What changed in this filing

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Item 1. Financial Statements

2020-08-05 compared with 2020-05-06 · 174 added, 115 removed, 322 unchanged (47% of the section changed)

7 unchanged sentences

Trade accounts receivable, net of allowance for doubtful accounts of $864 and $751,

as of March 31, 2020 and December 31, 2019, respectively

as of June 30, 2020 and December 31, 2019, respectively

Other current assets

18 unchanged sentences

Common stock, $0.0001 par value per share, 50,000 shares authorized, 21,810 and

21,483 shares issued and outstanding at March 31, 2020 and December 31, 2019,

21,483 shares issued and outstanding at June 30, 2020 and December 31, 2019,

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

or outstanding at March 31, 2020 and December 31, 2019

or outstanding at June 30, 2020 and December 31, 2019

Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

Accumulated deficit

5 unchanged sentences

(in thousands, except per share data)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Cost of revenue

4 unchanged sentences

Total operating expenses

Operating loss

Operating income (loss)

Interest and other income, net

Loss before income taxes and equity loss in investee

Provision for income taxes

Loss before equity loss in investee

Income (loss) before income taxes and equity loss in investee

Provision for (benefit from) income taxes

Income (loss) before equity loss in investee

Equity loss in investee

Net loss per common share:

Net income (loss)

Net income (loss) per common share:

Weighted-average common shares:

3 unchanged sentences

(in thousands)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Net income (loss)

Other comprehensive income (loss):

Foreign currency translation (loss) gain

Net unrealized (loss) gain on marketable securities, net of tax

Comprehensive loss

Foreign currency translation gain (loss)

Net unrealized gain on marketable securities, net of tax

Comprehensive income (loss)

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

14 unchanged sentences

Balance at March 31, 2020

Equity-based compensation

Exercise of common stock options

Restricted stock awards

Other comprehensive gain (loss)

Net income (loss)

Balance at June 30, 2020

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

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

Stockholders' Equity

9 unchanged sentences

Balance at March 31, 2019

Equity-based compensation

Exercise of common stock options

Restricted stock awards

Other comprehensive gain (loss)

Net income (loss)

Balance at June 30, 2019

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

2 unchanged sentences

(in thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flow from operating activities:

Adjustments to reconcile net loss to net cash provided by

operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash (used in)

provided by operating activities:

Equity-based compensation

Noncash lease expense

Loss on disposal of fixed asset

Amortization of premium of marketable securities

5 unchanged sentences

Accounts payable

Accrued liabilities and other liabilities

Income tax payable

Accrued liabilities and other current liabilities

Operating lease liabilities

Net cash provided by operating activities

Net cash (used in) provided by operating activities

Cash flow from investing activities:

2 unchanged sentences

Maturities of marketable securities

Net cash used in investing activities

Net cash (used in) provided by investing activities

Cash flow from financing activities:

4 unchanged sentences

Effect of exchange rate changes on cash and cash equivalents

Net decrease in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosures of cash flow information:

Income taxes paid

Supplemental disclosures of non-cash investing and financing activities:

Fixed assets included in accounts payable

Purchase of marketable securities in other current liabilities

Purchases of fixed assets in accounts payable

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

Public offerings costs included in accounts payable

3 unchanged sentences

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.

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.

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.

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.

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In 2019, the Company launched its first patient-initiated product, Picture Genetics, a new line of at-home screening tests that combines the Company’s advanced NGS solutions with actionable results and genetic counseling options for individuals.

Since March 2020, the Company has commercially launched several tests for the detection of SARS-CoV-2, the virus that causes the novel coronavirus, or COVID-19, including NGS and reverse transcription polymerase chain reaction – based, or RT-PCR-based, tests.

The Company has received Emergency Use Authorizations, or EUAs, from the U.S.

Food and Drug Administration, or the FDA, for the RT-PCR-based tests for the detection of SARS-CoV-2 using upper respiratory specimens (nasal, nasopharyngeal, and oropharyngeal swabs) and for the at-home testing service through Picture Genetics.

