Fulgent Genetics, Inc. 10-Q

Item 1. Financial Statements. FULGENT GENETICS, INC. Condensed Consolidated Balance Sheets (in thousands, except par value data) (unaudited) June 30, December 31, 2020 2019 Assets Current assets Cash and cash equivalents $ 2,431 $ 11,965 Marketable securities 18,530 16,304 Trade accounts receivable, net of allowance for doubtful accounts of $864 and $751, as of June 30, 2020 and December 31, 2019, respectively 13,863 6,555 Other current assets 6,359 2,255 Total current assets 41,183 37,079 Marketable securities, long-term 45,403 41,947 Equity method investments 430 872 Fixed assets, net 6,013 5,974 Operating lease right-of-use asset 2,806 2,633 Other long-term assets 80 251 Total assets $ 95,915 $ 88,756 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 3,636 $ 1,581 Accrued liabilities 1,750 1,333 Income tax payable — 24 Contract liabilities 622 365 Operating lease liabilities, short-term 501 420 Total current liabilities 6,509 3,723 Operating lease liabilities, long-term 2,363 2,256 Total liabilities 8,872 5,979 Commitments and contingencies (Note 8) Stockholders’ equity Common stock, $0.0001 par value per share, 50,000 shares authorized, 21,810 and 21,483 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively 2 2 Preferred stock, $0.0001 par value per share, 1,000 shares authorized, no shares issued or outstanding at June 30, 2020 and December 31, 2019 — — Additional paid-in capital 148,056 146,058 Accumulated other comprehensive income 1,049 146 Accumulated deficit (62,064 ) (63,429 ) Total stockholders’ equity 87,043 82,777 Total liabilities and stockholders’ equity $ 95,915 $ 88,756 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) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenue $ 17,265 $ 8,424 $ 25,018 $ 13,794 Cost of revenue $ 7,717 3,620 11,774 6,588 Gross profit 9,548 4,804 13,244 7,206 Operating expenses: Research and development $ 1,849 1,574 3,827 2,998 Selling and marketing 3,260 1,304 4,857 2,576 General and administrative 1,799 1,631 3,834 3,160 Total operating expenses 6,908 4,509 12,518 8,734 Operating income (loss) 2,640 295 726 (1,528 ) Interest and other income, net 275 192 516 399 Income (loss) before income taxes and equity loss in investee 2,915 487 1,242 (1,129 ) Provision for (benefit from) income taxes (599 ) 7 (565 ) 20 Income (loss) before equity loss in investee 3,514 480 1,807 (1,149 ) Equity loss in investee (193 ) (149 ) (442 ) (428 ) Net income (loss) $ 3,321 $ 331 $ 1,365 $ (1,577 ) Net income (loss) per common share: Basic $ 0.15 $ 0.02 $ 0.06 $ (0.09 ) Diluted $ 0.14 $ 0.02 $ 0.06 $ (0.09 ) Weighted-average common shares: Basic 21,747 18,343 21,656 18,286 Diluted 22,920 19,021 22,824 18,286 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 FULGENT GENETICS, INC. Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net income (loss) $ 3,321 $ 331 $ 1,365 $ (1,577 ) Other comprehensive income (loss): Foreign currency translation gain (loss) 2 (14 ) (1 ) 1 Net unrealized gain on marketable securities, net of tax 1,240 122 904 237 Comprehensive income (loss) $ 4,563 $ 439 $ 2,268 $ (1,339 ) 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) Stockholders' Equity Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Equity Balance at December 31, 2019 21,483 $ 2 $ 146,058 $ 146 $ (63,429 ) $ 82,777 Equity-based compensation — — 924 — — 924 Exercise of common stock options 33 — 12 — — 12 Restricted stock awards 159 — — — — — Repurchases of capital stock (3 ) — (46 ) — — (46 ) Other comprehensive gain (loss) — — — (339 ) — (339 ) Net income (loss) — — — — (1,956 ) (1,956 ) Balance at March 31, 2020 21,672 2 146,948 (193 ) (65,385 ) 81,372 Equity-based compensation — — 1,080 — — 1,080 Exercise of common stock options 11 — 28 — — 28 Restricted stock awards 127 — — — — — Other comprehensive gain (loss) — — — 1,242 — 1,242 Net income (loss) — — — — 3,321 3,321 Balance at June 30, 2020 21,810 $ 2 $ 148,056 $ 1,049 $ (62,064 ) $ 87,043 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) 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 (loss) — — — 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 (loss) — — — 108 — 108 Net income (loss) — — — — 331 331 Balance at June 30, 2019 18,393 $ 2 $ 115,532 $ 203 $ (64,595 ) $ 51,142 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) Six Months Ended June 30, 2020 2019 Cash flow from operating activities: Net income (loss) $ 1,365 $ (1,577 ) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Equity-based compensation 2,004 1,320 Depreciation 1,118 1,046 Noncash lease expense 220 201 Loss on disposal of fixed asset — 11 Amortization of premium of marketable securities 218 44 Provision for bad debt 135 — Equity loss in investee 442 428 Other (6 ) 38 Changes in operating assets and liabilities: Accounts receivable (7,437 ) 368 Other current and long-term assets (3,827 ) 183 Accounts payable 2,284 (124 ) Accrued liabilities and other liabilities 670 (20 ) Income tax payable (24 ) — Operating