ff

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 20222023

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37894

 

FULGENT GENETICS, INC.

(exactExact name of registrant as specified in its charter)

 

 

Delaware

81-2621304

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

49784399 Santa Anita Avenue

Temple CityEl Monte, CA

9178091731

(Address of principal executive offices)

(Zip Code)

 

(626) 350-0537

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

FLGT

 

The Nasdaq Stock Market
(Nasdaq Global Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No No ☒

As of May 1, 2022,2023, there were 30,327,20329,701,246 outstanding shares of the registrant’s common stock.

 

 


Table of Contents

 

 

Page

PART I—FINANCIAL INFORMATION

1

Item 1. Financial Statements (Unaudited)

1

Condensed Consolidated Balance Sheets

1

Condensed Consolidated Statements of IncomeOperations

2

Condensed Consolidated Statements of Comprehensive Income (Loss)

3

Condensed Consolidated Statements of Stockholders’ Equity

4

Condensed Consolidated Statements of Cash Flows

56

Notes to the Condensed Consolidated Financial Statements

67

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk

2725

Item 4. Controls and Procedures

2725

PART II—OTHER INFORMATION

2826

Item 1. Legal Proceedings

2826

Item 1A. Risk Factors

2826

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

2826

Item 5. Other Information

2926

Item 6. Exhibits

2926

Exhibit Index

3027

Signatures

3128

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FULGENT GENETICS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except par value data)

(unaudited)

 

March 31,

 

 

December 31,

 

March 31,

 

 

December 31,

 

2022

 

 

2021

 

2023

 

 

2022

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

353,069

 

 

$

164,894

 

$

66,172

 

 

$

79,506

 

Marketable securities

 

232,045

 

 

 

285,605

 

 

438,313

 

 

 

446,729

 

Trade accounts receivable, net of allowance for credit losses of $22,126 and $11,217

 

160,261

 

 

 

138,912

 

Trade accounts receivable, net of allowance for credit losses of $38,302 and $41,205

 

43,549

 

 

 

52,749

 

Other current assets

 

19,958

 

 

 

22,549

 

 

32,689

 

 

 

48,889

 

Total current assets

 

765,333

 

 

 

611,960

 

 

580,723

 

 

 

627,873

 

Marketable securities, long-term

 

493,182

 

 

 

485,047

 

 

366,833

 

 

 

326,648

 

Redeemable preferred stock investment

 

17,609

 

 

 

21,965

 

 

12,982

 

 

 

12,385

 

Fixed assets, net

 

68,622

 

 

 

62,287

 

 

79,083

 

 

 

81,353

 

Intangible assets, net

 

35,037

 

 

 

35,914

 

 

148,699

 

 

 

150,643

 

Goodwill

 

50,999

 

 

 

50,897

 

 

143,120

 

 

 

143,027

 

Other long-term assets

 

34,808

 

 

 

10,650

 

 

45,327

 

 

 

44,124

 

Total assets

$

1,465,590

 

 

$

1,278,720

 

$

1,376,767

 

 

$

1,386,053

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

$

23,699

 

 

$

20,494

 

$

22,080

 

 

$

23,093

 

Accrued liabilities

 

11,847

 

 

 

17,689

 

 

21,088

 

 

 

24,981

 

Income tax payable

 

52,163

 

 

 

787

 

Contract liabilities

 

14,102

 

 

 

14,570

 

 

2,733

 

 

 

3,199

 

Customer deposit

 

17,729

 

 

 

19,806

 

 

11,621

 

 

 

10,895

 

Investment margin loan

 

14,999

 

 

 

15,137

 

 

14,999

 

 

 

14,999

 

Contingent consideration

 

 

 

 

10,000

 

Notes payable, current portion

 

6,086

 

 

 

6,147

 

 

5,608

 

 

 

5,639

 

Other current liabilities

 

1,089

 

 

 

680

 

 

3,810

 

 

 

5,301

 

Total current liabilities

 

141,714

 

 

 

105,310

 

 

81,939

 

 

 

88,107

 

Unrecognized tax benefits

 

1,210

 

 

 

725

 

 

9,836

 

 

 

9,836

 

Other long-term liabilities

 

9,706

 

 

 

6,805

 

 

16,073

 

 

 

18,235

 

Total liabilities

 

152,630

 

 

 

112,840

 

 

107,848

 

 

 

116,178

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value per share, 50,000 shares authorized, 30,327 and 30,160 shares issued and outstanding

 

3

 

 

 

3

 

Preferred stock, $0.0001 par value per share, 1,000 shares authorized, 0 shares issued or outstanding

 

 

 

 

 

Common stock, $0.0001 par value per share, 50,000 shares authorized, 31,502 and 31,248 shares issued, respectively, and 29,692 and 29,438 shares outstanding, respectively

 

3

 

 

 

3

 

Preferred stock, $0.0001 par value per share, 1,000 shares authorized, no shares issued or outstanding

 

 

 

 

 

Additional paid-in capital

 

507,046

 

 

 

501,908

 

 

495,981

 

 

 

486,585

 

Accumulated other comprehensive loss

 

(12,493

)

 

 

(759

)

 

(17,196

)

 

 

(20,903

)

Retained earnings

 

811,576

 

 

 

657,597

 

 

785,660

 

 

 

801,000

 

Total Fulgent stockholders' equity

 

1,306,132

 

 

 

1,158,749

 

Total Fulgent stockholders’ equity

 

1,264,448

 

 

 

1,266,685

 

Noncontrolling interest

 

6,828

 

 

 

7,131

 

 

4,471

 

 

 

3,190

 

Total stockholders’ equity

 

1,312,960

 

 

 

1,165,880

 

 

1,268,919

 

 

 

1,269,875

 

Total liabilities and stockholders’ equity

$

1,465,590

 

 

$

1,278,720

 

$

1,376,767

 

 

$

1,386,053

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


FULGENT GENETICS, INC.

Condensed Consolidated Statements of IncomeOperations

(in thousands, except per share data)

(unaudited)

 

Three Months Ended March 31,

 

Three Months Ended March 31,

 

2022

 

 

2021

 

2023

 

 

2022

 

Revenue

$

320,268

 

 

$

359,429

 

$

66,168

 

 

$

320,268

 

Cost of revenue

 

77,725

 

 

 

74,075

 

 

47,357

 

 

 

77,725

 

Gross profit

 

242,543

 

 

 

285,354

 

 

18,811

 

 

 

242,543

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

5,989

 

 

 

5,422

 

 

9,782

 

 

 

5,989

 

Selling and marketing

 

7,940

 

 

 

5,008

 

 

10,083

 

 

 

7,940

 

General and administrative

 

25,775

 

 

 

8,002

 

 

21,802

 

 

 

25,775

 

Amortization of intangible assets

 

906

 

 

 

 

 

1,968

 

 

 

906

 

Total operating expenses

 

40,610

 

 

 

18,432

 

 

43,635

 

 

 

40,610

 

Operating income

 

201,933

 

 

 

266,922

 

Operating (loss) income

 

(24,824

)

 

 

201,933

 

Interest and other income, net

 

45

 

 

 

282

 

 

3,775

 

 

 

45

 

Income before income taxes

 

201,978

 

 

 

267,204

 

Provision for income taxes

 

48,421

 

 

 

66,513

 

Net income from consolidated operations

 

153,557

 

 

 

200,691

 

(Loss) income before income taxes

 

(21,049

)

 

 

201,978

 

(Benefit from) provision for income taxes

 

(5,200

)

 

 

48,421

 

Net (loss) income from consolidated operations

 

(15,849

)

 

 

153,557

 

Net loss attributable to noncontrolling interests

 

422

 

 

 

 

 

509

 

 

 

422

 

Net income attributable to Fulgent

$

153,979

 

 

$

200,691

 

Net (loss) income attributable to Fulgent

$

(15,340

)

 

$

153,979

 

 

 

 

 

 

 

 

 

Net income per common share attributable to Fulgent:

 

 

 

 

Net (loss) income per common share attributable to Fulgent:

 

 

 

 

Basic

$

5.09

 

 

$

6.96

 

$

(0.52

)

 

$

5.09

 

Diluted

$

4.93

 

 

$

6.52

 

$

(0.52

)

 

$

4.93

 

 

 

 

 

 

 

 

 

Weighted-average common shares:

 

 

 

 

 

 

 

 

Basic

 

30,234

 

 

 

28,831

 

 

29,536

 

 

 

30,234

 

Diluted

 

31,240

 

 

 

30,770

 

 

29,536

 

 

 

31,240

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2


FULGENT GENETICS, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

Net income from consolidated operations

$

153,557

 

 

$

200,691

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation gain

 

123

 

 

 

 

Net loss on available-for-sale debt securities, net of tax

 

(11,738

)

 

 

(654

)

Comprehensive income from consolidated operations

 

141,942

 

 

 

200,037

 

Net loss attributable to noncontrolling interest

 

422

 

 

 

 

Foreign currency translation gain attributable to noncontrolling interest

 

(119

)

 

 

 

Comprehensive loss attributable to noncontrolling interest

 

303

 

 

 

 

Comprehensive income attributable to Fulgent

$

142,245

 

 

$

200,037

 

 

Three Months Ended March 31,

 

 

2023

 

 

2022

 

Net (loss) income from consolidated operations

$

(15,849

)

 

$

153,557

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation gain

 

168

 

 

 

123

 

Net gain (loss) on available-for-sale debt securities, net of tax

 

5,329

 

 

 

(11,738

)

Comprehensive (loss) income from consolidated operations

 

(10,352

)

 

 

141,942

 

Net loss attributable to noncontrolling interest

 

509

 

 

 

422

 

Foreign currency translation gain attributable to noncontrolling interest

 

(1,790

)

 

 

(119

)

Comprehensive (income) loss attributable to noncontrolling interest

 

(1,281

)

 

 

303

 

Comprehensive (loss) income attributable to Fulgent

$

(11,633

)

 

$

142,245

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


FULGENT GENETICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

Fulgent Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fulgent Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
 Paid-In Capital

 

 

Accumulated
Other Comprehensive
Loss

 

 

Retained Earnings

 

 

Fulgent Stockholders' Equity

 

 

Noncontrolling Interest

 

 

Total
Equity

 

 

Shares (1)

 

 

Amount

 

 

Additional
 Paid-In Capital

 

 

Accumulated
Other Comprehensive
Income (Loss)

 

 

Retained Earnings

 

 

Fulgent Stockholders’ Equity

 

 

Noncontrolling Interest

 

 

Total
Equity

 

Balance at December 31, 2021

 

 

30,160

 

 

$

3

 

 

$

501,908

 

 

$

(759

)

 

$

657,597

 

 

$

1,158,749

 

 

$

7,131

 

 

$

1,165,880

 

Balance at December 31, 2022

 

 

29,438

 

 

$

3

 

 

$

486,585

 

 

$

(20,903

)

 

$

801,000

 

 

$

1,266,685

 

 

$

3,190

 

 

$

1,269,875

 

Equity-based compensation

 

 

 

5,616

 

 

 

5,616

 

 

5,616

 

 

 

 

 

 

 

 

 

10,265

 

 

 

 

 

 

 

 

 

10,265

 

 

 

 

 

 

10,265

 

Exercise of common stock options

 

3

 

 

16

 

 

 

16

 

 

16

 

Restricted stock awards

 

172

 

 

 

 

 

 

 

 

 

 

280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock withholding for employee tax obligations

 

(8

)

 

 

(494

)

 

 

 

(494

)

 

 

(494

)

 

 

(26

)

 

 

 

 

 

(869

)

 

 

 

 

 

 

 

 

(869

)

 

 

 

 

 

(869

)

Other comprehensive income (loss)

 

 

 

 

(11,734

)

 

 

(11,734

)

 

119

 

(11,615

)

 

 

 

 

 

 

 

 

 

 

 

3,707

 

 

 

 

 

 

3,707

 

 

 

1,790

 

 

 

5,497

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

153,979

 

 

 

153,979

 

 

 

(422

)

 

 

153,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,340

)

 

 

(15,340

)

 

 

(509

)

 

 

(15,849

)

Balance at March 31, 2022

 

 

30,327

 

 

$

3

 

 

$

507,046

 

 

$

(12,493

)

 

$

811,576

 

 

$

1,306,132

 

 

$

6,828

 

 

$

1,312,960

 

Balance at March 31, 2023

 

 

29,692

 

 

$

3

 

 

$

495,981

 

 

$

(17,196

)

 

$

785,660

 

 

$

1,264,448

 

 

$

4,471

 

 

$

1,268,919

 

(1) As of March 31, 2023,

371,006 shares of the Company's common stock were not issued and were held back by the Company as partial security for the indemnification obligations in connection with the business combination of Fulgent Pharma Holdings, Inc., or Fulgent Pharma, in 2022.

