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)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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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, 2024, there were
Table of Contents
i
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
FULGENT GENETICS, INC.
Condensed Consolidated 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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2024 |
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2023 |
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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, net |
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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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Customer deposit |
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Contract liabilities |
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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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Deferred tax 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) income |
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Retained earnings |
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Total Fulgent stockholders’ equity |
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Noncontrolling interest |
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( |
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( |
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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 Statements of Operations
(in thousands, except per share data)
(unaudited)
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Three Months Ended March 31, |
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2024 |
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2023 |
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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 |
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( |
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( |
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Interest and other income, net |
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Loss before income taxes |
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( |
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( |
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Benefit from income taxes |
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( |
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( |
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Net loss from consolidated operations |
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( |
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( |
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Net loss attributable to noncontrolling interests |
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Net loss attributable to Fulgent |
$ |
( |
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$ |
( |
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Net loss 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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2024 |
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2023 |
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Net loss from consolidated operations |
$ |
( |
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$ |
( |
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Other comprehensive income (loss): |
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Foreign currency translation (loss) gain |
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( |
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Net (loss) gain on available-for-sale debt securities, net of tax |
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( |
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Comprehensive loss from consolidated operations |
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( |
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( |
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Net loss attributable to noncontrolling interest |
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Foreign currency translation loss (gain) attributable to noncontrolling interest |
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( |
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Comprehensive loss (income) attributable to noncontrolling interest |
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( |
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Comprehensive loss attributable to Fulgent |
$ |
( |
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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, 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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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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— |
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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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Repurchase of common stock |
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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 loss, net |
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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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Net 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, 2024 |
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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)
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 (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, net |
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— |
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— |
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— |
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— |
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Net 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)
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)
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Three Months Ended March 31, |
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2024 |
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2023 |
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Cash flow from operating activities: |
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Net loss from consolidated operations |
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$ |
( |
) |
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$ |
( |
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Equity-based compensation |
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Depreciation and amortization |
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Gain for credit losses |
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( |
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( |
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Noncash lease expense |
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Loss (gain) on disposal of fixed asset |
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( |
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Amortization of discount of marketable securities |
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( |
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( |
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Deferred taxes |
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( |
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( |
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Net realized loss on marketable securities |
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— |
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Other |
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( |
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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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Other current and long-term assets |
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( |
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Accounts payable |
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( |
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( |
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Accrued liabilities and other liabilities |
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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 provided by (used in) 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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Purchases of fixed assets |
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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 investing activities |
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( |
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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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Repayment of notes payable |
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( |
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— |
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Repurchase of common stock |
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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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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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( |
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Net decrease 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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Cash paid for interest |
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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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Sale of fixed assets in other receivable |
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$ |
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$ |
— |
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Operating lease right-of-use assets reduced due to lease termination |
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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 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 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 laboratory services business and a therapeutic development business. Its laboratory services business – to which the Company formerly referred as its clinical diagnostic business, includes technical laboratory services and professional interpretation of laboratory results by licensed physicians. 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.
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, 2023, 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, 2024, or the 2023 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, 2023 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 2023 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 2023 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 loss rate model or probability-of-default and loss given default model. Following the loss rate method, expected credit losses are determined based on an estimated historical loss rate. The probability of default method 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 loss rate and 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.
The roll-forward for the allowance for credit losses for the three months ended March 31, 2024, dollars in thousands, is as follows:
Allowance for credit losses at beginning of year |
$ |
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Current period provision |
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( |
) |
Write-downs |
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( |
) |
Recoveries of amounts previously charged off |
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Allowance for credit losses as of March 31, 2024 |
$ |
|
Redeemable Preferred Stock Investment
The redeemable preferred stock investment of $
Finite-Lived Intangible assets
Intangible assets, unless determined to be indefinite-lived, are amortized over their estimated useful lives. The Company amortizes intangible assets on a straight-line basis with definite lives generally over periods ranging from to
Impairment of Long-Lived Assets
The Company evaluates the carrying amount of its long-lived assets whenever events or changes in circumstances indicate that the assets may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of an asset and its eventual disposition is less than the carrying amount of the asset.
Goodwill and Indefinite-Lived Intangibles
Intangibles in-process research & development costs, or IPR&D, are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If and when development is complete, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time.
The Company assesses goodwill and indefinite-lived intangibles for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company may choose to bypass a qualitative assessment of impairment for any reporting unit and proceed directly to performing a quantitative assessment. An impairment loss would be recognized for the amount by which the reporting unit's carrying amount exceeds its fair value.
8
The Company’s quantitative assessment includes estimating the fair value of each reporting unit and comparing it to its carrying value. The Company estimates the fair value of reporting units using both income-based and market-based valuation methods and typically engages a third-party appraisal firm to assist with the valuation. The estimated fair value for each reporting unit is determined based upon the range of estimated values developed from the income and market-based methods. If the estimated fair value of a reporting unit exceeds its carrying value, the goodwill is not impaired, and no further review is required.
The income-based fair value methodology is based on a reporting unit’s forecasted future cash flows that are discounted to the present value using the reporting unit’s weighted average cost of capital. Under the income-based approach, it requires management's assumptions and judgments regarding economic conditions in the markets in which the company operates and conditions in the capital markets, many of which are outside of management's control. The market-based fair value methodology looks at the guideline public company valuation method to determine the prices of comparable public companies and looks at merger and acquisition methods, similar businesses that were sold recently, to estimate the value of the reporting units. Under the market-based approach, judgment is required in evaluating market multiples and recent transactions.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, marketable securities, trade accounts receivable, redeemable preferred stock investment, accounts payable, and accrued liabilities. The carrying amounts of certain of these financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. Fair value of marketable securities and redeemable preferred stock investment is disclosed in Note 4, Fair Value Measurements, to the accompanying consolidated financial statements.