lease liabilities (205 ) (188 ) Net cash (used in) provided by operating activities (3,043 ) 1,730 Cash flow from investing activities: Purchases of fixed assets (1,207 ) (633 ) Purchase of marketable securities (12,387 ) (10,178 ) Maturities of marketable securities 7,327 11,500 Net cash (used in) provided by investing activities (6,267 ) 689 Cash flow from financing activities: Proceeds from exercise of stock options 40 9 Payment of public offering costs (217 ) — Repurchases of capital stock (46 ) — Net cash (used in) provided by financing activities (223 ) 9 Effect of exchange rate changes on cash and cash equivalents (1 ) 1 Net (decrease) increase in cash and cash equivalents (9,534 ) 2,429 Cash and cash equivalents at beginning of period 11,965 6,736 Cash and cash equivalents at end of period $ 2,431 $ 9,165 Supplemental disclosures of cash flow information: Income taxes paid $ 28 $ 20 Supplemental disclosures of non-cash investing and financing activities: Purchases of fixed assets in accounts payable $ 497 $ 5 Operating lease right-of-use assets obtained in exchange for lease liabilities $ 393 $ — Public offerings costs included in accounts payable $ 2 $ — 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 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 (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company uses the equity method to account for its investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. All significant intercompany accounts and transactions are eliminated from the accompanying condensed consolidated financial statements. Nature of the Business Fulgent Genetics, Inc., together with its subsidiaries, collectively referred to as the Company, unless otherwise noted or the context otherwise requires, is a technology company offering comprehensive genetic testing 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. 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 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, 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. The accompanying Condensed Consolidated Balance Sheet as of December 31, 2019 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 2019 Annual Report, including the notes thereto. 7 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 2019 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, including but not limited to the potential impacts arising from the recent global pandemic related to COVID-19. As the extent and duration of the impacts from COVID-19 remain unclear, 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 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 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. 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. Leases The Company determines if an arrangement is a lease at inception. 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 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. Concentration of Customers In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue. 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. 8 Revenue from Contracts with Customers Disaggregation of Revenue 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, 2020 2019 2020 2019 (in thousands) Testing Services by payor Institutional $ 16,454 $ 8,160 $ 23,932 $ 13,279 Patient 120 143 261 245 Insurance 691 121 825 270 Total Revenue $ 17,265 $ 8,424 $ 25,018 $ 13,794 Contract Balances 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 testing services that extend beyond one year. 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. ASU No. 2016-13 In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments . ASU No. 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. 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 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. Early application of the amendments is permitted. The Company does not expect the adoption of the new guidance under the standard to materially affect its financial position or results of operations and plans to adopt during the fiscal year 2023. 9 ASU No. 2018-15 In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which provides new guidance on the accounting for implementation, set-up, and other upfront costs incurred in a hosted cloud computing arrangement. Under the new guidance, entities will apply the same criteria for capitalizing implementation costs as they would for an internal-use software license arrangement. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 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 condensed consolidated financial statements or disclosures. ASU No. 2019-12 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 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. 