 

Fulgent Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
 Paid-In Capital

 

 

Accumulated
Other Comprehensive
Income (Loss)

 

 

Retained Earnings

 

 

Total
Equity

 

Balance at December 31, 2020

 

28,178

 

 

$

3

 

 

$

418,065

 

 

$

438

 

 

$

150,881

 

 

$

569,387

 

Equity-based compensation

 

 

 

 

 

 

 

2,962

 

 

 

 

 

 

 

 

 

2,962

 

Exercise of common stock options

 

45

 

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

44

 

Restricted stock awards

 

187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock withholding for employee tax obligations

 

(4

)

 

 

 

 

 

(513

)

 

 

 

 

 

 

 

 

(513

)

Issuance of common stock at an average of $52.00 per share, net

 

583

 

 

 

 

 

 

30,297

 

 

 

 

 

 

 

 

 

30,297

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

(654

)

 

 

 

 

 

(654

)

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

(887

)

 

 

(887

)

Cumulative tax effect of accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

239

 

 

 

239

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

200,691

 

 

 

200,691

 

Balance at March 31, 2021

 

28,989

 

 

$

3

 

 

$

450,855

 

 

$

(216

)

 

$

350,924

 

 

$

801,566

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.statements.

4


FULGENT GENETICS, INC.

Condensed Consolidated Statements of Cash FlowsStockholders’ Equity

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Cash flow from operating activities:

 

 

 

 

 

 

Net income from consolidated operations

 

$

153,557

 

 

$

200,691

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Equity-based compensation

 

 

5,616

 

 

 

2,962

 

Depreciation and amortization

 

 

4,695

 

 

 

1,922

 

Noncash lease expense

 

 

477

 

 

 

82

 

Loss on disposal of fixed asset

 

 

250

 

 

 

223

 

Amortization of premium of marketable securities

 

 

1,910

 

 

 

1,303

 

Provision for credit losses

 

 

11,574

 

 

 

1,064

 

Deferred taxes

 

 

(5,497

)

 

 

(786

)

Unrecognized tax benefits

 

 

485

 

 

 

96

 

Net loss on marketable securities

 

 

513

 

 

 

345

 

Other

 

 

15

 

 

 

(8

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Trade accounts receivable

 

 

(32,924

)

 

 

(34,595

)

Other current and long-term assets

 

 

2,962

 

 

 

(9,109

)

Accounts payable

 

 

2,110

 

 

 

(6,256

)

Income tax payable

 

 

51,376

 

 

 

67,203

 

Accrued liabilities and other liabilities

 

 

(8,231

)

 

 

8,124

 

Operating and finance lease liabilities

 

 

(477

)

 

 

(82

)

Net cash provided by operating activities

 

 

188,411

 

 

 

233,179

 

Cash flow from investing activities:

 

 

 

 

 

 

Purchases of fixed assets

 

 

(5,360

)

 

 

(11,492

)

Proceeds from sale of fixed assets

 

 

14

 

 

 

13

 

Purchase of marketable securities

 

 

(130,133

)

 

 

(219,470

)

Investment in private equity securities

 

 

(15,000

)

 

 

 

Proceeds from sale of marketable securities

 

 

133,407

 

 

 

 

Maturities of marketable securities

 

 

27,760

 

 

 

14,458

 

Contingent consideration payout related to a business acquisition

 

 

(10,000

)

 

 

 

Net cash provided by (used in) investing activities

 

 

688

 

 

 

(216,491

)

Cash flow from financing activities:

 

 

 

 

 

 

Proceeds from public offerings of common stock, net of issuance costs

 

 

 

 

 

47,787

 

Proceeds from exercise of stock options

 

 

16

 

 

 

44

 

Common stock withholding for employee tax obligations

 

 

(494

)

 

 

(513

)

Repayment of notes payable

 

 

(375

)

 

 

 

Principal paid for finance lease

 

 

(81

)

 

 

 

Borrowing under margin account

 

 

 

 

 

29

 

Net cash (used in) provided by financing activities

 

 

(934

)

 

 

47,347

 

Effect of exchange rate changes on cash and cash equivalents

 

 

10

 

 

 

 

Net increase in cash and cash equivalents

 

 

188,175

 

 

 

64,035

 

Cash and cash equivalents at beginning of period

 

 

164,894

 

 

 

87,426

 

Cash and cash equivalents at end of period

 

$

353,069

 

 

$

151,461

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Income taxes paid

 

$

435

 

 

$

33

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

Purchases of fixed assets in accounts payable

 

$

2,054

 

 

$

801

 

Purchases of fixed assets in notes payable

 

$

3,833

 

 

$

 

Operating lease right-of-use assets obtained in exchange for lease liabilities

 

$

 

 

$

368

 

Operating lease right-of-use assets reduced due to lease modification and termination

 

$

 

 

$

185

 

Public offerings costs included in accounts payable

 

$

 

 

$

50

 

 

 

Fulgent Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
 Paid-In Capital

 

 

Accumulated
Other Comprehensive
Income (Loss)

 

 

Retained Earnings

 

 

Fulgent Stockholders’ Equity

 

 

Noncontrolling Interest

 

 

Total
Equity

 

Balance at December 31, 2021

 

 

30,160

 

 

$

3

 

 

$

501,908

 

 

$

(759

)

 

$

657,597

 

 

$

1,158,749

 

 

$

7,131

 

 

$

1,165,880

 

Equity-based compensation

 

 

 

 

 

 

 

 

5,616

 

 

 

 

 

 

 

 

 

5,616

 

 

 

 

 

 

5,616

 

Exercise of common stock options

 

 

3

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

16

 

 

 

 

 

 

16

 

Restricted stock awards

 

 

172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock withholding for employee tax obligations

 

 

(8

)

 

 

 

 

 

(494

)

 

 

 

 

 

 

 

 

(494

)

 

 

 

 

 

(494

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

(11,734

)

 

 

 

 

 

(11,734

)

 

 

119

 

 

 

(11,615

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

153,979

 

 

 

153,979

 

 

 

(422

)

 

 

153,557

 

Balance at March 31, 2022

 

 

30,327

 

 

$

3

 

 

$

507,046

 

 

$

(12,493

)

 

$

811,576

 

 

$

1,306,132

 

 

$

6,828

 

 

$

1,312,960

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


FULGENT GENETICS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Cash flow from operating activities:

 

 

 

 

 

 

Net (loss) income from consolidated operations

 

$

(15,849

)

 

$

153,557

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Equity-based compensation

 

 

10,265

 

 

 

5,616

 

Depreciation and amortization

 

 

6,879

 

 

 

4,695

 

Provision for credit losses

 

 

(113

)

 

 

11,574

 

Noncash lease expense

 

 

1,561

 

 

 

477

 

(Gain) loss on disposal of fixed asset

 

 

(179

)

 

 

250

 

Amortization of (discount) premium of marketable securities

 

 

(478

)

 

 

1,910

 

Deferred taxes

 

 

(5,200

)

 

 

(5,497

)

Unrecognized tax benefits

 

 

 

 

 

485

 

Net loss on marketable securities

 

 

 

 

 

513

 

Other

 

 

 

 

 

15

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Trade accounts receivable

 

 

9,331

 

 

 

(32,924

)

Other current and long-term assets

 

 

(1,629

)

 

 

2,962

 

Accounts payable

 

 

(1,855

)

 

 

2,110

 

Income tax payable

 

 

 

 

 

51,376

 

Accrued liabilities and other liabilities

 

 

(9,114

)

 

 

(8,231

)

Operating and finance lease liabilities

 

 

(1,526

)

 

 

(477

)

Net cash (used in) provided by operating activities

 

 

(7,907

)

 

 

188,411

 

Cash flow from investing activities:

 

 

 

 

 

 

Purchase of marketable securities

 

 

(143,926

)

 

 

(130,133

)

Purchase of preferred stock of privately held company

 

 

 

 

 

(15,000

)

Purchases of fixed assets

 

 

(2,034

)

 

 

(5,360

)

Contingent consideration payout related to a business acquisition

 

 

 

 

 

(10,000

)

Proceeds from sale of fixed assets

 

 

198

 

 

 

14

 

Maturities of marketable securities

 

 

141,408

 

 

 

27,760

 

Proceeds from sale of marketable securities

 

 

 

 

 

133,407

 

Net cash (used in) provided by investing activities

 

 

(4,354

)

 

 

688

 

Cash flow from financing activities:

 

 

 

 

 

 

Common stock withholding for employee tax obligations

 

 

(869

)

 

 

(494

)

Repayment of notes payable

 

 

 

 

 

(375

)

Principal paid for finance lease

 

 

(232

)

 

 

(81

)

Proceeds from exercise of stock options

 

 

 

 

 

16

 

Net cash used in financing activities

 

 

(1,101

)

 

 

(934

)

Effect of exchange rate changes on cash and cash equivalents

 

 

28

 

 

 

10

 

Net (decrease) increase in cash and cash equivalents

 

 

(13,334

)

 

 

188,175

 

Cash and cash equivalents at beginning of period

 

 

79,506

 

 

 

164,894

 

Cash and cash equivalents at end of period

 

$

66,172

 

 

$

353,069

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Income taxes paid

 

$

1,680

 

 

$

435

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

Purchases of marketable securities in other current liabilities

 

$

3,519

 

 

$

 

Purchases of fixed assets in accounts payable

 

$

2,537

 

 

$

2,054

 

Purchases of fixed assets in notes payable

 

$

 

 

$

3,833

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


FULGENT GENETICS, INC.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

 

Note 1. Overview and Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. These financial statements include the assets, liabilities, revenues and expenses of all subsidiaries and entities in which the Company has a controlling financial interest or is deemed to be the primary beneficiary. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company uses the equity method to account for its investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. All significant intercompany accounts and transactions are eliminated from the accompanying condensed consolidated financial statements.

Nature of the Business

Fulgent Genetics, Inc., together with its subsidiaries and anaffiliated professional corporation,corporations, or PC, collectivelyPCs (collectively referred to as the“the Company, unless otherwise noted or the context otherwise requires,) is a technologytechnology-based company offering large-scale COVID-19 testing services,with a well-established clinical diagnostic business and a therapeutic development business. Its clinical diagnostic business offers molecular diagnostic testing services, and comprehensive genetic testing, and high-quality anatomic pathology laboratory services designed to provide physicians and patients with clinically actionable diagnostic information to improve the quality of patient care. A cornerstone of the Company’sIts therapeutic development business is its ability to provide expansive options and flexibilityfocused on developing drug candidates for all clients’ unique testing needs. To this end, the Company has developed a proprietary technology platform allowing it to offertreating a broad range of cancers using a novel nanoencapsulation and flexible test menutargeted therapy platform designed to improve the therapeutic window and pharmacokinetic profile of new and existing cancer drugs. The Company aims to continually expand and improve its proprietary genetic reference library, while maintaining accessible pricing, high accuracy and competitive turnaround times. Combining next generation sequencing, or NGS, with its technology platform, the Company performs 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.transform from a genomic diagnostic business into a fully integrated precision medicine company.

Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s audited consolidated financial statements as of and for the fiscal year ended December 31, 2021,2022, which are included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 28, 2022,2023, or the 20212022 Annual Report, and, in the opinion of management, include all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the Company’s financial position and results of operations. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or any other period. The accompanying Condensed Consolidated Balance Sheet as of MarchDecember 31, 2022 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the disclosures required by U.S. GAAP. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements included in the 20212022 Annual Report, including the notes thereto.

Note 2. Summary of Significant Accounting Policies

See the summary of the Company’s significant accounting policies set forth in the notes to its consolidated financial statements included in the 20212022 Annual Report.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, judgments and assumptions are based on historical data and experience available at the date of the accompanying condensed consolidated financial statements, as well as various other factors management believes to be reasonable under the circumstances, including but not limited to the potential impacts arising from the recent global pandemic related to COVID-19. As the extent and duration of the impacts from COVID-19 remain unclear, thecircumstances. The Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from these estimates.

On an on-going basis, management evaluates its estimates, primarily those related to: (i) revenue recognition criteria;criteria, (ii) accounts receivable and allowances for credit losses;losses, (iii) the useful lives of fixed assets and intangible assets;assets, (iv) estimates of tax liabilities; andliabilities, (v) valuation of intangible assets and goodwill.

6


Marketable Securitiesgoodwill at time of acquisition and on a recurring basis, and (vi) valuation of investments.

All marketable debt securities, which consist of corporate debt securities, municipal bonds, U.S. government and agency debt securities, and Yankee debt securities issued by foreign governments or entities and denominated in U.S. dollars have been classified as “available-for-sale,” and are carried at fair value. Net unrealized gains and losses, net of any related tax effects, are excluded from earnings and are included in other comprehensive income (loss) and reported as a separate component of stockholders’ equity until realized. Realized gains and losses on marketable debt securities are included in interest and other income, net, in the accompanying Condensed Consolidated Statements of Income. The cost of any marketable debt securities sold is based on the specific-identification method. The amortized cost of marketable debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest on marketable debt securities is included in interest and other income, net. In accordance with the Company’s investment policy, management invests to diversify credit risk and only invests in securities with high credit quality, including U.S. government securities.7

The Company’s investments in marketable equity securities are measured at fair value with the related gains and losses, realized and unrealized, recognized in interest and other income, net, in the accompanying Condensed Consolidated Statements of Income. The cost of any marketable equity securities sold is based on the specific-identification method.


For available-for-sale debt securities, in an unrealized loss, the Company determines whether a credit loss exists. The credit loss is estimated by considering available information relevant to the collectability of the security and information about past events, current conditions, and reasonable and supportable forecasts. The Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows to be collected is less than the amortized basis of the security, a credit loss exists, and any credit loss is recorded as a charge to interest and other income, net, not to exceed the amount of the unrealized loss. If the Company has an intent to sell, or if it is more likely than not that the Company will be required to sell a debt security in an unrealized loss position before recovery of its amortized cost basis, the Company will write down the security to its fair value and record the corresponding charge as a component of interest and other income, net.