Concentrations of Credit Risk, Customers, and Suppliers
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, trade accounts receivable, and marketable securities, which consist of debt securities and equity securities. As of March 31, 2024, substantially all of the Company’s cash and cash equivalents were deposited in accounts at financial institutions, and amounts may exceed federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial strength of the depository institutions in which its cash and cash equivalents are held.
In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue. For the laboratory services business, aggregating customers under common control,
The Company relies on a limited number of suppliers for certain laboratory substances used in the chemical reactions incorporated into its processes, referred to as reagents, as well as for the sequencers and various other equipment and materials it uses in its laboratory operations. In particular, the Company relies on a sole supplier for the next generation sequencers and associated reagents it uses to perform its genetic tests and as the sole provider of maintenance and repair services for these sequencers. The operations of the laboratory services business would be interrupted if it encountered delays or difficulties securing these reagents, sequencers, other equipment or materials or maintenance and repair services, which could occur for a variety of reasons, including if the Company needs a replacement or temporary substitute for any of its limited or sole suppliers and is not able to locate and make arrangements with an acceptable replacement or temporary substitute. The Company's development efforts could also be delayed or interrupted if is unable to procure items needed for its therapeutic development activities. The Company’s therapeutic development business also relies on ANP Technologies, Inc., or ANP, for certain laboratory services, equipment, tools, and drug intermediates in connection with research and development efforts. The Company believes there are currently only a few other manufacturers that are capable of supplying and servicing some of the equipment and other materials necessary for its laboratory operations, including collection kits, sequencers and various associated reagents.
Reportable Segment and Geographic Information
Reportable segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or CODM, in making decisions regarding resource allocation and assessing performance. The Company’s CODM is its Chief Executive Officer. The Company reports its business in
9
information for each of the periods presented regarding revenue, operating income (loss), and other important information, see Note 7, Reportable Segment and Geographic Information.
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 (loss) income 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, and inventories, property and nonmonetary assets and liabilities are measured at historical rates. Losses from these remeasurements were not significant in the three months ended March 31, 2024 and 2023.
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 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 three months ended March 31, 2024 or 2023. The tax effect related to net unrealized losses on available-for-sale debt securities was zero for the three months ended March 31, 2024 due to the valuation allowance in the current period that precludes the Company from recognizing the deferred tax benefit. The tax effect related to net unrealized losses was $
Disaggregation of Revenue
The Company classifies its customers into three payor types: (i) Insurance, (ii) Institutions, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, or (iii) Patients who pay directly. 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, |
|
|||||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Testing Services by Payor |
|
|
|
|
|
||
Institutional |
$ |
|
|
$ |
|
||
Insurance |
|
|
|
|
|
||
Patient |
|
|
|
|
|
||
Total Revenue |
$ |
|
|
$ |
|
||
$
Contract Balances
Receivables from contracts with customers - Receivables from contracts with customers are included within trade accounts receivable on the Condensed Consolidated Balance Sheets. Receivables 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 $
10
were recognized for the three months ended March 31, 2024 and 2023, respectively, related to contract liabilities at the beginning of the respective periods.
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.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segments. This update improves reportable segment disclosure requirements and requires enhanced disclosures related to significant segment expenses regularly provided to CODM, the amount for other segment items with descriptions of the composition, segment profit or loss, and clarification on if the CODM uses more than one measurement of a segment's profit or loss in assessing segment performance and deciding how to allocate resources. Amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impacts of this amendment on the consolidated financial statements and related disclosure.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures. The update requires more detailed information on certain income tax disclosures including the income tax rate reconciliation and income taxes paid. Amendments in this update are effective for annual periods beginning December 15, 2024 for public entities, and early adoption is permitted. The Company is currently evaluating the impacts of this amendment on the consolidated financial statements and related disclosure.
The Company does not expect that any other recently issued accounting guidance will have a significant effect on its consolidated financial statements.
11
Note 3. Equity and Debt Securities
The Company’s equity and debt securities consisted of the following:
|
March 31, 2024 |
|
|||||||||||||
|
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 |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
U.S. agency debt securities |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
U.S. treasury bills |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Corporate debt securities |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
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 |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Redeemable preferred stock investment |
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Municipal bonds |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Yankee debt securities |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
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 |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
12
|
December 31, 2023 |
|
|||||||||||||
|
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 |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
U.S. agency debt securities |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
U.S. treasury bills |
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Corporate debt securities |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
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 |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Gross unrealized losses on the Company’s equity and debt securities were $
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. |
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. |
13
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, 2024 |
|
|||||||||||||
|
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 |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Money market accounts |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Redeemable preferred stock investment |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Preferred stock of privately held company |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Municipal bonds |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Yankee debt securities |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Total equity securities, debt securities and cash equivalents |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
December 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 |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Money market accounts |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Redeemable preferred stock investment |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Preferred stock of privately held company |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Municipal bonds |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
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, 2024, 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, 2024 and December 31, 2023 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, 2024.
