Fulgent Genetics, Inc. (NASDAQ:FLGT) Q2 2021 Earnings Conference Call August 9, 2021 4:30 PM ET Company Participants Nicole Borsje - Investor Relations Ming Hsieh - Chief Executive Officer Larry Weiss - Chief Medical Officer Brandon Perthuis - Chief Commercial Officer Paul Kim - Chief Financial Officer Conference Call Participants Kevin DeGeeter - Oppenheimer Steven Mah - Piper Sandler Katie Tryhane - Crédit Suisse Operator Good day, and welcome to the Fulgent Genetics 2Q 2021 Earnings Conference Call. At t ...

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 June 30, 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 jurisdicti ...

Financial Data and Key Metrics Changes - The company reported Q1 2021 revenue of $359 million, an increase of over 4,500% compared to Q1 2020 and a 22% increase from the previous quarter [11][41] - Approximately 3.8 million tests were delivered in Q1, growing almost 290 times compared to Q1 last year [11][41] - Non-GAAP income was $202.9 million, or $6.59 per share, with adjusted EBITDA of $271.9 million [12][45] - The company ended the quarter with $697.4 million in cash, cash equivalents, and marketable securities [46] Business Line Data and Key Metrics Changes - COVID-19 testing business sustained high demand, processing over 3 million RT-PCR tests, which is approximately 284 times the volume from the same quarter last year [19][41] - Next-generation sequencing (NGS) revenue grew 115% year-over-year, with NGS volume increasing from 13,000 to 38,000 tests [21][42] - The majority of NGS revenue came from traditional genetic testing, with less than $1 million attributed to CDC contracts [53][56] Market Data and Key Metrics Changes - The company has a national presence, with significant operations in New York, California, and other states, adapting to a shift towards back-to-normalcy testing [71][72] - The CDC awarded the company a contract worth up to $47 million for COVID-19 genomic studies, enhancing its market position [28] Company Strategy and Development Direction - The company aims to expand its presence in the molecular diagnostics market, particularly in oncology testing, leveraging its scalable technology platform [14][18] - Plans to invest in technology and expand operations in China, targeting the growing genetic diagnostic market [16][17] - The company is actively evaluating M&A opportunities to fuel expansion and enhance its capabilities [18][40] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about ongoing growth in both COVID-19 testing and traditional genetic testing, raising revenue guidance for NGS testing from $70 million to over $100 million for 2021 [48][49] - The company anticipates a test volume of 8.5 million to 9 million for 2021, representing a 93% year-over-year growth [49] - Management acknowledged the competitive landscape but emphasized their strong operational capabilities and cost structure as advantages [68][69] Other Important Information - The company has initiated a mobile vaccination fleet to support vaccine distribution, administering tens of thousands of doses [34][35] - The appointment of Dr. Larry Weiss as Chief Medical Officer is expected to enhance the company's oncology product development and strategy [14][36] Q&A Session Summary Question: How much of the NGS business was from core genetic testing versus COVID surveillance? - The bulk of the NGS business in Q1 came from traditional genetic testing, with less than $1 million from the CDC [53][56] Question: What is the expected transition of the $1.7 billion opportunity for American Rescue Plan? - The initial grant from the CDC is significantly larger than previous grants, indicating strong confidence in the company's capabilities [54][55] Question: What drove the strength in the core genetic testing business? - Growth is attributed to execution on traditional business, industry-leading cost structure, and expanded test menu, rather than new contracts with large payers [59][60] Question: How is the company planning to build out its sales force? - The company is actively recruiting talent and expanding its sales force to enhance market coverage and support new test introductions [81][82]

FORM 10-Q PART I—FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Presents unaudited condensed consolidated financial statements for Q1 2021, covering balance sheets, income, equity, cash flows, and detailed accounting notes [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------- | :---------------------------- | :------------------------------- | | Total Assets | $999,083 | $700,461 | | Total Current Assets | $659,140 | $523,616 | | Cash and Cash Equivalents | $151,461 | $87,426 | | Marketable Securities | $258,317 | $211,941 | | Trade Accounts Receivable | $216,509 | $183,857 | | Total Liabilities | $197,517 | $131,074 | | Total Current Liabilities | $196,530 | $130,115 | | Total Stockholders' Equity | $801,566 | $569,387 | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | Change (YoY) | | :-------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :----------- | | Revenue | $359,429 | $7,753 | +4536% | | Cost of Revenue | $74,075 | $4,057 | +1726% | | Gross Profit | $285,354 | $3,696 | +7621% | | Operating Expenses | $18,432 | $5,610 | +229% | | Operating Income (Loss) | $266,922 | $(1,914) | N/A | | Provision for Income Taxes | $66,513 | $34 | +195526% | | Net Income (Loss) | $200,691 | $(1,956) | N/A | | Basic Net Income (Loss) per Common Share| $6.96 | $(0.09) | N/A | | Diluted Net Income (Loss) per Common Share| $6.52 | $(0.09) | N/A | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :-------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | 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) | [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) | Metric | December 31, 2020 (in thousands) | March 31, 2021 (in thousands) | | :-------------------------------------- | :------------------------------- | :---------------------------- | | Total Equity | $569,387 | $801,566 | | Common Stock Shares | 28,178 | 28,989 | | Additional Paid-In Capital | $418,065 | $450,855 | | Accumulated Other Comprehensive Income (Loss) | $438 | $(216) | | Retained Earnings | $150,881 | $350,924 | - Net income of **$200,691 thousand** significantly increased retained earnings from **$150,881 thousand** at December 31, 2020, to **$350,924 thousand** at March 31, 2021[19](index=19&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) | Cash Flow Activity | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :---------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net cash provided by operating activities | $233,179 | $1,366 | | Net cash used in investing activities | $(216,491) | $(3,862) | | Net cash provided by (used in) financing activities | $47,347 | $(164) | | Net increase (decrease) in cash and cash equivalents | $64,035 | $(2,663) | | Cash and cash equivalents at end of period | $151,461 | $9,302 | [Notes to the Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) Detailed explanations and disclosures for the condensed consolidated financial statements, covering accounting policies, financial instruments, debt, leases, equity compensation, and related party transactions [Note 1. Overview and Basis of Presentation](index=8&type=section&id=Note%201.%20Overview%20and%20Basis%20of%20Presentation) - Fulgent Genetics, Inc. is a technology company providing comprehensive genetic testing and large-scale COVID-19 testing services, utilizing a proprietary platform for NGS and RT-PCR-based tests[27](index=27&type=chunk) - The company launched its patient-initiated product, Picture Genetics, in 2019, and has received Emergency Use Authorization (EUA) from the FDA for its RT-PCR-based COVID-19 tests and at-home testing service[27](index=27&type=chunk) [Note 2. Summary of Significant Accounting Policies](index=8&type=section&id=Note%202.%20Summary%20of%20Significant%20Accounting%20Policies) - The Company adopted ASU 2016-13 (Financial Instruments-Credit Losses) on January 1, 2021, resulting in a cumulative effect adjustment of **$887,000** to retained earnings and trade accounts receivable, net, and a cumulative tax effect of **$239,000** to retained earnings and deferred tax assets[52](index=52&type=chunk)[54](index=54&type=chunk) - ASU 2019-12 (Simplifying the Accounting for Income Taxes) was also adopted in Q1 2021 with no material impact[54](index=54&type=chunk) Revenue by Payor Type (in thousands) | Payor Type | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------ | :-------------------------------- | :-------------------------------- | | Insurance | $207,558 | $134 | | Institutional | $151,569 | $7,478 | | Patient | $302 | $141 | | Total Revenue | $359,429 | $7,753 | - One customer (County of Los Angeles) contributed **25% of total revenue** in Q1 2021, compared to no single customer contributing 10% or more in Q1 2020[37](index=37&type=chunk) [Note 3. Marketable Securities](index=12&type=section&id=Note%203.