Fulgent Genetics, Inc. 10-Q

Item 1. Financial Statements. FULGENT GENETICS, INC. Condensed Consolidated Balance Sheets (in thousands, except par value data) (unaudited) March 31, December 31, 2021 2020 Assets Current assets Cash and cash equivalents $ 151,461 $ 87,426 Marketable securities 258,317 211,941 Trade accounts receivable, net of allowance for credit losses of $3,850 and $1,898 as of March 31, 2021 and December 31, 2020, respectively 216,509 183,857 Other current assets 32,853 40,392 Total current assets 659,140 523,616 Marketable securities, long-term 287,626 132,502 Fixed assets, net 46,987 40,199 Other long-term assets 5,330 4,144 Total assets $ 999,083 $ 700,461 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 17,440 $ 26,488 Income tax payable 120,522 53,319 Contract liabilities 13,960 26,576 Customer deposit 17,001 185 Investment margin loan 15,048 15,019 Other current liabilities 12,559 8,528 Total current liabilities 196,530 130,115 Unrecognized tax benefits 474 377 Other long-term liabilities 513 582 Total liabilities 197,517 131,074 Commitments and contingencies (Note 8) Stockholders’ equity Common stock, $0.0001 par value per share, 50,000 shares authorized, 28,989 and 28,178 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively 3 3 Preferred stock, $0.0001 par value per share, 1,000 shares authorized, no shares issued or outstanding at March 31, 2021 and December 31, 2020 — — Additional paid-in capital 450,855 418,065 Accumulated other comprehensive income (loss) (216 ) 438 Retained earnings 350,924 150,881 Total stockholders’ equity 801,566 569,387 Total liabilities and stockholders’ equity $ 999,083 $ 700,461 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 March 31, 2021 2020 Revenue $ 359,429 $ 7,753 Cost of revenue 74,075 4,057 Gross profit 285,354 3,696 Operating expenses: Research and development 5,422 1,978 Selling and marketing 5,008 1,597 General and administrative 8,002 2,035 Total operating expenses 18,432 5,610 Operating income (loss) 266,922 (1,914 ) Interest and other income, net 282 241 Income (loss) before income taxes and equity loss in investee 267,204 (1,673 ) Provision for income taxes 66,513 34 Income (loss) before equity loss in investee 200,691 (1,707 ) Equity loss in investee — (249 ) Net income (loss) $ 200,691 $ (1,956 ) Net income (loss) per common share: Basic $ 6.96 $ (0.09 ) Diluted $ 6.52 $ (0.09 ) Weighted-average common shares: Basic 28,831 21,566 Diluted 30,770 21,566 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 March 31, 2021 2020 Net income (loss) $ 200,691 $ (1,956 ) Other comprehensive loss: Foreign currency translation loss — (3 ) Net unrealized loss on marketable securities, net of tax (654 ) (336 ) Comprehensive income (loss) $ 200,037 $ (2,295 ) 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) Retained Earnings Total Equity Balance at December 31, 2020 28,178 $ 3 $ 418,065 $ 438 $ 150,881 $ 569,387 Equity-based compensation — — 2,962 — — 2,962 Exercise of common stock options 45 — 44 — — 44 Restricted stock awards 187 — — — — — Common stock withholding for employee tax obligations (4 ) — (513 ) — — (513 ) Issuance of common stock at an average of $52.00 per share, net 583 — 30,297 — — 30,297 Other comprehensive gain (loss) — — — (654 ) — (654 ) Cumulative effect of accounting change — — — — (887 ) (887 ) Cumulative tax effect of accounting change — — — — 239 239 Net income — — — — 200,691 200,691 Balance at March 31, 2021 28,989 $ 3 $ 450,855 $ (216 ) $ 350,924 $ 801,566 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 loss — — — — (1,956 ) (1,956 ) Balance at March 31, 2020 21,672 $ 2 $ 146,948 $ (193 ) $ (65,385 ) $ 81,372 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 FULGENT GENETICS, INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended March 31, 2021 2020 Cash flow from operating activities: Net income (loss) $ 200,691 $ (1,956 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity-based compensation 2,962 924 Depreciation 1,922 569 Noncash lease expense 82 108 Loss on disposal of fixed asset 223 — Amortization of premium of marketable securities 1,303 105 Provision for credit losses 1,064 121 Deferred taxes (786 ) — Unrecognized tax benefits 96 — Holding loss on equity securities 345 — Equity loss in investee — 249 Other (8 ) (42 ) Changes in operating assets and liabilities: Trade accounts receivable (34,595 ) 104 Other current and long-term assets (9,109 ) (924 ) Accounts payable (6,256 ) 1,907 Income tax payable 67,203 34 Other current liabilities 3,924 268 Contract liabilities (12,616 ) — Customer deposit 16,816 — Operating lease liabilities (82 ) (101 ) Net cash provided by operating activities 233,179 1,366 Cash flow from investing activities: Purchases of fixed assets (11,492 ) (796 ) Proceeds from sale of fixed assets 13 — Purchase of marketable securities (219,470 ) (7,992 ) Maturities of marketable securities 14,458 4,926 Net cash used in investing activities (216,491 ) (3,862 ) Cash flow from financing activities: Proceeds from (payment for) public offerings of common stock, net of issuance costs 47,787 (130 ) Proceeds from exercise of stock options 44 12 Repurchases of capital stock (513 ) (46 ) Borrowing under margin account 29 — Net cash