There were
14
Note 5. Fixed Assets
Major classes of fixed assets consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
Useful Lives |
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Medical lab equipment |
$ |
|
|
$ |
|
|||
Leasehold improvements |
|
|
|
|
|
|||
Building |
|
|
|
|
|
|||
Computer software |
|
|
|
|
|
|||
Building improvements |
|
|
|
|
|
|||
Computer hardware |
|
|
|
|
|
|||
Aircraft |
|
|
|
|
|
|||
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. Other Significant Balance Sheet Accounts
Other current assets consisted of the following:
|
March 31, |
|
|
December 31, |
|
||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Prepaid income taxes |
$ |
|
|
$ |
|
||
Prepaid expenses |
|
|
|
|
|
||
Reagents and supplies |
|
|
|
|
|
||
Marketable securities interest receivable |
|
|
|
|
|
||
Other receivable |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
Accrued liabilities consisted of the following:
|
March 31, |
|
|
December 31, |
|
||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Accrued legal liabilities |
$ |
|
|
$ |
|
||
Payroll liabilities |
|
|
|
|
|
||
Accrued bonus and commission |
|
|
|
|
|
||
Vacation accrual |
|
|
|
|
|
||
Other accrued liabilities |
|
|
|
|
|
||
Operating lease liabilities - short term |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
Accrued legal liabilities as of March 31, 2024, and December 31, 2023, included $
Other long-term liabilities consisted of the following:
15
|
March 31, |
|
|
December 31, |
|
||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Operating lease liabilities, long term |
$ |
|
|
$ |
|
||
Other long-term liabilities |
|
|
|
|
|
||
Notes payable, long term |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
Note 7. Reportable Segment and Geographic Information
The Company viewed and managed its operations in
There is no inter-segment allocation of interest expense and income taxes. There is no inter-segment revenue and operating income or loss.
|
Three Months Ended March 31, |
|
|||||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Revenue from services: |
|
|
|
|
|
||
Laboratory services: |
|
|
|
|
|
||
Precision diagnostics |
$ |
|
|
$ |
|
||
Anatomic pathology |
|
|
|
|
|
||
BioPharma services |
|
|
|
|
|
||
COVID-19 |
|
|
|
|
|
||
Total laboratory services |
|
|
|
|
|
||
Therapeutic development |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
|
Three Months Ended March 31, |
|
|||||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Loss before income taxes: |
|
|
|
|
|
||
Operating loss |
|
|
|
|
|
||
Laboratory services |
$ |
( |
) |
|
$ |
( |
) |
Therapeutic development |
|
( |
) |
|
|
( |
) |
Total operating loss |
|
( |
) |
|
|
( |
) |
Interest and other income, net |
|
|
|
|
|
||
Loss before income taxes |
$ |
( |
) |
|
$ |
( |
) |
|
Three Months Ended March 31, |
|
|||||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Depreciation and amortization: |
|
|
|
|
|
||
Laboratory services |
$ |
|
|
$ |
|
||
Therapeutic development |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
16
|
March 31, |
|
|
December 31, |
|
||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Assets: |
|
|
|
|
|
||
Laboratory services |
$ |
|
|
$ |
|
||
Therapeutic development |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
Geographic distribution of revenue:
|
Three Months Ended March 31, |
|
|||||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Revenue: |
|
|
|
|
|
||
United States |
$ |
|
|
$ |
|
||
Foreign |
|
|
|
|
|
||
China |
|
|
|
|
|
||
Other countries |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
Geographic distribution of property, plant and equipment, net:
|
March 31, |
|
|
December 31, |
|
||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Fixed assets: |
|
|
|
|
|
||
Unites States |
$ |
|
|
$ |
|
||
Foreign |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Note 8. Debt, Commitments, and Contingencies
Debt
Notes payable as of March 31, 2024, consisted of $
Operating Leases
See Note 9, Leases, for further information.
Purchase Obligations
From time to time, the Company enters into certain purchase commitments with its vendors, consisting primarily of services, reagent and supplies, computer software, medical lab equipment, and building assets. As of March 31, 2024, the Company had 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.
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
17
testing, and remuneration received or provided in violation of the Anti-Kickback Statute and the Stark Law. Among other things, this CID requests information and records relating to certain of the Company’s customers named in the CID. 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 its 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. The Company cannot predict when these matters will be resolved, the outcome of these matters, or their potential impact, which may materially and adversely affect the Company’s business, prospects, and financial condition.
Similar to other laboratories in the industry, the Company is currently being audited by the U.S. Health Resources and Services Administration, or HRSA, with respect to its reimbursement for COVID-19 tests furnished to patients believed to be uninsured. The Company recorded approximately $
The Company cannot reasonably estimate the loss or range of loss, if any, that may result from any material government investigations, audits, and reviews in which it is currently involved, given the inherent difficulty in predicting regulatory action, fines and penalties, if any, and the various remedies and levels of judicial review available to the Company in the event of an adverse finding. As a result, the Company has not recorded any liability related to these matters.
In relation to a recent advisory opinion issued by the Office of Inspector General of the Department of Health and Human Services, the Company’s subsidiary, Symphony Buyer, Inc., or Inform Diagnostics, initiated a voluntary disclosure process with the appropriate government contact. The Company currently has estimated and recorded $
Note 9. Leases
Lessee
The Company is a lessee to various non-cancelable operating leases with varying terms through
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 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, 2024, and December 31, 2023, were as follows:
|
March 31, |
|
|
December 31, |
|
||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
$ |
|
|
$ |
|
|||
$ |
|
|
$ |
|
|||
$ |
|
|
$ |
|
|||
$ |
|
|
$ |
|
|||
$ |
|
|
$ |
|
|||
$ |
|
|
$ |
|
|||
18
The following were operating and finance lease expenses:
|
Three Months Ended March 31, |
|
|||||
|
2024 |
|
|
2023 |
|
||
|
(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, 2024 |
|
|
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, |
|
|
|
|
|
||
2024 (remaining 9 months) |
$ |
|
|
$ |
|
||
2025 |
|
|
|
|
|
||
2026 |
|
|
|
|
|
||
2027 |
|
|
|
|
— |
|
|
2028 |
|
|
|
|
— |
|
|
2029 |
|
|
|
|
— |
|
|
Thereafter |
|
|
|
|
— |
|
|
Total lease payments |
|
|
|
|
|
||
Less imputed interest |
|
( |
) |
|
|
( |
) |
Total |
$ |
|
|
$ |
|
||
Lessor
The Company leases out space in buildings it owns and leases to third-party tenants under noncancelable operating leases. As of March 31, 2024, the remaining lease term is
The lease income was included in interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations.