%20Marketable%20Securities) Marketable Securities (in thousands) | Category | March 31, 2021 (Aggregate Fair Value) | December 31, 2020 (Aggregate Fair Value) | | :------------------------------------- | :------------------------------------ | :--------------------------------------- | | Total Short-term Marketable Securities | $258,317 | $211,941 | | Total Long-term Marketable Securities | $287,626 | $132,502 | | Total Marketable Securities | $545,943 | $344,443 | | Gross Unrealized Losses | $1,264 | $298 | - The Company's marketable securities of **$420.2 million** are used as collateral for an outstanding margin account borrowing of **$15.0 million** as of March 31, 2021, used for real property purchase in 2020[57](index=57&type=chunk) [Note 4. Fair Value Measurements](index=13&type=section&id=Note%204.%20Fair%20Value%20Measurements) Financial Assets Measured at Fair Value (in thousands) | Category | March 31, 2021 (Total) | March 31, 2021 (Level 1) | March 31, 2021 (Level 2) | December 31, 2020 (Total) | December 31, 2020 (Level 1) | December 31, 2020 (Level 2) | | :---------------------------------------- | :--------------------- | :----------------------- | :----------------------- | :------------------------ | :-------------------------- | :-------------------------- | | Total Marketable Securities and Cash Equivalents | $600,490 | $234,821 | $365,669 | $391,904 | $218,255 | $173,64

PART I [Business](index=5&type=section&id=Item%201.%20Business) Fulgent Genetics offers comprehensive genetic and large-scale COVID-19 testing services, leveraging a proprietary platform for significant 2020 growth [Overview](index=5&type=section&id=Overview) The company provides comprehensive genetic and large-scale COVID-19 testing services, achieving dramatic growth in 2020 with 4.4 million billable tests - The company offers a broad genetic test menu with over **18,000 single-gene tests** and more than **900 panels**, covering over **5,700 genetic conditions**[14](index=14&type=chunk) - Since March 2020, Fulgent has offered COVID-19 testing services, processing orders for governmental bodies, municipalities, and large corporations, including operating testing sites for the County of Los Angeles and the New York City public school system[16](index=16&type=chunk) Billable Test Volume Growth | Year | Billable Tests Delivered | | :--- | :--- | | 2020 | 4.4 million | | 2019 | 59,000 | [Our Technology Platform and Solution](index=6&type=section&id=Our%20Technology%20Platform%20and%20Solution) Fulgent's proprietary technology platform integrates gene probes, algorithms, and LIMS, driving operational efficiencies and a low internal cost per test - The company's proprietary technology platform integrates proprietary gene probes, advanced data comparison and suppression algorithms, adaptive learning software, and integrated laboratory information management systems (LIMS)[25](index=25&type=chunk)[26](index=26&type=chunk)[28](index=28&type=chunk) 2020 Key Operating Metrics | Metric | Value | | :--- | :--- | | Average Internal Cost per Billable Test | ~$20 | | Average Price per Billable Test | ~$96 | [Our Genetic Tests and COVID-19 Tests](index=8&type=section&id=Our%20Genetic%20Tests%20and%20COVID-19%20Tests) The company offers diverse genetic tests, including single-gene and whole exome sequencing, alongside COVID-19 tests with FDA Emergency Use Authorization and at-home collection kits - Test offerings include single-gene tests, over **900 pre-established panels**, whole exome/genome sequencing, and specialized tests like Solid Tumor Molecular Profiling and Rapid Whole Genome for NICU/PICU patients[36](index=36&type=chunk)[37](index=37&type=chunk) - The company launched **'Picture Genetics' in 2019**, a patient-initiated genetic testing service advertised directly to consumers[36](index=36&type=chunk) - Fulgent received an **FDA Emergency Use Authorization (EUA)** for its RT-PCR-based COVID-19 test, which includes an at-home specimen collection service through Picture Genetics, with labs capable of thousands of samples per day and a **24-48 hour turnaround time**[39](index=39&type=chunk) [Our Customers](index=9&type=section&id=Our%20Customers) Fulgent's customer base expanded to include governmental bodies for COVID-19 testing, with the County of Los Angeles and San Bernardino County representing **28% and 10% of 2020 revenue**, respectively Customer Concentration (2020 Revenue) | Customer | Percentage of Total Revenue | | :--- | :--- | | County of Los Angeles | 28% | | San Bernardino County | 10% | - The company classifies customers into three payor types: Insurance, Institutional (hospitals, labs, government bodies, corporations), and Patients (direct pay)[43](index=43&type=chunk) [Competition](index=11&type=section&id=Competition) Fulgent competes with numerous molecular genetic testing and COVID-19 diagnostic providers, leveraging its broad content and pricing, despite facing larger, more established competitors - Principal competitors include Ambry Genetics, Baylor Genetics, GeneDx, Laboratory Corporation of America Holdings, Myriad Genetics, Inc., and Quest Diagnostics Incorporated[57](index=57&type=chunk) - Key competitive factors in the market include breadth of genetic content, test customization, price, quality of results, turnaround time, and reimbursement arrangements[59](index=59&type=chunk) [Regulation](index=12&type=section&id=Regulation) Operating in a heavily regulated environment, the company's CLIA-certified labs offer LDTs, facing potential FDA oversight, complex reimbursement rules, and stringent privacy and fraud laws - The company's laboratories in California and Texas are certified under the Clinical Laboratory Improvement Amendments (CLIA) and accredited by the College of American Pathologists (CAP)[69](index=69&type=chunk) - Fulgent's genetic tests are considered Laboratory Developed Tests (LDTs), historically not subject to FDA premarket review, but future regulation like the proposed VALID Act could change this[83](index=83&type=chunk)[85](index=85&type=chunk) - The company is subject to various fraud and abuse laws, including the federal Anti-Kickback Statute, the Stark Law, and the False Claims Act, which carry severe penalties for non-compliance[113](index=113&type=chunk)[118](index=118&type=chunk)[121](index=121&type=chunk) - Compliance with data privacy laws such as HIPAA, HITECH, the California Consumer Privacy Act (CCPA), and the EU's General Data Protection Regulation (GDPR) is critical to operations[98](index=98&type=chunk)[104](index=104&type=chunk)[107](index=107&type=chunk) [Risk Factors](index=23&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from operational fluctuations, reliance on COVID-19 testing, intense competition, customer concentration, sole suppliers, evolving regulations, and stock price volatility [Business and Strategy Risks](index=24&type=section&id=Business%20and%20Strategy%20Risks) Key business risks include fluctuating operating results, reliance on temporary COVID-19 testing, a history of losses, intense competition, customer concentration, and sole supplier dependency - The expansion of the COVID-19 testing business has led to rapid growth but presents management challenges and is expected to decrease as vaccines become widely deployed[152](index=152&type=chunk)[156](index=156&type=chunk) - The company has a history of losses and may not be able to sustain the profitability achieved in 2020[157](index=157&type=chunk) - Revenue is concentrated, with two customers (County of Los Angeles and San Bernardino County) accounting for **28% and 10% of total revenue in 2020**, respectively[163](index=163&type=chunk) - The company relies on **Illumina as the sole supplier** for its next-generation sequencers and associated reagents, creating a significant supply chain risk[210](index=210&type=chunk) [Regulatory Risks](index=39&type=section&id=Regulatory%20Risks) Regulatory risks include potential FDA oversight of LDTs, the need to maintain CLIA and state licenses, and compliance with complex healthcare laws like PAMA, HIPAA, and anti-fraud statutes - Potential changes in FDA enforcement discretion for Laboratory Developed Tests (LDTs), including possible legislation like the VALID Act, could subject the