Forward-Looking Statements
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 $100 per billable
test delivered in 2021, and at a low cost to us, averaging approximately $22 per
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 million and $507.4 million, respectively, in 2021, compared to revenue
and income from operations of $421.7 million and $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.
2021 Developments
Incremental Investment in Chinese Joint Venture entity, FF Gene Biotech
In 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, GA and expands our presence in the southeastern United
States.
Strategic Partnership with Laboratory for Advanced Medicine, Inc., or Helio
Health
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's blood-based early cancer
detection tests. In conjunction with the commercial strategic partnership
whereby Helio Health has secured exclusive commercial rights for laboratory
develop tests, or LDTs, in the U.S. and Canada. Under this partnership, we and
Helio Health commercialized 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, 2020 and 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
Through 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.
Financial Overview
Revenue
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.
Operating Expenses
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 $ 570,872 135%
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 $ 293,054 137%
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 million in 2020 to $992.6
million in 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
$96 in 2020 to $100 in 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 million
in 2020 to $13.6 million in 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 China through FF Gene Biotech which contributed
$6.6 million in 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 Angeles and 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 million in 2020 to
$215.5 million in 2021. The increase was primarily due to increases of $43.3
million in reagent and supply expenses related to increased billable tests
delivered, $35.9 million in consulting and outside labor expense related to
increase of outside labor for production 2021, $18.0 million in personnel costs
and equity-based compensation related to increased headcount and the market
price of the Company's stock, $11.6 million in shipping and handling costs
related to delivery of collection kits for of COVID-19 tests, $6.8 million in
software expense related to usage of COVID-19 testing software, $5.8 million in
depreciation related to medical lab equipment purchased, and $2.6 million in
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 $20 in 2020 to $22 in
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 million in 2020
to $777.1 million in 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
million in 2020 to $24.2 million in 2021. The increase was primarily due to
increases of $8.8 million in personnel costs and equity-based compensation
related to increased headcount and the market price of the Company's stock and
$2.0 million in 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
million in 2020 to $24.4 million in 2021. The increase was primarily due to
increases of $8.8 million in personnel costs and equity-based compensation
related to increased commission expense and market price of the Company's stock,
$2.4 million in consulting and outside labor costs for increased outside labor
used, partially offset by a decrease of $2.4 million in marketing supplies and
related shipping costs.
General and Administrative
General and administrative expenses increased $35.5 million, or 233%, from $15.2
million in 2020 to $50.7 million in 2021. The increase was primarily due to
increases of $13.4 million in 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 million additional provision
for credit losses, $3.2 million in software and licensing related to increased
number of billings, $2.9 million in consulting and $2.6 million in legal
expenses related to business acquisitions and internal control compliance, $1.5
million in accounting expenses related to financial statement and internal
control audit and reviews, $1.1 million in facility repair and maintenance, and
$1.0 million in 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
2021.
Interest and Other Income, Net
Interest income, net was $1.3 million and $1.5 million for 2021 and 2020,
respectively. This income mainly related to interest received on various
investments in marketable securities and holding gain or loss on marketable
equity securities.
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 million and $72.5 million in 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 million in 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 $4.4 million in 2020 related to
our 30% ownership interest in FF Gene Biotech and 25% ownership interest in
BostonMolecules.
Equity Loss in Investee
Equity loss in investee was $488,000 in 2020 related to our 30% ownership
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 ResourcesLiquidity and Sources of Cash
We had $935.5 million and $431.9 million in cash, cash equivalents and
marketable securities as of December 31, 2021 and 2020, respectively. Our
marketable securities primarily consist of equity securities and corporate
bonds, municipal bonds, and U.S. government and U.S. agency debt securities as
of December 31, 2021 and 2020.
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 $9.37 per share, which resulted
in $979,000 of 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 $38.50 per share, which resulted in $42.7
million of 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 SEC on August 12, 2019 and declared effective on
August 23, 2019, and prospectus supplements and accompanying base prospectus
filed with the SEC on August 30, 2019, May 6, 2020 and 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 $10.52 per share, with a public
offering price of $11.25 per 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 SEC on
November 13, 2019.