|
Three Months Ended March 31, |
|
|||||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Lease income |
$ |
|
|
$ |
|
||
$ |
|
|
$ |
|
|||
19
Future fixed lease payments from tenants for all noncancelable operating leases as of March 31, 2024 are as follows:
|
Lease Payments |
|
|
|
from Tenants |
|
|
|
(in thousands) |
|
|
Year Ending December 31, |
|
|
|
2024 (remaining 9 months) |
$ |
|
|
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, |
|
|||||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Cost of revenue |
$ |
|
|
$ |
|
||
Research and development |
|
|
|
|
|
||
Selling and marketing |
|
|
|
|
|
||
General and administrative |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
20
Note 11. 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 (loss) 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 under examination by certain tax authorities for the 2020 to 2021 tax years. While the timing of the conclusion of the examination is uncertain, the Company believes that adequate amounts have been reserved for adjustments that may result. During 2024, the statutes of limitations will lapse on the Company’s 2020 federal tax year and certain 2019 and 2020 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 Company received $
Note 12. Loss per Share
The following table presents the calculation of basic and diluted loss per share for the three months ended March 31, 2024 and 2023:
|
Three Months Ended March 31, |
|
|||||
|
2024 |
|
|
2023 |
|
||
|
(in thousands, except per share data) |
|
|||||
Net loss attributable to common shareholders |
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
||
Weighted-average common shares - outstanding, basic |
|
|
|
|
|
||
Weighted-average common shares - outstanding, diluted |
|
|
|
|
|
||
|
|
|
|
|
|
||
Loss per share: |
|
|
|
|
|
||
Basic |
$ |
( |
) |
|
$ |
( |
) |
Diluted |
$ |
( |
) |
|
$ |
( |
) |
The following securities have been excluded from the calculation of diluted loss per share because their effect would have been anti-dilutive:
|
Three Months Ended March 31, |
|
|||||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Options |
|
|
|
|
|
||
Restricted Stock Units |
|
|
|
|
|
||
Contingently Issuable Shares |
|
|
|
|
|
||
The anti-dilutive shares described above were calculated using the treasury stock method. In the three months ended March 31, 2024 and 2023, the Company had outstanding stock options and restricted stock units and contingently issuable shares for shares held back in connection with 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.
21
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 , and the Company recognized $
Ming Hsieh, the Chief Executive Officer and Chairperson of the Board, is on the board of directors and an approximately
Note 14. Goodwill and Acquisition-Related Intangibles
There was no change in the carrying amount in the three months ended March 31, 2024.
|
March 31, |
|
|
December 31, |
|
||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Goodwill: |
|
|
|
|
|
||
Laboratory services |
$ |
— |
|
|
$ |
— |
|
Therapeutic development |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
The Company has identified its laboratory services business and its therapeutic development business as its
The Company tests for goodwill impairment at the reporting unit level on December 31st of each year and more frequently if events or circumstances indicate a potential impairment.
Laboratory Services
The Company recognized a full goodwill impairment loss for the goodwill of its laboratory services reporting unit as of December 31, 2023 due to a continued decline in its share price and market capitalization.
Therapeutic Development
Based upon the results of the quantitative assessments the Company performed as of December 31, 2023, the Company concluded that the fair values of the therapeutic development reporting unit and the IPR&D asset, at December 31, 2023, were greater than the carrying values and that there was no impairment. There have been no significant changes in the three months ended March 31, 2024.
There can be no assurance that the estimates and assumptions management made for the purposes of the goodwill or IPR&D impairment analysis will prove to be accurate predictions of future performance. It is possible that the conclusions regarding impairment or recoverability of goodwill or intangible assets could change in future periods. Management will continue to monitor the therapeutic development reporting unit. For all IPR&D projects, there are major risks and uncertainties associated with the timely and successful completion of development and commercialization of these product candidates, including the ability to confirm their efficacy based on data from clinical trials, the ability to obtain necessary regulatory approvals, and the ability to successfully complete these tasks within budgeted costs. The Company is not able to market a human therapeutic without obtaining regulatory approvals, and such approvals require completing clinical trials that demonstrate a product candidate is safe and effective. In addition, the availability and extent of coverage and reimbursement from third-party payors, including government healthcare programs and private insurance plans, impact the revenues a product can generate. Consequently, the eventual realized value, if any, of these acquired IPR&D projects may vary from their estimated fair values.
22
Summaries of intangible asset balances as of March 31, 2024 and December 31, 2023 were as follows:
|
|
March 31, |
|
|
December 31, |
|
||
|
Weighted-Average Amortization Period |
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Laboratory Services: |
|
|
|
|
|
|
||
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 |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Therapeutic Development: |
|
|
|
|
|
|
||
In-process research & development |
n/a |
|
|
|
|
|
||
Total |
|
|
|
|
|
|
||
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 IPR&D, which is related to the business combination of Fulgent Pharma 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.
Amortization of intangible assets was $
Based on the carrying value of finite-lived intangible assets recorded as of March 31, 2024, 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, |
|
|
|
2024 (remaining 9 months) |
$ |
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
2028 |
|
|
|
2029 |
|
|
|
Thereafter |
|
|
|
Total |
$ |
|
|
23
Note 15. Stock Repurchase Program
In March 2022, the Board authorized a $
Note 16. Retirement Plans
The Company offers a 401(k) retirement savings plan, or the 401(k) Plan, for its employees, including its executive officers, who satisfy certain eligibility requirements. The Internal Revenue Code of 1986, as amended, allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) Plan. The Company matches contributions to the 401(k) Plan based on the amount of salary deferral contributions the participant makes to the 401(k) Plan. The Company provides safe harbor match of the employee contribution to his or her 401(k) Plan account. Total Company matching contributions to the 401(k) Plan were $
Note 17. Subsequent Events
As of May 3, 2024, no subsequent events are being reported.