company's tests to premarket clearance or approval, increasing costs and delaying market access[252](index=252&type=chunk)[257](index=257&type=chunk) - Failure to comply with federal (CLIA) and state laboratory licensing requirements could result in the loss of ability to perform tests and significant business disruption[264](index=264&type=chunk)[270](index=270&type=chunk) - The marketing of COVID-19 tests under an Emergency Use Authorization (EUA) is subject to specific limitations, and the EUA can be terminated or revoked by the government[298](index=298&type=chunk)[300](index=300&type=chunk) - Changes in healthcare policy, such as the Affordable Care Act (ACA) and the Protecting Access to Medicare Act (PAMA), could negatively impact reimbursement rates and financial results[286](index=286&type=chunk)[288](index=288&type=chunk) [Intellectual Property Risks](index=47&type=section&id=Intellectual%20Property%20Risks) Intellectual property risks stem from reliance on trade secrets over patents, which may offer inadequate protection, and the potential for costly third-party infringement litigation - The company primarily relies on trade secret protection rather than patents, which may not be effective if confidential information is disclosed or independently developed by competitors[316](index=316&type=chunk)[317](index=317&type=chunk) - The company faces the risk of litigation from third parties claiming infringement of their intellectual property, which could result in substantial damages and prevent the sale of its tests[320](index=320&type=chunk)[321](index=321&type=chunk) [Common Stock Risks](index=50&type=section&id=Common%20Stock%20Risks) Common stock risks include high price volatility, limited liquidity due to concentrated ownership (CEO owning **28%**), and no anticipated dividends, with returns dependent on stock price appreciation - The trading price of the company's common stock has been and may continue to be highly volatile[334](index=334&type=chunk) - As of December 31, 2020, executive officers, directors, and 5%+ beneficial owners collectively owned approximately **32%** of the company's voting equity, with the founder and CEO alone owning **28%**, allowing for significant control over stockholder matters[338](index=338&type=chunk) - The company does not intend to pay dividends in the foreseeable future, limiting investor returns to potential stock price appreciation[343](index=343&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=54&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Fulgent Genetics' common stock trades on Nasdaq under 'FLGT' since 2016, with no anticipated dividends, and proceeds from equity offerings funding operations and a joint venture - The company's common stock has been listed on the Nasdaq Global Market under the symbol **"FLGT" since September 29, 2016**[366](index=366&type=chunk) - The company does not anticipate paying any cash dividends in the foreseeable future, planning to retain future earnings to finance business growth[370](index=370&type=chunk) - The company has raised significant capital through multiple equity offerings, including its **2016 IPO** and several equity distribution agreements and underwritten offerings in **2019 and 2020**[372](index=372&type=chunk)[374](index=374&type=chunk)[375](index=375&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=56&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Fulgent's 2020 financial performance was transformed by COVID-19 testing, with revenue surging to **$421.7 million**, net income of **$214.3 million**, and significantly strengthened liquidity from operations and equity offerings [Results of Operations](index=62&type=section&id=Results%20of%20Operations) In 2020, revenue surged **1196% to $421.7 million** due to COVID-19 testing, driving gross profit up **1702% to $331.9 million** and resulting in a net income of **$214.3 million** Financial Performance Comparison (2020 vs. 2019) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $421.7M | $32.5M | 1196% | | Gross Profit | $331.9M | $18.4M | 1702% | | Operating Income (Loss) | $290.2M | ($0.4M) | 67894% | | Net Income (Loss) | $214.3M | ($0.4M) | 52244% | | Billable Tests Delivered | 4.4M | 59K | 7373% | | Avg. Price per Test | $96 | $555 | (83)% | | Cost per Test | $20 | $241 | (92)% | - The dramatic increase in revenue was primarily due to the volume of COVID-19 tests, which have a lower price point than the company's traditional genetic tests, leading to a substantial decline in the average selling price per test[440](index=440&type=chunk)[441](index=441&type=chunk) - Cost of revenue increased primarily due to higher reagent and supply expenses (**$49.9 million**), consulting/labor (**$10.6 million**), and personnel costs (**$8.1 million**) needed to support the massive increase in test volume[445](index=445&type=chunk) [Liquidity and Capital Resources](index=64&type=section&id=Liquidity%20and%20Capital%20Resources) As of December 31, 2020, the company reported a strong liquidity position with **$87.4 million** in cash and **$344.4 million** in marketable securities, driven by operations and equity offerings Cash and Marketable Securities (Year-End, million) | Item | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $87.4 | $12.0 | | Marketable Securities | $344.4 | $58.3 | Summary of Cash Flows (Year Ended Dec 31, million) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operations | $140.6 | $5.5 | | Net Cash used in Investing | ($326.4) | ($29.0) | | Net Cash from Financing | $261.3 | $28.8 | - The company raised a total of **$261.3 million** from financing activities in 2020, primarily through sales of common stock via various equity distribution agreements[476](index=476&type=chunk) [Controls and Procedures](index=69&type=section&id=Item%209A.%20Controls%20and%20Procedures) As of December 31, 2020, management concluded that the company's disclosure controls and internal control over financial reporting were effective, with no material changes reported - Management concluded that the company's disclosure controls and procedures were **effective as of December 31, 2020**[498](index=498&type=chunk) - Management concluded that the company's internal control over financial reporting was **effective as of December 31, 2020**, based on the COSO 2013 framework[499](index=499&type=chunk) PART III [Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters](index=70&type=section&id=Items%2010-14) Information for Items 10-14, covering directors, executive officers, corporate governance, compensation, security ownership, and related transactions, is incorporated by reference from the 2021 proxy statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accounting Fees and Services (Item 14) is incorporated by reference from the registrant's definitive proxy statement for its 2021 annual meeting of stockholders[506](index=506&type=chunk)[507](index=507&type=chunk)[508](index=508&type=chunk)[509](index=509&type=chunk)[510](index=510&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=71&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) The consolidated financial statements are filed with this report, with other schedules omitted, and an index of all 10-K exhibits is included - The consolidated financial statements are filed with this report, and all other financial statement schedules have been omitted[514](index=514&type=chunk) [Financial Statements](index=77&type=section&id=Financial%20Statements) Audited consolidated financial statements for 2020 and 2019 show dramatic financial improvement, with total assets reaching **$700.5 million**, net income of **$214.3 million**, and diluted EPS of **$8.91** in 2020 Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $87,426 | $11,965 | | Marketable securities | $344,443 | $58,251 | | Trade accounts receivable, net | $183,857 | $6,555 | | **Total Assets** | **$700,461** | **$88,756** | | **Liabilities** | | | | Accounts payable | $26,488 | $1,581 | | Income tax payable | $53,319 | $24 | | **Total Liabilities** | **$131,074** | **$5,979** | | **Stockholders' Equity** | **$569,387** | **$82,777** | Consolidated Statement of Operations Data (in thousands) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Revenue | $421,712 | $32,528 | | Gross Profit | $331,905 | $18,421 | | Operating Income (Loss) | $290,158 | ($428) | | Net Income (Loss) | $214,310 | ($411) | | Diluted EPS | $8.91 | ($0.02) | - The company's revenue is disaggregated by payor type, with Insurance (**$257.6 million**) and Institutional (**$163.1 million**) customers being the primary sources of revenue in 2020[620](index=620&type=chunk)