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 condensed consolidated financial statements. Note 3. Marketable Securities The Company’s marketable securities consisted of the following: June 30, 2020 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Marketable securities: Short-term Money market accounts $ 86 $ — $ — $ 86 Corporate debt securities 18,410 124 (4 ) 18,530 Less: Cash equivalents (86 ) — — (86 ) Total short-term marketable securities 18,410 124 (4 ) 18,530 Long-term Corporate debt securities 43,492 908 (2 ) 44,398 U.S. government agency securities 1,000 5 — 1,005 Total long-term marketable securities 44,492 913 (2 ) 45,403 Total marketable securities $ 62,902 $ 1,037 $ (6 ) $ 63,933 10 December 31, 2019 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Marketable securities: Short-term Money market accounts $ 4,700 $ — $ — $ 4,700 Corporate debt securities 17,962 43 (2 ) 18,003 Less: Cash equivalents (6,399 ) — — (6,399 ) Total short-term marketable securities 16,263 43 (2 ) 16,304 Corporate debt securities 41,861 116 (30 ) 41,947 Total long-term marketable securities 41,861 116 (30 ) 41,947 Total marketable securities $ 58,124 $ 159 $ (32 ) $ 58,251 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 June 30, 2020. 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 inputs for the asset or liability. The following tables present information about the Company’s financial assets measured at fair value on a recurring basis, based on the three-tier fair value hierarchy: June 30, 2020 Total Level 1 Level 2 Level 3 (in thousands) Marketable securities and cash equivalents: Corporate debt securities $ 62,928 $ — $ 62,928 $ — U.S. government agency securities 1,005 — 1,005 — Money market accounts 86 86 — — Total marketable securities and cash equivalents $ 64,019 $ 86 $ 63,933 $ — 11 December 31, 2019 Total Level 1 Level 2 Level 3 (in thousands) Marketable securities and cash equivalents: Corporate debt securities $ 59,950 $ — $ 59,950 $ — Money market accounts 4,700 4,700 — — Total marketable securities and cash equivalents $ 64,650 $ 4,700 $ 59,950 $ — The Company’s Level 1 assets include money market instruments and are valued based upon observable market prices. Level 2 assets consist of U.S. government agency securities and corporate debt securities. Level 2 securities are valued based upon observable inputs that include reported trades, broker/dealer quotes, bids and offers. 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. Note 5. Fixed Assets Major classes of fixed assets consisted of the following: June 30, December 31, Useful Lives 2020 2019 (in thousands) Computer hardware 3 Years $ 1,764 $ 1,705 Computer software 3 Years 541 541 Medical lab equipment 5 Years 11,163 10,493 Furniture and fixtures 5 Years 235 235 Automobile 5 Years 15 — Leasehold improvements Shorter of lease term or estimated useful life 916 876 Assets not yet placed in service 487 114 Total 15,121 13,964 Accumulated depreciation (9,108 ) (7,990 ) Property and equipment, net $ 6,013 $ 5,974 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. 12 Note 6. Significant Balance Sheet Accounts Other current assets consisted of the following: June 30, December 31, 2020 2019 (in thousands) Prepaid expenses $ 2,906 $ 1,288 Reagents and supplies 2,155 277 Prepaid income taxes 619 46 Marketable securities interest receivable 485 478 Contract assets 150 150 Other receivable 44 16 Total $ 6,359 $ 2,255 Reagents are used for DNA sequencing applications in the Company’s DNA sequencing equipment. Note 7. Reporting Segment and Geographic Information 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 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, 2020 2019 2020 2019 (in thousands) Revenue: United States $ 16,138 $ 6,686 $ 21,777 $ 10,300 Foreign: Canada 329 516 948 1,054 Other Countries 798 1,222 2,293 2,440 Total $ 17,265 $ 8,424 $ 25,018 $ 13,794 Note 8. Commitments and Contingencies Operating Leases See Note 9, Leases, for further information. FF Gene Biotech See Note 14 for a description of the Company’s commitments related to its joint venture, FF Gene Biotech (as defined in Note 14). Purchase Obligations 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. 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. 13 Note 9. Leases The Company has various non-cancelable operating leases with varying terms through August 2023 primarily for office space. The Company has options to renew some of these leases for three years after their expiration. The Company considers these options, which may be elected at the Company’s sole discretion, in determining the lease term on a lease-by-lease basis. The Company does not have any finance leases or leases with variable lease payments. 