On September 25, 2020, we entered into the September 2020 Equity 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 $42.90 per share, which resulted in $122.1 million of net
proceeds to the Company. Shares sold under the September 2020 Equity
Distribution Agreement were offered and sold pursuant to the Company's
registration statement on Form S-3 (File No. 333-239964) filed with the SEC on
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 SEC on September 25, 2020.
On November 20, 2020, we entered into the November 2020 Equity 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 2020 Equity 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 2020 Equity
Distribution Agreement at a weighted-average net selling price of $48.70 per
share, which resulted in $99.1 million of 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 2020 Equity Distribution Agreement at
a weighted-average net selling price of $64.83 per share, which resulted in
$72.0 million of net proceeds to the Company. Shares sold under the November
2020 Equity Distribution Agreement were offered and sold pursuant to the
Company's registration statement on Form S-3 (File No. 333-239964) filed with
the SEC on 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 SEC on 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.
Cash Flows
The following table summarizes cash flows from continuing operations for each of
the periods presented:
Year Ended December 31,
2021 2020
(in thousands)Net cash provided by operating activities $ 538,577 $ 140,628
Net cash used in investing activities $ (546,548 ) $ (326,438 )
Net cash provided by financing activities $ 85,405 $ 261,251
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 million in equity-based compensation
expenses and $11.0 million in the depreciation and amortization. Cash provided
by operating activities decreased between periods primarily due to decreases of
$52.5 million in income tax payable due to tax payments made during the current
period and $12.2 million in accounts payable partially offset by the negative
impact of a decrease of $42.3 million in accounts receivable mainly due to the
timing of collections from customers and an increase of $13.1 million in 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 million in equity-based compensation
expenses, $4.4 million in impairment loss from equity-method investments and
$3.0 million in the depreciation of assets. Cash provided by operating
activities decreased between periods primarily due to the negative effect of
increases of $178.5 million in accounts receivable mainly due to the timing of
collections from customers and $21.1 million in other current assets related to
purchases of an increased amount of reagents and supplies, partially offset by
increases of $53.3 million in income tax payable due to a significant increase
in income,
60
——————————————————————————–
$32.7 million in accrued and other liabilities related to contract liabilities,
and $22.6 million in accounts payable mainly due to timing of payments.
Investing Activities
Cash used in investing activities in 2021 was $546.5 million, which primarily
related to $710.5 million in purchases of marketable securities, $61.9 million
related to business acquisitions, $23.8 million related to purchase of fixed
assets consisting mainly medical laboratory equipment and building improvement,
and $20.0 million related to purchase of redeemable preferred stock, partially
offset by proceeds of $185.7 million related to sales of marketable securities
and $83.8 million related to maturities of marketable securities.
Cash used in investing activities in 2020 was $326.4 million, which primarily
related to $324.4 million in purchases of marketable securities, $35.1 million
in 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 million in
investment in BostonMolecules and direct costs associates with the investment,
and purchase equipment with an aggregate fair value of $1.4 million contributed
to FF Gene Biotech, partially offset by maturities of $19.9 million of
marketable debt securities and proceeds of $17.1 million from sales of
marketable securities.
Financing Activities
Cash provided by financing activities in 2021 was $85.4 million, which primarily
related to $89.5 million proceeds from the November 2020 Equity Distribution
Agreement, partially offset by $4.2 million in 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 million
borrowed 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
As of December 31, 2021, we have an outstanding balance of $15.1 million in our
margin account and $6.1 million in 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) $ 7,782 $ 2,037 $ 2,733
$ 1,932 $ 1,080
Finance 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 Goodwill and 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 PronouncementsSee Note 2, Summary of Significant Accounting Policies, to our consolidated
financial statements included in this report for information about recent
accounting pronouncements.
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.
© Edgar Online, source Glimpses
