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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, 2024

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.)

 

 

4399 Santa Anita Avenue

El Monte, CA

91731

(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, 2024, there were 29,924,288 outstanding shares of the registrant’s common stock.

 

 


 

Table of Contents

 

 

Page

PART I—FINANCIAL INFORMATION

1

Item 1. Financial Statements (Unaudited)

1

Condensed Consolidated Balance Sheets

1

Condensed Consolidated Statements of Operations

2

Condensed Consolidated Statements of Comprehensive Income (Loss)

3

Condensed Consolidated Statements of Stockholders’ Equity

4

Condensed Consolidated Statements of Cash Flows

6

Notes to the Condensed Consolidated Financial Statements

7

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

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk

30

Item 4. Controls and Procedures

30

PART II—OTHER INFORMATION

32

Item 1. Legal Proceedings

32

Item 1A. Risk Factors

32

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

34

Item 5. Other Information

34

Item 6. Exhibits

34

Exhibit Index

35

Signatures

36

 

i


 

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,

 

 

2024

 

 

2023

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

$

54,677

 

 

$

97,473

 

Marketable securities

 

251,018

 

 

 

326,681

 

Trade accounts receivable, net of allowance for credit losses of $25,831 and $25,226

 

52,060

 

 

 

51,132

 

Other current assets

 

28,754

 

 

 

32,559

 

Total current assets

 

386,509

 

 

 

507,845

 

Marketable securities, long-term

 

540,495

 

 

 

423,571

 

Redeemable preferred stock investment

 

20,438

 

 

 

20,438

 

Fixed assets, net

 

86,723

 

 

 

83,464

 

Intangible assets, net

 

140,989

 

 

 

143,053

 

Goodwill, net

 

22,055

 

 

 

22,055

 

Other long-term assets

 

32,676

 

 

 

34,902

 

Total assets

$

1,229,885

 

 

$

1,235,328

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

$

19,616

 

 

$

15,360

 

Accrued liabilities

 

25,918

 

 

 

30,737

 

Customer deposit

 

27,240

 

 

 

22,700

 

Contract liabilities

 

2,762

 

 

 

2,874

 

Notes payable, current portion

 

413

 

 

 

1,183

 

Other current liabilities

 

 

 

 

164

 

Total current liabilities

 

75,949

 

 

 

73,018

 

Deferred tax liabilities

 

7,405

 

 

 

7,962

 

Unrecognized tax benefits

 

5,978

 

 

 

5,978

 

Other long-term liabilities

 

13,907

 

 

 

15,084

 

Total liabilities

 

103,239

 

 

 

102,042

 

Commitments and contingencies (Note 8)

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.0001 par value per share, 50,000 shares authorized, 32,664 and 32,416 shares issued, respectively, and 29,890 and 29,653 shares outstanding, respectively

 

3

 

 

 

3

 

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

 

 

 

 

 

Additional paid-in capital

 

511,329

 

 

 

501,718

 

Accumulated other comprehensive (loss) income

 

(1,102

)

 

 

1,205

 

Retained earnings

 

619,713

 

 

 

633,175

 

Total Fulgent stockholders’ equity

 

1,129,943

 

 

 

1,136,101

 

Noncontrolling interest

 

(3,297

)

 

 

(2,815

)

Total stockholders’ equity

 

1,126,646

 

 

 

1,133,286

 

Total liabilities and stockholders’ equity

$

1,229,885

 

 

$

1,235,328

 

 

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,

 

 

2024

 

 

2023

 

Revenue

$

64,485

 

 

$

66,168

 

Cost of revenue

 

42,381

 

 

 

47,357

 

Gross profit

 

22,104

 

 

 

18,811

 

Operating expenses:

 

 

 

 

 

Research and development

 

11,434

 

 

 

9,782

 

Selling and marketing

 

8,989

 

 

 

10,083

 

General and administrative

 

21,489

 

 

 

21,802

 

Amortization of intangible assets

 

1,990

 

 