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, 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 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. The Company determined its incremental borrowing rate based on inquiries with its bank. The Company’s lease agreements do not contain any residual value guarantees, material restrictive covenants, bargain purchase options or asset retirement obligations. Lease expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. The Company’s leases do not contain variable lease payments. The following was operating lease expense: Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 (in thousands) Operating lease cost $ 152 $ 146 $ 301 $ 292 Short-term lease cost 3 — 3 — Total lease cost $ 155 $ 146 $ 304 $ 292 Supplemental cash flow information related to leases was the following: Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 (in thousands) Cash paid for amounts included in the measurement of lease liabilities $ 148 $ 116 $ 311 $ 278 Noncash lease expense $ 112 $ 101 $ 220 $ 201 Right-of-use assets obtained in exchange for new operating lease liabilities $ 393 $ — $ 393 $ — 14 Supplemental i nformation related to leases was the following: June 30, 2020 Weighted average remaining lease term - operating leases 5.3 years Weighted average discount rate - operating leases 5.87 % The following is a maturity analysis of operating lease liabilities using undiscounted cash flows on an annual basis with renewal periods included: Operating Leases (in thousands) Year Ending December 31, 2020 (remaining 6 months) $ 326 2021 662 2022 668 2023 637 2024 400 2025 387 Thereafter 262 Total lease payments 3,342 Less imputed interest (478 ) Total $ 2,864 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 June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) Cost of revenue $ 270 $ 167 $ 501 $ 309 Research and development 364 233 676 411 Selling and marketing 222 186 393 311 General and administrative 224 151 434 289 Total $ 1,080 $ 737 $ 2,004 $ 1,320 Note 11. Income Taxes Provision for income taxes consists of U.S. federal and state income taxes. A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences, operating losses and tax credit carryforwards. 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 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. 15 Note 12. 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, 2020 2019 2020 2019 (in thousands, except per share data) Net income (loss) $ 3,321 $ 331 $ 1,365 $ (1,577 ) Weighted-average common shares—outstanding, basic 21,747 18,343 21,656 18,286 Weighted-average common shares—outstanding, diluted 22,920 19,021 22,824 18,286 Net income (loss) per common share, basic $ 0.15 $ 0.02 $ 0.06 $ (0.09 ) Net income (loss) per common share, diluted $ 0.14 $ 0.02 $ 0.06 $ (0.09 ) 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, 2020 2019 2020 2019 (in thousands) Options 4 19 10 387 Restricted Stock Units 42 358 21 1,093 The anti-dilutive shares described above were calculated using the treasury stock method. 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. Note 13. Related Parties Dr. 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 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 $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. Fulgent Pharma, LLC, or Fulgent Pharma, a former subsidiary of one of the Company's subsidiaries utilizes space in the facility at which the Company’s laboratory and corporate headquarters are located. 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 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. 16 Note 14. 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, 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 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. To date, the Company has purchased and contributed equipment with an aggregate fair value of $3.1 million pursuant to its contribution commitment under the JV Agreement. The Company accounted for this contribution in accordance with ASC 845, Nonmonetary Transactions , and recorded an investment based on the fair value of the contributed equipment, which is the same as carryover basis. The Company concluded FF Gene Biotech is a variable interest entity as FF Gene Biotech lacks sufficient capital to operate independently. The Company concluded that it alone does not have the power to direct the most significant activities of FF Gene Biotech and therefore is not the primary beneficiary of the entity. Judgment regarding the level of influence over FF Gene Biotech includes consideration of key factors such as the Company's ownership interest, representation on the board of directors or other management body and participation in policy-making decisions. 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 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 Carrying Value Ownership Percentage Carrying Value Ownership Percentage (in thousands) FF Gene Biotech $ 430 30 % $ 872 30 % Total equity method investments $ 430 30 % $ 872 30 % Summary Financial Information Summary financial information for FF Gene Biotech is as follows: Six Months Ended June 30 2020 2019 Consolidated Statements of Operations Data: (in thousands) Net sales $ 1,602 $ 1,131 Gross profit $ 28 $ 579 Net loss $ (1,618 ) $ (1,423 ) Share of loss from investments accounted for using the equity method $ (442 ) $ (428 ) Note 15. 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 17 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. 18