Quarterly Report (10-q)

Date : 05/10/2019 @ 7:13PM
Source : Edgar (US Regulatory)
Stock : Fulgent Genetics Inc (FLGT)
Quote : 11.42  -0.41 (-3.47%) @ 4:59AM
Fulgent Genetics share price Chart

Quarterly Report (10-q)

 

 

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, 2019

or

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

For the transition period from                              to                             

Commission File Number: 001-37894

 

FULGENT GENETICS, INC.

(exact name of registrant as specified in its charter)

 

 

Delaware

81-2621304

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

4978 Santa Anita Avenue, Suite 205

Temple City, CA

91780

(Address of principal executive offices)

(Zip Code)

(626) 350-0537

(Registrant’s telephone number, including area code)

 

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  

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)

As of May 1, 2019, there were 18,324,286 outstanding shares of the registrant’s common stock.

 

 

 

 


 

Table of Contents

 

 

 

 

 

 

i


PART I—FINANCIA L INFORMATION

Item 1. Financial Statements.

FULGENT GENETICS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except par value data)

(unaudited)

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

5,288

 

 

$

6,736

 

Marketable securities

 

24,139

 

 

 

24,298

 

Trade accounts receivable, net of allowance for doubtful accounts of $588 and $590, as of

   March 31, 2019 and December 31, 2018, respectively

 

4,563

 

 

 

5,948

 

Other current assets

 

2,311

 

 

 

2,561

 

Total current assets

 

36,301

 

 

 

39,543

 

Marketable securities, long-term

 

8,983

 

 

 

6,386

 

Equity method investments

 

1,233

 

 

 

1,512

 

Fixed assets, net

 

6,046

 

 

 

6,446

 

Operating lease right-of-use asset

 

2,858

 

 

 

 

Other long-term assets

 

231

 

 

 

17

 

Total assets

$

55,652

 

 

$

53,904

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

1,456

 

 

$

1,313

 

Accrued liabilities

 

1,354

 

 

 

1,425

 

Operating lease liabilities, short-term

 

393

 

 

 

 

Total current liabilities

 

3,203

 

 

 

2,738

 

Operating lease liabilities, long-term

 

2,488

 

 

 

 

Other long-term liabilities

 

 

 

 

14

 

Total liabilities

 

5,691

 

 

 

2,752

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $0.0001 par value per share, 50,000 shares authorized, 18,286 and 18,172

   shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

2

 

 

 

2

 

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

   outstanding at March 31, 2019 and December 31, 2018

 

 

 

 

 

Additional paid-in capital

 

114,790

 

 

 

114,203

 

Accumulated other comprehensive income (loss)

 

95

 

 

 

(35

)

Accumulated deficit

 

(64,926

)

 

 

(63,018

)

Total stockholders’ equity

 

49,961

 

 

 

51,152

 

Total liabilities and stockholders’ equity

$

55,652

 

 

$

53,904

 

 

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,

 

 

2019

 

 

2018

 

Revenue

$

5,370

 

 

$

4,653

 

Cost of revenue

 

2,968

 

 

 

2,772

 

Gross profit

 

2,402

 

 

 

1,881

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

1,424

 

 

 

1,458

 

Selling and marketing

 

1,272

 

 

 

1,130

 

General and administrative

 

1,529

 

 

 

1,487

 

Total operating expenses

 

4,225

 

 

 

4,075

 

Operating loss

 

(1,823

)

 

 

(2,194

)

Interest and other income, net

 

207

 

 

 

95

 

Loss before income taxes and equity loss in investee

 

(1,616

)

 

 

(2,099

)

Provision for (benefit from) income taxes

 

13

 

 

 

(434

)

Loss before equity loss in investee

 

(1,629

)

 

 

(1,665

)

Equity loss in investee

 

(279

)

 

 

(245

)

Net loss

$

(1,908

)

 

$

(1,910

)

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

Basic

$

(0.10

)

 

$

(0.11

)

Diluted

$

(0.10

)

 

$

(0.11

)

 

 

 

 

 

 

 

 

Weighted-average common shares:

 

 

 

 

 

 

 

Basic

 

18,228

 

 

 

17,864

 

Diluted

 

18,228

 

 

 

17,864

 

 

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,

 

 

2019

 

 

2018

 

Net loss

$

(1,908

)

 

$

(1,910

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation gain

 

15

 

 

 

22

 