24
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, 2023, filed with the SEC on February 28, 2024, or the 2023 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, the development of our drug candidates, 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 2023 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 laboratory services business and a therapeutic development business. Our laboratory services business, to which we formerly referred to as our clinical diagnostic business, includes technical laboratory services and professional interpretation of laboratory results by licensed physicians. 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.
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 2023 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 2023 Annual Report.
25
Results of Operations
The table below summarizes the 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 operations data, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2023 Annual Report.
|
Three Months Ended |
|
|
|
|
|
|
||||||
|
March 31, |
|
|
$ |
|
|
% |
||||||
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|||
|
(dollars in thousands) |
||||||||||||
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|||
Revenue |
$ |
64,485 |
|
|
$ |
66,168 |
|
|
$ |
(1,683 |
) |
|
(3%) |
Cost of revenue |
|
42,381 |
|
|
|
47,357 |
|
|
|
(4,976 |
) |
|
(11%) |
Gross profit |
|
22,104 |
|
|
|
18,811 |
|
|
|
3,293 |
|
|
18% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|||
Research and development |
|
11,434 |
|
|
|
9,782 |
|
|
|
1,652 |
|
|
17% |
Selling and marketing |
|
8,989 |
|
|
|
10,083 |
|
|
|
(1,094 |
) |
|
(11%) |
General and administrative |
|
21,489 |
|
|
|
21,802 |
|
|
|
(313 |
) |
|
(1%) |
Amortization of intangible assets |
|
1,990 |
|
|
|
1,968 |
|
|
|
22 |
|
|
1% |
Total operating expenses |
|
43,902 |
|
|
|
43,635 |
|
|
|
267 |
|
|
1% |
Operating loss |
|
(21,798 |
) |
|
|
(24,824 |
) |
|
|
3,026 |
|
|
12% |
Interest and other income, net |
|
7,625 |
|
|
|
3,775 |
|
|
|
3,850 |
|
|
102% |
Loss before income taxes |
|
(14,173 |
) |
|
|
(21,049 |
) |
|
|
6,876 |
|
|
33% |
Benefit from income taxes |
|
(327 |
) |
|
|
(5,200 |
) |
|
|
4,873 |
|
|
94% |
Net loss from consolidated operations |
|
(13,846 |
) |
|
|
(15,849 |
) |
|
|
2,003 |
|
|
13% |
Net loss attributable to noncontrolling interests |
|
384 |
|
|
|
509 |
|
|
|
(125 |
) |
|
(25%) |
Net loss attributable to Fulgent |
$ |
(13,462 |
) |
|
$ |
(15,340 |
) |
|
$ |
1,878 |
|
|
12% |
Revenue
|
Three Months Ended March 31, |
|
|
$ |
|
|
% |
||||||
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|||
|
(dollars in thousands) |
||||||||||||
Revenue Data: |
|
||||||||||||
Precision diagnostics |
$ |
37,446 |
|
|
$ |
27,905 |
|
|
$ |
9,541 |
|
|
34% |
Anatomic pathology |
|
23,107 |
|
|
|
26,411 |
|
|
|
(3,304 |
) |
|
(13)% |
BioPharma services |
|
2,656 |
|
|
|
8,420 |
|
|
|
(5,764 |
) |
|
(68)% |
COVID-19 |
|
1,276 |
|
|
|
3,432 |
|
|
|
(2,156 |
) |
|
(63)% |
Total |
$ |
64,485 |
|
|
$ |
66,168 |
|
|
$ |
(1,683 |
) |
|
(3)% |
Revenue decreased $1.7 million, or 3%, from $66.2 million in the three months ended March 31, 2023 to $64.5 million in the three months ended March 31, 2024. The decrease in revenue between periods was primarily due to decreased revenue from BioPharma services, anatomic pathology, and COVID-19 testing, and partially offset by an increase in our precision diagnostic testing services.
The decrease in BioPharma services was attributed to timing of BioPharma service projects. The decrease in anatomic pathology services was due to weather issues and changes in reimbursement rates in the three months ended March 31, 2024. The decrease in COVID-19 revenue was due to ceased COVID-19 testing operations at the end of March 2023. For the three months ended March 31, 2024, precision diagnostics accounted for 58% of our consolidated revenue and increased $9.5 million compared to the three months ended March 31, 2023. The increase in precision diagnostics revenue was due to a growth in our reproductive health services, including our expanded Beacon787 testing, which launched in late February 2023, and growth in our specialized oncology tests and testing services.
We believe the factors that will affect our ability to grow these revenue streams are 1) the average price point we offer and the reimbursement rate from third-party payors; 2) the concentration of our payor base; 3) the competitive advantage we have due to our broad and flexible test menu, detection rate, and turnaround times; and 4) growth in size of an addressable market. Estimated collection amounts from third-party payors are subject to the complexities and ambiguities of billing, reimbursement regulations and claims processing, as well as considerations unique to Medicare and Medicaid programs. Because our proprietary technology platform
26
allows for rapid scaling of a broad, flexible testing menu, we can offer our customers more scalable and affordable testing. Going forward, we will strive to maintain this competitive advantage and emphasize this in our marketing efforts to grow our testing revenue.
Our customer base includes insurance, institutional, and individual payors. In some periods, our revenue is concentrated on a smaller number of customers. For the laboratory services business, aggregating customers that are under common control, one customer comprised $12.6 million or 20% of our revenue in the three months ended March 31, 2024. No customer contributed 10% or more of the Company’s revenue in the three months ended March 31, 2023. To reduce this revenue risk, we will focus on increasing the number of customers and thereby reducing the concentration.
