Fulgent Genetics(US:FLGT)2024-08-02 11:38PART I—FINANCIAL INFORMATION Financial Statements (Unaudited) For the six months ended June 30, 2024, Fulgent Genetics reported a slight increase in revenue to $135.5 million and a narrowed net loss of $22.2 million, compared to a $26.6 million loss in the prior year period. The balance sheet remains strong with total assets of $1.23 billion and cash, cash equivalents, and marketable securities totaling $837.9 million. Cash flow from operations improved significantly to $11.6 million from $1.8 million in the same period last year Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $65,111 | $97,473 | | Marketable securities (Current & Long-term) | $772,758 | $750,252 | | Total assets | $1,232,239 | $1,235,328 | | Total liabilities | $103,391 | $102,042 | | Total stockholders' equity | $1,128,848 | $1,133,286 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Revenue | $135,513 | $134,021 | | Gross Profit | $48,595 | $39,383 | | Operating Loss | $(40,704) | $(44,622) | | Net Loss Attributable to Fulgent | $(22,172) | $(26,569) | | Diluted Loss Per Share | $(0.74) | $(0.90) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,551 | $1,830 | | Net cash used in investing activities | $(39,882) | $(5,450) | | Net cash used in financing activities | $(3,953) | $(17,360) | | Net decrease in cash and cash equivalents | $(32,362) | $(21,158) | Notes to the Condensed Consolidated Financial Statements The notes detail the company's structure into two reportable segments: Laboratory Services and Therapeutic Development. A significant customer concentration risk exists, with one customer accounting for 22% of revenue in H1 2024. The company is facing significant legal and regulatory challenges, including investigations by the DOJ and SEC, and an HRSA audit concerning COVID-19 test reimbursements. A $6.9 million liability has been recorded for a voluntary disclosure related to its Inform Diagnostics subsidiary. Goodwill of $22.1 million is entirely allocated to the Therapeutic Development segment, as the Laboratory Services goodwill was fully impaired in 2023 - The company operates in two segments: Laboratory Services (technical lab services and professional interpretation) and Therapeutic Development (cancer drug candidates)1553 - One customer accounted for 24% of total revenue in Q2 2024 and 22% in H1 2024, indicating significant customer concentration30101 - The company is under investigation by the DOJ and SEC regarding potential violations of the False Claims Act, Anti-Kickback Statute, and Stark Law. The SEC staff has made a preliminary determination to recommend an enforcement action61 - An audit by HRSA is underway regarding $548.9 million in reimbursements for COVID-19 tests for the uninsured, with potential for amounts to be returned62 - A liability of $6.9 million has been recorded in connection with a voluntary disclosure process initiated by the Inform Diagnostics subsidiary6452 - Goodwill for the Laboratory Services segment was fully impaired as of December 31, 2023. The remaining goodwill of $22.1 million is attributed to the Therapeutic Development segment8082 Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 1% year-over-year revenue growth for the first six months of 2024 to a strong 35% increase in Precision Diagnostics, which offset declines in Anatomic Pathology and BioPharma services. Gross margin improved significantly from 29% to 36% due to cost optimization efforts. Operating expenses rose, driven by increased R&D for the FID-007 therapeutic candidate. The company maintains a strong liquidity position with $837.9 million in cash and marketable securities, which is considered sufficient for operations for at least the next 12 months Results of Operations For the first six months of 2024, revenue increased by 1% to $135.5 million. This was driven by a $20.8 million (35%) increase in Precision Diagnostics revenue, offset by a $7.3 million (14%) decrease in Anatomic Pathology and a $9.9 million (61%) decrease in BioPharma services. Gross margin improved from 29% to 36% year-over-year due to a reduction in cost of revenue. R&D expenses increased by 28%, primarily for the Therapeutic Development segment's FID-007 drug study, while selling and marketing expenses decreased by 16% Revenue by Service Line (Six Months Ended June 30, in thousands) | Service Line | 2024 | 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Precision diagnostics | $80,590 | $59,840 | +35% | | Anatomic pathology | $46,538 | $53,801 | -14% | | BioPharma services | $6,268 | $16,191 | -61% | | COVID-19 | $2,117 | $4,189 | -50% | | Total | $135,513 | $134,021 | +1% | - Gross margin for the six months ended June 30, 