Quarterly Report (10-q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

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

For the transition period from to

Commission File Number: 001-37894

FULGENT GENETICS, INC.

(exact name of registrant as specified in its charter)

Delaware	81-2621304
( State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4978 Santa Anita Avenue, Suite 205 Temple City, CA	91780
(Address of principal executive offices)	(Zip Code)

(626) 350-0537

(Registrant’s telephone number, including area code)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.0001 per share		FLGT		The Nasdaq Stock Market (Nasdaq Global Market)

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

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

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

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 November 1, 2019, there were 18,710,357 outstanding shares of the registrant’s common stock.

Table of Contents


	Page
PART I—FINANCIAL INFORMATION	1
Item 1. Financial Statements (Unaudited)	1
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Operations	2
Condensed Consolidated Statements of Comprehensive Income (Loss)	3
Condensed Consolidated Statements of Stockholders’ Equity	4
Condensed Consolidated Statements of Cash Flows	6
Notes to the Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
PART II—OTHER INFORMATION	26
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 6. Exhibits	50
Exhibit Index	51
Signatures	52

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FULGENT GENETICS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except par value data)

(unaudited)

	September 30,			December 31,
	2019			2018
Assets
Current assets
Cash and cash equivalents	$	20,522		$	6,736
Marketable securities		11,596			24,298
Trade accounts receivable, net of allowance for doubtful accounts of $611 and $590, as of September 30, 2019 and December 31, 2018, respectively		5,292			5,948
Other current assets		1,795			2,561
Total current assets		39,205			39,543
Marketable securities, long-term		11,487			6,386
Equity method investments		909			1,512
Fixed assets, net		6,396			6,446
Operating lease right-of-use asset		2,739			—
Other long-term assets		409			17
Total assets	$	61,145		$	53,904
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	2,150		$	1,313
Accrued liabilities		1,634			1,425
Income tax payable		60			—
Operating lease liabilities, short-term		409			—
Total current liabilities		4,253			2,738
Operating lease liabilities, long-term		2,366			—
Other long-term liabilities		—			14
Total liabilities		6,619			2,752
Commitments and contingencies (Note 8)
Stockholders’ equity
Common stock, $0.0001 par value per share, 50,000 shares authorized, 18,673 and 18,172 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		2			2
Preferred stock, $0.0001 par value per share, 1,000 shares authorized, no shares issued or outstanding at September 30, 2019 and December 31, 2018		—			—
Additional paid-in capital		117,478			114,203
Accumulated other comprehensive income (loss)		179			(35	)
Accumulated deficit		(63,133	)		(63,018	)
Total stockholders’ equity		54,526			51,152
Total liabilities and stockholders’ equity	$	61,145		$	53,904

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

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	10,347		$	5,625		$	24,141		$	15,678
Cost of revenue		3,885			2,612			10,473			7,928
Gross profit		6,462			3,013			13,668			7,750
Operating expenses:
Research and development		1,744			1,438			4,742			4,108
Selling and marketing		1,687			1,115			4,263			3,524
General and administrative		1,522			1,306			4,682			4,159
Total operating expenses		4,953			3,859			13,687			11,791
Operating income (loss)		1,509			(846	)		(19	)		(4,041	)
Interest and other income, net		189			143			588			336
Income (loss) before income taxes and equity loss in investee		1,698			(703	)		569			(3,705	)
Provision for (benefit from) income taxes		61			(318	)		81			(852	)
Income (loss) before equity loss in investee		1,637			(385	)		488			(2,853	)
Equity loss in investee		(175	)		(210	)		(603	)		(701	)
Net income (loss)	$	1,462		$	(595	)	$	(115	)	$	(3,554	)

Net income (loss) per common share:
Basic	$	0.08		$	(0.03	)	$	(0.01	)	$	(0.20	)
Diluted	$	0.08		$	(0.03	)	$	(0.01	)	$	(0.20	)

Weighted-average common shares:
Basic		18,501			18,012			18,358			17,931
Diluted		19,456			18,012			18,358			17,931