 

1,968

 

Total operating expenses

 

43,902

 

 

 

43,635

 

Operating loss

 

(21,798

)

 

 

(24,824

)

Interest and other income, net

 

7,625

 

 

 

3,775

 

Loss before income taxes

 

(14,173

)

 

 

(21,049

)

Benefit from income taxes

 

(327

)

 

 

(5,200

)

Net loss from consolidated operations

 

(13,846

)

 

 

(15,849

)

Net loss attributable to noncontrolling interests

 

384

 

 

 

509

 

Net loss attributable to Fulgent

$

(13,462

)

 

$

(15,340

)

 

 

 

 

 

 

Net loss per common share attributable to Fulgent:

 

 

 

 

 

Basic

$

(0.45

)

 

$

(0.52

)

Diluted

$

(0.45

)

 

$

(0.52

)

 

 

 

 

 

 

Weighted-average common shares:

 

 

 

 

 

Basic

 

29,769

 

 

 

29,536

 

Diluted

 

29,769

 

 

 

29,536

 

 

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,

 

 

2024

 

 

2023

 

Net loss from consolidated operations

$

(13,846

)

 

$

(15,849

)

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation (loss) gain

 

(333

)

 

 

168

 

Net (loss) gain on available-for-sale debt securities, net of tax

 

(2,072

)

 

 

5,329

 

Comprehensive loss from consolidated operations

 

(16,251

)

 

 

(10,352

)

Net loss attributable to noncontrolling interest

 

384

 

 

 

509

 

Foreign currency translation loss (gain) attributable to noncontrolling interest

 

98

 

 

 

(1,790

)

Comprehensive loss (income) attributable to noncontrolling interest

 

482

 

 

 

(1,281

)

Comprehensive loss attributable to Fulgent

$

(15,769

)

 

$

(11,633

)

 

 

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)

 

 

 

Fulgent Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares (1)

 

 

Amount

 

 

Additional
 Paid-In Capital

 

 

Accumulated
Other Comprehensive
Income (Loss)

 

 

Retained Earnings

 

 

Fulgent Stockholders’ Equity

 

 

Noncontrolling Interest

 

 

Total
Equity

 

Balance at December 31, 2023

 

 

29,653

 

 

$

3

 

 

$

501,718

 

 

$

1,205

 

 

$

633,175

 

 

$

1,136,101

 

 

$

(2,815

)

 

$

1,133,286

 

Equity-based compensation

 

 

 

 

 

 

 

 

11,518

 

 

 

 

 

 

 

 

 

11,518

 

 

 

 

 

 

11,518

 

Exercise of common stock options

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock awards

 

 

315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock withholding for employee tax obligations

 

 

(69

)

 

 

 

 

 

(1,682

)

 

 

 

 

 

 

 

 

(1,682

)

 

 

 

 

 

(1,682

)

Repurchase of common stock

 

 

(10

)

 

 

 

 

 

(225

)

 

 

 

 

 

 

 

 

(225

)

 

 

 

 

 

(225

)

Other comprehensive loss, net

 

 

 

 

 

 

 

 

 

 

 

(2,307

)

 

 

 

 

 

(2,307

)

 

 

(98

)

 

 

(2,405

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,462

)

 

 

(13,462

)

 

 

(384

)

 

 

(13,846

)

Balance at March 31, 2024

 

 

29,890

 

 

$

3

 

 

$

511,329

 

 

$

(1,102

)

 

$

619,713

 

 

$

1,129,943

 

 

$

(3,297

)

 

$

1,126,646

 

(1) 185,503 shares of the Company's common stock were not issued and were held back by the Company as partial security for the indemnification obligations in connection with the business combination of Fulgent Pharma Holdings, Inc., or Fulgent Pharma, as of March 31, 2024 and December 31, 2023.