The Company’s at-home testing service for COVID-19 and RT-PCR-based test have been granted EUAs by the FDA only for the detection of nucleic acid from SARS-CoV-2, not for any other viruses or pathogens.

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.

A cornerstone of the Company’s business is its ability to provide expansive options and flexibility for all clients’ unique 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, 2019, which are included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2020 (the “2019 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.

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, 2019, which are included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 13, 2020, or the 2019 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.

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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, including but not limited to the potential impacts arising from the recent global pandemic related to the novel coronavirus (“COVID-19”).

As the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change.

Actual results could differ significantly from these estimates.

Actual results could differ from these estimates.

On an on-going basis, management evaluates its estim ates, primarily those related to:

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.

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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 first quarters of 2020 and 2019.

Gains and losses from these translations were not significant in the three and six months ended June 30, 2020 and 2019.

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 $85,000 in the first quarter of 2020.

Gain and losses from these remeasurements were not significant in the first quarter of 2019.

Gains from these remeasurements were $26,000 in the three months ended June 30, 2020, and losses from these remeasurements were $59,000 in the six months ended June 30, 2020.

Gain and losses from these remeasurements were not significant in the three and six months ended June 30, 2019.

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.

Operating leases are included as operating lease right-of-use, or ROU, assets, operating lease liabilities, short-term, and operating lease liabilities, long-term, on the Company’s Condensed Consolidated Balance Sheets.

Lease ROU 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 lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, including options to extend the lease when it is reasonably certain that the Company will exercise that option.

The Company uses its incremental borrowing rate based on the information available at the commencement date 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.

The lease ROU 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.

1 unchanged sentence

In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue.

In the first quarter of 2020 , after aggregating customers that are under common control or are affiliates, no customer contributed 10% or more of the Company’s revenue.

In the in the first quarter of 2019 , after aggregating customers that are under common control or are affiliates, two customers contributed 20% and 11% of the Company’s revenue.

No customer comprised 10% or more of total accounts receivable as of March 31, 2020 and December 31, 2019.

After aggregating customers that are under common control or are affiliates, one customer contributed 45% and 31%, respectively, of the Company’s revenue for the three and six months ended June 30, 2020.

Two customers contributed 32% and 15%, respectively, of the Company’s revenue for the three months ended June 30, 2019, and two customers contributed 27% and 10%, respectively, of the Company’s revenue for the six months ended June 30, 2019.

One customer comprised 49% of total accounts receivable as of June 30, 2020.

No customer comprised 10% or more of total accounts receivable as of December 31, 2019.

Revenue from the U.S.

government was less than 10% of total revenue for the three and six months ended June 30, 2020 and 2019.

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 first quarters of 2020 and 2019 .

Three Months Ended March 31,

The Company classifies its customers into three payor types, Institutional, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, Patients who pay directly or 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 six months ended June 30, 2020 and 2019 .

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Genetic Testing Services by payor

Testing Services by payor

Institutional

1 unchanged sentence

Contract Balances

Receivables from contracts with customers - As of March 31, 2020 and December 31, 2019, receivables from contracts with customers were approximately $6.4 million and $6.6 million, respectively, and are included within Trade accounts receivable on the Condensed Consolidated Balance Sheets.

Contracts assets and liabilities - As of March 31, 2020 and December 31, 2019, contract assets from contracts with customers were $150,000, associated with contract execution and 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.

The Company had $444,000 and $365,000 of contract liability as of March 31, 2020 and December 31, 2019, respectively.

Revenues of $242,000 and $33,000 for the three months ended March 31, 2020 and 2019, respectively, related to contract liabilities at the beginning of the respective periods were recognized.

Receivables from contracts with customers —As of June 30, 2020 and December 31, 2019, receivables from contracts with customers were approximately $13.9 million and $6.6 million, respectively, and are included within trade accounts receivable on the Condensed Consolidated Balance Sheets.

