UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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The
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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.
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).
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.
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Emerging growth company |
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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
As of May 1, 2023, there were
Table of Contents
i
PART I—FIN ANCIAL INFORMATION
Item 1. Fina ncial Statements.
FULGENT GENETICS, INC.
Condensed Consolida ted Balance Sheets
(in thousands, except par value data)
(unaudited)
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March 31, |
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December 31, |
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2023 |
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2022 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
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Marketable securities |
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Trade accounts receivable, net of allowance for credit losses of $
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Other current assets |
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Total current assets |
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Marketable securities, long-term |
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Redeemable preferred stock investment |
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Fixed assets, net |
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Intangible assets, net |
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Goodwill |
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Other long-term assets |
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Total assets |
$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current liabilities |
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Accounts payable |
$ |
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$ |
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Accrued liabilities |
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Contract liabilities |
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Customer deposit |
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Investment margin loan |
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Notes payable, current portion |
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Other current liabilities |
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Total current liabilities |
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Unrecognized tax benefits |
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Other long-term liabilities |
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Total liabilities |
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Stockholders’ equity |
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Common stock, $
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Preferred stock, $
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Retained earnings |
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Total Fulgent stockholders’ equity |
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Noncontrolling interest |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
FULGENT GENETICS, INC.
Condensed Consolidated S tatements of Operations
(in thousands, except per share data)
(unaudited)
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Three Months Ended March 31, |
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2023 |
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2022 |
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Revenue |
$ |
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$ |
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Cost of revenue |
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Gross profit |
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Operating expenses: |
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Research and development |
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Selling and marketing |
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General and administrative |
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Amortization of intangible assets |
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Total operating expenses |
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Operating (loss) income |
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Interest and other income, net |
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(Loss) income before income taxes |
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(Benefit from) provision for income taxes |
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Net (loss) income from consolidated operations |
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Net loss attributable to noncontrolling interests |
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Net (loss) income attributable to Fulgent |
$ |
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$ |
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Net (loss) income per common share attributable to Fulgent: |
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Basic |
$ |
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$ |
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Diluted |
$ |
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$ |
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Weighted-average common shares: |
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Basic |
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Diluted |
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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)
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Three Months Ended March 31, |
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2023 |
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2022 |
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Net (loss) income from consolidated operations |
$ |
(
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$ |
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Other comprehensive income (loss): |
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Foreign currency translation gain |
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Net gain (loss) on available-for-sale debt securities, net of tax |
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Comprehensive (loss) income from consolidated operations |
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Net loss attributable to noncontrolling interest |
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Foreign currency translation gain attributable to noncontrolling interest |
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Comprehensive (income) loss attributable to noncontrolling interest |
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Comprehensive (loss) income attributable to Fulgent |
$ |
(
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$ |
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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)
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Fulgent Stockholders’ Equity |
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Shares (1) |
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Amount |
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Additional
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Accumulated
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Retained Earnings |
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Fulgent Stockholders’ Equity |
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Noncontrolling Interest |
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Total
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Balance at December 31, 2022 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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$ |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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— |
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Restricted stock awards |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Common stock withholding for employee tax obligations |
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(
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— |
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(
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— |
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— |
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(
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— |
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(
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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Net income (loss) |
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— |
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— |
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— |
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— |
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(
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(
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(
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(
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Balance at March 31, 2023 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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$ |
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(1) As of March 31, 2023,
The accompanying notes are an integral part of these condensed consolidated financial statements .
4
FULGENT GENETICS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)
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Fulgent Stockholders’ Equity |
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Shares |
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Amount |
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Additional
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Accumulated
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Retained Earnings |
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Fulgent Stockholders’ Equity |
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Noncontrolling Interest |
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Total
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Balance at December 31, 2021 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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$ |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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— |
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Exercise of common stock options |
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— |
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— |
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— |
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— |
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Restricted stock awards |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Common stock withholding for employee tax obligations |
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(
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) |
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— |
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(
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— |
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— |
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(
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— |
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(
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Other comprehensive income (loss) |
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— |
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— |
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— |
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(
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— |
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(
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(
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Net income (loss) |
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— |
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— |
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— |
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— |
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(
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) |
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Balance at March 31, 2022 |
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$ |
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$ |
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$ |
(
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) |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
FULGENT GENETICS, INC.