 

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

4


 

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

 

Fulgent Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares (1)

 

 

Amount

 

 

Additional
 Paid-In Capital

 

 

Accumulated
Other Comprehensive
Income (Loss)

 

 

Retained Earnings

 

 

Fulgent Stockholders’ Equity

 

 

Noncontrolling Interest

 

 

Total
Equity

 

Balance at December 31, 2022

 

 

29,438

 

 

$

3

 

 

$

486,585

 

 

$

(20,903

)

 

$

801,000

 

 

$

1,266,685

 

 

$

3,190

 

 

$

1,269,875

 

Equity-based compensation

 

 

 

 

 

 

 

 

10,265

 

 

 

 

 

 

 

 

 

10,265

 

 

 

 

 

 

10,265

 

Restricted stock awards

 

 

280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock withholding for employee tax obligations

 

 

(26

)

 

 

 

 

 

(869

)

 

 

 

 

 

 

 

 

(869

)

 

 

 

 

 

(869

)

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

3,707

 

 

 

 

 

 

3,707

 

 

 

1,790

 

 

 

5,497

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,340

)

 

 

(15,340

)

 

 

(509

)

 

 

(15,849

)

Balance at March 31, 2023

 

 

29,692

 

 

$

3

 

 

$

495,981

 

 

$

(17,196

)

 

$

785,660

 

 

$

1,264,448

 

 

$

4,471

 

 

$

1,268,919

 

(1) 371,006 shares of the Company's common stock were not issued and were held back by the Company as partial security for the indemnification obligations in connection with the business combination of Fulgent Pharma as of March 31, 2023.

 

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

5


 

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Cash flow from operating activities:

 

 

 

 

 

 

Net loss from consolidated operations

 

$

(13,846

)

 

$

(15,849

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Equity-based compensation

 

 

11,518

 

 

 

10,265

 

Depreciation and amortization

 

 

6,663

 

 

 

6,879

 

Gain for credit losses

 

 

(2,497

)

 

 

(113

)

Noncash lease expense

 

 

1,510

 

 

 

1,561

 

Loss (gain) on disposal of fixed asset

 

 

183

 

 

 

(179

)

Amortization of discount of marketable securities

 

 

(1,184

)

 

 

(478

)

Deferred taxes

 

 

(557

)

 

 

(5,200

)

Net realized loss on marketable securities

 

 

580

 

 

 

 

Other

 

 

(12

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Trade accounts receivable

 

 

1,484

 

 

 

9,331

 

Other current and long-term assets

 

 

5,130

 

 

 

(1,629

)

Accounts payable

 

 

(245

)

 

 

(1,855

)

Accrued liabilities and other liabilities

 

 

51

 

 

 

(9,114

)

Operating and finance lease liabilities

 

 

(1,512

)

 

 

(1,526

)

Net cash provided by (used in) operating activities

 

 

7,266

 

 

 

(7,907

)

Cash flow from investing activities:

 

 

 

 

 

 

Purchase of marketable securities

 

 

(195,741

)

 

 

(143,926

)

Purchases of fixed assets

 

 

(4,056

)

 

 

(2,034

)

Proceeds from sale of fixed assets

 

 

258

 

 

 

198

 

Maturities of marketable securities

 

 

95,450

 

 

 

141,408

 

Proceeds from sale of marketable securities

 

 

56,903

 

 

 

 

Net cash used in investing activities

 

 

(47,186

)

 

 

(4,354

)

Cash flow from financing activities:

 

 

 

 

 

 

Common stock withholding for employee tax obligations

 

 

(1,682

)

 

 

(869

)

Repayment of notes payable

 

 

(765

)

 

 

 

Repurchase of common stock

 

 

(225

)

 

 

 

Principal paid for finance lease

 

 

(135

)

 

 

(232

)

Net cash used in financing activities

 

 

(2,807

)

 

 

(1,101

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(69

)

 

 

28

 

Net decrease in cash and cash equivalents

 

 

(42,796

)

 

 

(13,334

)

Cash and cash equivalents at beginning of period

 

 

97,473

 

 

 

79,506

 

Cash and cash equivalents at end of period

 