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

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income (loss)	$	1,462		$	(595	)	$	(115	)	$	(3,554	)
Other comprehensive income (loss):
Foreign currency translation loss		(17	)		(23	)		(16	)		(44	)
Net unrealized gain (loss) on marketable securities, net of tax		(7	)		48			230			31
Comprehensive income (loss)	$	1,438		$	(570	)	$	99		$	(3,567	)

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

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

	Stockholders' Equity
	Shares		Amount			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit				Total Equity
Balance at December 31, 2018		18,172		$	2		$	114,203		$	(35	)		$	(63,018	)		$	51,152
Equity-based compensation		—			—			583			—				—				583
Exercise of common stock options		9			—			4			—				—				4
Restricted stock awards		105			—			—			—				—				—
Other comprehensive gain, net		—			—			—			130				—				130
Net income (loss)		—			—			—			—				(1,908	)			(1,908	)
Balance at March 31, 2019		18,286			2			114,790			95				(64,926	)			49,961
Equity-based compensation		—			—			737			—				—				737
Exercise of common stock options		15			—			5			—				—				5
Restricted stock awards		92			—			—			—				—				—
Other comprehensive gain, net		—			—			—			108				—				108
Net income (loss)		—			—			—			—				331				331
Balance at June 30, 2019		18,393			2			115,532			203				(64,595	)			51,142
Equity-based compensation		—			—			951			—				—				951
Exercise of common stock options		43			—			16			—				—				16
Restricted stock awards		133			—			—			—				—				—
Issuance of common stock at an average of $9.37 per share, net		104			—			979			—				—				979
Other comprehensive gain, net		—			—			—			(24	)			—				(24	)
Net income (loss)		—			—			—			—				1,462				1,462
Balance at September 30, 2019		18,673		$	2		$	117,478		$	179			$	(63,133	)		$	54,526

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

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

	Stockholders' Equity
	Shares		Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Equity
Balance at December 31, 2017		17,847	$	2	$	111,884	$	(44	)	$	(57,664	)	$	54,178
Equity-based compensation		—		—		545		—			—			545
Exercise of common stock options		5		—		2		—			—			2
Restricted stock awards		24		—		—		—			—			—
Cumulative effect of accounting change		—		—		—		—			327			327
Cumulative tax effect of accounting change		—		—		—		—			(74	)		(74	)
Other comprehensive gain, net		—		—		—		(43	)		—			(43	)
Net income (loss)		—		—		—		—			(1,910	)		(1,910	)
Balance at March 31, 2018		17,876		2		112,431		(87	)		(59,321	)		53,025
Equity-based compensation		—		—		573		—			—			573
Exercise of common stock options		18		—		7		—			—			7
Restricted stock awards		69		—		—		—			—			—
Other comprehensive gain, net		—		—		—		5			—			5
Net income (loss)		—		—		—		—			(1,049	)		(1,049	)
Balance at June 30, 2018		17,963		2		113,011		(82	)		(60,370	)		52,561
Equity-based compensation		—		—		588		—			—			588
Exercise of common stock options		6		—		1		—			—			1
Restricted stock awards		88		—		—		—			—			—
Other comprehensive gain, net		—		—		—		25			—			25
Net income (loss)		—		—		—		—			(595	)		(595	)
Balance at September 30, 2018		18,057	$	2	$	113,600	$	(57	)	$	(60,965	)	$	52,580