Trade Accounts Receivable and Allowance for Credit Losses

The Company adopted Accounting Standards Update, or ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, using the modified retrospective approach as of January 1, 2021. Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains an allowance for credit losses for expected uncollectible trade accounts receivable, which is recorded as an offset to trade accounts receivable, and changes in allowance for credit losses are classified as a general and administrative expense in the accompanying Condensed Consolidated Statements of Income.Operations. The Company assesses collectability by reviewing trade accounts receivable on a collective basis where similar risk characteristics exist and on an individual basis when it identifies specific customers that have deterioration in credit quality such that they may no longer share similar risk characteristics with the other receivables. In determining the amount of the allowance for credit losses, the Company uses a probability-of-default and loss given default model, which allows the ability to define a point of default and measure credit losses for receivables that have reached the point of default for purposes of calculating the allowance for credit losses. Loss given default represents the likelihood that a receivable that has reached the point of default will not be collected in full. The Company updates its probability-of-default and loss given default factors annually to incorporate the most recent historical data and adjusts the quantitative portion of the reserve through its qualitative reserve overlay. The Company looks at qualitative factors such as general economic conditions in determining expected credit losses. During the first quarters of 2023 and 2022, the Company recorded $(113,000) and $11.6 million of provision for credit losses for trade accounts receivable, respectively.

Redeemable Preferred Stock Investment

The redeemable preferred stock investment of $17.613.0 million as of March 31, 20222023 represents the fair value of redeemable preferred stock of Laboratory for Advanced Medicine, Inc., or Helio Health,of a private company that the Company purchased in July 2021. The investment is classified as available-for-sale debt securities. The fair value of available-for-sale debt security is included in the Condensed Consolidated Statement of Balance Sheets. Unrealized gain of $597,000 is excluded from earnings and reported in other comprehensive loss in the first quarter of 2023, and unrealized loss of $2.44.4 million is excluded from earnings and reported in other comprehensive income (loss) asloss in the first quarter of March 31, 2022. Since the Company intends on holding the preferred stock, and the preferred stock is not redeemable until July 2027, the investment is recorded as a long-term investment.

Foreign Currency Translation and Foreign Currency Transactions

The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in accumulated other comprehensive income (loss) in the accompanying Condensed Consolidated Statements of Stockholders’ Equity. Gain or loss from these translations were not significant in the first quarters of 2022 and 2021. The Company and its subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each

7


period, whereas reagents and supplies, property and nonmonetary assets and liabilities are measured at historical rates. Losses from these remeasurements were not significant in the first quarters of 20222023 and 2021.2022.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of net unrealized gain or loss on available-for-sale debt securities, net of tax, and foreign currency translation adjustments fromfrom the Company's subsidiaries not using the U.S. dollar as their functional currency. ReclassificationsThere were no reclassifications from other comprehensive income (loss) to net loss in the first quarter of 2023, and reclassification from other comprehensive income (loss) to net earnings werewas not significant in the first quartersquarter of 2022 and 2021.2022. The tax effects related to net unrealized loss on available-for-sale debt securities were $1.9 million and $4.5 million in the first quarterquarters of 2022. The tax effects were 0t significant in the first quarter of 2021.

Leases

The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset2023 and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Operating and finance lease right-of-use assets, or ROU assets, short-term lease liabilities, and long-term lease liabilities are included in other long-term assets, accrued liabilities, and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheets.

Lease ROU assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, including options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company uses its incremental borrowing rate based on the information available at the commencement date, including inquiries with its bank, in determining the present value of lease payments since its leases do not provide an implicit rate. Lease ROU assets consist of initial measurement of lease liabilities, any lease payments made to lessor on or before the lease commencement date, minus any lease incentive received, and any initial direct costs incurred by the Company. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term. For finance lease, ROU assets are amortized on a straight-line basis from the commencement date to the earlier of the end of useful life of the ROU assets or the end of the lease term. Amortization of ROU assets and interest on the lease liability for finance leases are included as charges to the accompanying Condensed Consolidated Statements of Income.

Lease ROU assets and liabilities arising from business combinations are recognized and measured at the acquisition dates as if an acquired lease were a new lease at the date of acquisition using the Company’s incremental borrowing rate unless the discount rate is implicit in the lease. The Company elects to not to recognize assets or liabilities as of the acquisition dates for leases that, on the acquisition dates, have a remaining lease term of 12 months or less. The Company also retains the acquirees’ classification of the leases if there are no modifications as part of the business combinations.

The Company leases and subleases out space in buildings it owns or leases to third-party tenants or subtenants under noncancelable operating leases. The Company recognizes lease payments as income over the lease terms on a straight-line basis and recognizes variable lease payments as income in the period in which the changes in facts and circumstances on which the variable lease payments are based occur. The net rental income is included in the interest and other income, net, in the accompanying Condensed Consolidated Statement of Income.2022, respectively.

Concentration of Customers

In certain periods, a small number of customers hashave accounted for a significant portion of the Company’s revenue. After aggregating customers that are under common control or affiliation, 1no customer contributed 10% or more of the Company’s revenue in the first quarter of 2023, and one customer contributed 27% and 25% of the Company'sCompany’s revenue in the first quartersquarter of 2022 and 2021, respectively.2022. NaNOne customer comprised 1021% or moreand 17% of total accounts receivable, net, as of March 31, 20222023 and December 31, 2021.2022, respectively.

8


Disaggregation of Revenue

The Company classifies its customers into three payor types: (i) Insurance, including claim reimbursement from the U.S. Health Resources and Services Administration, or HRSA,HRSA, for uninsured individuals, (ii) Institutional customers,Institutions, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, or (iii) Patients who pay directly,directly; as the Company believes thisthese classifications best depictsdepict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. The following table summarizes revenue from contracts with customers by payor type for the first quarters of 20222023 and 2021.2022.

 

Three Months Ended March 31,

 

Three Months Ended March 31,

 

2022

 

 

2021

 

2023

 

 

2022

 

(in thousands)

 

(in thousands)

 

Testing Services by payor

 

 

 

 

 

 

 

 

Insurance

$

210,677

 

 

$

207,558

 

$

34,551

 

 

$

210,677

 

Institutional customers

 

109,468

 

 

 

151,569

 

Patients

 

123

 

 

 

302

 

Institutional

 

30,992

 

 

 

109,468

 

Patient

 

625

 

 

 

123

 

Total Revenue

$

320,268

 

 

$

359,429

 

$

66,168

 

 

$

320,268

 

The insurance revenue category above includes zero and $106.7 million and $112.7 million infor the first quarters of 20222023 and 2021,2022, respectively, for services related to claims covered by the HRSA COVID-19 Uninsured Program. The HRSA program stopped accepting claims at 11:59 p.m. on March 22, 2022.

There was no material variable consideration recognized in the current period that relates to performance obligations that were completed in the prior period.

CollectionProvided the Company has billed insurers accurately with complete information prior to the established filing deadline, collection of the Company’s net revenues from insurers is normally a function of providing complete and correct billing information within the various filing deadlines. Provided the Company has billed insurers accurately with complete information prior to the established filing deadline, there has historically been little to no credit risk. If there has been a delay in billing, the Company determines if the amounts in question will likely go past the filing deadline, and if so, the Company will reserve accordingly for the billing.

Contract Balances

Receivables from contracts with customers - Receivables from contracts with customers are included within trade accounts receivable on the Condensed Consolidated Balance Sheets. ReceivableNet receivable from Insurance and Institutional customers represented 7314% and 2786%, respectively, as of both March 31, 2022. Receivable from Insurance2023 and Institutional customers represented 47% and 53%, respectively, as of December 31, 2021.2022.

Contracts assets and liabilities - Contract assets from contracts with customers associated with contract execution and certain costs to fulfill a contract are included in other current assets in the accompanying Condensed Consolidated Balance Sheets. Contract liabilities are recorded when the Company receives payment prior to completing its obligation to transfer goods or services to a customer. Contract liabilities are included in the Condensed Consolidated Balance Sheets. Revenues of $11.11.3 million and $18.811.1 million were recognized for the first quarters of 20222023 and 2021,2022, respectively, related to contract liabilities at the beginning of the respective periods were recognized.

Reagents and Supplies

The Company maintains reagents and other consumables primarily used in sample collections and testing which are valued at the lower of cost or net realizable value. Cost is determined using actual costs on a first-in, first-out basis. The reagents and supplies were included in other current assets in the accompanying Condensed Consolidated Balance Sheets.periods.

Customer Deposit

Customer deposit in the accompanying Condensed Consolidated Balance Sheets consists primarily of payments received from customers in excess of their outstanding trade accounts receivable balances, and the excess paymentsbalances. These deposits will be refunded to the customers or offset against future testing receivables.

9


Business Combination

The Company uses the acquisition method of accounting and allocates the fair value of purchase considerationreceivables or refunded to the assets acquired and liabilities assumed from an acquiree based on their respective fair values as of the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth and margins, future changes in technology, expected cost and time to develop in-process research and development, brand awareness and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability.

Goodwill

Goodwill is not amortized but is subject to impairment tests on an annual basis, or more frequently if indicators of potential impairment exist, and goodwill is written down when it is determined to be impaired. The Company typically performs an annual impairment review in the fourth quarter of each fiscal year unless one had been performed previously within the past 12 months and compares the fair value of the reporting unit in which the goodwill resides to its carrying value.customers.

Recent Accounting Pronouncements

The Company evaluates all Accounting Standards Updates, or ASUs, issued by the Financial Accounting Standards Board, or FASB, for consideration of their applicability. ASUs not included in the Company’s disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s condensed consolidated financial statements.

9


Note 3. Equity and Debt Securities

The Company’s equity and debt securities consisted of the following:

 

March 31, 2022

 

March 31, 2023

 

Amortized
Cost Basis

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Aggregate
Fair Value

 

Amortized
Cost Basis

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Aggregate
Fair Value

 

(in thousands)

 

(in thousands)

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in private equity securities

$

15,000

 

 

 

 

 

 

 

 

 

15,000

 

Preferred stock of privately held company

$

15,000

 

 

$

 

 

$

 

 

$

15,000

 

Total equity securities

 

15,000

 

 

 

 

 

 

 

 

 

15,000

 

 

15,000

 

 

 

 

 

 

 

 

 

15,000

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government debt securities

 

176,704

 

 

 

 

 

 

(3,233

)

 

 

173,471

 

Corporate debt securities

 

111,981

 

9

 

(818

)

 

111,172

 

 

119,175

 

 

 

 

 

 

(2,383

)

 

 

116,792

 

U.S. agency debt securities

 

87,707

 

 

 

67

 

 

 

(476

)

 

 

87,298

 

U.S. treasury bills

 

67,944

 

 

 

1

 

 

 

(62

)

 

 

67,883

 

Money market accounts

 

105,415

 

 

 

105,415

 

 

11,902

 

 

 

 

 

 

 

 

 

11,902

 

U.S. government debt securities

 

110,594

 

 

(702

)

 

109,892

 

Municipal bonds

 

5,062

 

 

(33

)

 

5,029

 

 

7,885

 

 

 

 

 

 

(72

)

 

 

7,813

 

Yankee debt securities

 

5,983

 

 

(31

)

 

5,952

 

Less: Cash equivalents

 

(105,415

)

 

 

 

 

 

 

 

 

(105,415

)

 

(26,846

)

 

 

 

 

 

 

 

 

(26,846

)

Total debt securities due within 1 year

 

233,620

 

 

 

9

 

 

 

(1,584

)

 

 

232,045

 

 

444,471

 

 

 

68

 

 

 

(6,226

)

 

 

438,313

 

After 1 year through 5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government debt securities

 

216,936

 

5

 

(4,931

)

 

212,010

 

U.S. government debt securities

 

185,378

 

 

 

725

 

 

 

(3,838

)

 

 

182,265

 

U.S. agency debt securities

 

123,823

 

 

 

229

 

 

 

(2,456

)

 

 

121,596

 

Corporate debt securities

 

194,432

 

 

(5,771

)

 

188,661

 

 

51,058

 

 

 

 

 

 

(2,717

)

 

 

48,341

 

U.S. agency debt securities

 

69,959

 

 

(2,466

)

 

67,493

 

Municipal bonds

 

12,422

 

 

(255

)

 

12,167

 

 

10,553

 

 

 

2

 

 

 

(121

)

 

 

10,434

 

Yankee debt securities

 

6,161

 

 

 

 

 

 

(215

)

 

 

5,946

 

 

753

 

 

 

 

 

 

(81

)

 

 

672

 

Redeemable preferred stock investment

 

20,000

 

 

 

 

 

 

(7,018

)

 

 

12,982

 

Total debt securities due after 1 year through 5 years

 

499,910

 

 

 

5

 

 

 

(13,638

)

 

 

486,277

 

 

391,565

 

 

 

956

 

 

 

(16,231

)

 

 

376,290

 

After 5 years through 10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

7,085

 

 

(180

)

 

6,905

 

 

3,580

 

 

 

 

 

 

(55

)

 

 

3,525

 

Redeemable preferred stock investment

 

20,000

 

 

 

 

 

 

(2,391

)

 

 

17,609

 

Total debt securities due after 5 years through 10 years

 

27,085

 

 

 

 

 

 

(2,571

)

 

 

24,514

 

 

3,580

 

 

 

 

 

 

(55

)

