses and other similar costs. Additional funding may not be available to us when needed, on acceptable terms or at all. For example, the COVID-19 pandemic caused extreme disruption and volatility in the global capital markets, which could reduce our ability to access capital. If we are not able to secure funding if and when needed and on reasonable terms, we may be forced to delay, reduce the scope of or eliminate one or more sales and marketing initiatives, research and development programs or other growth plans or strategies. In addition, we may be forced to work with a partner on one or more aspects of our tests or market development programs or initiatives, which could lower the economic value to us of these tests, programs or initiatives. Any such outcome could significantly harm our business, performance and prospects.
The following table summarizes cash flows from continuing operations for each of the periods presented: Year Ended
December 31, 20212020 (in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Operating Activities Cash provided by operating activities in 2021 was
$538.6 million. The difference between net income and cash provided by operating activities for the period was primarily due to the effect of $15.9 millionin equity-based compensation expenses and $11.0 millionin the depreciation and amortization. Cash provided by operating activities decreased between periods primarily due to decreases of $52.5 millionin income tax payable due to tax payments made during the current period and $12.2 millionin accounts payable partially offset by the negative impact of a decrease of $42.3 millionin accounts receivable mainly due to the timing of collections from customers and an increase of $13.1 millionin accrued and other liabilities primary due to increased customer deposits and bonus accrual. Cash provided by operating activities in 2020 was $140.6 million. The difference between net income and cash provided by operating activities for the period was primarily due to the effect of $8.2 millionin equity-based compensation expenses, $4.4 millionin impairment loss from equity-method investments and $3.0 millionin the depreciation of assets. Cash provided by operating activities decreased between periods primarily due to the negative effect of increases of $178.5 millionin accounts receivable mainly due to the timing of collections from customers and $21.1 millionin other current assets related to purchases of an increased amount of reagents and supplies, partially offset by increases of $53.3 millionin income tax payable due to a significant increase in income, 60
Cash used in investing activities in 2021 was
$546.5 million, which primarily related to $710.5 millionin purchases of marketable securities, $61.9 millionrelated to business acquisitions, $23.8 millionrelated to purchase of fixed assets consisting mainly medical laboratory equipment and building improvement, and $20.0 millionrelated to purchase of redeemable preferred stock, partially offset by proceeds of $185.7 millionrelated to sales of marketable securities and $83.8 millionrelated to maturities of marketable securities. Cash used in investing activities in 2020 was $326.4 million, which primarily related to $324.4 millionin purchases of marketable securities, $35.1 millionin purchases of fixed assets consisting mainly of medical laboratory equipment, real property located in El Monte, California, a 2008 Cessna Citation Sovereign aircraft, computer hardware and building and land improvements, $2.6 millionin investment in BostonMolecules and direct costs associates with the investment, and purchase equipment with an aggregate fair value of $1.4 millioncontributed to FF Gene Biotech, partially offset by maturities of $19.9 millionof marketable debt securities and proceeds of $17.1 millionfrom sales of marketable securities.
Cash provided by financing activities in 2021 was
$85.4 million, which primarily related to $89.5 millionproceeds from the November 2020Equity Distribution Agreement, partially offset by $4.2 millionin common stock withholding for employee tax obligations. Cash provided by financing activities in 2020 was $261.3 million, which primarily represents net proceeds from sales of shares of our common stock made pursuant to various equity distribution agreements with Piper and $15.0 millionborrowed from a margin loan collateralized by marketable debt securities held by the Company, to purchase real property located in El Monte, California.
Material Cash Requirements and Contractual Obligations as of
December 31, 2021, we have an outstanding balance of $15.1 millionin our margin account and $6.1 millionin notes payable which is payable on December 31, 2022. The following summarizes our contractual obligations as of December 31, 2021: Payments Due by Period Less than 1 More than 5 Total year 1-3 years 3-5 years years (in thousands)
Operating lease obligations (1)
$ 1,932 $ 1,080Finance lease obligations(2) 1,874 383 759 732 - Purchase obligations(3) 11,584 11,584 - - - Total contractual obligations $ 21,240 $ 14,004 $ 3,492 $ 2,664 $ 1,080
(1) Represents non-cancelable operating leases. For further information, refer
to Note 9 to the Consolidated Financial Statements.