Condensed Consolidated S tatements of Cash Flows
(in thousands)
(unaudited)
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Three Months Ended March 31, |
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2023 |
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2022 |
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Cash flow from operating activities: |
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Net (loss) income from consolidated operations |
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$ |
(
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Equity-based compensation |
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Depreciation and amortization |
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Provision for credit losses |
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(
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Noncash lease expense |
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(Gain) loss on disposal of fixed asset |
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(
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Amortization of (discount) premium of marketable securities |
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(
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Deferred taxes |
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(
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(
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Unrecognized tax benefits |
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— |
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Net loss on marketable securities |
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— |
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Other |
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— |
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Changes in operating assets and liabilities: |
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Trade accounts receivable |
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(
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Other current and long-term assets |
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(
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Accounts payable |
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(
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Income tax payable |
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— |
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Accrued liabilities and other liabilities |
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(
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(
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Operating and finance lease liabilities |
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(
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(
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Net cash (used in) provided by operating activities |
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(
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Cash flow from investing activities: |
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Purchase of marketable securities |
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(
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(
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Purchase of preferred stock of privately held company |
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— |
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(
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Purchases of fixed assets |
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(
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(
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Contingent consideration payout related to a business acquisition |
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— |
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(
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Proceeds from sale of fixed assets |
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Maturities of marketable securities |
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Proceeds from sale of marketable securities |
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— |
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Net cash (used in) provided by investing activities |
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(
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Cash flow from financing activities: |
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Common stock withholding for employee tax obligations |
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(
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) |
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(
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Repayment of notes payable |
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— |
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(
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Principal paid for finance lease |
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(
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(
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Proceeds from exercise of stock options |
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— |
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Net cash used in financing activities |
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(
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(
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Effect of exchange rate changes on cash and cash equivalents |
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Net (decrease) increase in cash and cash equivalents |
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(
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) |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Supplemental disclosures of cash flow information: |
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Income taxes paid |
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$ |
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$ |
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Supplemental disclosures of non-cash investing and financing activities: |
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Purchases of marketable securities in other current liabilities |
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$ |
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$ |
— |
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Purchases of fixed assets in accounts payable |
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$ |
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$ |
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Purchases of fixed assets in notes payable |
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$ |
— |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
FULGENT GENETICS, INC.
Notes to the Condensed Consol idated 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 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 affiliated professional corporations, or PCs (collectively referred to as “the Company,” unless otherwise noted or the context otherwise requires,) is a technology-based company with a well-established clinical diagnostic business and a therapeutic development business. Its clinical diagnostic business offers molecular diagnostic testing services, 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. Its therapeutic development business is focused on developing drug candidates for treating a broad range of cancers using a novel nanoencapsulation and targeted therapy platform designed to improve the therapeutic window and pharmacokinetic profile of new and existing cancer drugs. The Company aims to 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, 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, 2023, or the 2022 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 December 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 2022 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 2022 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. 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, (ii) accounts receivable and allowances for credit losses, (iii) the useful lives of fixed assets and intangible assets, (iv) estimates of tax liabilities, (v) valuation of intangible assets and goodwill at time of acquisition and on a recurring basis, and (vi) valuation of investments.
7
Trade Accounts Receivable and Allowance for Credit Losses
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 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
$(
Redeemable Preferred Stock Investment
The redeemable preferred stock investment of
$
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. 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 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 2023 and 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 d
ebt securities, net of tax, and foreign currency translation adjustments from the Company's subsidiaries not using the U.S. dollar as their functional currency. There 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 was not significant in the first quarter of 2022. The tax effects related to net unrealized loss on available-for-sale debt securities were $
Concentration of Customers
In certain periods, a small number of customers have accounted for a significant portion of the Company’s revenue. After aggregating customers that are under common control or affiliation,
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 H
RSA, for uninsured individuals, (ii) Institutions, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, or (iii) Patients who pay directly; as the Company believes these classifications best depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.
|
|
Three Months Ended March 31, |
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|||||
|
|
2023 |
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|
2022 |
|
||
|
|
(in thousands) |
|
|||||
|
Testing Services by payor |
|
|
|
|
|
||
|
Insurance |
$ |
|
|
|
$ |
|
|
|
Institutional |
|
|
|
|
|
|
|
|
Patient |
|
|
|
|
|
|
|
|
Total Revenue |
$ |
|
|
|
$ |
|
|
The insurance revenue category above includes
There was no material variable consideration recognized in the current period that relates to performance obligations that were completed in the prior period.