Contracts assets and liabilities —As of June 30, 2020 and December 31, 2019, contract assets from contracts with customers were $150,000, associated with contract execution and included in other current assets in the accompanying Condensed Consolidated Balance Sheets.

Contract liabilities are recorded when the Company receives payment or bills prior to completing its obligation to transfer goods or services to a customer.

The Company had $622,000 and $365,000 of contract liabilities as of June 30, 2020 and December 31, 2019, respectively.

Revenues of $196,000 and $31,000 for the three months and $246,000 and $32,000 for the six months were recognized for the periods ended June 30, 2020 and 2019, respectively, related to contract liabilities at the beginning of the respective periods were recognized.

Transaction Price Allocated to Future Performance Obligations

The Company does not have material future obligations associated with genetic testing services that extend beyond one year.

The Company does not have material future obligations associated with testing services that extend beyond one year.

Recent Accounting Pronouncements

The Company evaluates all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) for consideration of their applicability.

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.

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Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

The standard will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those reporting periods for public business entities that meet the definition of an U.S.

Securities and Exchange (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC.

For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

7 unchanged sentences

This ASU can be adopted prospectively to eligible costs incurred on or after the date of adoption or retrospectively.

The adoption of this update did not have a material impact on the Company’s consolidated financial statements or disclosures.

The adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements or disclosures.

In December 2019, the FASB issued ASU No.

2019-12, Simplifying the Accounting for Income Taxes (Topic 740) , which is intended to reduce the complexity of accounting standards while maintaining or enhancing the helpfulness of information provided to financial statement users.

The amendment in this update simplifies the accounting for income taxes by removing some exceptions including the incremental approach for intraperiod tax allocation, t he requirement to recognize a deferred tax liability for equity method investments, the ability not to recognize a deferred tax liability for a foreign subsidiary, and the general methodology for calculating income taxes in an interim period.

The amendment in this ASU simplifies the accounting for income taxes by removing some exceptions including the incremental approach for intraperiod tax allocation, t he requirement to recognize a deferred tax liability for equity method investments, the ability not to recognize a deferred tax liability for a foreign subsidiary, and the general methodology for calculating income taxes in an interim period.

Other changes include requiring entities to recognize franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, evaluate tax basis step-up in goodwill obtained in a transaction that is not a business combination, and reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date, making minor codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method, and specifying that an entity is not required to allocate the consolidated current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements.

This amendment is effective for public business entities beginning after December 15, 2020 with early adoption permitted.

For public business entities, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 with early adoption permitted.

The Company has decided not to early adopt the amendments.

The Company is currently evaluating the amendment and has not yet determined the impact on its consolidated financial statements.

The Company is currently evaluating the amendment and has not yet determined the impact on its condensed consolidated financial statements.

Marketable Securities

The Company’s marketable securities consisted of the following:

March 31, 2020

June 30, 2020

(in thousands)

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Total marketable securities

Management determined that the gross unrealized losses of $369,000 on the Company’s marketable securities as of March 31, 2020 were temporary in nature.

Management determined that the gross unrealized losses of $6,000 on the Company’s marketable securities as of June 30, 2020 were temporary in nature.

Gross unrealized losses on the Company’s marketable securities were $32,000 as of December 31, 2019.

The Company currently does not intend to sell these securities prior to maturity and does not consider these investments to be other-than-temporarily impaired as of March 31, 2020.

The Company currently does not intend to sell these securities prior to maturity and does not consider these investments to be other-than-temporarily impaired as of June 30, 2020.

Fair Value Measurements

9 unchanged sentences

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

March 31, 2020

June 30, 2020

(in thousands)

3 unchanged sentences

Money market accounts

Total marketable securities

Total marketable securities and cash equivalents

December 31, 2019

8 unchanged sentences

Level 2 securities are valued based upon observable inputs that include reported trades, broker/dealer quotes, bids and offers.

As of March 31, 2020, the Company had no investments that were measured using unobservable (Level 3) inputs.

There were no transfers between fair value measurement levels during the first quarter of 2020.