Revenue from non-U.S. sources increased $2.5 million, or 62%, from $4.1 million in the three months ended March 31, 2023 to $6.6 million in the three months ended March 31, 2024. 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 Fujian Fujun Gene Biotech Co., Ltd., or FF Gene Biotech.
Cost of Revenue
|
Three Months Ended March 31, |
|
|
$ |
|
|
% |
||||||
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|||
|
(dollars in thousands) |
||||||||||||
Cost of revenue |
$ |
42,381 |
|
|
$ |
47,357 |
|
|
$ |
(4,976 |
) |
|
(11)% |
Cost of revenue as a % of revenue |
|
65.7 |
% |
|
|
71.6 |
% |
|
|
|
|
|
|
Our consolidated cost of revenue decreased $5.0 million, or 11%, from $47.4 million in the three months ended March 31, 2023 to $42.4 million in the three months ended March 31, 2024. The decrease was primarily due to decreases of $2.1 million consulting and outside labor costs, $921,000 in personnel costs including equity-based compensation, $615,000 in facility expenses, $591,000 in shipping and handling expenses, and $575,000 in reagents and supply expenses related to cessation of COVID-19 testing operations and closure of a laboratory.
Our consolidated cost of revenues as a percentage of revenue decreased from 71.6% to 65.7%. Our gross profit increased $3.3 million, from $18.8 million in the three months ended March 31, 2023 to $22.1 million in the three months ended March 31, 2024. Our gross profit as a percentage of revenue, or gross margin, increased from 28.4% to 34.3%. The changes were primarily due to product mix.
Research and Development
|
Three Months Ended March 31, |
|
|
|
|
|
|
||||||
|
2024 |
|
|
2023 |
|
|
Change |
|
|
Change |
|||
Research and development |
(dollars in thousands) |
||||||||||||
Laboratory services |
$ |
7,321 |
|
|
$ |
7,309 |
|
|
$ |
12 |
|
|
0% |
Therapeutic development |
|
4,113 |
|
|
|
2,473 |
|
|
|
1,640 |
|
|
66% |
|
$ |
11,434 |
|
|
$ |
9,782 |
|
|
$ |
1,652 |
|
|
17% |
27
Research and development expenses for the laboratory services business were mainly for developing our technology and future testing and testing services. The expenses were flat for the three months ended March 31, 2024 and 2023.
Research and development expenses for the therapeutic development business were primarily related to the development of FID-007. The expenses increased $1.6 million, or 66%, from $2.5 million in the three months ended March 31, 2023 to $4.1 million in the three months ended March 31, 2024. The change was primarily due to increased expenses related to a drug study with our contract research organizations. We anticipate research and development expenditures for this segment to increase as we expect to begin enrollment for a phase 2 study of FID-007 in the second quarter of 2024.
Selling and Marketing
Our consolidated selling and marketing expenses decreased $1.1 million, or 11%, from $10.1 million in the three months ended March 31, 2023 to $9.0 million in the three months ended March 31, 2024. The decrease was primarily due to decreases of $607,000 in consulting and outside labor costs related to cessation of COVID-19 testing operations and $482,000 in facility expenses.
General and Administrative
Our consolidated general and administrative expenses decreased $313,000, or 1%, from $21.8 million in the three months ended March 31, 2023 to $21.5 million in the three months ended March 31, 2024 due to decreases of $2.4 million in provisions for credit losses and $881,000 in business insurance expense, partially offset by increases of $2.4 million in personnel costs including equity-based compensation expense and $708,000 in facility expenses.
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 for each of the three months ended March 31, 2024 and 2023.
Interest and Other Income, net
Interest and other income, net, is primarily comprised of interest income, net, which was $7.6 million and $3.8 million in the three months ended March 31, 2024 and 2023, respectively. This interest income, net, related to interest earned on various investments in marketable securities including realized gain or loss on sale of marketable securities, net of interest expenses incurred for our notes payable. The increase in interest income, net, was primarily due to increased interest rates on marketable securities relative to the prior comparative period.
Benefit from Income Taxes
Benefit from income taxes was $327,000 and $5.2 million for the three months ended March 31, 2024 and 2023, respectively. The effective tax rate was 2% and 25% for the three months ended March 31, 2024 and 2023, respectively. The change in the effective tax rate compared to prior period is due to the valuation allowance in the current period that precludes us from recognizing the benefit from our net operating losses.
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 $846.2 million and $847.7 million in cash, cash equivalents, and marketable securities as of March 31, 2024 and December 31, 2023, 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, 2024 and December 31, 2023.
Our primary uses of cash are to fund our operations, repurchase our stock, 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.
28
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 has significantly contributed to our ability to meet our liquidity needs, including paying for capital expenditures; however, cash provided by our operations has in the past experienced fluctuations from period to period, which we expect may continue in the future. These fluctuations can occur because of a variety of factors, including, among others, factors relating to the 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, |
|
|||||
|
2024 |
|
|
2023 |
|
||
|
(in thousands) |
|
|||||
Net cash provided by (used in) operating activities |
$ |
7,266 |
|
|
$ |
(7,907 |
) |
Net cash used in investing activities |
$ |
(47,186 |
) |
|
$ |
(4,354 |
) |
Net cash used in financing activities |
$ |
(2,807 |
) |
|
$ |
(1,101 |
) |
Operating Activities
During the three months ended March 31, 2024, our operations provided $7.3 million of cash, as compared to $7.9 million used in the three months ended March 31, 2023. The increase in cash provided from operating activities in the three months ended March 31, 2024, as compared with the corresponding period in 2023 was primarily due to the timing of cash receipts from customers and cash payments for operating expenses. We expect to incur more operating expenses and use more cash in operating activities in the coming year as a result of our planned and ongoing clinical trials for FID-007 and as we continue to invest resources to grow our laboratory services business.