Provided 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. 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. Net receivable from Insurance and Institutional customers represented
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 $
Customer Deposit
Customer deposit in the accompanying Condensed Consolidated Balance Sheets consists of payments received from customers in excess of their outstanding trade accounts receivable balances. These deposits will be offset against future testing receivables or refunded to the 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:
|
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March 31, 2023 |
|
|||||||||||||
|
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Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Aggregate
|
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||||
|
|
(in thousands) |
|
|||||||||||||
|
Equity securities: |
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|
||||
|
Long-term |
|
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|
|
|
|
|
|
|
|
||||
|
Preferred stock of privately held company |
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Total equity securities |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Available-for-sale debt securities |
|
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|
|
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|
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|
||||
|
Short-term |
|
|
|
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|
|
|
|
|
|
||||
|
U.S. government debt securities |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Corporate debt securities |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
U.S. agency debt securities |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
U.S. treasury bills |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Money market accounts |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Municipal bonds |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Less: Cash equivalents |
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
Total debt securities due within 1 year |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
After 1 year through 5 years |
|
|
|
|
|
|
|
|
|
|
|
||||
|
U.S. government debt securities |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
U.S. agency debt securities |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Corporate debt securities |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Municipal bonds |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Yankee debt securities |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Redeemable preferred stock investment |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Total debt securities due after 1 year through 5 years |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
After 5 years through 10 years |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Municipal bonds |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Total debt securities due after 5 years through 10 years |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Total available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Total equity and debt securities |
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
10
|
|
December 31, 2022 |
|
|||||||||||||
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Aggregate
|
|
||||
|
|
(in thousands) |
|
|||||||||||||
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Long-term |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Preferred stock of privately held company |
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Total equity securities |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Short-term |
|
|
|
|
|
|
|
|
|
|
|
||||
|
U.S. government debt securities |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Corporate debt securities |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
U.S. treasury bills |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
U.S. agency debt securities |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Money market accounts |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Municipal bonds |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Yankee debt securities |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Less: Cash equivalents |
|
(
|
) |
|
|
— |
|
|
|
— |
|
|
|
(
|
) |
|
Total debt securities due within 1 year |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
After 1 year through 5 years |
|
|
|
|
|
|
|
|
|
|
|
||||
|
U.S. government debt securities |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
U.S. agency debt securities |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Corporate debt securities |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Municipal bonds |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Yankee debt securities |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Redeemable preferred stock investment |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Total debt securities due after 1 year through 5 years |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
After 5 years through 10 years |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Municipal bonds |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Total debt securities due after 5 years through 10 years |
|
|
|
|
|
— |
|
|
|
(
|
) |
|
|
|
|
|
Total available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Total equity and debt securities |
$ |
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
Gross unrealized losses on the Company’s equity and debt securities were
$
The Company’s marketable securities of $
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:
|
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, 2023 |
|
|||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
|
Equity securities, debt securities and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
||||
|
U.S. government debt securities |
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
U.S. agency debt securities |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Corporate debt securities |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
U.S. treasury bills |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Municipal bonds |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Preferred stock of privately held company |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Redeemable preferred stock investment |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Money market accounts |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Yankee debt securities |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Total equity securities, debt securities and cash equivalents |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
December 31, 2022 |
|
|||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
(in thousands) |
|
|||||||||||||
|
Equity securities, debt securities and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
||||
|
U.S. government debt securities |
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
Corporate debt securities |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
U.S. agency debt securities |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
U.S. treasury bills |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Money market accounts |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Municipal bonds |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Preferred stock of privately held company |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Redeemable preferred stock investment |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Yankee debt securities |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Total equity securities, debt securities and cash equivalents |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company’s Level 1 assets include 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, 2023, the Company had preferred stock of a privately held company, which was included in other long-term assets in the accompanying Condensed Consolidated Balance Sheets, and redeemable preferred stock of a private company that were measured using unobservable (Level 3) inputs. The fair value of redeemable preferred stock 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 preferred stock of the privately held company did not have a readily determinable fair value, and no impairment loss was recorded as of March 31, 2023.