Gross unrealized gains or losses for cash equivalents and marketable securities as of March 31, 2020 were not material.

As of March 31, 2020 , there were no unrealized losses for securities in an unrealized loss position for more than 12 months.

During the three months ended March 31, 2020, the Company did not recognize other-than-temporary impairment losses related to its marketable securities.

As of June 30, 2020, the Company had no investments that were measured using unobservable (Level 3) inputs.

There were no transfers between fair value measurement levels during the three and six months ended June 30, 2020.

Gross unrealized losses for cash equivalents and marketable securities as of June 30, 2020 were not material.

As of June 30, 2020 , there were no unrealized losses for securities in an unrealized loss position for more than 12 months.

During the six months ended June 30, 2020 , the Company did not recognize other-than-temporary impairment losses related to its marketable securities.

Major classes of fixed assets consisted of the following:

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Property and equipment, net

Depreciation expense on fixed assets totaled $569,000 and $535,000 for the first quarters of 2020 and 2019, respectively.

Depreciation expense on fixed assets totaled $549,000 and $511,000 for the three months and $1.1 million and $1.0 million for the six months ended June 30, 2020 and 2019, respectively.

Significant Balance Sheet Accounts

1 unchanged sentence

(in thousands)

Reagents and supplies

Contract assets

Prepaid expenses

Reagents and supplies

Prepaid income taxes

Marketable securities interest receivable

Contract assets

Other receivable

2 unchanged sentences

The Company views its operations and manages its business in one reporting segment.

Long-lived assets were primarily located in the United States as of March 31, 2020 and December 31, 2019 with an insignificant amount located in Canada .

Revenue by region was as follows:

Three Months Ended March 31,

Long-lived assets were primarily located in the United States as of June 30, 2020 and December 31, 2019 with an insignificant amount located in Canada.

Revenue by region during the three and six months ended June 30, 2020 and 2019 were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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Purchase Obligations

As of March 31, 2020, the Company had non-cancelable purchase obligations of $3.2 million for reagents and other supplies, of which, $2.7 million is payable within the next twelve months, and $469,000 is payable within the next twenty-four months.

As of June 30, 2020, the Company had non-cancelable purchase obligations of $9.0 million for medical lab equipment, reagents and other supplies, of which, $8.8 million is payable within twelve months, and $194,000 is payable within the next twenty-four months.

Contingencies

From time to time, the Company may be subject to legal proceedings and claims arising in the ordinary course of business.

Management does not believe that the outcome of any of these matters will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In the opinion of management, the outcome of these matters would not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

The Company has various non-cancelable operating leases with varying terms through August 2023 primarily for office space.

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The determination of whether an arrangement contains a lease is made at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset.

The Company’s headquarters is located in Temple City, California, which is comprised of various corporate offices and a laboratory certified under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”), accredited by the College of American Pathologists (“CAP”) and licensed by the State of California Department of Public Health.

The Company’s headquarters is located in Temple City, 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.

Additional offices are located in El Monte, California and Atlanta, Georgia and are used for certain research and development, customer service, report generation and other administrative functions.

The Company adopted new accounting standard ASC 842, Leases, on January 1, 2019.

Upon adoption, the Company recorded right-of-use (“ROU”) assets of $3.0 million and short-term and long-term lease liabilities of $384,000 and $2.6 million, respectively.

The Company adopted new accounting standard Accounting Standards Codification, or ASC, 842, Leases , on January 1, 2019.

Upon adoption, the Company recorded ROU assets of $3.0 million and short-term and long-term lease liabilities of $384,000 and $2.6 million, respectively.

The difference between the ROU asset and liability is due to the existing balance of deferred rent at the date of adoption.

There was no impact to retained earnings upon adoption.

The Company entered into three new operating leases, or New Leases, with an existing landlord in the three and six months ended June 30, 2020.

Upon entering into the New Leases, the Company recorded ROU assets of $393,000 and short-term and long-term lease liabilities of $58,000 and $335,000, respectively.