$

54,677

 

 

$

66,172

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Income taxes paid

 

$

1,307

 

 

$

1,680

 

Cash paid for interest

 

$

439

 

 

$

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

Purchases of marketable securities in other current liabilities

 

$

 

 

$

3,519

 

Purchases of fixed assets in accounts payable

 

$

4,739

 

 

$

2,537

 

Sale of fixed assets in other receivable

 

$

11

 

 

$

 

Operating lease right-of-use assets reduced due to lease termination

 

$

57

 

 

$

 

 

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

6


 

FULGENT GENETICS, INC.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

 

Note 1. Overview and Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. These financial statements include the assets, liabilities, revenues and expenses of all 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 intercompany accounts and transactions are eliminated from the accompanying condensed consolidated financial statements.

Nature of the Business

Fulgent Genetics, Inc., together with its subsidiaries and affiliated professional corporations, or PCs (collectively referred to as the Company, unless otherwise noted or the context otherwise requires), is a technology-based company with a well-established laboratory services business and a therapeutic development business. Its laboratory services business – to which the Company formerly referred as its clinical diagnostic business, includes technical laboratory services and professional interpretation of laboratory results by licensed physicians. Its therapeutic development business is focused on developing drug candidates for treating a broad range of cancers using a novel nanoencapsulation and targeted therapy platform designed to improve the therapeutic window and pharmacokinetic profile of new and existing cancer drugs.

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, 2023, which are included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 28, 2024, or the 2023 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, 2023 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 2023 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 2023 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 statements, as well as various other factors management believes to be reasonable under the circumstances. The Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from these estimates.

On an on-going basis, management evaluates its estimates, primarily those related to: (i) revenue recognition criteria, (ii) accounts receivable and allowances for credit losses, (iii) the useful lives of fixed assets and intangible assets, (iv) estimates of tax liabilities, (v) valuation of intangible assets and goodwill at time of acquisition and on a recurring basis, and (vi) valuation of investments.

 

7


 

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 loss rate model or probability-of-default and loss given default model. Following the loss rate method, expected credit losses are determined based on an estimated historical loss rate. The probability of default method 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 updates its loss rate and 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.

The roll-forward for the allowance for credit losses for the three months ended March 31, 2024, dollars in thousands, is as follows:

 

Allowance for credit losses at beginning of year

$

25,226

 

Current period provision

 

(2,497

)

Write-downs

 

(1,336

)

Recoveries of amounts previously charged off

 

4,438

 

Allowance for credit losses as of March 31, 2024

$

25,831

 

Redeemable Preferred Stock Investment

The redeemable preferred stock investment of $20.4 million as of March 31, 2024 represents the fair value of redeemable preferred stock of a private company that the Company purchased in July 2021. The investment is classified as available-for-sale debt securities. The fair value of available-for-sale debt security is included in the Condensed Consolidated Statement of Balance Sheets. Unrealized gain of $597,000 was excluded from earnings and reported in other comprehensive loss in the three months ended March 31, 2023, and there was no unrealized gain or loss in the three months ended March 31, 2024. Since the Company intends on holding the preferred stock, and the preferred stock is not redeemable until July 2027, the investment is recorded as a long-term investment.

Finite-Lived Intangible assets

Intangible assets, unless determined to be indefinite-lived, are amortized over their estimated useful lives. The Company amortizes intangible assets on a straight-line basis with definite lives generally over periods ranging from three to fourteen years. See Note 14, Goodwill and Acquisition-Related Intangibles, for details of intangible assets.

Impairment of Long-Lived Assets

The Company evaluates the carrying amount of its long-lived assets whenever events or changes in circumstances indicate that the assets may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of an asset and its eventual disposition is less than the carrying amount of the asset.

Goodwill and Indefinite-Lived Intangibles

Intangibles in-process research & development costs, or IPR&D, are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If and when development is complete, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time.