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

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash flow from operating activities:
Net loss	$	(115	)	$	(3,554	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Equity-based compensation		2,271			1,706
Depreciation		1,549			1,625
Noncash lease expense		306			—
Loss on disposal of fixed asset		11			88
Amortization of premium of marketable securities		52			239
Provision for bad debt		37			230
Deferred taxes		(21	)		(887	)
Equity loss in investee		603			701
Other		41			18
Changes in operating assets and liabilities:
Accounts receivable		588			(1,993	)
Other current and long-term assets		450			215
Accounts payable		(91	)		(175	)
Accrued liabilities		202			334
Income tax payable		60			—
Operating lease liabilities		(310	)		—
Net cash provided by (used in) operations		5,633			(1,453	)
Cash flow from investing activities:
Purchases of fixed assets		(721	)		(2,199	)
Purchase of marketable securities		(11,846	)		(13,165	)
Maturities of marketable securities		19,600			19,360
Purchase of equipment contributed to Equity Method Investee		—			(510	)
Net cash provided by investing activities		7,033			3,486
Cash flow from financing activities:
Proceeds from public offerings of common stock, net of issuance costs		1,110			—
Proceeds from exercise of stock options		26			10
Net cash provided by financing activities		1,136			10
Effect of exchange rate changes on cash and cash equivalents		(16	)		(44	)
Net increase in cash		13,786			1,999
Cash balance at beginning of period		6,736			6,490
Cash balance at end of period	$	20,522		$	8,489
Supplemental disclosures of cash flow information:
Income taxes paid	$	20		$	1
Supplemental disclosures of non-cash investing and financing activities:
Purchases of fixed assets in accounts payable	$	880		$	73
Operating lease right-of-use assets obtained in exchange for lease liabilities	$	110		$	—
Public offerings costs included in accounts payable	$	131		$	—

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

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 (“U.S. GAAP”). These financial statements include the assets, liabilities, revenues and expenses of all wholly-owned 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 (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company uses the equity method to account for its investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. All significant intercompany accounts and transactions are eliminated from the accompanying condensed consolidated financial statements.

Nature of the Business

Fulgent Genetics, Inc., together with its subsidiaries (collectively referred to as the “Company,” unless otherwise noted or the context otherwise requires), is a growing technology company offering comprehensive genetic testing and providing physicians with clinically actionable diagnostic information they can use to improve the quality of patient care. The Company has developed a proprietary technology platform that allows it to offer a broad and flexible test menu and continually expand and improve its proprietary genetic reference library, while maintaining accessible pricing, high accuracy and competitive turnaround times. Combining next generation sequencing, or NGS, with its technology platform, the Company performs full-gene sequencing with deletion/duplication analysis in single-gene tests; pre-established, multi-gene, disease-specific panels; and customized panels that can be tailored to meet specific customer needs. The Company believes its test menu offers more genes for testing than its competitors in today’s market, which enables it to provide expansive options for test customization and clinically actionable results. A cornerstone of the Company’s business is its ability to provide expansive options and flexibility for all clients’ unique genetic testing needs.

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, 2018, which are included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2019 (the “2018 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, 2018 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 2018 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 2018 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 and disclosure of contingent 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. Actual results could differ 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 doubtful accounts, (iii) the useful lives of fixed assets, (iv) estimates of tax liabilities and (v) equity method investments.

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 other comprehensive income (loss) in the accompanying condensed consolidated statements of stockholders’ equity. Gains and losses from these translations were not significant in the three and nine months ended September 30, 2019 and 2018. 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 at historical rates. Losses from these remeasurements were not significant in the three and nine months ended September 30, 2019 and 2018.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included as operating lease right-of-use (“ROU”) assets, operating lease liabilities, short-term, and operating lease liabilities, long-term, on the Company’s condensed consolidated balance sheets.

ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating ROU lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, including options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments since its leases do not provide an implicit rate. The ROU lease asset includes any base rent payments made and excludes lease incentives and variable operating expenses. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Concentration of Customers

In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue. In the three and nine months ended September 30, 2019, after aggregating customers that are under common control or are affiliates, one customer contributed 40% and 33%, respectively, of the Company’s revenue. In the three and nine months ended September 30, 2018, after aggregating customers that are under common control or are affiliates, one customer contributed 13% of the Company’s revenue.

Revenue from Contracts with Customers

Disaggregation of Revenue

The Company classifies its customers into three payor types, Clinical Institutional, Patients who pay directly or Clinical Insurance, as the Company believes this best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. The following table summarizes revenue from contracts with customers by payor type for the three and nine months of 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
	(in thousands)
Genetic Testing Services by payor
Institutional	$	10,031	$	5,334	$	23,310	$	14,594
Patient		128		148		373		407
Insurance		188		143		458		677
Total Revenue	$	10,347	$	5,625