The Company also entered into four short-term leases during the three and six months ended June 30, 2020 and elected short-term lease recognition exemption for such leases.

As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the commencement date in determining the discount rate used to calculate present value lease payment.

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The Company’s leases do not contain variable lease payments.

The Company does not have any short-term leases and thus has excluded short-term costs from the table below.

The Company did not enter into any new leases during the three months ended March 31, 2020.

The following was operating lease expense:

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

(in thousands)

Operating lease cost

Short-term lease cost

Total lease cost

Supplemental cash flow information related to leases was the following:

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

(in thousands)

1 unchanged sentence

Noncash lease expense

Supplemental information related to leases was the following:

March 31, 2020

Right-of-use assets obtained in exchange for new operating lease liabilities

Supplemental i nformation related to leases was the following:

June 30, 2020

Weighted average remaining lease term - operating leases

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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,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

In order to determine the Company’s quarterly provision for income taxes, the Company used an estimated annual effectiv e tax rate for the full fiscal year ending December 31, 2020, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates, adjusted for discrete items recognized during the period.

Certain sig nificant or unusual items are separately recognized in the quarter during which they occur and can cause the effective tax rate to vary from quarter to quarter.

The Company’s effective tax rates were -2% and -1% for the three months ended March 31, 2020 and 2019, respectively.

The change in effective tax rate for the three months ended March 31, 2020 and 2019 was primarily attributable to the full valuation allowance and certain minimum state income taxes.

Loss per Share

The following table presents the calculation of basic and diluted loss per share for the first quarters of 2020 and 2019:

Three Months Ended March 31,

In order to determine the Company’s quarterly provision for income taxes, the Company used an estimated annual effective tax rate for the full fiscal year ending December 31, 2020, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates, adjusted for discrete items recognized during the period.

Certain significant or unusual items are separately recognized in the quarter during which they occur and can cause the effective tax rate to vary from quarter to quarter.

The Company’s effective tax rates were -21% and -45% for the three and six months ended June 30, 2020, respectively, compared with 1% and -2% for the three and six months ended June 30, 2019, respectively.

The change in effective tax rates for the three and six months ended June 30, 2020, relative to the comparative 2019 periods, was primarily attributable to deferred tax benefit related to the partial release of valuation allowance.

This partial release is related to the projected increase in taxable income attributable to the Company’s new COVID testing capabilities.

Income ( Loss ) per Share

The following table presents the calculation of basic and diluted income (loss) per share for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands, except per share data)

Net income (loss)

Weighted-average common shares—outstanding, basic

Weighted-average common shares—outstanding, diluted

Net loss per common share, basic

Net loss per common share, 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,

Net income (loss) per common share, basic

Net income (loss) per common share, diluted

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

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Restricted Stock Units

The anti-dilutive shares described above were calculated using the treasury stock method.

During the first quarters of 2020 and 2019, the Company had outstanding stock options and RSUs that were excluded from the weighted-average share calculation due to the Company’s net loss position.

Related Party

Yun Yen, who is a member of the Company’s Board of Directors and a stockholder, serves as the President and Chairman of the Board for the Sino-American Cancer Foundation (the “Foundation”) and served as the President for the Taipei Medical University (the “University”), from August 1, 2011 through July 31, 2016.

During the six months ended June 30, 2019, the Company had outstanding stock options and restricted stock units that were excluded from the weighted-average share calculation due to the Company’s net loss position.

Related Parties

Yun Yen, who is a member of the Company’s board of directors and a stockholder, serves as the President and Chairman of the Board for the Sino-American Cancer Foundation, or the Foundation, and served as the President for the Taipei Medical University, or the University, from August 1, 2011 through July 31, 2017 and currently serves as a Chair Professor for the University.

From time to time, the Company performs research testing services, on an arms-length basis, for the Foundation.

The Company recognized zero in revenue during the first quarters of 2020 and 2019, as consideration for such services.

Additionally, the Company subleased certain of its headquarters facilities to the Foundation prior to April 2019.