2024, increased to 36% from 29% in the prior year period, primarily due to cost structure optimization105 - R&D expenses for the Therapeutic Development segment increased by 99% to $10.3 million for H1 2024, mainly due to the FID-007 drug study. Enrollment for the phase 2 study began in Q2 2024106107 - Selling and marketing expenses decreased 16% in H1 2024, attributed to discontinued marketing for COVID-19 and lower revenue in BioPharma and anatomic pathology services109 Liquidity and Capital Resources As of June 30, 2024, the company held $837.9 million in cash, cash equivalents, and marketable securities. Net cash from operating activities for the first six months of 2024 was $11.6 million, a significant improvement from $1.8 million in the prior year period. The company repurchased $0.2 million of its common stock in H1 2024, with $150.5 million remaining available under its repurchase program. Management believes current liquidity is sufficient for at least the next 12 months - The company has a strong liquidity position with $837.9 million in cash, cash equivalents, and marketable securities as of June 30, 2024117 Cash Flow Summary (Six Months Ended June 30, in thousands) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,551 | $1,830 | | Net cash used in investing activities | $(39,882) | $(5,450) | | Net cash used in financing activities | $(3,953) | $(17,360) | - As of June 30, 2024, approximately $150.5 million remained available for future repurchases under the company's stock repurchase program12488 Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its market risk disclosures during the six months ended June 30, 2024, from what was previously disclosed in its 2023 Annual Report on Form 10-K - There were no material changes in quantitative and qualitative disclosures about market risk during the six months ended June 30, 2024128 Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2024. There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls - Based on an evaluation as of June 30, 2024, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective129 - No material changes to internal control over financial reporting were identified during the quarter130 PART II—OTHER INFORMATION Legal Proceedings The company is involved in several significant legal matters, including investigations by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), audits by the Health Resources and Services Administration (HRSA), and a voluntary disclosure process. These matters are detailed in Note 8 of the financial statements and represent a material risk - The company is engaged in legal investigations, audits, and voluntary disclosure processes, with further details provided in Note 8 of the financial statements133 Risk Factors The company highlights significant risks from ongoing governmental investigations. Specifically, it notes a Civil Investigative Demand (CID) from the DOJ related to improper billing and kickback allegations, and a non-public SEC investigation into related matters. On May 6, 2024, the SEC staff informed the company of a preliminary determination to recommend an enforcement action, which the company is contesting - The company faces risk from a DOJ investigation under the False Claims Act concerning medically unnecessary testing, improper billing, and potential violations of the Anti-Kickback Statute and Stark Law135 - On May 6, 2024, the SEC staff made a preliminary determination to recommend filing an enforcement action against the company. The company responded on June 7, 2024, stating it does not believe the recommendation is warranted and is in ongoing discussions135 Unregistered Sales of Equity Securities and Use of Proceeds The company provides an update on its use of proceeds from prior stock sales, with funds used for operations, a business combination, and debt repayment. It also details its stock repurchase activity, having bought back 10,000 shares for $0.2 million in March 2024 under its authorized program - The company repurchased 10,000 shares of common stock in March 2024 at an average price of $22.02 per share138 Other Information During the second quarter of 2024, no directors or officers of the company adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No directors or officers adopted or terminated Rule 10b5-1 trading arrangements during the three and six months ended June 30, 2024139 Exhibits This section references the Exhibit Index, which lists all documents filed as part of this quarterly report, including certifications by the CEO and CFO and XBRL data files - The report includes required exhibits, such as CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906, and Inline XBRL documents140143