 

 

3,525

 

Total available-for-sale debt securities

 

760,615

 

 

 

14

 

 

 

(17,793

)

 

 

742,836

 

 

839,616

 

 

 

1,024

 

 

 

(22,512

)

 

 

818,128

 

Total equity and debt securities

$

775,615

 

 

$

14

 

 

$

(17,793

)

 

$

757,836

 

$

854,616

 

 

$

1,024

 

 

$

(22,512

)

 

$

833,128

 

 

10


 

December 31, 2021

 

December 31, 2022

 

Amortized
Cost Basis

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Aggregate
Fair Value

 

Amortized
Cost Basis

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Aggregate
Fair Value

 

(in thousands)

 

(in thousands)

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

Bond funds

$

99,314

 

$

 

$

(515

)

 

$

98,799

 

Exchange traded funds

 

35,174

 

 

 

 

 

 

(174

)

 

 

35,000

 

Long-term

 

 

 

 

 

 

 

 

Preferred stock of privately held company

$

15,000

 

 

$

 

 

$

 

 

$

15,000

 

Total equity securities

 

134,488

 

 

 

 

 

 

(689

)

 

 

133,799

 

 

15,000

 

 

 

 

 

 

 

 

 

15,000

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government debt securities

 

189,333

 

 

 

 

 

 

(3,373

)

 

 

185,960

 

Corporate debt securities

 

92,116

 

24

 

(148

)

 

91,992

 

 

120,480

 

 

 

 

 

 

(2,222

)

 

 

118,258

 

U.S. treasury bills

 

69,991

 

 

 

 

 

 

(193

)

 

 

69,798

 

U.S. agency debt securities

 

68,411

 

 

 

 

 

 

(342

)

 

 

68,069

 

Money market accounts

 

77,067

 

 

 

77,067

 

 

27,455

 

 

 

 

 

 

 

 

 

27,455

 

U.S. government debt securities

 

51,318

 

 

(81

)

 

51,237

 

Municipal bonds

 

4,980

 

 

(12

)

 

4,968

 

 

7,371

 

 

 

 

 

 

(80

)

 

 

7,291

 

Yankee debt securities

 

3,615

 

 

(6

)

 

3,609

 

 

2,347

 

 

 

 

 

 

(5

)

 

 

2,342

 

Less: Cash equivalents

 

(77,067

)

 

 

 

 

 

 

 

 

(77,067

)

 

(32,444

)

 

 

 

 

 

 

 

 

(32,444

)

Total debt securities due within 1 year

 

152,029

 

 

 

24

 

 

 

(247

)

 

 

151,806

 

 

452,944

 

 

 

 

 

 

(6,215

)

 

 

446,729

 

After 1 year through 5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government debt securities

 

152,435

 

 

 

2

 

 

 

(6,349

)

 

 

146,088

 

U.S. agency debt securities

 

92,054

 

 

 

 

 

 

(3,435

)

 

 

88,619

 

Corporate debt securities

 

242,421

 

29

 

(1,913

)

 

240,537

 

 

80,647

 

 

 

 

 

 

(4,756

)

 

 

75,891

 

U.S. Government debt securities

 

147,699

 

7

 

(786

)

 

146,920

 

U.S. agency debt securities

 

70,069

 

 

(535

)

 

69,534

 

Municipal bonds

 

11,920

 

13

 

(11

)

 

11,922

 

 

12,065

 

 

 

 

 

 

(217

)

 

 

11,848

 

Yankee debt securities

 

8,633

 

 

 

 

 

 

(89

)

 

 

8,544

 

 

753

 

 

 

 

 

 

(85

)

 

 

668

 

Redeemable preferred stock investment

 

20,000

 

 

 

 

 

 

(7,615

)

 

 

12,385

 

Total debt securities due after 1 year through 5 years

 

480,742

 

 

 

49

 

 

 

(3,334

)

 

 

477,457

 

 

357,954

 

 

 

2

 

 

 

(22,457

)

 

 

335,499

 

After 5 years through 10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

7,633

 

 

(43

)

 

7,590

 

 

3,617

 

 

 

 

 

 

(83

)

 

 

3,534

 

Redeemable preferred stock investment

 

20,000

 

 

 

1,965

 

 

 

 

 

 

21,965

 

Total debt securities due after 5 years through 10 years

 

27,633

 

 

 

1,965

 

 

 

(43

)

 

 

29,555

 

 

3,617

 

 

 

 

 

 

(83

)

 

 

3,534

 

Total available-for-sale debt securities

 

660,404

 

 

 

2,038

 

 

 

(3,624

)

 

 

658,818

 

 

814,515

 

 

 

2

 

 

 

(28,755

)

 

 

785,762

 

Total equity and debt securities

$

794,892

 

 

$

2,038

 

 

$

(4,313

)

 

$

792,617

 

$

829,515

 

 

$

2

 

 

$

(28,755

)

 

$

800,762

 

 

Gross unrealized losses on the Company’s equity and debt securities were $17.822.5 million and $28.8 million as of March 31, 2022. Gross unrealized losses on the Company’s equity2023 and debt securities were $4.3 million as of December 31, 2021. During the first quarters of 2022, and 2021, therespectively. The Company did not recognize any credit losses.losses for its available-for-sale debt securities during the first quarters of 2023 and 2022.

The Company’s marketable securities of $492.4478.0 million, aremanaged by the custodian of the Company’s marketable debt security investment account, of which the Company has an outstanding margin loan, is used as collateral for an outstandingthe margin account borrowing. As of March 31, 2022,See Note 8, Debt, Commitments and Contingencies, for more information on the Company had an outstanding borrowing of $15.0 million under its margin account. Margin account borrowings were used for the purchase of real property located in El Monte, California in 2020.loan.

Note 4. Fair Value Measurements

The authoritative guidance on fair value measurements establishes a framework with respect to measuring assets and liabilities at fair value on a recurring basis and non-recurring basis. Under the framework, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as of the measurement date. The framework also establishes a three-tier hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability and are developed based on the best information available in the circumstances. The hierarchy consists of the following three levels:

11


Level 1:

Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

11


Level 2:

Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3:

Inputs are unobservable for the asset or liability.

 

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis, based on the above three-tier fair value hierarchy:

 

March 31, 2022

 

March 31, 2023

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

(in thousands)

 

(in thousands)

 

Equity securities, debt securities and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in private equity securities

$

15,000

 

$

 

$

 

$

15,000

 

U.S. government debt securities

 

321,902

 

 

321,902

 

 

$

355,736

 

 

$

 

 

$

355,736

 

 

$

 

U.S. agency debt securities

 

208,894

 

 

 

 

 

 

208,894

 

 

 

 

Corporate debt securities

 

299,833

 

 

299,833

 

 

 

165,133

 

 

 

 

 

 

165,133

 

 

 

 

U.S. agency debt securities

 

67,493

 

 

67,493

 

 

U.S. treasury bills

 

67,883

 

 

 

67,883

 

 

 

 

 

 

 

Municipal bonds

 

24,101

 

 

24,101

 

 

 

21,772

 

 

 

 

 

 

21,772

 

 

 

 

Yankee debt securities

 

11,898

 

 

11,898

 

 

Preferred stock of privately held company

 

15,000

 

 

 

 

 

 

 

 

 

15,000

 

Redeemable preferred stock investment

 

17,609

 

 

 

17,609

 

 

12,982

 

 

 

 

 

 

 

 

 

12,982

 

Money market accounts

 

105,415

 

 

 

105,415

 

 

 

 

 

 

 

 

11,902

 

 

 

11,902

 

 

 

 

 

 

 

Yankee debt securities

 

672

 

 

 

 

 

 

672

 

 

 

 

Total equity securities, debt securities and cash equivalents

$

863,251

 

 

$

105,415

 

 

$

725,227

 

 

$

32,609

 

$

859,974

 

 

$

79,785

 

 

$

752,207

 

 

$

27,982

 

 

December 31, 2021

 

December 31, 2022

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

(in thousands)

 

(in thousands)

 

Equity securities, debt securities and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government debt securities

$

332,048

 

 

$

 

 

$

332,048

 

 

$

 

Corporate debt securities

$

332,529

 

$

 

$

332,529

 

$

 

 

194,149

 

 

 

 

 

 

194,149

 

 

 

 

U.S. government debt securities

 

198,157

 

 

198,157

 

 

Bond funds

 

98,799

 

98,799

 

 

 

U.S. agency debt securities

 

69,534

 

 

69,534

 

 

 

156,688

 

 

 

 

 

 

156,688

 

 

 

 

Exchange traded funds

 

35,000

 

35,000

 

 

 

U.S. treasury bills

 

69,798

 

 

 

69,798

 

 

 

 

 

 

 

Money market accounts

 

27,455

 

 

 

27,455

 

 

 

 

 

 

 

Municipal bonds

 

24,480

 

 

24,480

 

 

 

22,673

 

 

 

 

 

 

22,673

 

 

 

 

Preferred stock of privately held company

 

15,000

 

 

 

 

 

 

 

 

 

15,000

 

Redeemable preferred stock investment

 

12,385

 

 

 

 

 

 

 

 

 

12,385

 

Yankee debt securities

 

12,153

 

 

12,153

 

 

 

3,010

 

 

 

 

 

 

3,010

 

 

 

 

Redeemable preferred stock investment

 

21,965

 

 

 

21,965

 

Money market accounts

 

77,067

 

 

 

77,067

 

 

 

 

 

 

 

Total equity securities, debt securities and cash equivalents

$

869,684

 

 

$

210,866

 

 

$

636,853

 

 

$

21,965

 

$

833,206

 

 

$

97,253

 

 

$

708,568

 

 

$

27,385

 

 

The Company’s Level 1 assets include bond funds, exchange traded funds,U.S. treasury bills and money market instruments, and are valued based upon observable market prices. Level 2 assets consist of U.S. government and U.S. agency debt securities, municipal bonds, corporate debt securities and Yankee debt securities. Level 2 securities are valued based upon observable inputs that include reported trades, broker/dealer quotes, bids and offers. As of March 31, 2022,2023, the Company had $15.0 millionpreferred stock of investmenta privately held company, which was included in private equity securitiesother long-term assets in the accompanying Condensed Consolidated Balance Sheets, and $17.6 million of redeemable preferred stock of Helio Healtha private company that were measured using unobservable (Level 3) inputs. The fair value of redeemable preferred stock is based on the most recent valuation as of March 31, 2023 and December 31, 2022 was based on valuation performed by a third-party valuation company utilizing the guideline public company method under market approach and the discounted cash flow method under income approach. For the value of the investment in private equity securities, the Company elected to measure it at cost minus impairment, as the private equity securitiespreferred stock of the privately held company did not have a readily determinable fair value, and the Company did not believe the investmentno impairment loss was impairedrecorded as of March 31, 2022.2023.

There were 0no transfers between fair value measurement levels during the first quarterquarters of 2023 and 2022.

12


Note 5. Fixed Assets

Major classes of fixed assets consisted of the following:

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

December 31,

 

Useful Lives

2022

 

 

2021

 

Useful Lives

2023

 

 

2022

 

 

(in thousands)

 

 

(in thousands)

 

Medical lab equipment

1 to 12 Years

$

40,079

 

$

35,930

 

5 months to 12 Years

$

53,523

 

 

$

53,503

 

Leasehold improvements

Shorter of lease term or estimated useful life

 

11,824

 

 

 

11,804

 

Computer software

1 to 5 Years

 

8,079

 

 

 

6,982

 

Computer hardware

1 to 5 Years

 

7,238

 

 

 

6,979

 

Building

39 Years

 

6,731

 

6,731

 

39 Years

 

6,731

 

 

 

6,731

 

Aircraft

7 Years

 

6,503

 

6,503

 

7 Years

 

6,400

 

 

 

6,400

 

Computer hardware

3-5 Years

 

5,728

 

5,661

 

Leasehold improvements

Shorter of lease term or estimated useful life

 

4,090

 

4,003

 

Building improvements

6 months to 39 Years

 

4,659

 

3,936

 

6 months to 39 Years

 

5,878

 

 

 

5,865

 

Furniture and fixtures

2 to 10 Years

 

2,713

 

2,255

 

1 to 5 Years

 

3,822

 

 

 

4,248

 

Computer software

3 to 5 Years

 

1,722

 

1,408

 

Land improvements

5 to 15 Years

 

904

 

 

 

904

 

Automobile

2 to 7 Years

 

826

 

825

 

2 to 7 Years

 

506

 

 

 

797

 

Land improvements

5 to 15 Years

 

554

 

403

 

General equipment

3 to 5 Years

 

44

 

44

 

3 to 5 Years

 

44

 

 

 

44

 

Land

 

 

7,500

 

7,500

 

 

 

7,500

 

 

 

7,500

 

Assets not yet placed in service

 

 

10,690

 

 

 

6,718

 

 

 

12,773

 

 

 

12,877

 

Total

 

91,839

 

81,917

 

 

 

125,222

 

 

 

124,634

 

Less: Accumulated depreciation

 

 

(23,217

)

 

 

(19,630

)

 

 

(46,139

)

 

 

(43,281

)

Fixed assets, net

 

$

68,622

 

 

$

62,287

 

 

$

79,083

 

 

$

81,353

 

 

Depreciation expenses on fixed assets totaled $3.74.7 million and $1.93.7 million for the first quarters of 2023 and 2022, and 2021, respectively.During March 2022, the Company revised the estimated useful lives of certain fixed assets dedicated to the Company’s COVID-19 testing to conclude at the end of 2022 which resulted in an incremental depreciation expense of $866,000 in the first quarter of 2022.