The Company recognized $8,000 in the first quarter of 2019, as consideration for such sublease.

As of March 31, 2020, and December 31, 2019, an insignificant amount was owed to the Company by the Foundation in connection with these relationships.

The Company recognized zero in revenue during the three and six months ended June 30, 2020 and $2,000 for the three and six months ended June 30, 2019, as consideration for such services.

Additionally, the Company subleased certain space in its facilities to the Foundation prior to April 2019.

The Company recognized $8,000 and $16,000 for the three and six months ended June 30, 2019, as consideration for such sublease.

As of June 30, 2020 and December 31, 2019, an insignificant amount was owed to the Company by the Foundation in connection with these relationships.

From time to time, the Company performs genetic sequencing services, on an arms-length basis, for the University.

The Company recognized $ 49,000 and $ 13 ,000 as consideration for such services in the first quarters of 20 20 and 201 9 , respectively.

As of March 31, 20 20 , and December 31, 20 1 9 , $ 49,000 and $ 39 ,000, respectively, was owed to the Company by the University in connection with this relationship.

As more fully described in Note 14, in April 2017, the Company, through an affiliated company formed for the purpose of the relationship, entered into a cooperation agreement (the “JV Agreement”) with Xilong Scientific Co., Ltd.

(“Xilong Scientific”) and Fuzhou Jinqiang Investment Partnership (LP) (“FJIP”) to form a joint venture under the laws of the People’s Republic of China (“PRC”) called Fujian Fujun Gene Biotech Co., Ltd.

(“FF Gene Biotech”).

Xilong Scientific is an affiliate of Xi Long USA, Inc., a large stockholder of the Company that, as of March 31, 2020, owned 9.3% of the outstanding shares of the Company’s common stock, and FJIP is owned by key management of FF Gene Biotech, including Dr.

The Company recognized $17,000 and $9,000 for the three months ended and $65,000 and $22,000 for the six months ended June 30, 2020 and 2019, respectively, as consideration for such services.

As of June 30, 2020, and December 31, 2019, $62,000 and $39,000, respectively, was owed to the Company by the University in connection with this relationship.

As more fully described in Note 14, in April 2017, the Company, through an affiliated company formed for the purpose of the relationship, entered into a cooperation agreement, or JV Agreement, with Xilong Scientific Co., Ltd., or Xilong Scientific, and Fuzhou Jinqiang Investment Partnership (LP), or FJIP, to form a joint venture under the laws of the People’s Republic of China, or PRC, called Fujian Fujun Gene Biotech Co., Ltd., or FF Gene Biotech.

Xilong Scientific is an affiliate of Xi Long USA, Inc., a company which at one point owned greater than 10% of the Company’s common stock.

XiLong USA, Inc.

has since reported beneficial ownership of 4.92% of the Company’s common stock in a Schedule 13G filed with the SEC on June 12, 2020.

FJIP is owned by key management of FF Gene Biotech, including Dr.

Han Lin Gao, the Chief Scientific Officer and a large stockholder of the Company and the owner of approximately 25% of FJIP.

1 unchanged sentence

Fulgent Pharma reimburses the Company for the portion of the rent the Company pays that is attributable to the space it uses, which amounts are not significant.

As of March 31, 2020, and December 31, 2019, $25,000 and $26,000, respectively, was due from Fulgent Pharma as a result of this arrangement, which is recorded in Other receivable in Other current assets in the accompanying Condensed Consolidated Balance Sheets.

As of June 30, 2020, and December 31, 2019, $44,000 and $26,000, respectively, was due from Fulgent Pharma as a result of this arrangement, which is recorded in other receivable in other current assets in the accompanying Condensed Consolidated Balance Sheets.

Equity Method Investments

In April 2017, the Company, through an affiliated company formed for the purpose of the relationship, entered into the JV Agreement with Xilong Scientific and FJIP to form FF Gene Biotech, a joint venture formed under the laws of the PRC to offer genetic testing services to customers in the PRC.