The Company assesses goodwill and indefinite-lived intangibles for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company may choose to bypass a qualitative assessment of impairment for any reporting unit and proceed directly to performing a quantitative assessment. An impairment loss would be recognized for the amount by which the reporting unit's carrying amount exceeds its fair value.

8


 

The Company’s quantitative assessment includes estimating the fair value of each reporting unit and comparing it to its carrying value. The Company estimates the fair value of reporting units using both income-based and market-based valuation methods and typically engages a third-party appraisal firm to assist with the valuation. The estimated fair value for each reporting unit is determined based upon the range of estimated values developed from the income and market-based methods. If the estimated fair value of a reporting unit exceeds its carrying value, the goodwill is not impaired, and no further review is required.

The income-based fair value methodology is based on a reporting unit’s forecasted future cash flows that are discounted to the present value using the reporting unit’s weighted average cost of capital. Under the income-based approach, it requires management's assumptions and judgments regarding economic conditions in the markets in which the company operates and conditions in the capital markets, many of which are outside of management's control. The market-based fair value methodology looks at the guideline public company valuation method to determine the prices of comparable public companies and looks at merger and acquisition methods, similar businesses that were sold recently, to estimate the value of the reporting units. Under the market-based approach, judgment is required in evaluating market multiples and recent transactions.

Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash and cash equivalents, marketable securities, trade accounts receivable, redeemable preferred stock investment, accounts payable, and accrued liabilities. The carrying amounts of certain of these financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. Fair value of marketable securities and redeemable preferred stock investment is disclosed in Note 4, Fair Value Measurements, to the accompanying consolidated financial statements.

Concentrations of Credit Risk, Customers, and Suppliers

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, trade accounts receivable, and marketable securities, which consist of debt securities and equity securities. As of March 31, 2024, substantially all of the Company’s cash and cash equivalents were deposited in accounts at financial institutions, and amounts may exceed federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial strength of the depository institutions in which its cash and cash equivalents are held.

In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue. For the laboratory services business, aggregating customers under common control, one customer comprised of $12.6 million or 20% of total revenue in the three months ended as of March 31, 2024. No customer contributed 10% or more of the Company's revenue in the three months ended March 31, 2023. One customer comprised 12% of total accounts receivable, net, as of March 31, 2024, and comprised 13% of total accounts receivable, net, as of December 31, 2023. For the therapeutic development business, as of March 31, 2024 and December 31, 2023, there is no concentration risk, as there are no customers or revenue, as it does not have any commercialized or approved product candidates.

The Company relies on a limited number of suppliers for certain laboratory substances used in the chemical reactions incorporated into its processes, referred to as reagents, as well as for the sequencers and various other equipment and materials it uses in its laboratory operations. In particular, the Company relies on a sole supplier for the next generation sequencers and associated reagents it uses to perform its genetic tests and as the sole provider of maintenance and repair services for these sequencers. The operations of the laboratory services business would be interrupted if it encountered delays or difficulties securing these reagents, sequencers, other equipment or materials or maintenance and repair services, which could occur for a variety of reasons, including if the Company needs a replacement or temporary substitute for any of its limited or sole suppliers and is not able to locate and make arrangements with an acceptable replacement or temporary substitute. The Company's development efforts could also be delayed or interrupted if is unable to procure items needed for its therapeutic development activities. The Company’s therapeutic development business also relies on ANP Technologies, Inc., or ANP, for certain laboratory services, equipment, tools, and drug intermediates in connection with research and development efforts. The Company believes there are currently only a few other manufacturers that are capable of supplying and servicing some of the equipment and other materials necessary for its laboratory operations, including collection kits, sequencers and various associated reagents.

Reportable Segment and Geographic Information

Reportable segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or CODM, in making decisions regarding resource allocation and assessing performance. The Company’s CODM is its Chief Executive Officer. The Company reports its business in two segments, a laboratory services business and a therapeutic development business. For further financial information about these segments, including

9


 

information for each of the periods presented regarding revenue, operating income (loss), and other important information, see Note 7, Reportable Segment and Geographic Information.