Note 6. Other Current AssetsSignificant Balance Sheet Accounts

Other current assets consisted of the following:

 

March 31,

 

 

December 31,

 

March 31,

 

 

December 31,

 

2022

 

 

2021

 

2023

 

 

2022

 

(in thousands)

 

(in thousands)

 

Prepaid income taxes

$

16,432

 

 

$

15,434

 

Prepaid expenses

 

6,875

 

 

 

6,814

 

Reagents and supplies

$

10,612

 

$

12,206

 

 

4,722

 

 

 

4,280

 

Prepaid expenses

 

4,696

 

4,244

 

Marketable securities interest receivable

 

2,914

 

2,743

 

 

3,844

 

 

 

2,525

 

Other receivable

 

1,505

 

1,403

 

 

816

 

 

 

19,836

 

Contract assets

 

231

 

 

237

 

Prepaid income taxes

 

 

 

 

1,716

 

Total

$

19,958

 

 

$

22,549

 

$

32,689

 

 

$

48,889

 

Other long-term liabilities primarily include operating and finance lease liabilities, long-term, see Note 9,

ReagentsLeases, and supplies include reagentsnotes payable, long-term, see Note 8, Debt, Commitments and consumables used for COVID-19 testing and genetics testing and collection kits for COVID-19 testing.Contingencies.

Note 7. Reporting Segment and Geographic Information

The Company views its operations and manages its business in 1one reporting segment. Long-lived assets were primarily located in the United States as of March 31, 20222023 and December 31, 2021. 2022.Revenue by region during the first quarters of 20222023 and 20212022 were as follows:

 

Three Months Ended March 31,

 

 

Three Months Ended March 31,

 

2022

 

 

2021

 

 

2023

 

 

2022

 

(in thousands)

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

United States

$

317,190

 

$

357,537

 

$

62,062

 

 

$

317,190

 

Foreign

 

3,078

 

 

 

1,892

 

 

 

4,106

 

 

 

3,078

 

Total

$

320,268

 

 

$

359,429

 

 

$

66,168

 

 

$

320,268

 

 

13


Note 8. Debt, Commitments and Contingencies

Debt

As of March 31, 2022,2023, the Company had an outstanding borrowing of $15.0 million under its margin account with the custodian of the Company’s marketable debt security investment account, Pershing Advisor Solutions, LLC, a BNY Mellon Company. Margin account borrowings were used for the purchase of real property located in El Monte, California in 2020. The securities in the brokerage account were used as collateral for the margin loan. The custodian can issue a margin call at any time. The interest rate on the margin loan was the effective federal funds rate, or EFFR, plus a spread. The EFFR and/or the spread can be changed by BNY Mellon at any time. The interest was 1% at the time of withdrawal of $15.0 million from the margin account, and the interest rate at March 31, 20222023 was less than 15%. The Company did not make any other withdrawals from the margin account, and the outstanding balance is included in the accompanying Condensed Consolidated Balance Sheets. The related interest expenses for the first quarters of 2023 and 2022 and 2021 were both$200,000 and $29,000., respectively.

Notes payable as of March 31, 20222023 consisted of $3.83.4 million of notes payable related to an installment sale contract the Company entered in February 2022 for a building and $5.65.2 million of notes payable to Xilong Scientific Co., Ltd, or Xilong Scientific, by Fujian Fujun Gene Biotech Co., Ltd., or FF Gene Biotech. The notes payable related to the installment sale isare due in February 2030, and the interest rate is 1.08%. The current portion and noncurrent portion are $461,000408,000 and $3.43.0 million, respectively, and the noncurrent portion is included in the Other Long-Term Liabilitiesother long-term liabilities in the accompanying Condensed Consolidated Balance Sheet.Sheets. The notes payable to Xilong Scientific were extended to and are due on December 31, 2022,2023, and the interest rate on the loan is 4.97%. The related interest expenses for the first quarterquarters of 2023 and 2022 were $75,000 and $78,000, and there were respectively.0 related interest expenses in the first quarter of 2021 as the Company did not have such notes payable in the first quarter of 2021.

Operating Leases

See Note 9, Leases, for further information.

Purchase Obligations

As of March 31, 2022,2023, the Company had non-cancelable purchase obligations of $9.017.8 million, of which, $8.38.4 million for computer software and hardware, $3.3 million for services, $2.4 million for reagents and other supplies, and $400,000487,000 for medical lab equipment and $300,000 for medical lab furniture are payable within twelve months, and $2.4 million for computer software and $885,000 for services are payable within the next thirty-six months.

Contingencies

From time to time, the Company may be subject to legal proceedings and claims arising in the ordinary course of business. In the opinion of management, the outcome of these matters would not have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows.

The Company has received a Civil Investigative Demand, or CID, issued by the U.S. Department of Justice pursuant to the False Claims Act related to its investigation of allegations of medically unnecessary laboratory testing, improper billing for laboratory testing, and remuneration received or provided in violation of the Anti-Kickback Statute and the Stark Law. This CID requests information and records relating to certain of the Company’s customers named in the CID, which represent a small portion of the Company’s revenues. As previously disclosed in the Company’s Exchange Act reports, the SEC is also conducting a non-public formal investigation, which appears to relate to the matters raised in the CID requests and our Exchange Act reports filed for 2018 through 2020. The Company is fully cooperating with the U.S. Department of Justice and the SEC to promptly respond to the requests for information in this CID and investigation and does not presently expect this CID or resulting investigation or the SEC investigation to have a material adverse impact. However, the Company cannot predict when the investigationthese matters will be resolved, the outcome of the investigationthese matters, or itstheir potential impact, which may ultimately be greater than what the Company currently expects.

Note 9. Leases

Lessee

The Company is party as a lessee to various non-cancelable operating leases with varying terms through March 2028 primarily for laboratory and office space and equipment. The Company has options to renew some of these leases after their expirations. On a lease-by-lease basis, the Company considers such options, which may be elected at the Company’s sole discretion, in determining the lease term. The Company also has twovarious finance leases for lab equipment with varying terms through December 2026 one, some of which waswere acquired in the acquisition of Cytometry Specialists, Inc., or CSI. The Company retained CSI’s classification of its leases.business combinations. The Company does not have any leases with variable lease payments. The Company’s operating lease agreements do not contain any residual value guarantees, material restrictive covenants, bargain purchase options, or asset retirement obligations.

14


The Company’s headquarters are located in Temple City,El Monte, California, which is comprised of various corporate offices and a laboratory certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, accredited by the College of American Pathologists, or CAP, and licensed by the State of California Department of Public Health. Other CLIA-certified laboratories are located in Houston, TexasTemple City, California; Irving, Texas; Needham, Massachusetts; Phoenix, Arizona; Alpharetta, Georgia; and Alpharetta, Georgia. Additional offices are located in Atlanta, Georgia and are used for certain report generation functions.New York, New York.

The operating and finance lease right-of-use asset, short-term lease liabilities, and long-term lease liabilities as of March 31, 20222023 and December 31, 20212022 were as follows:

 

March 31,

 

 

December 31,

 

March 31,

 

 

December 31,

 

2022

 

 

2021

 

2023

 

 

2022

 

(in thousands)

 

(in thousands)

 

Operating lease ROU asset, net

$

6,664

 

 

$

7,141

 

$

13,227

 

 

$

14,784

 

Operating lease liabilities, short term

$

1,756

 

 

$

1,842

 

$

6,095

 

 

$

6,132

 

Operating lease liabilities, long term

$

4,957

 

 

$

5,344

 

$

7,309

 

 

$

8,795

 

Finance lease ROU asset, net

$

1,647

 

 

$

1,735

 

$

2,543

 

 

$

2,784

 

Finance lease liabilities, short term

$

335

 

 

$

332

 

$

954

 

 

$

943

 

Finance lease liabilities, long term

$

1,314

 

 

$

1,398

 

$

1,575

 

 

$

1,818

 

The following waswere operating and finance lease expense:expenses:

 

Three months ended March 31,

 

Three Months Ended March 31,

 

2022

 

 

2021

 

2023

 

 

2022

 

(in thousands)

 

(in thousands)

 

Operating lease cost

$

538

 

$

69

 

$

1,702

 

 

$

538

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

Amortization of ROU assets

 

96

 

 

 

243

 

 

 

96

 

Interest on lease liabilities

 

14

 

 

 

 

 

27

 

 

 

14

 

Short-term lease cost

 

97

 

 

 

131

 

 

501

 

 

 

97

 

Total lease cost

$

745

 

 

$

200

 

$

2,473

 

 

$

745

 

Supplemental information related to operating leases and finance lease wasleases were the following:

 

 

March 31, 20222023

 

Weighted average remaining lease term - operating leases

4.83 3.12years

 

Weighted average discount rate - operating leases

 

3.143.79

%

Weighted average remaining lease term -finance- finance lease

4.69 2.87years

 

Weighted average discount rate - finance lease

 

3.213.96

%

The following is a maturity analysis of operating and finance lease liabilities using undiscounted cash flows on an annual basis with renewal periods included:

 

Operating Leases

 

 

Finance Lease

 

Operating Leases

 

 

Finance Lease

 

(in thousands)

 

(in thousands)

 

Year Ending December 31,

 

 

 

 

 

 

 

 

2022 (remaining 9 months)

$

1,505

 

 

$

288

 

2023

 

1,580

 

383

 

2023 (remaining 9 months)

$

4,929

 

 

$

727

 

2024

 

1,156

 

376

 

 

4,073

 

 

 

1,033

 

2025

 

1,049

 

366

 

 

2,119

 

 

 

547

 

2026

 

884

 

366

 

 

1,522

 

 

 

366

 

2027

 

863

 

 

 

1,360

 

 

 

 

Thereafter

 

217

 

 

 

 

216

 

 

 

 

Total lease payments

 

7,254

 

1,779

 

 

14,219

 

 

 

2,673

 

Less imputed interest

 

(541

)

 

(130

)

 

(815

)

 

 

(144

)

Total

$

6,713

 

 

$

1,649

 

$

13,404

 

 

$

2,529

 

 

15


Lessor

The Company leases out space in buildings it owns and leases to third-party tenants under noncancelable operating leases. As of March 31, 2022,2023, the remaining lease terms left range from 89 months to 4121 months, including renewal options and may include rent escalation clauses. Lease income primarily represents fixed lease payments from tenants recognized on a straight-line basis over the application lease term. Variable lease income represents tenant payments for real estate taxes, insurance, and maintenance.

The lease income was included in interest and other income, net, in the accompanying Condensed Consolidated Statements of Income.Operations. Total lease income was as follows:

 

Three months ended March 31,

 

 

Three Months Ended March 31,

 

2022

 

 

2021

 

 

2023

 

 

2022

 

(in thousands)

 

 

(in thousands)

 

Lease income

$

97

 

 

$

156

 

 

$

45

 

 

$

97

 

Variable lease income

 

1

 

 

 

1

 

 

 

 

 

 

1

 

Total lease income

$

98

 

 

$

157

 

 

$

45

 

 

$

98

 

Future fixed lease payments from tenants for all noncancelable operating leases as of March 31, 20222023 are as follows:

 

Lease Payments

 

Lease Payments

 

from Tenants

 

from Tenants

 

(in thousands)

 

(in thousands)

 

Year Ending December 31,

 

 

 

 

2022 (remaining 9 months)

$

266

 

2023

 

264

 

2023 (remaining 9 months)

$

136

 

2024

 

180

 

 

94

 

2025

 

120

 

Total

$

830

 

$

230

 

 

Note 10. Equity-Based Compensation

The Company has included equity-based compensation expense as part of cost of revenue and operating expenses in the accompanying Condensed Consolidated Statements of IncomeOperations as follows:

 

Three Months Ended March 31,

 

 

Three Months Ended March 31,

 

2022

 

 

2021

 

 

2023

 

 

2022

 

(in thousands)

(in thousands)

 

Cost of revenue

$

1,465

 

$

674

 

 

$

2,394

 

 

$

1,465

 

Research and development

 

1,921

 

1,223

 

 

3,448

 

 

 

1,921

 

Selling and marketing

 

825

 

426

 

 

1,361

 

 

 

825

 

General and administrative

 

1,405

 

 

639

 

 

 

3,062

 

 

 

1,405

 

Total

$

5,616

 

 

$

2,962

 

 

$

10,265

 

 

$

5,616

 

 

16


Note 11. (Benefit from) Provision for Income Taxes

The effective tax rate used for interim periods is the estimated annual effective consolidated tax rate, based on the current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur. The annual effective tax rate is based upon several significant estimates and judgments, including the estimated annual pre-tax income of the Company in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year. In addition, the Company’s tax expense can be impacted by changes in tax rates or laws and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The Company recorded consolidated benefit from income taxes of $(5.2) million for the first quarter of 2023 and a consolidated provision for income taxes of $48.4 million and $66.5 million for the first quarters of 2022 and 2021, respectively, or 24% of earnings before income taxes for the first quarter of 2022, compared to 2022. The Company’s effective tax rate was (25% of earnings before income taxes) for the first quarter of 2021. The decrease in the effective tax rate2023 compared with 24% for the first quarter of 2022, relative to 2021, was primarily attributable to international restructuring.2022.