There were
12
Note 5. Fixed Assets
Major classes of fixed assets consisted of the following:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
Useful Lives |
2023 |
|
|
2022 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Medical lab equipment |
|
$ |
|
|
|
$ |
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
|
Computer software |
|
|
|
|
|
|
|
|
|
Computer hardware |
|
|
|
|
|
|
|
|
|
Building |
|
|
|
|
|
|
|
|
|
Aircraft |
|
|
|
|
|
|
|
|
|
Building improvements |
|
|
|
|
|
|
|
|
|
Furniture and fixtures |
|
|
|
|
|
|
|
|
|
Land improvements |
|
|
|
|
|
|
|
|
|
Automobile |
|
|
|
|
|
|
|
|
|
General equipment |
|
|
|
|
|
|
|
|
|
Land |
|
|
|
|
|
|
|
|
|
Assets not yet placed in service |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation |
|
|
(
|
) |
|
|
(
|
) |
|
Fixed assets, net |
|
$ |
|
|
|
$ |
|
|
Depreciation expenses on fixed assets totaled
$
Note 6. Ot her Significant Balance Sheet Accounts
Other current assets consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
|
Prepaid income taxes |
$ |
|
|
|
$ |
|
|
|
Prepaid expenses |
|
|
|
|
|
|
|
|
Reagents and supplies |
|
|
|
|
|
|
|
|
Marketable securities interest receivable |
|
|
|
|
|
|
|
|
Other receivable |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
Other long-term liabilities primarily include operating and finance lease liabilities, long-term, see Note 9, Leases , and notes payable, long-term, see Note 8, Debt, Commitments and Contingencies .
Note 7. Reporting Segment and Geographic Information
The Company views its operations and manages its business in
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
|
Revenue: |
|
|
|
|
|
||
|
United States |
$ |
|
|
|
$ |
|
|
|
Foreign |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
13
Note 8. Debt, Commitments and Contingencies
Debt
As of March 31, 2023, the Company had an outstanding borrowing of $
Notes payable as of March 31, 2023 consisted of
$
Operating Leases
See Note 9, Leases , for further information.
Purchase Obligations
As of March 31, 2023, the Company had non-cancelable purchase obligations of $
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 these matters will be resolved, the outcome of these matters, or their potential impact, which may ultimately be greater than what the Company currently expects.
Note 9. Leases
Lessee
The Company is a lessee to various non-cancelable operating leases with varying terms through
14
The Company’s headquarters are located in 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 Temple City, California; Irving, Texas; Needham, Massachusetts; Phoenix, Arizona; Alpharetta, Georgia; and 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, 2023 and December 31, 2022 were as follows:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
|
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
The following were operating and finance lease expenses:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
|
Operating lease cost |
$ |
|
|
|
$ |
|
|
|
Finance lease cost: |
|
|
|
|
|
||
|
Amortization of ROU assets |
|
|
|
|
|
|
|
|
Interest on lease liabilities |
|
|
|
|
|
|
|
|
Short-term lease cost |
|
|
|
|
|
|
|
|
Total lease cost |
$ |
|
|
|
$ |
|
|
Supplemental information related to operating and finance leases were the following:
|
|
March 31, 2023 |
|
|
|
Weighted average remaining lease term - operating leases |
|
|
|
|
Weighted average discount rate - operating leases |
|
|
% |
|
Weighted average remaining lease term - finance lease |
|
|
|
|
Weighted average discount rate - finance lease |
|
|
% |
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 |
|
||
|
|
(in thousands) |
|
|||||
|
Year Ending December 31, |
|
|
|
|
|
||
|
2023 (remaining 9 months) |
$ |
|
|
|
$ |
|
|
|
2024 |
|
|
|
|
|
|
|
|
2025 |
|
|
|
|
|
|
|
|
2026 |
|
|
|
|
|
|
|
|
2027 |
|
|
|
|
|
— |
|
|
Thereafter |
|
|
|
|
|
— |
|
|
Total lease payments |
|
|
|
|
|
|
|
|
Less imputed interest |
|
(
|
) |
|
|
(
|
) |
|
Total |
$ |
|
|
|
$ |
|
|
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, 2023, the remaining lease terms range from
The lease income was included in interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations.
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
|
Lease income |
$ |
|
|
|
$ |
|
|
|
Variable lease income |
|
— |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Future fixed lease payments from tenants for all noncancelable operating leases as March 31, 2023 are as follows:
|
|
Lease Payments |
|
|
|
|
from Tenants |
|
|
|
|
(in thousands) |
|
|
|
Year Ending December 31, |
|
|
|
|
2023 (remaining 9 months) |
$ |
|
|
|
2024 |
|
|
|
|
Total |
$ |
|
|
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 Operations as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
|
Cost of revenue |
$ |
|
|
|
$ |
|
|
|
Research and development |
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
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
$(
The Company is not currently under examination by any major income tax jurisdiction. During 2023, the statutes of limitations will lapse on the Company’s 2019 federal tax year and certain 2018 and 2019 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.