provided by (used in) financing activities 47,347 (164 ) Effect of exchange rate changes on cash and cash equivalents — (3 ) Net increase (decrease) in cash and cash equivalents 64,035 (2,663 ) Cash and cash equivalents at beginning of period 87,426 11,965 Cash and cash equivalents at end of period $ 151,461 $ 9,302 Supplemental disclosures of cash flow information: Income taxes paid $ 33 $ — Supplemental disclosures of non-cash investing and financing activities: Purchases of fixed assets in accounts payable $ 801 $ 43 Operating lease right-of-use assets obtained in exchange for lease liabilities $ 368 $ — Operating lease right-of-use assets reduced due to lease modification $ 185 $ — Purchase of marketable securities in other current liabilities $ — $ 500 Public offerings costs included in accounts payable $ 50 $ 1 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 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 an Emergency Use Authorization, or EUA, 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 an EUA 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, 2020, which are included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 8, 2021, or 2020 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, 2020 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 2020 Annual Report, including the notes thereto. Note 2. Summary of Significant Accounting Policies See the summary of the Company’s significant accounting policies set forth in the notes to its consolidated financial statements included in the 2020 Annual Report. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, judgments and assumptions are based on historical data and experience available at the date of the accompanying condensed consolidated financial 6 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) trade accounts receivable and allowances for credit losses, (iii) the useful lives of fixed assets, (iv) estimates of tax liabilities and (v) the valuation of 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 accumulated 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 2021 and 2020. The Company and its subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and nonmonetary assets and liabilities at historical rates. Losses from these remeasurements were not significant for the first quarter of 2021. Losses from these remeasurements were $85,000 in the first quarter of 2020. Leases The Company determines if an arrangement is a lease 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. Operating lease right-of-use, or ROU, asset, short-term lease liabilities, and long-term lease liabilities were included in other long-term assets, other current liabilities, and other long-term liabilities, respectively, in the accompanying 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, including inquiries with its bank, 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. The Company leases out space in buildings it owns in El Monte, California, to third-party tenants under noncancelable operating leases and has leased out such space since the Company purchased such buildings. The Company determines whether a lease exists at inception. The Company recognizes lease payments as income over the lease terms on a straight-line basis and recognizes variable lease payments as income in the period in which the changes in facts and circumstances on which the variable lease payment are based occur. The net rental income is included in the interest and other income, net, in the accompanying Condensed Consolidated Statement of Operations. Concentration of Customers In certain periods, a small number of customers have accounted for a significant portion of the Company’s revenue. In the first quarter of 2021 , after aggregating customers that are under common control or are affiliates, one customer contributed 25% 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. No customer comprised 10% or more of total trade accounts receivable as of March 31, 2021 and December 31, 2020. Revenue from the U.S. government was less than 10% of total revenue in the first quarters of 2021 and 2020. Revenue from Contracts with Customers Disaggregation of Revenue The Company classifies its customers into three payor types: (i) Insurance, (ii) Institutional, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, or (iii) Patients who pay directly, as the Company believes this best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by 7 economic factors . The following table summarizes revenue from contracts with customers by payor type for the first quarters of 2021 and 2020 . Three Months Ended March 31, 2021 2020 (in thousands) Testing Services by payor Insurance $ 207,558 $ 134 Institutional 151,569 7,478 Patient 302 141 Total Revenue $ 359,429 $ 7,753 Contract Balances Receivables from contracts with customers - As of March 31, 2021 and December 31, 2020, receivables from contracts with customers were approximately $216.5 million and $183.9 million, respectively, and are included within trade accounts receivable on the Condensed Consolidated Balance Sheets. Contracts assets and liabilities - As of March 31, 2021 and December 31, 2020, contract assets from contracts with customers were $506,000 and $1.4 million, respectively, associated with contract execution and certain costs to fulfill a contract, which is 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 $14.0 million and $26.6 million of contract liabilities as of March 31, 2021 and December 31, 2020, respectively. Revenues of $18.8 million and $242,000 for the first quarters of 2021 and 2020, 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. Reagents and Supplies The Company maintains reagents and other consumables primarily used in sample collections and testing which are valued at the lower of cost or net realizable value. Cost is determined using actual costs on a first-in, first-out basis. The reagents and supplies was $25.7 million and $16.5 million as of March 31, 2021 and December 31, 2020, respectively, and was included in other current assets in the accompanying Condensed Consolidated Balance Sheets. While the Company has not experienced significant disruption in its supply chain and the Company does not yet know the full impact COVID-19 will have on its supply chain, the Company has increased its reagents and supplies on hand to respond to potential future disruptions that may occur. Customer Deposit Customer deposit in the accompanying Condensed Consolidated Balance Sheets consists primarily of payments received from customers in excess of their outstanding trade accounts receivable balances. Trade Accounts Receivable and Allowance for Credit Losses Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains an allowance for credit losses for expected uncollectible trade accounts receivable, which is recorded as an offset to trade accounts receivable and changes in allowance for credit losses are classified as a general and administrative expense in the accompanying Condensed Consolidated Statements of Operations. The Company assesses collectability by reviewing trade accounts receivable on a collective basis where similar risk characteristics exist and on an individual basis when it identifies specific customers that have deterioration in credit quality such that they may no longer share similar risk characteristics with the other receivables. In determining the amount of the allowance for credit losses, the Company uses a probability-of-default and loss given default model, which allows the ability to define a point of default and measure credit losses for receivables that have reached the point of default for purposes of calculating the allowance for credit losses. Loss given default represents the likelihood that a receivable that has reached the point of default will not be collected in full. The Company will update its probability-of-default and loss given default factors annually to incorporate the most recent historical data and adjusts the quantitative portion of the reserve through its qualitative reserve overlay. The Company looks at qualitative factors such as general economic conditions in determining expected credit losses. During the first quarter of 2021, the Company recorded $1.1 million provision for credit losses for trade accounts receivable. 8 Marketable Securities All marketable debt securities, which consist of corporate debt securities, U.S. government agency debt securities, and Yankee debt securities issued by foreign governments or entities and denominated in U.S. dollars, have been classified as “available for sale”, and are carried at fair value. Unrealized gains and losses, net of any related tax effects, are excluded from earnings and are included in other comprehensive income (loss) and reported as a separate component of stockholders’ equity until realized. Realized gains and losses on marketable debt securities are included in interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations. The cost of any marketable debt securities sold is based on the specific-identification method. The amortized cost of marketable debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest on marketable debt securities is included in interest and other income, net. In accordance with the Company’s investment policy, management invests to diversify credit risk and only invests in securities with high credit quality, including U.S. government securities, and the maximum final maturity from the date of purchase is three years. The Company’s investments in marketable equity securities are measured at fair value with the related gains and losses, realized and unrealized, recognized in interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations. The cost of any marketable equity securities sold is based on the specific-identification method. The Company will recognize an allowance for credit losses on available-for-sale debt securities on an individual basis, and no longer consider other-than-temporary impairment or immediately reduce the cost basis of the investment provided that it is more likely than not that the security will be held to recovery or maturity. Further, the Company will recognize any improvements in estimated credit losses on available-for-sale debt securities immediately in earnings and reduce the existing allowance for credit losses. Previously, a recovery of an impairment loss on an available-for-sale debt security was recognized prospectively as interest income. The Company