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 (loss) income in the accompanying Condensed Consolidated Statements of Stockholders’ Equity. 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 are measured at historical rates. Losses from these remeasurements were not significant in the three months ended March 31, 2024 and 2023.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of net unrealized gain or loss on available-for-sale debt securities, net of tax, and foreign currency translation adjustments from the Company's subsidiaries not using the U.S. dollar as their functional currency. There were no reclassifications from other comprehensive income (loss) to net loss in the three months ended March 31, 2024 or 2023. The tax effect related to net unrealized losses on available-for-sale debt securities was zero for the three months ended March 31, 2024 due to the valuation allowance in the current period that precludes the Company from recognizing the deferred tax benefit. The tax effect related to net unrealized losses was $1.9 million for the three months ended March 31, 2023.

Disaggregation of Revenue

The Company classifies its customers into three payor types: (i) Insurance, (ii) Institutions, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, or (iii) Patients who pay directly. The Company believes these classifications best depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. The following table summarizes revenue from contracts with customers by payor type for the three months ended March 31, 2024 and 2023.

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

 

(in thousands)

 

Testing Services by Payor

 

 

 

 

 

Institutional

$

33,604

 

 

$

30,992

 

Insurance

 

30,043

 

 

 

34,551

 

Patient

 

838

 

 

 

625

 

Total Revenue

$

64,485

 

 

$

66,168

 

$1.2 million variable consideration was recognized in the three months ended March 31, 2024, that related to COVID-19 tests completed in the prior periods due to the recent collection efforts, which was included as revenue from insurance in the table above. During the three months ended March 31, 2024, the Company experienced a change in estimate related to variable consideration. The Company estimates variable consideration using the expected value method. Any changes in variable consideration estimates that affect transactions are accounted for on a cumulative catch-up basis. There was no material variable consideration recognized in the three months ended March 31, 2023.

Contract Balances

Receivables from contracts with customers - Receivables from contracts with customers are included within trade accounts receivable on the Condensed Consolidated Balance Sheets. Receivables from Insurance and Institutional customers represented 43% and 57%, respectively, as of March 31, 2024 and 39% and 61%, respectively, as of December 31, 2023.

Contracts assets and liabilities - Contract assets from contracts with customers associated with contract execution and certain costs to fulfill a contract are included in other current assets in the accompanying Condensed Consolidated Balance Sheets. Contract liabilities are recorded when the Company receives payment prior to completing its obligation to transfer goods or services to a customer. Contract liabilities are included in the Condensed Consolidated Balance Sheets. Revenues of $860,000 and $1.3 million

10


 

were recognized for the three months ended March 31, 2024 and 2023, respectively, related to contract liabilities at the beginning of the respective periods.

Recent Accounting Pronouncements

The Company evaluates all Accounting Standards Updates, or ASUs, issued by the Financial Accounting Standards Board, or FASB, for consideration of their applicability. ASUs not included in the Company’s disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s condensed consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segments. This update improves reportable segment disclosure requirements and requires enhanced disclosures related to significant segment expenses regularly provided to CODM, the amount for other segment items with descriptions of the composition, segment profit or loss, and clarification on if the CODM uses more than one measurement of a segment's profit or loss in assessing segment performance and deciding how to allocate resources. Amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impacts of this amendment on the consolidated financial statements and related disclosure.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures. The update requires more detailed information on certain income tax disclosures including the income tax rate reconciliation and income taxes paid. Amendments in this update are effective for annual periods beginning December 15, 2024 for public entities, and early adoption is permitted. The Company is currently evaluating the impacts of this amendment on the consolidated financial statements and related disclosure.

The Company does not expect that any other recently issued accounting guidance will have a significant effect on its consolidated financial statements.