Financial Data and Key Metrics Changes - The company reported fourth quarter revenue of $295 million, which is almost three times the revenue generated in the third quarter and more than 35 times the fourth quarter revenue of the previous year [11][47] - Non-GAAP income exceeded $6 per share in the fourth quarter and more than $9 per share for the full year, with $105.5 million in free cash flow [12][54] - Full year 2020 revenues totaled $422 million, up almost 1,200% year-over-year, with operating income of $290 million compared to an operating loss of $428,000 the previous year [54][55] Business Line Data and Key Metrics Changes - The company performed over 3 million tests in the fourth quarter and over 4.4 million tests for the year, compared to about 60,000 tests in all of 2019 [11][48] - The non-COVID-19 business grew approximately 43% year-over-year in the fourth quarter, with core business revenues reaching almost $37 million [24][48] - Next Generation Sequencing (NGS) tests volume increased from 59,000 in 2019 to 72,000 in 2020, with expectations for NGS revenue to grow above 92% year-over-year to $70 million in 2021 [18][60] Market Data and Key Metrics Changes - The company was recognized as the number one provider of COVID-19 tests in California, processing the highest volume of tests with over 90% of results returned within 24 hours [14] - The customer base diversified significantly, with direct agreements established with 11 counties and various large corporations, sports teams, and nursing homes [28][30] - The company expects to generate approximately $800 million in revenues for 2021, representing a growth of 90% year-over-year [58] Company Strategy and Development Direction - The company plans to invest in sales and marketing initiatives and explore international expansion, viewing M&A as a potential avenue for growth [20][63] - The company aims to leverage its technology platform to address larger markets and enhance its competitive position [19][22] - The introduction of new software products, such as the vaccine management platform and community testing software, is part of the strategy to expand service offerings [43][44] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's market share and positioning for 2021, despite potential fluctuations in COVID testing demand [67][68] - The company anticipates a more diverse mix of revenue drivers in 2021, with significant growth expected from both COVID-19 and non-COVID-19 testing [55][56] - Management highlighted the importance of maintaining high-quality service and turnaround times to differentiate from competitors [95][96] Other Important Information - The company donated $1 million to the National Academy of Engineering to support COVID-19 engineering solutions and made an initial donation of $250,000 to USC for cancer research initiatives [21][22] - The company ended the fourth quarter with $432 million in cash and cash equivalents, with a strong capital structure and minimal dilution to shareholders [53][63] Q&A Session Summary Question: What is the trend of revenue concentration in California for 2021? - Management acknowledged that a significant portion of revenue comes from California but emphasized ongoing diversification efforts within the state and other regions [65][66] Question: Can you provide details on the Department of Homeland Security contract? - The company is one of four labs in a $2 billion contract, with the ability to handle a meaningful portion of the testing demand driven by government task orders [70][72] Question: How does the company view the market for COVID variant characterization? - Management expressed optimism about the market for NGS testing related to COVID variants, highlighting the company's capabilities and existing contracts [75][76] Question: What is the expected revenue mix for 2022? - Management indicated that both NGS and non-NGS testing will contribute to revenue, with a focus on expanding NGS capabilities [90][91]

Fulgent Genetics, Inc. (NASDAQ:FLGT) Q3 2020 Results Earnings Conference Call November 9, 2020 4:30 PM ET Company Participants Nicole Borsje - Head, Investor Relations Ming Hsieh - Chief Executive Officer Paul Kim - Chief Financial Officer Brandon Perthuis - Chief Commercial Officer Conference Call Participants Rachel Vatnsdal - Piper Sandler Erin Wright - Credit Suisse Kevin DeGeeter - Oppenheimer Operator Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2020 Fulgent Genetics Earnings ...

[PART I—FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) This section presents the unaudited condensed consolidated financial statements and accompanying notes, reflecting significant growth in revenue, net income, assets, and equity, primarily driven by the COVID-19 testing business [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section provides the unaudited condensed consolidated financial statements and notes, detailing the company's financial position, performance, and cash flows, significantly impacted by COVID-19 testing [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This statement presents the company's financial position, detailing assets, liabilities, and equity at specific points in time | Metric | September 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------- | :-------------------------------- | :------------------------------- | | Total Assets | $247,311 | $88,756 | | Total Current Assets | $195,615 | $37,079 | | Cash and cash equivalents | $53,031 | $11,965 | | Trade accounts receivable, net | $90,680 | $6,555 | | Total Liabilities | $60,356 | $5,979 | | Total Stockholders' Equity | $186,955 | $82,777 | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This statement reports the company's revenues, expenses, and net income or loss over specific periods | Metric (in thousands, except per share data) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $101,716 | $10,347 | $126,734 | $24,141 | | Net Income (Loss) | $46,638 | $1,462 | $48,003 | $(115) | | Basic Net Income (Loss) per common share | $2.11 | $0.08 | $2.20 | $(0.01) | | Diluted Net Income (Loss) per common share | $1.98 | $0.08 | $2.07 | $(0.01) | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) This statement presents net income or loss and other comprehensive income or loss, providing a complete view of changes in equity from non-owner sources | Metric (in thousands) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) | $46,638 | $1,462 | $48,003 | $(115) | | Comprehensive income | $46,196 | $1,438 | $48,464 | $99 | [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This statement details changes in stockholders' equity, including net income, stock issuances, and other comprehensive income, over specific periods | Metric (in thousands) | Balance at Dec 31, 2019 | Balance at Sep 30, 2020 | | :-------------------- | :---------------------- | :---------------------- | | Total Equity | $82,777 | $186,955 | - Issuance of common stock at an average of **$38.50 per share**, net, contributed **$42,655 thousand** to additional paid-in capital during the nine months ended September 30, 2020[19](index=19&type=chunk) - Issuance of common stock at an average of **$39.24 per share**, net, contributed **$7,849 thousand** to additional paid-in capital during the nine months ended September 30, 2020[19](index=19&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement reports the cash generated and used by operating, investing, and financing activities over specific periods | Cash Flow Activity (in thousands) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $6,372 | $5,633 | | Net cash (used in) provided by investing activities | $(7,671) | $7,033 | | Net cash provided by financing activities | $42,348 | $1,136 | | Net increase in cash and cash equivalents | $41,066 | $13,786 | | Cash and cash equivalents at end of period | $53,031 | $20,522 | [Notes to the Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) These notes provide additional detail and context to the financial statements, explaining accounting policies, significant transactions, and other relevant information [Note 1. Overview and Basis of Presentation](index=9&type=section&id=Note%201.%20Overview%20and%20Basis%20of%20Presentation) The company is a technology firm specializing in comprehensive genetic testing, utilizing a proprietary platform for a broad test menu. Since March 2020, it has launched SARS-CoV-2 detection tests, including NGS and RT-PCR-based tests, which have received FDA Emergency Use Authorizations (EUAs) - Fulgent Genetics, Inc. is a technology company offering comprehensive genetic testing, providing clinically actionable diagnostic information[28](index=28&type=chunk) - The company launched SARS-CoV-2 detection tests (NGS and RT-PCR-based) in March 2020, receiving FDA EUAs for RT-PCR-based tests and an at-home testing service[28](index=28&type=chunk) [Note 2. Summary of Significant Accounting Policies](index=10&type=section&id=Note%202.