Investing Activities
The cash provided by or used in investing activities are impacted by capital expenditures for operation needs and timing of payments, timing of maturities of marketable securities, and discretionary business combinations and other investment.
Cash used in investing activities in the three months ended March 31, 2024, was $47.2 million, which primarily related to $195.7 million on purchase of marketable securities and $4.1 million on purchases of fixed assets, partially offset by $95.5 million related to maturities of marketable securities and $56.9 million on proceeds from the sale of marketable securities.
Cash used in investing activities in the three months ended March 31, 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.
29
Financing Activities
Cash used in financing activities in the three months ended March 31, 2024, was $2.8 million, which primarily related to $1.7 million common stock withholding for employee tax obligations and $765,000 for repayment of notes payable.
Cash used in financing activities in the three months ended March 31, 2023, was $1.1 million, which primarily related to $869,000 common stock withholding for employee tax obligations.
We do not expect to use any credit facilities for the foreseeable future due to the strong cash position as of March 31, 2024.
Stock Repurchase Program
In March 2022, our Board of Directors 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, we may repurchase shares from time to time in the open market or in privately negotiated transactions.
During the three months ended March 31, 2024, we repurchased 10,000 shares of our common stock under our stock repurchase program at an aggregate cost of $225,000 under the stock repurchase program. We did not repurchase any common stock under our stock repurchase program during the three months ended March 31, 2023. As of March 31, 2024, a total of approximately $150.5 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 2023 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.
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.
For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2023 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, 2024. 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, 2024.
30
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 three months ended March 31, 2024 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.
31
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. As disclosed in Note 8, Debt, Commitments, and Contingencies, to the Condensed Consolidated Financial Statements, we are engaged in certain legal investigations, audits and voluntary disclosures processes, and the disclosure set forth in Note 8 relating to these certain legal matters is incorporated herein by reference.
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.
Except as set forth below, there have been no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2023 Annual Report.
Any changes in laws, regulations, or the enforcement discretion of the FDA with respect to the marketing of diagnostic products, or violations of laws or regulations by us, could materially and adversely affect our business, prospects, results of operations, or financial condition.
The laws and regulations governing the marketing of diagnostic products are evolving, extremely complex and in many instances, have no significant regulatory or judicial interpretations of these laws and regulations. Pursuant to its authority under the federal FDC Act, the FDA has jurisdiction over medical devices, including IVDs, and, therefore, potentially our clinical laboratory tests. Among other things, pursuant to the FDC Act and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion, and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. In addition, the FDA regulates the import and export of medical devices.
Although the FDA has statutory authority to assure that medical devices and IVDs, potentially including our tests, are safe and effective for their intended uses, the FDA had historically exercised enforcement discretion and not enforced applicable provisions of the FDC Act and regulations with respect to LDTs, which are a particular type of medical device. We believe our tests are not currently subject to the FDA’s medical device regulations and the applicable FDC Act provisions due to their status as LDTs. However, in October 2023, the FDA issued a proposed rule aimed at regulating LDTs under the current medical device framework and proposing to phase out its existing enforcement discretion policy for this category of diagnostic tests. The agency’s final rule was released to the public on April 29, 2024 and will be officially published in the Federal Register on May 6, 2024, with an effective date of July 5, 2024.
The agency’s final rule provides that the LDT enforcement policy phase-out process will occur in gradual stages over a total period of four years, with pre-market approval applications for high-risk tests to be submitted by the 3.5-year mark. Moderate-risk and low-risks tests are expected to be in compliance at the 4-year mark, although FDA has stated that if premarket submissions are pending review it will continue to exercise enforcement discretion with respect to those tests. . Litigation challenging the agency’s authority to take adopt this final rule is highly likely, although the outcome of such litigation is uncertain. Litigation challenging the final rule may also have an impact on FDA’s plans to implement these new LDT requirements, making the potential implementation timeline somewhat uncertain. Affected stakeholders continue to press for a comprehensive legislative solution to create a harmonized paradigm for oversight of LDTs by both the FDA and CMS, instead of implementation of the FDA’s final rule, which may be disruptive to the industry and to patient access to certain diagnostic tests.
Separately, members of Congress have been working with stakeholders for several years on a possible bill to reform the regulation of in vitro clinical tests including LDTs. For example, as drafted and re-introduced for consideration by the current Congress, the Verifying Accurate, Leading-edge IVCT Development Act, or the VALID Act, has been garnering bipartisan and bicameral support. The VALID Act would codify into law the term “in vitro clinical test” to create a new medical product category separate from medical devices that includes products currently regulated as IVDs, as well as LDTs. The VALID Act would also create a new system for labs and hospitals to use to submit their tests electronically to the FDA for approval, which is aimed at reducing the amount of time it takes for the agency to approve such tests, and establish a new program to expedite the development of diagnostic tests that can be used to address a current unmet need for patients. Most recently, on March 21, 2024, the House Energy and Commerce held a subcommittee hearing titled “Evaluating Approaches to Diagnostic Test Regulation and the Impact of the FDA’s
32
Proposed Rule.” The private witnesses testifying at the hearing expressed broad support for the bipartisan VALID Act instead of the FDA’s plan to use its medical device authorities to regulate LDTs.
It is unclear whether Congress will take action, through the VALID Act or otherwise, to supersede FDA’s recent final rule with comprehensive diagnostic reform legislation, or whether such legislation would be signed into law by President Biden. In addition, at this time it is unclear what testing and data may be required to support any required FDA clearance or approval of our tests, should the final rule be fully implemented as envisioned by FDA and HHS.