The Company is not currently under examination by any major income tax jurisdiction. During 2022,2023, the statutes of limitations will lapse on the Company's 2018Company’s 2019 federal tax year and certain 20172018 and 20182019 state tax years. The Company does not believe the federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the interim financial statements for the first quarters of 2022 and 2021.

16


Note 12. Income (Loss) per Share

The following table presents the calculation of basic and diluted income (loss) per share for the first quarters of 20222023 and 2021:2022:

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

 

(in thousands, except per share data)

 

Net income attributable to Fulgent

$

153,979

 

 

$

200,691

 

Weighted-average common shares—outstanding, basic

 

30,234

 

 

 

28,831

 

Weighted-average common shares—outstanding, diluted

 

31,240

 

 

 

30,770

 

Net income per common share, basic

$

5.09

 

 

$

6.96

 

Net income per common share, diluted

$

4.93

 

 

$

6.52

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands, except per share data)

Net income (loss) attributable to Fulgent

$

(15,340

)

 

$

153,979

 

 

Weighted-average common shares—outstanding, basic

 

29,536

 

 

 

30,234

 

 

Weighted-average common shares—outstanding, diluted

 

29,536

 

 

 

31,240

 

 

Net income (loss) per common share, basic

$

(0.52

)

 

$

5.09

 

 

Net income (loss) per common share, diluted

$

(0.52

)

 

$

4.93

 

 

The following securities have been excluded from the calculation of diluted income (loss) per share because their effect would have been anti-dilutive:

 

Three Months Ended March 31,

 

Three Months Ended March 31,

 

2022

 

 

2021

 

2023

 

 

2022

 

(in thousands)

 

(in thousands)

 

Options

 

5

 

 

 

 

 

211

 

 

 

5

 

Restricted Stock Units

 

352

 

 

 

37

 

 

2,040

 

 

 

352

 

Contingently Issuable Shares

 

371

 

 

 

 

 

The anti-dilutive shares described above were calculated using the treasury stock method. In the first quarter of 2023, the Company had outstanding stock options and restricted stock unit and contingently issuable shares for held back related shares to the business combination of Fulgent Pharma that were excluded from the weighted-average share calculation for continuing operations due to the Company’s net loss positions.

Note 13. Related Parties

Linda Marsh, who is a member of the Company’s boardBoard of directors,Directors, or the Board, is currently the Senior Executive Vice President of AHMC Healthcare Inc., or AHMC. The Company performs genetic testing and other testing services, on an arms-length basis, for AHMC, and the Company recognized $775,00095,000 and $1.1775,000 million in revenue from AHMC in the first quarters of 20222023 and 2021,2022, respectively. As of March 31, 20222023 and December 31, 2021,2022, $509,00066,000 and $556,00093,000, respectively, was owed to the Company by AHMC, which is included in trade accounts receivable, net, in the accompanying Condensed Consolidated Balance Sheets, in connection with this relationship.

TheMing Hsieh, the Chief Executive Officer and Chairperson of the Board, is on the board of directors and a 20% owner of ANP Technologies, Inc., or ANP, from which the Company purchased COVID-19 antigen rapid test kits and Fulgent Pharma LLC, the Company’s former subsidiary, are party to shared services arrangements where researchentered into certain drug-related licensing and development administrative servicesservice agreements. The President and office space and equipment are provided between the companies, on an arms-length basis. Ming Hsieh is the Manager and a memberChief Scientific Officer of Fulgent Pharma, LLC.Ray Yin, is the Founder, President and Chief Technology Officer of ANP. The cost of researchCompany incurred $959,000 related to the licensing and development services rendered by Fulgent Pharma LLC forand purchases of COVID-19 antigen rapid test kits in the Company wasfirst quarter of 2023. 0Not significant costs were incurred in the first quarter of 2022. During the first quarter of 2021, the cost of research and development services rendered by Fulgent Pharma LLC for the Company was $108,000. Amounts for services performed by the Company for Fulgent Pharma LLC were 0t significant during the first quarters of 2022 and 2021. As of March 31, 2022,2023, and December 31, 2021,2022, $689,000890,000 and $679,000607,000, respectively, were owed to Fulgent Pharma LLCANP by the Company which are

17


included in in other current liabilities in the accompanying Condensed Consolidated Balance Sheets, in connection with these relationships.

The Chief Executive Officer and Chairman of the Company’s board of directors, Ming Hsieh, is the owner of PTJ Associates Inc., or PTJ. PTJ provides flight services to the Company on an arms-length basis. During the first quarter of 2022, the Company incurred $136,000 in expenses for flights between California and Texas to transport employees and supplies. Such expenses were 0t significant in the first quarter of 2021. As of March 31, 2022 and December 31, 2021, 0 amount was owed to PTJ by the Company in connection with this relationship.17


Note 14. Equity Distribution Agreement

In November 2020, the Company entered into an Equity Distribution Agreement, or the November 2020 Equity Distribution Agreement, with Piper Sandler & Co. (f/k/a Piper Jaffray & Co.), or Piper, Oppenheimer & Co. Inc., and BTIG LLC, as sales agents, pursuant to which the Company may offer and sell, from time to time through Piper, shares of its 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 first quarter of 2021, the Company sold approximately 583,000 shares of its common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $52.00, and 0 shares of common stock were sold during the first quarter of 2022.

Note 15.14. Goodwill and Acquisition-Related Intangibles

Summaries of goodwill and intangibles balances assets as of March 31, 20222023 and December 31, 20212022 were as follows:

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

December 31,

 

Weighted-Average Amortization Period

2022

 

 

2021

 

Weighted-Average Amortization Period

2023

 

 

2022

 

 

(in thousands)

 

 

(in thousands)

 

Goodwill

 

$

50,999

 

 

$

50,897

 

 

$

143,120

 

 

$

143,027

 

 

 

 

 

 

In-process research & development

n/a

$

64,590

 

 

$

64,590

 

 

 

 

 

 

 

 

 

 

 

Royalty-free technology

10 Years

$

5,828

 

$

5,803

 

10 Years

 

5,388

 

 

 

5,364

 

Less: accumulated amortization

 

 

(534

)

 

 

(387

)

 

 

(1,033

)

 

 

(894

)

Royalty-free technology, net

 

 

5,294

 

5,416

 

 

 

4,355

 

 

 

4,470

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

12 Years

 

28,850

 

28,845

 

13 Years

 

82,755

 

 

 

82,750

 

Less: accumulated amortization

 

 

(1,764

)

 

 

(1,125

)

 

 

(7,814

)

 

 

(6,215

)

Customer relationships, net

 

 

27,086

 

27,720

 

 

 

74,941

 

 

 

76,535

 

 

 

 

 

 

 

 

 

 

 

Trade name

10 Years

 

1,090

 

1,090

 

8 Years

 

3,790

 

 

 

3,790

 

Less: accumulated amortization

 

 

(73

)

 

 

(45

)

 

 

(535

)

 

 

(412

)

Trade name, net

 

 

1,017

 

1,045

 

 

 

3,255

 

 

 

3,378

 

 

 

 

 

 

 

 

 

 

 

In-place lease intangible assets

5 Years

 

360

 

 

 

360

 

Less: accumulated amortization

 

 

(64

)

 

 

(46

)

In-place lease intangible assets, net

 

 

296

 

 

 

314

 

 

 

 

 

 

Laboratory information system platform

5 Years

 

1,860

 

1,860

 

5 Years

 

1,860

 

 

 

1,860

 

Less: accumulated amortization

 

 

(248

)

 

 

(155

)

 

 

(620

)

 

 

(527

)

Laboratory information system platform, net

 

 

1,612

 

1,705

 

 

 

1,240

 

 

 

1,333

 

 

 

 

 

 

 

 

 

 

 

Purchased patent

10 Years

 

32

 

31

 

10 Years

 

29

 

 

 

29

 

Less: accumulated amortization

 

 

(4

)

 

 

(3

)

 

 

(7

)

 

 

(6

)

Purchased patent, net

 

 

28

 

 

28

 

 

 

22

 

 

 

23

 

Total intangible assets, net

 

$

35,037

 

 

$

35,914

 

 

$

148,699

 

 

$

150,643

 

Acquisition-related intangibles included in the above tables are generally finite-lived and are carried at cost less accumulated amortization, except for In-Process Research and Development, or IPR&D, which is related to a business combination in 2022 and has an indefinite life until research and development efforts are completed or abandoned. All other finite-lived acquisition-related intangibles related to the business combinations in 2022 and 2021 are amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized.

Changes in the carrying amount of goodwill for the first quarter of 2023 are as follows:

 

Amounts

 

 

(in thousands)

 

Balance as of January 1, 2023

 

 

Goodwill

$

143,027

 

Accumulated impairment losses

 

 

 

 

143,027

 

 

 

 

Net foreign currency exchange differences

 

93

 

 

 

 

Balance as of March 31, 2023

 

 

Goodwill

 

143,120

 

Accumulated impairment losses

 

 

 

 

143,120

 

 

18


Based on the carrying value of finite-lived intangible assets recorded as of March 31, 2022,2023, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for intangible assets is expected to be as follows:

 

Amounts

 

Amounts

 

(in thousands)

 

(in thousands)

 

Year Ending December 31,

 

 

 

 

2022 (remaining 9 months)

 

2,714

 

2023

 

3,618

 

2023 (remaining 9 months)

$

5,900

 

2024

 

3,618

 

 

7,867

 

2025

 

3,618

 

 

7,867

 

2026

 

3,295

 

 

7,557

 

2027

 

2,994

 

 

7,228

 

2028

 

7,193

 

Thereafter

 

15,180

 

 

40,497

 

Total

$

35,037

 

$

84,109

 

 

Note 15. Stock Repurchase Program

In March 2022, the Board authorized a $250.0 million stock repurchase program. Under the stock repurchase program, the Company may repurchase shares from time to time in the open market or in privately negotiated transactions. The stock repurchase program has no expiration from the date of authorization. During the first quarters of 2023 and 2022, the Company did not repurchase any shares of its common stock. As of March 31, 2023, a total of approximately $175.7 million remained available for future repurchases of its common stock under the stock repurchase program.

Note 16. Subsequent Events

In April 2022, the Company entered into an Agreement and PlanAs of Merger, or the Merger Agreement, pursuant to which the Company acquired Symphony Buyer, Inc., an indirect parent of Inform Diagnostics, Inc., or InformDx. InformDx is a leading national independent pathology laboratory based in Irving, Texas. The acquisition was completed on April 26, 2022. Under the terms of the Merger Agreement, the total purchase price payable to the securityholders of Symphony Buyer, Inc. was approximately $170 million, as adjusted for closing cash, closing indebtedness, closing working capital, closing transaction expenses and other transaction matters. With the addition of InformDx, the Company will extend its test menu into breast pathology, gastrointestinal pathology, dermatopathology, urologic pathology, neuropathology, and hematopathology.May 1, 2023, no subsequent events are being reported.

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included in this report. Additionally, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K promulgated by the U.S. Securities and Exchange Commission, or SEC, in preparing this discussion and analysis, we presume that readers have access to and have read the discussion and analysis of our financial condition and results of operations included in our annual report on Form 10-K for our fiscal year ended December 31, 20212022 filed with the SEC on February 28, 2022,2023, or the 20212022 Annual Report. As used in this discussion and analysis and elsewhere in this report, unless the context otherwise requires, the terms “Fulgent,” the “Company,” “we,” “us” and “our” refer to Fulgent Genetics, Inc. and its consolidated subsidiaries.

Forward-Looking Statements

The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. 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 the 20212022 Annual 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 technologytechnology-based company offering large-scale COVID-19 testing services,with a well-established clinical diagnostic business and a therapeutic development business. Our clinical diagnostic business offers molecular diagnostic testing services, and comprehensive genetic testing, and high-quality anatomic pathology laboratory services designed to provide physicians and patients with clinically actionable diagnostic information to improve the quality of patient care. A cornerstone of ourOur therapeutic development business is our ability to provide expansive options and flexibilityfocused on developing drug candidates for all clients’ unique testing needs. To this end, we have developed a proprietary technology platform allowing us to offertreating a broad range of cancers using a novel nanoencapsulation and flexible test menutargeted therapy platform designed to improve the therapeutic window and pharmacokinetic profile, or PK profile, of new and existing cancer drugs. We aim 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.

Our technology platform, which integrates sophisticated data comparison and suppression algorithms, adaptive learning software, in comparison to our competitors advanced genetic diagnostics tools andtransform from a genomic diagnostic business into a fully 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.

20


We offer tests at competitive prices, averaging approximately $99 per billable test delivered in the first quarter of 2022, and at a low cost to us, averaging approximately $24 per billable test delivered in the first quarter of 2022. We delivered over 3.2 million billable tests in the first quarter of 2022, compared to approximately 3.8 million billable tests delivered in the first quarter of 2021. We recorded revenue and net income of $320.3 million and $154.0 million, respectively, in the first quarter of 2022, compared to revenue and net income of $359.4 million and $200.7 million, respectively, in the first quarter of 2021. As of March 31, 2022, an aggregate of approximately 17.7 million billable tests have been delivered to approximately 1,900 customers since launching our first commercial genetic tests in 2013. We have experienced compound quarterly growth of 51% in the number of billable tests delivered in our last eight completed fiscal quarters. We achieved profitability in the first half of 2017, and in the second and the third quarter of 2019, the second, third and fourth quarters of 2020, each quarter of 2021, and the first quarter of 2022, but we have recorded losses in all other periods since our inception.