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines key accounting policies, including the use of estimates, foreign currency translation, and lease accounting. It highlights significant customer concentration, with one customer contributing 37% and 35% of revenue for the three and nine months ended September 30, 2020, respectively. Contract liabilities also saw a substantial increase - Management's estimates, particularly for revenue recognition, accounts receivable, fixed asset useful lives, tax liabilities, and equity method investments, are subject to potential impacts from the COVID-19 pandemic[32](index=32&type=chunk)[33](index=33&type=chunk) - One customer accounted for **37% of revenue** for the three months ended September 30, 2020, and **35%** for the nine months ended September 30, 2020[37](index=37&type=chunk) Revenue from Contracts with Customers by Payor Type (in thousands) | Payor Type | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | | :------------ | :------------------------------ | :----------------------------- | | Institutional | $34,527 | $58,459 | | Patient | $1,078 | $1,339 | | Insurance | $66,111 | $66,936 | | Total Revenue | $101,716 | $126,734 | - Contract liabilities increased from **$365 thousand** as of December 31, 2019, to **$18.5 million** as of September 30, 2020[42](index=42&type=chunk) [Note 3. Marketable Securities](index=12&type=section&id=Note%203.%20Marketable%20Securities) The company's marketable securities primarily consist of corporate debt securities and U.S. government agency securities. Total marketable securities decreased slightly from December 2019 to September 2020 Marketable Securities (Aggregate Fair Value, in thousands) | Category | September 30, 2020 | December 31, 2019 | | :------------------------ | :----------------- | :---------------- | | Total marketable securities | $50,939 | $58,251 | Marketable Securities Composition (September 30, 2020, in thousands) | Category | Aggregate Fair Value | | :---------------------------- | :------------------- | | Corporate debt securities | $49,935 | | U.S. government agency securities | $1,004 | [Note 4. Fair Value Measurements](index=13&type=section&id=Note%204.%20Fair%20Value%20Measurements) The company measures financial assets at fair value using a three-tier hierarchy. As of September 30, 2020, most marketable securities were classified as Level 2 (observable inputs), with no Level 3 investments - Level 1 assets include money market instruments, valued based on observable market prices[56](index=56&type=chunk) - Level 2 assets consist of U.S. government agency securities and corporate debt securities, valued based on observable inputs like reported trades and broker/dealer quotes[56](index=56&type=chunk) - As of September 30, 2020, the company had no investments measured using unobservable (Level 3) inputs[56](index=56&type=chunk) Total Marketable Securities and Cash Equivalents (Fair Value, in thousands) | Date | Total Fair Value | | :------------------ | :--------------- | | September 30, 2020 | $89,040 | | December 31, 2019 | $64,650 | [Note 5. Fixed Assets](index=14&type=section&id=Note%205.%20Fixed%20Assets) Net fixed assets significantly increased from December 2019 to September 2020, primarily due to investments in medical lab equipment and assets not yet placed in service Property and Equipment, Net (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :------------------------ | :----------------- | :---------------- | | Property and equipment, net | $17,385 | $5,974 | - Major increases in fixed assets include medical lab equipment (**$13,207 thousand** in 2020 vs **$10,493 thousand** in 2019) and assets not yet placed in service (**$9,485 thousand** in 2020 vs **$114 thousand** in 2019)[59](index=59&type=chunk) - Depreciation expense for the nine months ended September 30, 2020, was **$1.8 million**, up from **$1.5 million** in the same period of 2019[59](index=59&type=chunk) [Note 6. Significant Balance Sheet Accounts](index=14&type=section&id=Note%206.%20Significant%20Balance%20Sheet%20Accounts) Other current assets experienced a substantial increase, primarily driven by reagents and supplies, and other receivables related to public offerings of common stock Other Current Assets (in thousands) | Category | September 30, 2020 | December 31, 2019 | | :------------------------ | :----------------- | :---------------- | | Total Other Current Assets | $30,000 | $2,255 | | Reagents and supplies | $17,747 | $277 | | Other receivable | $8,414 | $16 | - Other receivable primarily consists of proceeds to be received from public offerings of the Company's common stock[60](index=60&type=chunk) [Note 7. Reporting Segment and Geographic Information](index=15&type=section&id=Note%207.%20Reporting%20Segment%20and%20Geographic%20Information) The company operates as a single reporting segment, with its long-lived assets predominantly located in the United States. U.S. revenue saw a significant increase, while foreign revenue experienced a decrease, mainly due to reduced traditional genetic testing sales in COVID-19 affected regions - The company views its operations and manages its business in one reporting segment[62](index=62&type=chunk) Revenue by Region (in thousands) | Region | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | United States | $100,223 | $8,479 | $122,000 | $18,779 | | Foreign | $1,493 | $1,868 | $4,734 | $5,362 | - Decreases in foreign revenue were primarily due to decreased sales of traditional genetic testing services to customers in other countries adversely affected by the COVID-19 pandemic[129](index=129&type=chunk) [Note 8. Commitments and Contingencies](index=15&type=section&id=Note%208.%20Commitments%20and%20Contingencies) The company has non-cancelable purchase obligations totaling $13.1 million, payable within twelve months, for computer and medical lab equipment, reagents, and other supplies. Legal proceedings are not expected to have a material effect on the company's financial position - Non-cancelable purchase obligations of **$13.1 million** are payable within twelve months for computer equipment, medical lab equipment, reagents, and other supplies[64](index=64&type=chunk) - Legal proceedings and claims arising in the ordinary course of business are not expected to have a material effect on the company's consolidated financial position, results of operations, or cash flows[65](index=65&type=chunk) [Note 9. Leases](index=15&type=section&id=Note%209.%20Leases) The company holds various non-cancelable operating leases, primarily for office space, with a weighted-average remaining lease term of 5.0 years and a discount rate of 5.87%. Total lease costs increased in 2020, and a new CLIA-certified laboratory was opened in Houston, Texas, during the third quarter to expand capacity Operating Lease Liabilities (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :------------------------------------ | :----------------- | :---------------- | | Operating lease right-of-use asset | $2,680 | $2,633 | | Operating lease liabilities, short-term | $512 | $420 | | Operating lease liabilities, long-term | $2,231 | $2,256 | Total Lease Cost (in thousands) | Period | 2020 | 2019 | | :-------------------- | :--- | :--- | | Three months ended Sep 30 | $223 | $146 | | Nine months ended Sep 30 | $527 | $438 | - The weighted-average remaining lease term for operating leases is **5.0 years**, with a weighted-average discount rate of **5.87%**[73](index=73&type=chunk) - During the three months ended September 30, 2020, the company opened a new CLIA-certified laboratory in Houston, Texas, to expand its capacity[68](index=68&type=chunk) [Note 10. Equity-Based Compensation](index=17&type=section&id=Note%2010.%20Equity-Based%20Compensation) Equity-based compensation expense significantly increased across all categories (cost of revenue, R&D, selling & marketing, G&A) for both the three and nine months ended September 30, 2020, reflecting increased headcount and stock price Equity-Based Compensation Expense (in thousands) | Category | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of revenue | $428 | $174 | $929 | $483 | | Research and development | $887 | $279 | $1,563 | $690 | | Selling and marketing | $1,184 | $332 | $1,577 | $643 | | General and administrative | $651 | $166 | $1,085 | $455 | | Total | $3,150 | $951 | $5,154 | $2,271 | [Note 11. Income Taxes](index=17&type=section&id=Note%2011.