If FDA implements the LDT final rule or Congress enacts comprehensive legislation to regulate in vitro diagnostics, or if the FDA disagrees with our assessment that our tests meet the criteria to be marketed LDTs, we could, for the first time, be subject to enforcement of a variety of regulatory requirements, including registration and listing, medical device reporting and quality control, and we could be required to obtain premarket clearance or approval for our existing tests and any new tests we may develop, which may force us to cease marketing our tests until we obtain the required clearance or approval. The premarket review process can be lengthy, expensive, time-consuming and unpredictable. Further, obtaining premarket clearance may involve, among other things, successfully completing clinical trials. Clinical trials require significant time and cash resources and are subject to a high degree of risk, including risks of experiencing delays, failing to complete the trial or obtaining unexpected or negative results. If we are required to obtain premarket clearance or approval and/or conduct premarket clinical trials, our development costs could significantly increase, our introduction of any new tests we may develop may be delayed and sales of our existing tests could be interrupted or stopped. Any of these outcomes could reduce our revenue or increase our costs and materially adversely affect our business, prospects, results of operations or financial condition. Moreover, any cleared or approved labeling claims may not be consistent with our current claims or adequate to support continued adoption of and reimbursement for our tests. For instance, if we are required by the FDA to label our tests as investigational, or if labeling claims the FDA allows us to make are limited, order levels may decline and reimbursement may be adversely affected. As a result, we could experience significantly increased development costs and a delay in generating additional revenue from our existing tests or from tests we may develop.
In addition, while we qualify all materials used in our products in accordance with the regulations and guidelines of CLIA, the FDA could promulgate regulations or guidance documents impacting our ability to purchase materials necessary for the performance of our tests. If any of the reagents we obtain from suppliers and use in our tests are affected by future regulatory actions, our business could be adversely affected, including by increasing the cost of testing or delaying, limiting or prohibiting the purchase of reagents necessary to perform testing with our products.
Failure to comply with any applicable FDA requirements could trigger a range of enforcement actions by the FDA, including warning letters, civil monetary penalties, injunctions, criminal prosecution, recall or seizure, operating restrictions, partial suspension or total shutdown of operations and denial of or challenges to applications for clearance or approval, as well as significant adverse publicity.
33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Use of Proceeds from Registered Securities
To date, we have used $146.7 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, $126.4 million was used to fund the Company’s operations and a business combination, and $15.8 million was used to pay off the investment margin loan. 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 number of shares of common stock repurchased by the Company under the stock repurchase program and the average price paid per share are as follows:
Period |
|
(a) Total Number of Shares Purchased |
|
|
(b) Average Price Paid Per Share (1) |
|
|
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
(d) Maximum Dollar Value that May Yet be Purchased Under the Plans or Programs |
|
||||
May 2022 (5/1/2022 - 5/31/2022) |
|
|
30,000 |
|
|
$ |
49.56 |
|
|
|
30,000 |
|
|
$ |
248,515,000 |
|
June 2022 (6/1/2022 - 6/30/2022) |
|
|
185,000 |
|
|
$ |
48.97 |
|
|
|
185,000 |
|
|
$ |
239,429,000 |
|
August 2022 (8/1/2022 - 8/31/2022) |
|
|
247,000 |
|
|
$ |
47.68 |
|
|
|
247,000 |
|
|
$ |
227,657,000 |
|
September 2022 (9/1/2022 - 9/30/2022) |
|
|
533,000 |
|
|
$ |
43.04 |
|
|
|
533,000 |
|
|
$ |
204,752,000 |
|
October 2022 (10/1/2022 - 10/31/2022) |
|
|
244,000 |
|
|
$ |
37.33 |
|
|
|
244,000 |
|
|
$ |
195,661,000 |
|
November 2022 (11/1/2022 - 11/30/2022) |
|
|
234,000 |
|
|
$ |
35.83 |
|
|
|
234,000 |
|
|
$ |
187,276,000 |
|
December 2022 (12/1/2022 - 12/31/2022) |
|
|
337,000 |
|
|
$ |
34.32 |
|
|
|
337,000 |
|
|
$ |
175,718,000 |
|
September 2023 (9/1/2023-9/30/2023) |
|
|
80,000 |
|
|
$ |
27.65 |
|
|
|
80,000 |
|
|
$ |
173,522,000 |
|
October 2023 (10/1/2023-10/31/2023) |
|
|
533,000 |
|
|
$ |
25.65 |
|
|
|
533,000 |
|
|
$ |
159,864,000 |
|
November 2023 (11/1/2023-11/30/2023) |
|
|
222,000 |
|
|
$ |
26.95 |
|
|
|
222,000 |
|
|
$ |
153,875,000 |
|
December 2023 (12/1/2023-12/31/2023) |
|
|
118,000 |
|
|
$ |
27.01 |
|
|
|
118,000 |
|
|
$ |
150,686,000 |
|
March 2024 (3/1/2024-3/31/2024) |
|
|
10,000 |
|
|
$ |
22.02 |
|
|
|
10,000 |
|
|
$ |
150,461,000 |
|
Total |
|
|
2,773,000 |
|
|
|
|
|
|
2,773,000 |
|
|
|
|
||
(1) Includes commissions for the shares repurchased under the stock repurchase program.
Item 5. Other Information
Rule 10b5-1 trading arrangements
During the three months ended March 31, 2024,
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.
34
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 |
|
10-Q |
|
001-37894 |
|
8/4/2023 |
|
|
|
|
|
|
|
|
|
31.1* |
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2* |
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1 |
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.
35
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 3, 2024 |
|
By: |
/s/ Ming Hsieh |
|
|
|
Ming Hsieh |
|
|
|
Chief Executive Officer (principal executive officer) |
|
|
|
|
Date: May 3, 2024 |
|
By: |
/s/ Paul Kim |
|
|
|
Paul Kim |
|
|
|
Chief Financial Officer (principal financial and accounting officer) |
36