(2) Represents non-cancelable finance leases. For further information, refer to
Note 9 to the Consolidated Financial Statements.
(3) Represents non-cancelable purchase obligations for medical lab equipment,
reagents and other supplies, see Note 8 to the Consolidated Financial Statements. Critical Accounting Policies and Use of Estimates This discussion and analysis is based on our consolidated financial statements included in this report, which have been prepared in accordance with
U.S.Generally Accepted Accounting Principles, or U.S.GAAP. The preparation of consolidated financial statements in accordance with U.S.GAAP requires management to make certain estimates, judgments and assumptions and decisions that affect the reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In making these estimates and assumptions and reaching these decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including historical data and experience available at the date of the consolidated financial statements, as well as various other factors management believes to be reasonable under the circumstances, including but not limited to valuation of intangible assets and goodwill in recent business combinations and the potential impacts arising from the recent global pandemic related to COVID-19. As the extent and duration of the impacts from 61 -------------------------------------------------------------------------------- COVID-19 remain unclear, our estimates and assumptions may evolve as conditions change. Actual results could differ from our estimates. We are committed to incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in our consolidated financial statements. While our significant accounting policies are described in more detail in the notes to the consolidated financial statements included in this report, we believe the accounting policies discussed below used in the preparation of our consolidated financial statements require the most significant estimates, judgments, assumptions and decisions. Revenue Recognition We generate revenue from sales of our COVID-19, molecular diagnostic and genetic testing services. We currently receive payments from: insurance, institutional customers, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, and patients who pay directly. We recognize revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for the transfer of promised goods or services to our customers. To determine revenue recognition for contracts with customers, the Company performs the following steps: (1) identifies the contract with the customer, (2) identifies the performance obligations in the contract, (3) determines the transaction price, (4) allocates the transaction price to the performance obligations in the contract, and (5) recognizes revenue when (or as) the entity satisfies a performance obligation. Our test results are primarily delivered electronically. We bill certain customers for shipping and handling fees incurred by us associated with COVID-19 tests, and shipping and handling fees billed to customers are included in revenue, and shipping and handling fees incurred are included in cost of revenue in the accompanying Consolidated Statements of Operations. While the transaction price is typically stated within the contract, we may accept payments from third-party payors that are less than the contractually stated price and is therefore variable consideration. Accounting for insurance contracts includes estimation of the transaction price, defined as the amount we expect to be entitled to receive in exchange for providing the services under the contract. Due to our out-of-network status with the majority of insurance payors for COVID-19 tests, estimation of the transaction price represents variable consideration. We estimate that the variable consideration paid by insurance payors will approximate our self-pay rate for COVID-19 tests that is published on our website, which is the rate established by the Center for Medicare & Medicaid Services, as supported by a historical reimbursement trend analysis. Valuation of Goodwilland Intangible Assets The valuation of assets acquired in a business combination and asset impairment reviews require the use of significant estimates and assumptions. The acquisition method of accounting for business combinations requires us to estimate the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in an acquired business to properly allocate purchase price consideration between assets that are depreciated or amortized and goodwill. Long-lived assets, including property and equipment and intangible assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected from an asset and its eventual disposition is less than the carrying amount. We evaluate goodwill annually or more frequently if events or changes in circumstances indicate that goodwill may be impaired. In accordance with guidance related to impairment testing, we have the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If the qualitative assessment option is not elected, or if the qualitative assessment indicates that it is more likely than not that the fair value is less than its carrying amount, a quantitative analysis is then performed. The quantitative analysis, if performed, compares the fair value of the reporting unit with its respective carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, including goodwill, goodwill is considered not to be impaired and no additional steps are necessary. If the fair value is less than the carrying amount, including goodwill, then an impairment adjustment must be recorded up to the carrying amount of goodwill. 62 -------------------------------------------------------------------------------- Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to our consolidated
financial statements included in this report for information about recent
Off-Balance Sheet Arrangements We did not have, and do not currently have, any off-balance sheet arrangements during the periods presented, as defined in the rules and regulations of the
SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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