COVID-19 Considerations

During the first quarter of 2022, 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 the first quarter of 2022 and 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. 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. 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 core genetic tests ordered and, if repeated, may again cause the volume of our core 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 COVID‑19 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 third‑party 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 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 March 31, 2022. 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 March 31, 2022.

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 the 2021 Annual Report.precision medicine company.

Business Risks and Uncertainties and Other Factors Affecting Our Performance

Our business and prospects are exposed to numerous risks and uncertainties. For more information, see “Item 1A. Risk Factors” in Part I of the 20212022 Annual Report. In addition, our performance in any period is affected by a number of other factors. See the description of some of the material factors affecting our performance in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 20212022 Annual Report.

 

2120


Results of Operations

The table below summarizes our results of our continuing operations for each of the periods indicated.presented. For a financial overview relating to our results of operations, including general descriptions of the make-up of material line items of our statement of incomeoperation data, see “Item“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 20212022 Annual Report.

 

Three Months Ended

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

$

 

%

 

March 31,

 

 

$

 

%

2022

 

 

2021

 

 

Change

 

 

Change

 

2023

 

 

2022

 

 

Change

 

 

Change

Statement of Income Data:

(dollars and billable tests in thousands, except per billable test data)

 

Statement of Operations Data:

(in thousands)

Revenue

$

320,268

 

 

$

359,429

 

$

(39,161

)

 

(11

%)

$

66,168

 

 

$

320,268

 

 

$

(254,100

)

 

(79%)

Cost of revenue

 

77,725

 

 

 

74,075

 

 

 

3,650

 

 

 

5

%

 

47,357

 

 

 

77,725

 

 

 

(30,368

)

 

(39%)

Gross profit

 

242,543

 

 

 

285,354

 

 

 

(42,811

)

 

 

(15

%)

 

18,811

 

 

 

242,543

 

 

 

(223,732

)

 

(92%)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

5,989

 

 

 

5,422

 

567

 

10

%

 

9,782

 

 

 

5,989

 

 

 

3,793

 

 

63%

Selling and marketing

 

7,940

 

 

 

5,008

 

2,932

 

59

%

 

10,083

 

 

 

7,940

 

 

 

2,143

 

 

27%

General and administrative

 

25,775

 

 

 

8,002

 

17,773

 

222

%

 

21,802

 

 

 

25,775

 

 

 

(3,973

)

 

(15%)

Amortization of intangible assets

 

906

 

 

 

 

 

 

906

 

 

*

 

 

1,968

 

 

 

906

 

 

 

1,062

 

 

117%

Total operating expenses

 

40,610

 

 

 

18,432

 

 

 

22,178

 

 

 

120

%

 

43,635

 

 

 

40,610

 

 

 

3,025

 

 

7%

Operating income

 

201,933

 

 

 

266,922

 

(64,989

)

 

(24

%)

Operating (loss) income

 

(24,824

)

 

 

201,933

 

 

 

(226,757

)

 

(112%)

Interest and other income, net

 

45

 

 

 

282

 

 

 

(237

)

 

 

(84

%)

 

3,775

 

 

 

45

 

 

 

3,730

 

 

8,289%

Income before income taxes

 

201,978

 

 

 

267,204

 

(65,226

)

 

(24

%)

Provision for income taxes

 

48,421

 

 

 

66,513

 

 

 

(18,092

)

 

 

(27

%)

Net income from consolidated operations

 

153,557

 

 

 

200,691

 

(47,134

)

 

(23

%)

(Loss) income before income taxes

 

(21,049

)

 

 

201,978

 

 

 

(223,027

)

 

(110%)

(Benefit from) provision for income taxes

 

(5,200

)

 

 

48,421

 

 

 

(53,621

)

 

(111%)

Net (loss) income from consolidated operations

 

(15,849

)

 

 

153,557

 

 

 

(169,406

)

 

(110%)

Net loss attributable to noncontrolling interests

 

422

 

 

 

 

 

 

422

 

 

*

 

 

509

 

 

 

422

 

 

 

87

 

 

21%

Net income attributable to Fulgent

$

153,979

 

 

$

200,691

 

 

$

(46,712

)

 

 

(23

%)

 

 

 

 

 

 

 

 

 

 

Other Operating Data:

 

 

 

 

 

 

 

 

 

 

Billable tests delivered(1)

 

3,224

 

 

 

3,774

 

(550

)

 

(15

%)

Average price per billable test delivered(2)

$

99

 

 

$

95

 

$

4

 

4

%

Cost per billable test delivered(3)

$

24

 

 

$

20

 

$

4

 

20

%

Net (loss) income attributable to Fulgent

$

(15,340

)

 

$

153,979

 

 

$

(169,319

)

 

(110%)

* 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.

2221


Revenue

Revenue decreased $39.2$254.1 million, or 11%79%, from $359.4 million in the first quarter of 2021 to $320.3 million in the first quarter of 2022.2022 to $66.2 million in the first quarter of 2023. The decreasesdecrease in revenue between periods were primarily due to decreases in the number of billable tests delivered, primarily related to decreased orders for our COVID-19 tests.

The average price of the billable tests we delivered increased from $95 in the first quarter of 2021 to $99 in the first quarter of 2022. The increase in the first quarter of 2022 was due to the mix of tests we delivered in 2022 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 $1.2$1.0 million, or 63%33%, from $1.9 million in the first quarter of 2021 to $3.1 million in the first quarter of 2022.2022 to $4.1 million in the first quarter of 2023. The increase in revenue from non-U.S. sources between periods were primarily due to increased sales of our coretraditional genetic testing services to customers in China through FF Gene Biotech.

The number of billable tests we delivered decreased 550,000, from 3.8 millionour joint venture in the first quarter of 2021 to 3.2 million in the first quarter of 2022. The decrease was primarily attributable to the decrease of COVID-19 tests.China.

After aggregating customers that are under common control or affiliation,, one no customer contributed 27% and 25%10% or more of the Company’s revenue in the first quartersquarter of 20222023, and 2021, respectively.one customer contributed 27% of the Company’s revenue in the first quarter of 2022.

Cost of Revenue

Cost of revenue increased $3.7decreased $30.4 million, or 5%39%, from $74.1 million in the first quarter of 2021 to $77.7 million in the first quarter of 2022.2022 to $47.4 million in the first quarter of 2023. The increasedecrease was primarily due to increasesdecreases of $7.1$20.2 million in reagents and supply expense, $17.7 million in consulting and outside labor costs, $2.1 million in shipping and handling expense, $1.1 million in external customer engagement platform expense related to the decreased tests delivered and orders for production, $4.2our COVID-19 tests, and $1.2 million in depreciation expenses, partially offset by an increase of $12.3 million in personnel costs including equity-based compensation expense relateddue to increased headcount and market price of the Company’s stock at grant dates, and $1.6 million in depreciation expenses related to medical lab equipment purchased, partially offset by decreases of $6.8 million in reagent and supply expenses related to decreased billable tests delivered, $1.7 million in software expense related to usage of COVID-19 testing software, and $850,000 in shipping and handling expense related to delivery of collection kits for of COVID-19 tests.

Cost per billable test delivered increased $4, or 20%, from $20 in the first quarter of 2021 to $24 in the first quarter of 2022. The increase in cost per billable tests was primarily due to the mix of tests we delivered in 2022.headcount.

Our gross profit decreased $42.8$223.7 million, from $285.4 million in the first quarter of 2021 to $242.5 million in the first quarter of 2022.2022 to $18.8 million in the first quarter of 2023. The decrease in gross profit was primarily due to the decrease in revenue from our COVID-19 tests. Our gross profit as a percentage of revenue, or gross margin, decreased from 79.4%75.7% to 75.7% between periods28.4% due to the decreasechanges in revenue and increases in our cost per billable test and cost of revenue described above.product mix.

Research and Development

Research and development expenses increased $567,000,$3.8 million, or 10%63%, from $5.4 million in the first quarter of 2021 to $6.0 million in the first quarter of 2022.2022 to $9.8 million in the first quarter of 2023. The increase was primarily due to increases of $1.3$3.3 million in personnel costs including equity-based compensation expense relateddue to increased headcount and market price of the Company’s stock at grant dates,$418,000 in consulting and partially offset by a decrease of $1.0 million in reagent and supply expensesoutside labor costs related to decreased reagent usage for COVID-19 research.continued development of our therapeutic products.

Selling and Marketing

Selling and marketing expenses increased $2.9$2.1 million, or 59%27% from $5.0 million in the first quarter of 2021 to $7.9 million in the first quarter of 2022.2022 to $10.1 million in the first quarter of 2023. The increase was primarily due to increases of $1.4 million in software expense, $611,000 in personnel costs including equity-based compensation expense due to increased headcount, and $520,000 in allocated overhead expenses, partially offset by a decrease of $922,000 in consulting and outside labor costs.

General and Administrative

General and administrative expenses decreased $4.0 million, or 15% from $25.8 million in the first quarter of 2022 to $21.8 million in the first quarter of 2023 due to decreases of $11.7 million in provisions for credit losses, $1.8 million in legal and professional fees, and $908,000 in software and software licensing due to decreased testing volume, partially offset by increases of $5.0 million in personnel costs including equity-based compensation expense related to increased commission expense and market price of the Company’s stock at grant dates and $839,000 in consulting and outside labor related to marketing projects in the current period.

General and Administrative

General and administrative expenses increased $17.8 million, or 222% from $8.0 million in the first quarter of 2021 to $25.8 million in the first quarter of 2022. The increase was primarily due to increases of $10.5 million in additional provision for credit losses, $2.9 million in personnel costs including equity-based compensation expense related to increased headcount, and market price of the Company’s stock at grant dates, $2.6$2.1 million in legalfacility expenses, and professional fees primarily related to business acquisitions$1.8 million in depreciation expense and general corporate matters, $965,000 in accounting fees related to financial statement and internal control audits, $401,000$709,000 in business insurance expenses, and $399,000 in consulting and outside labor costs.expense.

23


Amortization of Intangible Assets

Amortization of intangible assets represents amortization expenses on the intangible assets arisingarose from the business combinations in 2022 and 2021 and a patent purchased afterin 2021. Amortization expenses were $2.0 million and $906,000 in the first quarterquarters of 2021.2023 and 2022, respectively.

Interest and Other Income, net

NetInterest and other income, net, is primarily comprised of net interest (expense) income (expenses), which was $(50,000)$3.8 million and $230,000$(50,000) in the first quarters of 20222023 and 2021,2022, respectively. This interest income (expense) income related to interest earned on various investments in marketable securities including realized and holding gain (loss) on marketable equity securities, net of interest expenses incurred for our notes payable and margin loan.

Other income (expense) was not significant in the first quarters of 2022 and 2021, respectively. The primary components of other income (expense) were rental income net of rental expenses and foreign currency exchange gain (loss).22


(Benefit from) Provision for Income Taxes

Provision(Benefit from) provision for income taxes were $48.4income taxes was $(5.2) million and $66.5$48.4 million for the first quarters of 20222023 and 2021,2022, respectively. The effective tax rate was 24%(25%) and 25%24% for the first quarters of 2023 and 2022, and 2021, respectively. The decrease in the effective tax rate for the first quarter of 2022, relative to 2021, was primarily attributable to international restructuring.

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.

from entities not wholly owned.

Liquidity and Capital Resources

Liquidity and Sources of Cash

We had $1.1 billion$871.3 million and $935.5$852.9 million in cash, cash equivalents and marketable securities as of March 31, 20222023 and December 31, 2021,2022, respectively. Our marketable securities primarily consist of corporate bonds, municipal bonds, and U.S. government and U.S. agency debt securities, U.S. treasury bills, corporate bonds, municipal bonds, and Yankee debt securities as of March 31, 20222023 and December 31, 2021.2022.

Our primary uses of cash are to fund our operations and to fund strategic acquisitions 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.

24


On September 25, 2020, we entered into an Equity Distribution Agreement, or 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 an Equity Distribution Agreement, or 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, and short-term marketable securities along with cash from operations, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. Cash provided by operations has significantly contributed to our ability to meet our liquidity needs, including paying for capital expenditures, and 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.

expenditures. 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. For instance, cash provided by our operations has in the past experienced fluctuationsfluctuates 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,demand for our tests, 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, funding of government programs from which we receive government funding, 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 additional 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.

25


Cash Flows

The following table summarizes our cash flows for each of the periods indicated:

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

 

(in thousands)

 

Net cash provided by operating activities

$

188,411

 

 

$

233,179

 

Net cash provided by (used in) investing activities

$

688

 

 

$

(216,491

)

Net cash (used in) provided by financing activities

$

(934

)

 

$

47,347

 

 

Three Months Ended March 31,

 

 

2023

 

 

2022

 

 

(in thousands)

 

Net cash (used in) provided by operating activities

$

(7,907

)

 

$

188,411

 

Net cash (used in) provided by investing activities

$

(4,354

)

 

$

688

 

Net cash used in financing activities

$

(1,101

)

 

$

(934

)

 

23


Operating Activities

Cash used in operating activities in the first quarter of 2023 was $7.9 million. The difference between net loss and cash used in operating activities for the period was primarily due to the effects of $10.3 million in equity-based compensation expenses, $6.9 million in the depreciation and amortization, and $1.6 million in noncash lease expense, partially offset by $5.2 million in deferred taxes. Changes in operating assets and liabilities primarily consisted of decreases of $9.1 million in accrued liabilities and other current and non-current liabilities and $1.9 million in accounts payable related to timing of payments, $1.5 million in operating and finance lease liabilities, and an increase of $1.6 million in other current and long-term assets, partially offset by a decrease of $9.3 million in trade accounts receivable due to timing of collections.