Pursuant to the terms of the JV Agreement, the Company has agreed to contribute to FF Gene Biotech genetic sequencing and other equipment with a total cost of 60,000,000 renminbi (“ RMB”) over a five-year period for a 30% ownership interest in FF Gene Biotech, previously three-year per original agreement and amended in April 2019, Xilong Scientific has agreed to contribute to FF Gene Biotech 102,000,000 RMB over a five-year period for a 51% ownership interest in the FF Gene Biotech, previously three-year per original agreement and amended in April 2019, and FJIP has agreed to contribute to FF Gene Biotech 19,000,000 RMB over a ten-year period for a 19% ownership interest in FF Gene Biotech, previously five-year per original agreement and amended in April 2019 .

Pursuant to the terms of the JV Agreement, the Company has agreed to contribute to FF Gene Biotech genetic sequencing and other equipment with a total cost of 60,000,000 renminbi, or RMB, over a five-year period for a 30% ownership interest in FF Gene Biotech, previously three-year per original agreement and amended in April 2019.

Xilong Scientific has agreed to contribute to FF Gene Biotech 102,000,000 RMB over a five-year period for a 51% ownership interest in the FF Gene Biotech, previously three-year per original agreement and amended in April 2019.

FJIP has agreed to contribute to FF Gene Biotech 19,000,000 RMB over a ten-year period for a 19% ownership interest in FF Gene Biotech, previously five-year per original agreement and amended in April 2019.

The Company’s maximum exposure to fund losses of FF Gene Biotech as a result of its minority ownership of this entity is equal to its contribution obligation under the JV Agreement as described above.

As of March 31, 2020, 39,300,000 RMB (or approximately $5.5 million U.S.

As of June 30, 2020 , 39,300,000 RMB (or approximately $5.6 million U.S.

dollars) remains to be contributed to the investee under the terms of the JV agreement.

5 unchanged sentences

The Company accounts for its 30% interest in FF Gene Biotech using the equity method of accounting.

The Company recorded its proportionate share of the losses of FF Gene Biotech in the three months ended March 31, 2020 in the accompanying Condensed Consolidated Statements of Operations, and recorded its contribution to date, net of its proportionate share in the accumulated losses of FF Gene Biotech, in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2020.

Equity method investments as of March 31, 2020 and December 31, 2019 consisted of the following:

March 31, 2020

The Company recorded its proportionate share of the losses of FF Gene Biotech in the three and six months ended June 30, 2020 in the accompanying Condensed Consolidated Statements of Operations, and recorded its contribution to date, net of its proportionate share in the accumulated losses of FF Gene Biotech, in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2020 .

Equity method investments as of June 30, 2020 and December 31, 2019 consisted of the following:

June 30, 2020

December 31, 2019

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Total equity method investments

Summary Financial Information

Summary financial information for FF Gene Biotech is as follows:

Six Months Ended June 30

Consolidated Statements of Operations Data:

(in thousands)

Share of loss from investments accounted for using the equity method

Subsequent Event

Subsequent to the period end, on July 23, 2020, the Company entered into an Agreement for Purchase and Sale of Property, or the Purchase Agreement, for the purchase of real property located at 4399-4401 Santa Anita Avenue, El Monte, California, or the Property, from 4401 Santa Anita Corporation, a California corporation, or the Seller, in exchange for the payment of an aggregate cash purchase price of $15.4 million.

The Property consists of approximately 61,612 total square feet of building situated on 2.6 acres of land.

Pursuant to the terms of the Purchase Agreement, Fulgent will have 60 days following execution of the Purchase Agreement to

conduct due diligence on the Property, or the Due Diligence Period.

During the Due Diligence Period, Fulgent may del iver a notice of termination to the Seller should Fulgent determine through its due diligence that the Property is not suitable for purchase by Fulgent.

As set forth in and subject to the conditions of the Purchase Agreement, the closing of the sale will o ccur 30 days after the expiration of the Due Diligence Period.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements