flgt-10q_20210331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2021

or

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

For the transition period from                              to                             

Commission File Number: 001-37894

 

FULGENT GENETICS, INC.

(exact name of registrant as specified in its charter)

 

 

Delaware

81-2621304

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

4978 Santa Anita Avenue  

Temple City, CA

91780

(Address of principal executive offices)

(Zip Code)

(626) 350-0537

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

FLGT

 

The Nasdaq Stock Market 

(Nasdaq Global Market)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of May 1, 2021, there were 29,005,206 outstanding shares of the registrant’s common stock.

 

 

 

 


 

Table of Contents

 

 

Page

PART I—FINANCIAL INFORMATION

1

Item 1. Financial Statements (Unaudited)

1

Condensed Consolidated Balance Sheets

1

Condensed Consolidated Statements of Operations

2

Condensed Consolidated Statements of Comprehensive Income (Loss)

3

Condensed Consolidated Statements of Stockholders’ Equity

4

Condensed Consolidated Statements of Cash Flows

5

Notes to the Condensed Consolidated Financial Statements

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3. Quantitative and Qualitative Disclosures About Market Risk

26

Item 4. Controls and Procedures

26

PART II—OTHER INFORMATION

27

Item 1. Legal Proceedings

27

Item 1A. Risk Factors

28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 6. Exhibits

59

Exhibit Index

60

Signatures

61

 

 

 

 

 

 


 

PART I—FINANCIAL INFORMATION

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, the 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