will disaggregate its available-for-sale debt securities into the following categories: corporate debt, government and agency securities and money market funds. The Company’s corporate bonds are comprised of predominantly high-grade corporate bonds while its government and agency securities are U.S. treasury bonds, and U.S. agency bonds. The Company has analyzed both corporate bonds and government and agency securities and identified that both types of securities have similar risk characteristics in that they are traded infrequently and have contractual interest rates and maturity dates. Money market funds are actively traded and short-term, and as such, the risk for these securities is not as high as for the other two security types. In determining the impairment, the Company reviews and assesses its available-for-sale debt securities. Management reviews credit rating changes, securities trends, interest rate movements and unrealized loss at the security level. If any of these give rise to a potential credit concern, the Company performs a discounted cash flow analysis to determine the credit portion of the impairment. The discounted cash flow analysis will be performed either internally or through the assistance of a third party. Once the credit component of the impairment is determined, the Company will record the impaired amount as an allowance to the available-for-sale debt securities balance and as a charge to interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations, not to exceed the amount of the unrealized loss. The Company assesses expected credit losses at the end of each reporting period and adjusts the allowance through interest and other income, net. Recently Adopted Accounting Pronouncements 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, or ASU No. 2016-13. 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 adopted ASU 2016-13 using the modified retrospective approach as of January 1, 2021. The cumulative effect upon adoption was $887,000 to the retained earnings in the accompanying Condensed Consolidated Statements of Stockholders’ Equity and trade accounts receivable, net, in the accompanying Condensed Consolidated Balance Sheets. The cumulative tax effective was $239,000 to retained earnings and deferred tax assets included in other long-term assets in the accompanying Condensed Consolidated Balance Sheets. There was no impact related to available-for-sale debt securities. ASU No. 2019-12 9 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 adopted ASU 2019-12 in the first quarter of 2021, and the adoption had no material impact to the Company’s condensed consolidated financial statements. Note 3. Marketable Securities The Company’s marketable securities consisted of the following: March 31, 2021 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Marketable securities: Short-term Equity securities Bond fund $ 163,079 $ — $ (429 ) $ 162,650 Exchange traded funds 17,629 — (5 ) 17,624 Available-for-sale debt securities Money market accounts 54,547 — — 54,547 Corporate debt securities 77,871 194 (22 ) 78,043 Less: Cash equivalents (54,547 ) — — (54,547 ) Total short-term marketable securities 258,579 194 (456 ) 258,317 Long-term Corporate debt securities 278,907 285 (736 ) 278,456 Yankee debt securities 9,242 — (72 ) 9,170 Total long-term marketable securities 288,149 285 (808 ) 287,626 Total marketable securities $ 546,728 $ 479 $ (1,264 ) $ 545,943 10 December 31, 2020 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Marketable securities: Short-term Equity securities Bond fund $ 153,269 $ 67 $ (151 ) $ 153,185 Exchange traded funds 17,614 — (5 ) 17,609 Available-for-sale debt securities Money market accounts 47,461 — — 47,461 Corporate debt securities 41,061 101 (15 ) 41,147 Less: Cash equivalents (47,461 ) — — (47,461 ) Total short-term marketable securities 211,944 168 (171 ) 211,941 Long-term Corporate debt securities 124,989 580 (117 ) 125,452 U.S. government agency debt securities 1,000 2 — 1,002 Yankee debt securities 6,054 4 (10 ) 6,048 Total long-term marketable securities 132,043 586 (127 ) 132,502 Total marketable securities $ 343,987 $ 754 $ (298 ) $ 344,443 Gross unrealized losses on the Company’s marketable securities were $1.3 million as of March 31, 2021. Gross unrealized losses on the Company’s marketable securities were $298,000 as of December 31, 2020. The Company currently does not intend to sell these securities prior to maturity. During the first quarter of 2021, the Company did not recognize credit losses. The Company’s securities of $420.2 million are used as collateral for an outstanding margin account borrowing. As of March 31, 2021, the Company had an outstanding borrowing of $15.0 million under its margin account. Margin account borrowings were used for the purchase of real property located in El Monte, California in 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. 11 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, 2021 Total Level 1 Level 2 Level 3 (in thousands) Marketable securities and cash equivalents: Bond Fund $ 162,650 $ 162,650 $ — $ — Exchange traded funds 17,624 17,624 — — Corporate debt securities 356,499 — 356,499 — Yankee debt securities 9,170 — 9,170 — Money market accounts 54,547 54,547 — — Total marketable securities and cash equivalents $ 600,490 $ 234,821 $ 365,669 $ — December 31, 2020 Total Level 1 Level 2 Level 3 (in thousands) Marketable securities and cash equivalents: Bond Fund $ 153,185 $ 153,185 $ — $ — Exchange traded funds 17,609 17,609 — — Corporate debt securities 166,599 — 166,599 — U.S. government agency debt securities 1,002 — 1,002 — Yankee debt securities 6,048 — 6,048 — Money market accounts 47,461 47,461 — — Total marketable securities and cash equivalents $ 391,904 $ 218,255 $ 173,649 $ — The Company’s Level 1 assets include marketable equity securities and money market instruments and are valued based upon observable market prices. Level 2 assets consist of U.S. government agency debt securities, corporate debt securities and Yankee debt securities. Level 2 securities are valued based upon observable inputs that include reported trades, broker/dealer quotes, bids and offers. As of March 31, 2021, 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 2021. Note 5. Fixed Assets Major classes of fixed assets consisted of the following: March 31, December 31, Useful Lives 2021 2020 (in thousands) Medical lab equipment 5 Years $ 26,568 $ 20,849 Building 39 Years 6,731 6,731 Aircraft 7 Years 6,503 6,503 Computer hardware 3 Years 3,948 3,699 Leasehold improvements Shorter of lease term or estimated useful life 1,618 1,580 Furniture and fixtures 2 to 5 Years 903 454 Automobile 2 to 5 Years 715 53 Building improvements 6 months to 5 Years 707 707 Computer software 3 to 5 Years 594 541 Land improvements 5 to 15 Years 403 403 General equipment 3 to 5 Years 44 44 Land 7,500 7,500 Assets not yet placed in service 3,592 2,055 Total 59,826 51,119 Less: Accumulated depreciation (12,839 ) (10,920 ) Property and equipment, net $ 46,987 $ 40,199 12 Depreciation expense on fixed assets totaled $1.9 million and $569,000 for the first quarters of 2021 and 2020, respectively. Note 6. Other Current Assets Other current assets consisted of the following: March 31, December 31, 2021 2020 (in thousands) Reagents and supplies $ 25,684 $ 16,491 Prepaid expenses 4,515 3,682 Marketable securities interest receivable 2,133 1,016 Contract assets 506 1,379 Prepaid income taxes 14 14 Other receivable 1 17,810 Total $ 32,853 $ 40,392 Reagents and supplies includes reagents and consumables used for COVID-19 testing and genetics testing and collection kits for COVID-19 testing. Other receivable primarily consists of proceeds to be received from public offerings of the Company’s common stock as of December 31, 2020. 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, or U.S., as of March 31, 2021 and December 31, 2020 with an insignificant amount located in Canada . Revenue by region was as follows: Three Months Ended March 31, 2021 2020 (in thousands) Revenue: United States $ 357,537 $ 5,639 Foreign 1,892 2,114 Total $ 359,429 $ 7,753 Note 8. Debt, Commitments and Contingencies Debt As of March 31, 2021, the Company had an outstanding borrowing of $15.0 million under its margin account with the custodian of the Company’s marketable debt security investment account, Pershing Advisor Solutions, LLC, a BNY Mellon Company . Margin account borrowings were used for the purchase of real property located in El Monte, California in 2020. The securities in the brokerage account were used as collateral for the margin loan. The custodian can issue a margin call at any time. The interest rate on the margin loan was the effective federal funds rate, or EFFR, plus a spread, and the EFFR and/or the spread can be changed by Bank of New York at any time. The interest was 1% at the time of withdrawal of $15.0 million from the margin account, and the interest rate at March 31, 2021 was less than 1%. The Company did not make any other withdrawals from the margin account, and the outstanding balance of $ 15.0 million is included in the accompanying Condensed Consolidated Balance Sheets. The related interest expenses for the first quarter of 2021 were $29,000. Operating Leases See Note 9, Leases, for further information. 13 FF Gene Biotech See Note 14, Equity Method Investments, for a description of the Company’s commitments related to its joint venture, FF Gene Biotech, as defined in Note 13, Related Parties. Purchase Obligations As of March 31, 2021, the Company had non-cancelable purchase obligations of $25.4 million, of which, $22.8 million for reagents and other supplies and $1.4 million for medical lab equipment are payable within twelve months, and $1.2 million for reagents 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 condensed consolidated financial position, results of operations or cash flows. Note 9. Leases Lessee The Company is party as a lessee to various non-cancelable operating leases with varying terms through October 2025 primarily for office space and equipment. The Company has an option to renew one of these leases for one year after its expiration. On a lease-by-lease basis, the Company considers such options, which may be elected at the Company’s sole discretion, in determining the lease term. The Company does not have any finance leases or leases with variable lease payments. The Company’s lease agreements do not contain any residual value guarantees, material