%20Income%20Taxes) The provision for income taxes increased substantially in 2020, driven by a significant increase in income. The effective tax rate also rose, partially offset by a reduction in the valuation allowance on deferred tax assets and increased windfall tax deductions Provision for Income Taxes (in thousands) | Period | 2020 | 2019 | | :-------------------- | :--- | :--- | | Three months ended Sep 30 | $14,526 | $61 | | Nine months ended Sep 30 | $13,961 | $81 | Effective Tax Rates | Period | 2020 | 2019 | | :-------------------- | :---- | :--- | | Three months ended Sep 30 | 23% | 4% | | Nine months ended Sep 30 | 21% | 14% | - The change in effective tax rates was primarily due to a significant increase in income, partially offset by a reduction in the valuation allowance on deferred tax assets and increased windfall tax deductions related to stock-based compensation[80](index=80&type=chunk) - As of September 30, 2020, the company had **$389 thousand** in unrecognized income tax benefits related to federal and state R&D credits[79](index=79&type=chunk) [Note 12. Income (Loss) per Share](index=18&type=section&id=Note%2012.%20Income%20(Loss)%20per%20Share) Basic and diluted income per share increased substantially for both the three and nine months ended September 30, 2020, reflecting the company's improved net income Net Income (Loss) per Common Share | Metric (per share) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic | $2.11 | $0.08 | $2.20 | $(0.01) | | Diluted | $1.98 | $0.08 | $2.07 | $(0.01) | [Note 13. Related Parties](index=18&type=section&id=Note%2013.%20Related%20Parties) The company engaged in transactions with related parties, including genetic testing services for AHMC Healthcare Inc. (an entity where a board member is a senior executive) and purchases of office furniture from JEM Enterprise (owned by the CEO's spouse). It also has a joint venture, FF Gene Biotech, with entities related to its CSO and a former significant stockholder - The company recognized **$1.3 million** in revenue from genetic testing services for AHMC Healthcare Inc. (where a board member is a Senior Executive VP) for both the three and nine months ended September 30, 2020[84](index=84&type=chunk) - The company purchased **$200 thousand** of office furniture and supplies from JEM Enterprise (owned by the CEO's spouse) in the three months ended September 30, 2020[85](index=85&type=chunk) - The company formed a joint venture, FF Gene Biotech, with Xilong Scientific Co., Ltd. (an affiliate of a former >10% stockholder) and Fuzhou Jinqiang Investment Partnership (LP), which includes the company's Chief Scientific Officer and a large stockholder[86](index=86&type=chunk) [Note 14. Equity Method Investments](index=19&type=section&id=Note%2014.%20Equity%20Method%20Investments) The company holds a 30% equity interest in FF Gene Biotech, a genetic testing joint venture in the PRC, with a remaining contribution obligation of approximately $4.4 million. A 25% investment in BostonMolecules, Inc. was fully impaired in September 2020 due to product development delays and market changes - The company has a **30% ownership interest** in FF Gene Biotech, a joint venture in the PRC, with a carrying value of **$1,621 thousand** as of September 30, 2020[99](index=99&type=chunk) - The company has a remaining contribution obligation of **29,700,000 RMB** (approximately **$4.4 million USD**) to FF Gene Biotech[88](index=88&type=chunk) - A **$2.5 million** investment in BostonMolecules, Inc. (**25% ownership**) was fully impaired in September 2020 due to delayed product development and the availability of similar products in the market[95](index=95&type=chunk)[97](index=97&type=chunk) Equity Loss and Impairment (in thousands) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------------- | :----------------------------- | :----------------------------- | | Equity loss in investee | $(631) | $(603) | | Impairment loss in equity-method investment | $(2,591) | — | [Note 15. Equity Distribution Agreements](index=20&type=section&id=Note%2015.%20Equity%20Distribution%20Agreements) The company utilized equity distribution agreements to sell common stock, generating significant net proceeds. In Q3 2020, $42.7 million net proceeds were raised from one agreement and $7.8 million from another, with a new agreement allowing for up to $125.0 million in future sales - During the three months ended September 30, 2020, the company sold **1,107,884 shares** of common stock under an Equity Distribution Agreement, resulting in **$42.7 million** of net proceeds[100](index=100&type=chunk) - In September 2020, the company entered into a new Equity Distribution Agreement, selling **200,000 shares** for **$7.8 million** net proceeds in Q3 2020, with an aggregate offering price of up to **$125.0 million**[102](index=102&type=chunk) [Note 16. Subsequent Event](index=21&type=section&id=Note%2016.%20Subsequent%20Event) Subsequent to September 30, 2020, the company purchased real property for $15.4 million, financed by a margin loan. Additionally, it sold 940,018 shares of common stock, generating $40.9 million in gross proceeds - On October 20, 2020, the company closed escrow on a **$15.4 million** real property purchase, financed using a margin loan collateralized by marketable securities[103](index=103&type=chunk)[104](index=104&type=chunk) - Subsequent to September 30, 2020, the company sold **940,018 shares** of common stock for **$40.9 million** in gross proceeds under the 2020 Equity Distribution Agreement[105](index=105&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, highlighting the significant impact of the COVID-19 testing business on revenue growth, profitability, and operational expansion. It also discusses liquidity, capital resources, and critical accounting policies [Overview](index=22&type=section&id=Overview) This overview describes the company's business as a genetic testing technology firm and highlights its rapid growth in billable tests, primarily driven by COVID-19 testing - Fulgent Genetics is a technology company offering comprehensive genetic testing, leveraging a proprietary platform for a broad, flexible, and competitively priced test menu[111](index=111&type=chunk) - The company experienced rapid growth in 2020, with billable tests delivered increasing by **4,829%** in the three months and **2,631%** in the nine months ended September 30, 2020, primarily due to COVID-19 tests[113](index=113&type=chunk)[125](index=125&type=chunk) Key Financial and Operational Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $101,716 | $10,347 | $126,734 | $24,141 | | Net Income (Loss) | $46,638 | $1,462 | $48,003 | $(115) | | Billable tests delivered | 1,035 | 21 | 1,229 | 45 | [Impact of COVID-19 Testing Business](index=23&type=section&id=Impact%20of%20COVID-19%20Testing%20Business) This section details how the COVID-19 testing business significantly expanded operations, increased headcount, shifted revenue sources, and boosted overall financial performance, despite anticipated future demand decreases - The launch of COVID-19 tests in March 2020 led to rapid business expansion, increasing total headcount from **154 to 473** by September 2020 and daily test volume by over **6,000%**[114](index=114&type=chunk) - The majority of COVID-19 testing revenue comes from third-party payors (insurance, Medicare), a shift from the direct payments typical of traditional genetic testing[114](index=114&type=chunk) - The company expanded capacity by increasing shifts at its Temple City lab and establishing a new lab in Houston, Texas[114](index=114&type=chunk) - The COVID-19 pandemic did not negatively impact consolidated operating results or liquidity as of September 30, 2020, but rather resulted in significant revenue growth[119](index=119&type=chunk)[120](index=120&type=chunk) - While demand for COVID-19 tests is anticipated to decrease post-vaccine, the company continues to invest in expanding capacity for the next two quarters[114](index=114&type=chunk) [Results of Operations](index=25&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, highlighting substantial revenue and gross profit growth driven by increased billable tests, alongside significant changes in average pricing and costs per test Consolidated Results of Operations (in thousands, except per billable test data) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | % Change (YoY) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | % Change (YoY) | | :----------------------------------- | :------------------------------ | :------------------------------ | :------------- | :----------------------------- | :----------------------------- | :------------- | | Revenue | $101,716 | $10,347 | 883% | $126,734 | $24,141 | 425% | | Gross profit | $75,455 | $6,462 | 1,068% | $88,699 | $13,668 | 549% | | Operating income (loss) | $63,523 | $1,509 | 4,110% | $64,249 | $(19) | 338,253% | | Net income (loss) | $46,638 | $1,462 | 3,090% | $48,003 | $(115) | 41,842% | | Average price per billable test delivered | $98 | $493 | (80%) | $103 | $536 | (81%) | | Cost per billable test delivered | $25 | $185 | (86%) | $31 | $233 | (87%) | | Research and development | $3,177 | $1,744 | 82% | $7,004 | $4,742 | 48% | | Selling and marketing | $5,014 | $1,687 | 197% | $9,871 | $4,263 | 132% | | General and administrative | $3,741 | $1,522 | 146% | $7,575 | $4,682 | 62% | - Revenue growth was primarily due to an increase in billable tests delivered, mainly COVID-19 tests, offset by a substantial decline in average selling price per test[127](index=127&type=chunk) - Cost per billable test decreased significantly due to economies of scale from increased test volume and leveraging technology[134](index=134&type=chunk) - Gross margin increased from **62.5% to 74.2%** for the three months and from **56.6% to 70.0%** for the nine months ended September 30, 2020[136](index=136&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet short-term and long-term obligations, detailing its cash position, marketable securities, and reliance on operating cash flow and equity financings Liquidity Position (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :---------------------- | :----------------- | :---------------- | | Cash and cash equivalents | $53,000 | $12,000 | | Marketable securities | $50,900 | $58,300 | - Operations are primarily financed by cash from operations and equity financings[151](index=151&type=chunk) - The company raised **$42.7 million** in net proceeds from one Equity Distribution Agreement and **$7.8 million** from another in Q3 2020[153](index=153&type=chunk)[156](index=156&type=chunk) - Existing cash and proceeds from equity financings are expected to be sufficient to meet anticipated cash requirements for at least the next 12 months[157](index=157&type=chunk) [Cash Flows](index=30&type=section&id=Cash%20Flows) This section analyzes the sources and uses of cash from operating, investing, and financing activities, highlighting significant investments in marketable securities and fixed assets, and proceeds from equity offerings Summary of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $6,372 | $5,633 | | Net cash (used in) provided by investing activities | $(7,671) | $7,033 | | Net cash provided by financing activities | $42,348 | $1,136 | - Cash used in investing activities in 2020 was primarily due to purchases of marketable securities (**$13.6 million**), fixed assets (**$11.3 million**), investment in BostonMolecules (**$2.6 million**), and equipment for FF Gene (**$1.4 million**)[164](index=164&type=chunk) - Cash provided by financing activities in 2020 primarily represents net proceeds from the Equity Distribution Agreement and the 2020 Equity Distribution Agreement[166](index=166&type=chunk) [Critical Accounting Policies and Use of Estimates](index=31&type=section&id=Critical%20Accounting%20Policies%20and%20Use%20of%20Estimates) This section discusses the significant accounting policies and estimates that require management's judgment, particularly those influenced by the COVID-19 pandemic, and confirms no material changes since the 2019 Annual Report - The preparation of financial statements requires management to make estimates, judgments, and assumptions, particularly influenced by the potential impacts of the COVID-19 pandemic[169](index=169&type=chunk) - There have been no significant changes to critical accounting policies and estimates as described in the 2019 Annual Report, except as set forth in Note 2[170](index=170&type=chunk) [The JOBS Act](index=31&type=section&id=The%20JOBS%20Act) This section explains the company's status as an 'emerging growth company' and 'smaller reporting company' under the JOBS Act, which allows for reduced disclosure requirements, and its election to opt out of the extended transition period for new accounting standards - The company qualifies as an 'emerging growth company' and 'smaller reporting company,' allowing for reduced disclosure requirements[172](index=172&type=chunk) - The company has irrevocably elected to opt out of the extended transition period for complying with new or revised financial accounting standards[172](index=172&type=chunk)[264](index=264&type=chunk) [Off-Balance Sheet Arrangements](index=31&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms that the company does not have any material off-balance sheet arrangements - The company did not have, and does not currently have, any material off-balance sheet arrangements[174](index=174&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=32&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that the information required for Quantitative and Qualitative Disclosures About Market Risk is not applicable to the company for this report - This item is not applicable[176](index=176&type=chunk) [Item 4. Controls and Procedures](index=32&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the evaluation of the company's disclosure controls and procedures, concluding their effectiveness as of September 30, 2020. It also confirms no material changes in internal control over financial reporting during the quarter and acknowledges the inherent limitations of such controls [Evaluation of Disclosure Controls and Procedures](index=32&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section details management's evaluation of the effectiveness of the company's disclosure controls and procedures as of September 30, 2020 - Management, with the participation of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[179](index=179&type=chunk) [Changes in Internal Control over Financial Reporting](index=32&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section confirms that there were no material changes in the company's internal control over financial reporting during the three months ended September 30, 2020 - There have been no material changes in internal control over financial reporting during the three months ended September 30, 2020[181](index=181&type=chunk) [Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting](index=32&type=section&id=Inherent%20Limitations%20on%20Disclosure%20Controls%20and%20Procedures%20and%20Internal%20Control%20over%20Financial%20Reporting) This section acknowledges that controls and procedures, despite their design, are subject to inherent limitations such as human error, circumvention, and deterioration, providing only reasonable assurance - Management recognizes that controls and procedures can only provide reasonable assurance and are subject to inherent limitations, including faulty judgment, simple errors, circumvention, and deterioration[182](index=182&type=chunk) [PART II—OTHER INFORMATION](index=33&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) This section addresses legal proceedings, comprehensive risk factors, details of unregistered equity sales, and a list of filed exhibits [Item 1. Legal Proceedings](index=33&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently involved in any legal proceedings that management believes would have a material effect on its business, financial condition, results of operations, or cash flows - The company is not presently a party to any legal proceedings that, in the opinion of management, would have a material effect on its business[185](index=185&type=chunk) [Item 1A. Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) This section outlines significant risks associated with investing in the company's common stock, categorized into business and strategy, regulatory, intellectual property, and common stock risks. Key concerns include the volatility of operating results due to COVID-19 testing, intense competition, regulatory changes for diagnostic products, reliance on trade secrets, and potential stock price fluctuations [Business and Strategy Risks](index=33&type=section&id=Business%20and%20Strategy%20Risks) This section highlights risks related to the company's operations and strategic direction, including volatile operating results, management challenges from rapid growth, competition, supplier dependence, and IT system vulnerabilities - Operating results may fluctuate significantly due to factors like sales timing, pricing changes, and global health crises (e.g., COVID-19), making predictions difficult[188](index=188&type=chunk) - The rapid expansion of the COVID-19 testing business presents management challenges, and demand is anticipated to decrease once an effective vaccine is widely deployed[191](index=191&type=chunk) - The company has a history of losses and may not be able to achieve or sustain profitability, especially with continued investments in growth[192](index=192&type=chunk) - Intense competition from molecular genetic testing services and new COVID-19 test providers could lead to price declines or reduced market share[201](index=201&type=chunk)[204](index=204&type=chunk) - Growth depends on diversifying the customer base beyond hospitals and medical institutions to include governmental bodies, municipalities, and large corporations for COVID-19 testing, as well as individual physicians[197](index=197&type=chunk) - Substantial investments are required to expand infrastructure (testing capacity, IT systems) and hire skilled personnel to support desired growth, and failure to manage this effectively could jeopardize the business[210](index=210&type=chunk)[212](index=212&type=chunk) - The company relies on a limited number of suppliers, including Illumina as the sole supplier for next-generation sequencers and associated reagents, posing risks of disruption[233](index=233&type=chunk) - Dependence on information technology systems for critical operations makes the company vulnerable to hardware/software malfunctions, delays, and cybersecurity breaches[252](index=252&type=chunk)[254](index=254&type=chunk) [Regulatory Risks](index=50&type=section&id=Regulatory%20Risks) This section details regulatory compliance risks, including potential changes in FDA oversight for laboratory developed tests, the need to adhere to federal, state, and foreign licensing, and the complexities of privacy, security, fraud, and abuse laws - Changes in FDA enforcement discretion or new regulations (e.g., VALID Act) could subject the company's laboratory developed tests (LDTs) to premarket review, increasing costs and delays[269](index=269&type=chunk)[275](index=275&type=chunk)[276](index=276&type=chunk) - Failure to comply with federal (CLIA), state (California, New York), and foreign laboratory licensing requirements could result in loss of testing ability or business disruptions[279](index=279&type=chunk)[282](index=282&type=chunk)[284](index=284&type=chunk) - The company is subject to broad privacy and security laws (HIPAA, HITECH, GDPR, CCPA); non-compliance could lead to harsh penalties, reputational damage, and business harm[285](index=285&type=chunk)[288](index=288&type=chunk)[289](index=289&type=chunk)[290](index=290&type=chunk) - Compliance with federal and state fraud and abuse laws (Anti-Kickback Statute, Stark Law, False Claims Act, EKRA) is complex, and violations could result in substantial penalties and exclusion from healthcare programs[293](index=293&type=chunk)[294](index=294&type=chunk)[307](index=307&type=chunk) - Marketing COVID-19 tests under Emergency Use Authorizations (EUAs) is subject to limitations and government discretion; termination or revocation of EUAs could require full FDA clearance[312](index=312&type=chunk) - International operations are subject to anti-bribery laws like the FCPA, and violations could lead to significant fines and reputational damage[314](index=314&type=chunk)[315](index=315&type=chunk) [Intellectual Property Risks](index=59&type=section&id=Intellectual%20Property%20Risks) This section addresses risks related to intellectual property, including the company's reliance on trade secrets without patents, potential infringement claims, and the impact of evolving patent law on genetic discoveries - The company currently owns no patents and relies on trade secret protection, non-disclosure agreements, and invention assignment agreements, which may not be fully effective against competitors[320](index=320&type=chunk)[321](index=321&type=chunk) - Litigation or third-party claims of intellectual property infringement or misappropriation could be costly, time-consuming, and prevent the company from selling its tests[323](index=323&type=chunk)[324](index=324&type=chunk) - Developments in patent law, such as Supreme Court decisions (Prometheus, Myriad, Alice), could negatively impact the ability to obtain or enforce patents related to genetic discoveries[325](index=325&type=chunk)[327](index=327&type=chunk) - Enforcing intellectual property rights outside the United States may be difficult due to varying legal protections in foreign countries[331](index=331&type=chunk) [Common Stock Risks](index=61&type=section&id=Common%20Stock%20Risks) This section covers risks associated with the company's common stock, including potential price volatility, significant control by principal stockholders, dilution from future stock issuances, lack of dividends, and anti-takeover provisions - An active, liquid trading market for common stock may not be sustained, and the price may be volatile due to various factors, including operating results, competition, and market conditions[334](index=334&type=chunk)[337](index=337&type=chunk) - Principal stockholders and management own a significant percentage (approximately **39%**) of voting equity, allowing them to exert significant control over matters subject to stockholder approval[340](index=340&type=chunk) - Future issuances of common stock or rights to purchase common stock could result in additional dilution to existing stockholders[342](index=342&type=chunk) - The company does not intend to pay dividends on its common stock, meaning returns will be limited to stock price appreciation[343](index=343&type=chunk) - Provisions in the company's charter documents and Delaware law (Section 203 DGCL) could discourage, delay, or prevent a change in control or changes in management[346](index=346&type=chunk)[347](index=347&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=66&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the use of proceeds from the company's initial public offering (IPO) and subsequent registered equity offerings. Proceeds have been used for contributions to a joint venture, funding operations, and investing in interest-bearing securities - Net proceeds from the October 2016 IPO were approximately **$36.0 million**; **$28.8 million** has been used, including **$4.5 million** for FF Gene Biotech and **$24.3 million** for operations[356](index=356&type=chunk)[357](index=357&type=chunk) - The company received **$42.7 million** in net proceeds from an Equity Distribution Agreement in Q3 2020 and **$7.8 million** from the 2020 Equity Distribution Agreement in Q3 2020[358](index=358&type=chunk)[360](index=360&type=chunk) - Net proceeds of approximately **$27.6 million** were received from an underwritten offering in November 2019[359](index=359&type=chunk) [Item 6. Exhibits](index=66&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including key agreements such as the Amended and Restated 2016 Omnibus Incentive Plan, Aircraft Purchase Agreement, and Agreement for Purchase and Sale of Property, along with various certifications - The exhibit index includes the Amended and Restated 2016 Omnibus Incentive Plan, Aircraft Purchase Agreement, and Agreement for Purchase and Sale of Property[364](index=364&type=chunk) - Certifications of the Principal Executive Officer and Principal Financial Officer are furnished with the report[364](index=364&type=chunk) [Signatures](index=68&type=section&id=Signatures) This section contains the official signatures certifying the accuracy and submission of the report - The report was signed on November 9, 2020, by Ming Hsieh, President and Chief Executive Officer, and Paul Kim, Chief Financial Officer[367](index=367&type=chunk)

Fulgent Genetics, Inc. (NASDAQ:FLGT) Q2 2020 Earnings Conference Call August 4, 2020 4:30 PM ET Company Participants Nicole Borsje - Head, IR Ming Hsieh - Chief Executive Officer Paul Kim - Chief Commercial Officer Brandon Perthuis - Chief Commercial Officer Conference Call Participants Sung Ji Nam - BTIG Steven Mah - Piper Sandler Operator Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Fulgent Genetics Earnings Conference Call. At this time all participants are in listen-only m ...

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 June 30, 2020 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 jurisdict ...