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 2023 and 2022:
|
|
Three Months Ended March 31, |
|
|
|||||
|
|
2023 |
|
|
2022 |
|
|
||
|
|
(in thousands, except per share data) |
|||||||
|
Net income (loss) attributable to Fulgent |
$ |
(
|
) |
|
$ |
|
|
|
|
Weighted-average common shares—outstanding, basic |
|
|
|
|
|
|
|
|
|
Weighted-average common shares—outstanding, diluted |
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic |
$ |
(
|
) |
|
$ |
|
|
|
|
Net income (loss) per common share, diluted |
$ |
(
|
) |
|
$ |
|
|
|
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, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
|
Options |
|
|
|
|
|
|
|
|
Restricted Stock Units |
|
|
|
|
|
|
|
|
Contingently Issuable Shares |
|
|
|
|
|
— |
|
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 Board of 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 $
Ming Hsieh, the Chief Executive Officer and Chairperson of the Board, is on the board of directors and a
17
Note 14. Goodwill and Acquisition-Related Intangibles
Summaries of goodwill and intangibles balances assets as of March 31, 2023 and December 31, 2022 were as follows:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
Weighted-Average Amortization Period |
2023 |
|
|
2022 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Goodwill |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
In-process research & development |
n/a |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
Royalty-free technology |
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
|
(
|
) |
|
|
(
|
) |
|
Royalty-free technology, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Customer relationships |
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
|
(
|
) |
|
|
(
|
) |
|
Customer relationships, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Trade name |
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
|
(
|
) |
|
|
(
|
) |
|
Trade name, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
In-place lease intangible assets |
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
|
(
|
) |
|
|
(
|
) |
|
In-place lease intangible assets, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Laboratory information system platform |
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
|
(
|
) |
|
|
(
|
) |
|
Laboratory information system platform, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Purchased patent |
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
|
(
|
) |
|
|
(
|
) |
|
Purchased patent, net |
|
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
$ |
|
|
|
$ |
|
|
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 |
$ |
|
|
|
Accumulated impairment losses |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency exchange differences |
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2023 |
|
|
|
|
Goodwill |
|
|
|
|
Accumulated impairment losses |
|
— |
|
|
|
|
|
|
18
Based on the carrying value of finite-lived intangible assets recorded as of March 31, 2023, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for intangible assets is expected to be as follows:
|
|
Amounts |
|
|
|
|
(in thousands) |
|
|
|
Year Ending December 31, |
|
|
|
|
2023 (remaining 9 months) |
$ |
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
$ |
|
|
Note 15. Stock Repurchase Program
In March 2022, the Board authorized a $
Note 16. Subsequent Events
As of 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, 2022 filed with the SEC on February 28, 2023, or the 2022 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 2022 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 technology-based company with a well-established clinical diagnostic business and a therapeutic development business. Our clinical diagnostic business offers molecular diagnostic testing services, 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. Our therapeutic development business is focused on developing drug candidates for treating a broad range of cancers using a novel nanoencapsulation and targeted therapy platform designed to improve the therapeutic window and pharmacokinetic profile, or PK profile, of new and existing cancer drugs. We aim to transform from a genomic diagnostic business into a fully integrated 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 2022 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 2022 Annual Report.
20
Results of Operations
The table below summarizes our results of our continuing operations for each of the periods 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 operation data, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2022 Annual Report.