restrictive covenants, bargain purchase options or asset retirement obligations. The Company’s headquarters are 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. A nother CLIA-certified laboratory is located in Houston, Texas. Additional offices are located in Atlanta, Georgia and are used for certain report generation functions. During the first quarter of 2021, the Company entered into one long-term operating lease. Upon entering into this lease, the Company recorded lease ROU assets of $368,000 and short-term and long-term lease liabilities of $125,000 and $243,000, respectively. The Company extended the lease for its headquarters for another two years to January 31, 2023. The Company also entered into various short-term operating leases for additional office, laboratory, parking and storage space during the first quarter of 2021 and elected short-term lease recognition exemption for these leases. The operating lease right-of-use asset, short-term lease liabilities, and long-term lease liabilities as of March 31, 2021 and December 31, 2020 were as follows: March 31, December 31, 2021 2020 (in thousands) Operating lease right-of-use asset $ 928 $ 828 Operating lease liabilities, short term $ 437 $ 267 Operating lease liabilities, long term $ 499 $ 568 The following was operating lease expense: Three months ended March 31, 2021 2020 (in thousands) Operating lease cost $ 69 $ 149 Short-term lease cost 131 — Total lease cost $ 200 $ 149 14 Supplemental information related to leases was the following: March 31, 2021 Weighted average remaining lease term - operating leases 2.2 years Weighted average discount rate - operating leases 3.41 % 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, 2021 (remaining 9 months) $ 345 2022 463 2023 159 2024 2 2025 2 2026 1 Thereafter — Total lease payments 972 Less imputed interest (36 ) Total $ 936 Lessor The Company leases out space in buildings it owns to third-party tenants under noncancelable operating leases and has leased out such space since the Company purchased such buildings in October 2020. As of March 31, 2021, the remaining lease terms left range from 1 month to 3 years and 9 months including renewal options and may include rent escalation clauses. Lease income primarily represents fixed lease payments from tenants recognized on a straight-line basis over the application lease term. Variable lease income represents tenant payments for real estate taxes, insurance and maintenance. The lease income was $157,000 for the three months ended March 31, 2021, which was included in interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations. Total lease income was as follows: Three months ended March 31, 2021 2020 (in thousands) Lease income $ 156 $ — Variable lease income 1 — Total lease income $ 157 $ — Future fixed lease payments from tenants for all noncancelable operating leases as of March 31, 2021 are as follows: Lease Payments from Tenants (in thousands) Year Ending December 31, 2021 (remaining 9 months) $ 174 2022 190 2023 95 2024 61 Total $ 520 15 Note 10. Equity-Based Compensation The Company has included equity-based compensation expense as part of cost of revenue and operating expenses in the accompanying Condensed Consolidated Statements of Operations as follows: Three Months Ended March 31, 2021 2020 (in thousands) Cost of revenue $ 674 $ 231 Research and development 1,223 312 Selling and marketing 426 171 General and administrative 639 210 Total $ 2,962 $ 924 Note 11. Provision for Income Taxes The effective tax rate used for interim periods is the estimated annual effective consolidated tax rate, based on the current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur. The annual effective tax rate is based upon several significant estimates and judgments, including the estimated annual pre-tax income of the Company in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year. In addition, the Company’s tax expense can be impacted by changes in tax rates or laws and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions. The Company recorded consolidated provision for income taxes of $66.5 million and $34,000 during the first quarters of 2021 and 2020, respectively, or 25% of earnings before income taxes for the first quarter of 2021, compared to -2% of loss before income taxes and equity loss in investee for the first quarter of 2020. The change in effective tax rate for the first quarter of 2021, relative to 2020, was primarily attributable to a significant increase in income for the first quarter of 2021, partially offset by increased windfall tax deductions related to stock-based compensation. The Company is not currently under examination by any major income tax jurisdiction. During 2021, the statutes of limitations will lapse on the Company's 2017 Federal tax year and certain 2016 and 2017 state tax years. The Company does not believe the Federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the interim financial statements for the three months ended March 31, 2021 and 2020. Note 12. Income (Loss) per Share The following table presents the calculation of basic and diluted income (loss) per share for the first quarters of 2021 and 2020: Three Months Ended March 31, 2021 2020 (in