11


 

Note 3. Equity and Debt Securities

The Company’s equity and debt securities consisted of the following:

 

 

March 31, 2024

 

 

Amortized
Cost Basis

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Aggregate
Fair Value

 

 

(in thousands)

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

Long-term

 

 

 

 

 

 

 

 

 

 

 

Preferred stock of privately held company

$

15,000

 

 

$

 

 

$

 

 

$

15,000

 

Total equity securities

 

15,000

 

 

 

 

 

 

 

 

 

15,000

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

U.S. government debt securities

 

106,187

 

 

 

 

 

 

(1,059

)

 

 

105,128

 

U.S. agency debt securities

 

57,328

 

 

 

 

 

 

(1,071

)

 

 

56,257

 

U.S. treasury bills

 

45,613

 

 

 

 

 

 

(4

)

 

 

45,609

 

Corporate debt securities

 

39,655

 

 

 

 

 

 

(299

)

 

 

39,356

 

Money market accounts

 

21,718

 

 

 

 

 

 

 

 

 

21,718

 

Municipal bonds

 

4,696

 

 

 

 

 

 

(28

)

 

 

4,668

 

Less: Cash equivalents

 

(21,718

)

 

 

 

 

 

 

 

 

(21,718

)

Total debt securities due within 1 year

 

253,479

 

 

 

 

 

 

(2,461

)

 

 

251,018

 

After 1 year through 5 years

 

 

 

 

 

 

 

 

 

 

 

U.S. government debt securities

 

345,156

 

 

 

284

 

 

 

(2,102

)

 

 

343,338

 

U.S. agency debt securities

 

151,721

 

 

 

5

 

 

 

(1,412

)

 

 

150,314

 

Corporate debt securities

 

41,025

 

 

 

 

 

 

(760

)

 

 

40,265

 

Redeemable preferred stock investment

 

20,000

 

 

 

438

 

 

 

 

 

 

20,438

 

Municipal bonds

 

5,061

 

 

 

1

 

 

 

(35

)

 

 

5,027

 

Yankee debt securities

 

752

 

 

 

 

 

 

(59

)

 

 

693

 

Total debt securities due after 1 year through 5 years

 

563,715

 

 

 

728

 

 

 

(4,368

)

 

 

560,075

 

After 5 years through 10 years

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

864

 

 

 

1

 

 

 

(7

)

 

 

858

 

Total debt securities due after 5 years through 10 years

 

864

 

 

 

1

 

 

 

(7

)

 

 

858

 

Total available-for-sale debt securities

 

818,058

 

 

 

729

 

 

 

(6,836

)

 

 

811,951

 

Total equity and debt securities

$

833,058

 

 

$

729

 

 

$

(6,836

)

 

$

826,951

 

 

12


 

 

 

December 31, 2023

 

 

Amortized
Cost Basis

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Aggregate
Fair Value

 

 

(in thousands)

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

Long-term

 

 

 

 

 

 

 

 

 

 

 

Preferred stock of privately held company

$

15,000

 

 

$

 

 

$

 

 

$

15,000

 

Total equity securities

 

15,000

 

 

 

 

 

 

 

 

 

15,000

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

U.S. government debt securities

 

119,739

 

 

 

8

 

 

 

(1,765

)

 

 

117,982

 

U.S. agency debt securities

 

72,310

 

 

 

 

 

 

(1,414

)

 

 

70,896

 

U.S. treasury bills

 

69,214

 

 

 

36

 

 

 

 

 

 

69,250

 

Corporate debt securities

 

63,810

 

 

 

 

 

 

(792

)

 

 

63,018

 

Money market accounts

 

38,291

 

 

 

 

 

 

 

 

 

38,291

 

Municipal bonds

 

5,557

 

 

 

1

 

 

 

(23

)

 

 

5,535

 

Less: Cash equivalents

 

(38,291

)

 

 

 

 

 

 

 

 

(38,291

)

Total debt securities due within 1 year

 

330,630

 

 

 

45

 

 

 

(3,994

)

 

 

326,681

 

After 1 year through 5 years

 

 

 

 

 

 

 

 

 

 

 

U.S. government debt securities