|
|
Three Months Ended |
|
|
|
|
|
|
||||||
|
|
March 31, |
|
|
$ |
|
|
% |
||||||
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Change |
|||
|
Statement of Operations Data: |
(in thousands) |
||||||||||||
|
Revenue |
$ |
66,168 |
|
|
$ |
320,268 |
|
|
$ |
(254,100 |
) |
|
(79%) |
|
Cost of revenue |
|
47,357 |
|
|
|
77,725 |
|
|
|
(30,368 |
) |
|
(39%) |
|
Gross profit |
|
18,811 |
|
|
|
242,543 |
|
|
|
(223,732 |
) |
|
(92%) |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|||
|
Research and development |
|
9,782 |
|
|
|
5,989 |
|
|
|
3,793 |
|
|
63% |
|
Selling and marketing |
|
10,083 |
|
|
|
7,940 |
|
|
|
2,143 |
|
|
27% |
|
General and administrative |
|
21,802 |
|
|
|
25,775 |
|
|
|
(3,973 |
) |
|
(15%) |
|
Amortization of intangible assets |
|
1,968 |
|
|
|
906 |
|
|
|
1,062 |
|
|
117% |
|
Total operating expenses |
|
43,635 |
|
|
|
40,610 |
|
|
|
3,025 |
|
|
7% |
|
Operating (loss) income |
|
(24,824 |
) |
|
|
201,933 |
|
|
|
(226,757 |
) |
|
(112%) |
|
Interest and other income, net |
|
3,775 |
|
|
|
45 |
|
|
|
3,730 |
|
|
8,289% |
|
(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 |
|
509 |
|
|
|
422 |
|
|
|
87 |
|
|
21% |
|
Net (loss) income attributable to Fulgent |
$ |
(15,340 |
) |
|
$ |
153,979 |
|
|
$ |
(169,319 |
) |
|
(110%) |
21
Revenue
Revenue decreased $254.1 million, or 79%, from $320.3 million in the first quarter of 2022 to $66.2 million in the first quarter of 2023. The decrease in revenue between periods were primarily due to decreased orders for our COVID-19 tests.
Revenue from non-U.S. sources increased $1.0 million, or 33%, from $3.1 million in the first quarter of 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 traditional genetic testing services to customers in China through our joint venture in China.
After aggregating customers that are under common control or affiliation, no customer contributed 10% or more of the Company’s revenue in the first quarter of 2023, and one customer contributed 27% of the Company’s revenue in the first quarter of 2022.
Cost of Revenue
Cost of revenue decreased $30.4 million, or 39%, from $77.7 million in the first quarter of 2022 to $47.4 million in the first quarter of 2023. The decrease was primarily due to decreases of $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 our 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 due to increased headcount.
Our gross profit decreased $223.7 million, from $242.5 million in the first quarter of 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 75.7% to 28.4% due to changes in product mix.
Research and Development
Research and development expenses increased $3.8 million, or 63%, from $6.0 million in the first quarter of 2022 to $9.8 million in the first quarter of 2023. The increase was primarily due to increases of $3.3 million in personnel costs including equity-based compensation expense due to increased headcount and $418,000 in consulting and outside labor costs related to continued development of our therapeutic products.
Selling and Marketing
Selling and marketing expenses increased $2.1 million, or 27% from $7.9 million in the first quarter of 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 due to increased headcount, $2.1 million in facility expenses, and $1.8 million in depreciation expense and $709,000 in business insurance expense.
Amortization of Intangible Assets
Amortization of intangible assets represents amortization expenses on the intangible assets arose from the business combinations in 2022 and 2021 and a patent purchased in 2021. Amortization expenses were $2.0 million and $906,000 in the first quarters of 2023 and 2022, respectively.
Interest and Other Income, net
Interest and other income, net, is primarily comprised of net interest income (expenses), which was $3.8 million and $(50,000) in the first quarters of 2023 and 2022, respectively. This interest income (expense) 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.
22
(Benefit from) Provision for Income Taxes
(Benefit from) provision for income taxes income taxes was $(5.2) million and $48.4 million for the first quarters of 2023 and 2022, respectively. The effective tax rate was (25%) and 24% for the first quarters of 2023 and 2022, respectively.
Net Loss Attributable to Noncontrolling Interest
Net loss attributable to noncontrolling interest represents net loss attributable to the minority shareholders from entities not wholly owned.
Liquidity and Capital Resources
Liquidity and Sources of Cash
We had $871.3 million and $852.9 million in cash, cash equivalents and marketable securities as of March 31, 2023 and December 31, 2022, respectively. Our marketable securities primarily consist of 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, 2023 and December 31, 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.
We believe our existing cash, cash equivalent, and short-term marketable securities will be sufficient to meet our anticipated cash requirements for at least the next 12 months. Cash provided by operations significantly contributed to our ability to meet our liquidity needs, including paying for capital expenditures. However, cash provided by our operations fluctuates 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 demand for our tests, the amount and timing of sales, the prices we charge for our tests due to changes in product mix, customer mix, general price degradation for tests, or other factors, the rate and timing of our billing and collections cycles and the timing and amount of our commitments and other payments. Moreover, even if our liquidity expectations are correct, we may still seek to raise additional capital through securities offerings, credit facilities or other debt financings, asset sales or collaborations or licensing arrangements.
If we raise 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. If we are not able to secure funding if and when needed and on reasonable terms, we may be forced to delay, reduce the scope of or eliminate one or more sales and marketing initiatives, research and development programs or other growth plans or strategies. In addition, we may be forced to work with a partner on one or more aspects of our tests or market development programs or initiatives, which could lower the economic value to us of these tests, programs or initiatives. Any such outcome could significantly harm our business, performance and prospects.
Cash Flows
The following table summarizes our cash flows for each of the periods indicated:
|
|
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. Changes in operating assets and liabilities primarily consisted 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 used in investing activities in the first quarter of 2023 was $4.4 million, which primarily related to $143.9 million on purchase of marketable securities and $2.0 million on purchases of fixed assets, partially offset by $141.4 million related to maturities of marketable 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, $10.0 million contingent consideration payment related to the acquisition of Cytometry Specialists, Inc, and $5.4 million on purchases of fixed assets.
Financing Activities
Cash used in financing activities in the first quarter of 2023 was $1.1 million, which primarily related to $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
In 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 2023, we did not repurchase any common stock under our stock repurchase program. As of March 31, 2023, a total of approximately $175.7 million remained available for future repurchases of our common stock 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,” included in the 2022 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.
24
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 Qualitativ e Disclosures About Market Risk.
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. Contr ols 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, 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, 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 2023 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.
25
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be involved in legal proceedings arising in the ordinary course of our business.
The outcome of litigation is inherently uncertain, and there can be no assurances that 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 2022 Annual Report.
Item 2. Unregistered Sales of Equit y Securities and Use of Proceeds.
Use of Proceeds from Registered Securities
To date, we have used $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 acquisition and $81.4 million was used to fund the Company’s 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 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.
Information on Share Repurchases
The Company did not repurchase any common stock during the first quarter of 2023.
Item 5. Other Information
Executive Officer Incentive Plan
On May 2, 2023, the Compensation Committee of the Board (the “Compensation Committee”) approved the Company’s Executive Officer Incentive 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 executive management team for their contributions in the achievement of corporate profitability and other important performance targets. As further described in and subject to the terms of the 2023 Incentive Plan, Executive Officers will be eligible to receive annual incentive compensation based on corporate performance metrics. The Compensation Committee will administer the 2023 Incentive Plan. The foregoing summary of the 2023 Incentive Plan does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the 2023 Incentive Plan, a copy of which is attached as Exhibit 10.3 to this Current Report on Form 10-Q and incorporated herein by reference.
Item 6. Ex hibits.
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.
26
EXHIBI T INDEX
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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 |
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001-37894 |
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8/14/2017 |
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|
|
3.1.1 |
Certificate of Amendment to Certificate of Incorporation of the registrant, dated August 2, 2016. |
|
10-Q |
|
001-37894 |
|
8/14/2017 |
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|
|
3.1.2 |
Certificate of Amendment to Certificate of Incorporation of the registrant, dated May 17, 2017. |
|
10-Q |
|
001-37894 |
|
8/14/2017 |
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|
|
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|
3.2 |
|
S-1/A |
|
333-213469 |
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9/26/2016 |
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10.1*^ |
Amended and Restated Non-Employee Director Compensation Policy, dated as of February 23, 2023. |
X |
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10.2 |
|
8-K |
|
001-37894 |
|
1/12/2023 |
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10.3*^# |
X |
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31.1 |
X |
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31.2 |
X |
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32.1* |
X |
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|
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 |
|
|
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
X |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
X |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
X |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
X |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
X |
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104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
X |
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* 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
of any omitted exhibit or schedule upon request by the SEC.
27
SIGNAT URES
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.
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|
|
FULGENT GENETICS, INC. |
|
|
|
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|
|
Date: May 5, 2023 |
|
By: |
/s/ Ming Hsieh |
|
|
|
|
Ming Hsieh |
|
|
|
|
Chief Executive Officer (principal executive officer) |
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|
|
Date: May 5, 2023 |
|
By: |
/s/ Paul Kim |
|
|
|
|
Paul Kim |
|
|
|
|
Chief Financial Officer (principal financial and accounting officer) |
28