thousands, except per share data) Net income (loss) $ 200,691 $ (1,956 ) Weighted-average common shares—outstanding, basic 28,831 21,566 Weighted-average common shares—outstanding, diluted 30,770 21,566 Net income (loss) per common share, basic $ 6.96 $ (0.09 ) Net income (loss) per common share, diluted $ 6.52 $ (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 March 31, 2021 2020 (in thousands) Options — 307 Restricted Stock Units 37 1,367 16 The anti-dilutive shares described above were calculated using the treasury stock method. Due to the Company’s net loss position during the first quarter of 2020, all outstanding stock options and restricted stock units were excluded from the weighted-average share calculation. Note 13. Related Parties Linda Marsh, who is a member of the Company’s board of directors, is currently the Senior Executive Vice President of AHMC Healthcare Inc. , or AHMC. The Company performs genetic testing and other testing services, on an arms-length basis, for AHMC, and the Company recognized $1.1 million in revenue in the first quarter of 2021. As of March 31, 2021, and December 31, 2020, $1.8 million was owed to the Company by AHMC, which is included in trade accounts receivable, net, in the accompanying Condensed Consolidated Balance Sheets, in connection with this relationship. As more fully described in Note 14, Equity Method Investments, 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 was 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. The Company and Fulgent Pharma LLC, the Company’s former subsidiary, are party to shared services arrangements where research and development and administrative services and office space and equipment are provided between the companies, on an arms-length basis . Ming Hsieh is the Manager and a member of Fulgent Pharma LLC. During the first quarter of 2021, the cost of research development services rendered by Fulgent Pharma LLC for the Company was $108,000. Amounts for services performed by the Company for Fulgent Pharma LLC were not significant during the first quarters of 2021 and 2020. As of March 31, 2021, and December 31, 2020, $494,000 and $409,000, respectively, were owed to Fulgent Pharma LLC by the Company, which are included in accrued liabilities in the accompanying Condensed Consolidated Balance Sheets, in connection with these relationships. Note 14. Equity Method Investments FF Gene Biotech 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 China to offer genetic testing services to customers in China. 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 60.0 million 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 102.0 million 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 19.0 million 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, 2021, 29.7 million RMB (or approximately $4.5 million U.S. dollars) remained to be contributed to FF Gene Biotech by the Company under the terms of the JV Agreement. To date, the Company has purchased and contributed equipment with an aggregate fair value of $4.5 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. 17 The Company accounts for its 30 % interest in FF Gene Biotech using the equity method of accounting . The Company recorded an impairment loss to bring down the carrying value to zero in 2020 as the decline in the fair value of the investment compared to the pro forma carrying value is more than the carrying value as of December 31, 2020, and the Company believes the decline is other-than-temporary. BostonMolecules, Inc. In September 2020, the Company entered into a Series A Preferred Stock Purchase Agreement with BostonMolecules, Inc., or BostonMolecules, a Delaware corporation, pursuant to which the Company purchased 333 shares of Series A Preferred Stock of BostonMolecules, $0.0001 par value per share, or the BostonMolecules Shares, at a purchase price of $7,500 per share and an aggregate purchase price of $2.5 million. The BostonMolecules Shares represent an approximate 25% ownership interest in BostonMolecules. The Company initially accounted for its 25% interest in BostonMolecules using the equity method of accounting and subsequently recorded an impairment loss to bring down the carrying value to zero in 2020. Equity method investments as of March 31, 2021 and December 31, 2020, consisted of 30% ownership interest in FF Gene Biotech and 25% ownership interest in BostonMolecules, and the carrying value of both investments was zero due to impairment losses recorded in 2020. Note 15. Equity Distribution Agreement In November 2020, the Company entered into an Equity Distribution Agreement, or the November 2020 Equity Distribution Agreement, with Piper Sandler & Co. (f/k/a Piper Jaffray & Co.), Oppenheimer & Co. Inc., and BTIG LLC, as sales agents, pursuant to which the Company may offer and sell, from time to time through Piper, shares of its common stock having an aggregate offering price of up to $175.0 million. Piper may receive a commission of up to 3% of the gross proceeds received by the Company for sales pursuant to the November 2020 Equity Distribution Agreement. During the first quarter of 2021, the Company sold approximately 583,000 shares of its common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $52.00. 18