Cash provided by operating activities in the first quarter of 2022 was $188.4 million. The difference between net income and cash provided by operating activities for the period was primarily due to the effects of $11.6 million in provision for credit losses, $5.6 million in equity-based compensation expenses, and $4.7 million in the depreciation and amortization. Cash provided byChanges in operating activities increased between periodsassets and liabilities primarily due toconsisted of increases of $51.4 million in income tax payable and $2.1 million in accounts payable due to timing of payments and a decrease of $3.0 million in other current and long-term assets primarily related to reagents and supplies, partially offset by an increase of $32.9 million in trade receivable due to timing of collections and a decrease of $8.2 million in accrued liabilities and other current and non-current liabilities primarily due to the payments for bonus accruals.

Investing Activities

Cash provided by operatingused in investing activities in the first quarter of 20212023 was $233.2 million. The difference between net income and cash provided by operating activities for the period was$4.4 million, which primarily due to the effects of $3.0 million in equity-based compensation expenses and $1.9 million in the depreciation of assets. Cash provided by operating activities increased between periods primarily due to increases of $67.2 million in income tax payable due to a significant increase in income, $16.8 million in customer deposit due to payments received from customers in excess of their outstanding trade accounts receivable balances, and $3.9 million in other current liabilities related to increased payroll liabilities,$143.9 million on purchase of marketable securities and $2.0 million on purchases of fixed assets, partially offset by the negative impact of increases of $34.6$141.4 million in trade accounts receivable mainly due to timing of collections from customers and insurance companies and $9.1 million in other current and long-term assets related to additions in reagents and supplies, and decreasesmaturities of $12.6 million in contract liabilities due to increased revenue recognized in the current period, and $6.3 million in accounts payable mainly due to timing of payments.

Investing Activitiesmarketable securities.

Cash provided by investing activities in the first quarter of 2022 was $688,000, which primarily related to $133.4 million related to sales of marketable securities and $27.8 million related to maturities of marketable securities, partially offset by purchases of $130.1 million of marketable securities, $15.0 million investment in private equity securities, and $10.0 million contingent consideration payment related to the acquisition of CSI.Cytometry Specialists, Inc, and $5.4 million on purchases of fixed assets.

Financing Activities

Cash used in investingfinancing activities in the first quarter of 20212023 was $216.5$1.1 million, which primarily related to purchase of $219.5 million marketable securities, purchase of $11.5 million fixed assets consisting mainly of medical lab equipment, and partially offset by maturities of $14.5 million marketable securities.

Financing Activities$869,000 common stock withholding for employee tax obligations.

Cash used in financing activities in the first quarter of 2022 was $934,000, which primarily related to $494,000 common stock withholding for employee tax obligations and $375,000 repayments of partial notes payable.

Stock Repurchase Program

Cash provided byIn March 2022, the Board authorized a $250.0 million stock repurchase program. The stock repurchase program has no expiration from the date of authorization. Under the stock repurchase program, the Company may repurchase shares from time to time in the open market or in privately negotiated transactions.

During the first quarter of 2021 was $47.32023, we did not repurchase any common stock under our stock repurchase program. As of March 31, 2023, a total of approximately $175.7 million which primarily represents net proceeds from saleremained available for future repurchases of our common stock made pursuant to the November 2020 Equity Distribution Agreement.under our stock repurchase program.

Critical Accounting Policies and Use of Estimates

There have been no material changes to our critical accounting policies or estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”,Operations,” included in the 20212022 Annual Report.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, to our condensed consolidated financial statements included in this report for information about recent accounting pronouncements.

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Off-Balance Sheet Arrangements

We did not have during the periods presented, and do not currently have, any off-balance sheet arrangements, 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2022 Annual Report.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2022.2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.2023.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control (as required by Rule 13a-15(b) under the Exchange Act) over the financial reporting during the first quarter of 20222023 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting

Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of these inherent limitations, our disclosure and internal controls may not prevent or detect all instances of fraud, misstatements or other control issues. In addition, projections of any evaluation of the effectiveness of disclosure or internal controls to future periods are subject to risks, including, among others, that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.

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PART II—OTHER INFORMATION

From time to time, we may be involved in legal proceedings arising in the ordinary course of our business. We are not presently a party,

The outcome of litigation is inherently uncertain, and our properties are not presently subject, to any legal proceedingsthere can be no assurances that in the opinion of management, would have a material effect on our business. favorable outcomes will be obtained.

Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm, among other factors.

Item 1A. Risk Factors.

There have been no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 20212022 Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Use of Proceeds from Registered Securities

On October 4, 2016, we completed the IPO of our common stock, in which we issued and sold an aggregate of 4.8 million shares of common stock (including 630,000 shares issued and sold on October 7, 2016 pursuant to the underwriters’ exercise in full of their option to purchase additional shares) at a public offering price of $9.00 per share. We received net proceeds from the IPO of approximately $36.0 million, after deducting underwriting discounts and commissions and offering expenses paid or payable by us of approximately $4.4 million. The shares issued and sold in the IPO were registered under the Securities Act on a registration statement on Form S-1 (File No. 333-213469), as amended, and the final prospectus dated September 28, 2016 included in such registration statement, or the Prospectus.

To date, we have used $43.9$85.9 million of the net proceeds from sales of our common stock, of which, $4.5 million was used for contributions to FF Gene Biotech prior to the FF Gene Biotech Acquisitionacquisition and $39.4$81.4 million was used to fund the Company’s operations.operations and a business combination. All other net proceeds from sales of our common stock are invested in investment-grade and interest-bearing securities, such as corporate bonds, municipal bonds, and U.S. government and U.S. agency debt securities,. corporate bonds, and municipal bonds. There has been no material change in the planned use of proceeds from the sales of our common stock from that described in the Prospectus.

On August 30, 2019, we entered into the 2019 Equity Distribution Agreement with Piper as sales agent, which was amendedInformation on August 4, 2020. During the year ended December 31, 2019, we sold an aggregate of 104,000 shares of ourShare Repurchases

The Company did not repurchase any common stock pursuant to the 2019 Equity Distribution Agreement 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, 2020, we sold an aggregate of 1.1 million shares of our common stock pursuant to the 2019 Equity Distribution Agreement at a weighted-average net selling price of $38.50 per share, which resulted in $42.7 million of net proceeds to the Company. Shares sold under the Equity Distribution Agreement were offered and sold pursuant to our shelf 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. There has been no material change in the planned use of proceeds as described in the prospectus supplements and accompanying base prospectus.

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 registered under the Securities Act and sold pursuant to our shelf 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. There has been no material change in the planned use of proceeds as described in the prospectus supplement and accompanying base prospectus.

On September 25, 2020, we entered into the September 2020 Equity Distribution Agreement, with Piper as sales agent, pursuant to which we sold 2.8 million shares of our common stock pursuant to the September 2020 Equity Distribution Agreement at a weighted-average net selling price of $42.90 per share during the year ended December 31, 2020, which resulted in $122.1 millionfirst quarter of net proceeds to the Company. Piper may receive a commission of up to 3% of the gross proceeds received by the Company for sales pursuant to the September 2020 Equity Distribution Agreement. Shares sold under the September 2020 Equity Distribution Agreement were offered and sold pursuant to our 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. There has been no material change in the planned use of proceeds as described in the prospectus supplement and accompanying base prospectus.2023.

28


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. There has been no material change in the planned use of proceeds as described in the prospectus supplement and accompanying base prospectus.

Item 5. Other Information

Executive Officer Incentive Plan

On May 3, 2022,2, 2023, the Board appointed Jian Xie, Chief Operating Officer of the Company, as the Company’s President, effective immediately. Mr. Xie will retain his role as Chief Operating Officer of the Company. Mr. Hsieh, the Company’s current President, Chief Executive Officer and ChairCompensation Committee of the Board will continue to serve as(the “Compensation Committee”) approved the Company’s Chief Executive Officer ChairIncentive Plan (the “2023 Incentive Plan”). The 2023 Incentive Plan covers a performance period of January 1 through December 31 (the “Performance Year”) for each calendar year, effective January 1, 2023. The 2023 Incentive Plan is designed to reward members of the Boardexecutive management team for their contributions in the achievement of corporate profitability and principal executive officer.

Mr. Xie, a co-founderother important performance targets. As further described in and subject to the terms of Fulgent Genetics, Inc., has been Company’s Chief Operating Officer since April 2018. Priorthe 2023 Incentive Plan, Executive Officers will be eligible to Mr. Xie’s service as our Chief Operating Officer, he served as our Vice Presidentreceive annual incentive compensation based on corporate performance metrics. The Compensation Committee will administer the 2023 Incentive Plan. The foregoing summary of Bioinformatics, a position he held since our inception. Priorthe 2023 Incentive Plan does not purport to joining Fulgent, Mr. Xie served as the Senior Vice President of Cogent Inc., a publicly traded biometric identification service and product company from 1996 until 2011. As President and Chief Operating Officer of Fulgent, Mr. Xie is responsible for managing all global operations, product vision and product engineering. He is focused on unifying all departments to maximize efficiency, drive sustainable growth and inspire continuous innovation. He received his B.A. in Engineering from Chongqing University in 1987 and has both an M.S. in Industrial Engineering and an M.S. in Computer Science from the University of New South Wales in 1992.

Mr. Xie is not a party to any arrangement or understanding with any person pursuant to which he was appointed as Presidentbe complete and is not partysubject to, any material plan, contract, or arrangement withand qualified in its entirety by, the Company other than those relatedfull text of the 2023 Incentive Plan, a copy of which is attached as Exhibit 10.3 to his compensation as described in the Company’s Proxy Statementthis Current Report on Schedule 14A as filed with the U.S. SecuritiesForm 10-Q and Exchange Commission on March 29, 2022 (and such description is incorporated herein by reference). Mr. Xie is also not a party to any transaction required to be disclosed under Item 404(a) of Regulation S-K involving the Company. With the exception of Mr. Xie’s familial relationship with Mr. Hsieh (Mr. Xie is Mr. Hsieh’s brother), there are no family relationships between Mr. Xie and any of the Company’s other directors or executive officers.reference.

Item 6. Exhibits.

The information required by this Item 6 is set forth on the Exhibit Index that immediately precedes the signature page to this report and is incorporated herein by reference.

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EXHIBIT INDEX

 

 

 

 

Incorporated by Reference

Exhibit No.

Exhibit Title

Filed with this Form 10-Q

Form

 

Form No.

 

Date Filed

 

 

 

 

 

 

 

 

3.1

Certificate of Incorporation of the registrant, dated May 13, 2016.

 

10-Q

 

001-37894

 

8/14/2017

 

 

 

 

 

 

 

 

3.1.1

Certificate of Amendment to Certificate of Incorporation of the registrant, dated August 2, 2016.

 

10-Q

 

001-37894

 

8/14/2017

 

 

 

 

 

 

 

 

3.1.2

Certificate of Amendment to Certificate of Incorporation of the registrant, dated May 17, 2017.

 

10-Q

 

001-37894

 

8/14/2017

 

 

 

 

 

 

 

 

3.2

Bylaws of the registrant.

 

S-1/A

 

333-213469

 

9/26/2016

 

 

 

 

 

 

 

 

10.1^10.1*^

Fulgent Genetics, Inc. IncentiveAmended and Restated Non-Employee Director Compensation Recoupment Policy, dated as of February 23, 2023.

.X

 

8-K

 

001-37894

 

3/29/2022

 

 

 

 

 

 

 

 

10.2

Agreement and Plan of MergerCommercial Lease Addendum (II) dated January 6, 2023, by and amongbetween Fulgent Therapeutics LLC solely for purpose of Section 6.20, Fulgent Genetics, Inc., Ducks Acquisition Sub, Inc., Symphony Buyer, Inc., solely in its capacity as the representative of Symphony’s securityholders, Avista Capital Partners IV GP, L.P. and solely for purposes of Section 6.21, Article VIII and Section 10.14, those company stockholders set forth on the signature page thereto, dated as of April 16, 2022E&E Plaza LLC.

 

8-K

 

001-37894

 

4/26/20221/12/2023

10.3*^#

Executive Officer Incentive Plan.

X

 

 

 

 

 

 

 

 

31.1

Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1*

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

X

99.1

Press Release Announcing Appointment Jian Xie

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH

Inline XBRL Taxonomy Extension Schema Document

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

X

 

 

 

 

 

 

 

 

 

 

 

 

 

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

X

 

 

 

 

 

 

* Furnished herewith.

^ Management compensation plan or arrangement.

# Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplementally a copy

30of any omitted exhibit or schedule upon request by the SEC.

27


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 FULGENT GENETICS, INC.

Date: May 5, 20222023

By:

/s/ Ming Hsieh

Ming Hsieh

Chief Executive Officer

(principal executive officer)

 

Date: May 5, 20222023

By:

/s/ Paul Kim

Paul Kim

Chief Financial Officer

(principal financial and accounting officer)

 

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