Net unrealized gain (loss) on marketable securities, net of tax

 

115

 

 

 

(65

)

Comprehensive loss

$

(1,778

)

 

$

(1,953

)

 

 

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

3


 

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In Capital

 

 

Accumulated

Other Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Total

Equity

 

Balance at December 31, 2018

 

 

18,172

 

 

$

2

 

 

$

114,203

 

 

$

(35

)

 

$

(63,018

)

 

$

51,152

 

Equity-based compensation

 

 

 

 

 

 

 

 

583

 

 

 

 

 

 

 

 

 

583

 

Exercise of common stock options

 

 

9

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Restricted stock awards

 

 

105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

 

 

 

130

 

 

 

 

 

 

130

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,908

)

 

 

(1,908

)

Balance at March 31, 2019

 

 

18,286

 

 

$

2

 

 

$

114,790

 

 

$

95

 

 

$

(64,926

)

 

$

49,961

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In Capital

 

 

Accumulated

Other Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Total

Equity

 

Balance at December 31, 2017

 

 

17,847

 

 

$

2

 

 

$

111,884

 

 

$

(44

)

 

$

(57,664

)

 

$

54,178

 

Equity-based compensation

 

 

 

 

 

 

 

 

545

 

 

 

 

 

 

 

 

 

545

 

Exercise of common stock options

 

 

5

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Restricted stock awards

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

327

 

 

 

327

 

Cumulative tax effect of accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

(74

)

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

(43

)

 

 

 

 

 

(43

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,910

)

 

 

(1,910

)

Balance at March 31, 2018

 

 

17,876

 

 

$

2

 

 

$

112,431

 

 

$

(87

)

 

$

(59,321

)

 

$

53,025

 

 

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

4


 

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(1,908

)

 

$

(1,910

)

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

   operating activities:

 

 

 

 

 

 

 

 

Equity-based compensation

 

 

583

 

 

 

545

 

Depreciation

 

 

535

 

 

 

516

 

Noncash lease expense

 

 

100

 

 

 

 

Loss on disposal of fixed asset

 

 

 

 

 

51

 

Amortization of premium of marketable securities

 

 

37

 

 

 

82

 

Provision for bad debt

 

 

 

 

 

48

 

Deferred taxes

 

 

 

 

 

(434

)

Equity loss in investee

 

 

279

 

 

 

245

 

Other

 

 

(28

)

 

 

28

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,414

 

 

 

(713

)

Other current and long-term assets

 

 

64

 

 

 

(125

)

Accounts payable

 

 

79

 

 

 

218

 

Accrued liabilities

 

 

(7

)

 

 

158

 

Operating lease liabilities

 

 

(93

)

 

 

 

Net cash provided by (used in) operations

 

 

1,055

 

 

 

(1,291

)

Cash flow from investing activities:

 

 

 

 

 

 

 

 

Purchases of fixed assets

 

 

(134

)

 

 

(1,116

)

Purchase of marketable securities

 

 

(5,988

)

 

 

(4,683

)

Maturities of marketable securities

 

 

3,600

 

 

 

5,850

 

Net cash (used in) provided by investing activities

 

 

(2,522

)

 

 

51

 

Cash flow from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

4

 

 

 

2

 

Net cash provided by financing activities

 

 

4

 

 

 

2

 

Effect of exchange rate changes on cash and cash equivalents

 

 

15

 

 

 

22

 

Net decrease in cash

 

 

(1,448

)

 

 

(1,216

)

Cash balance at beginning of period

 

 

6,736

 

 

 

6,490

 

Cash balance at end of period

 

$

5,288

 

 

$

5,274

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Fixed assets included in accounts payable

 

$

45

 

 

$

6

 

 

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

5


 

FULGENT GENETICS, INC.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

 

Note 1. Overview and Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These financial statements include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries and entities in which the Company has a controlling financial interest or is deemed to be the primary beneficiary. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company uses the equity method to account for its investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. All significant intercompany accounts and transactions are eliminated from the accompanying condensed consolidated financial statements.

Nature of the Business

Fulgent Genetics, Inc., together with its subsidiaries (collectively referred to as the “Company,” unless otherwise noted or the context otherwise requires), is a growing technology company offering comprehensive genetic testing and providing physicians with clinically actionable diagnostic information they can use to improve the quality of patient care. The Company has developed a proprietary technology platform that allows us to offer a broad and flexible test menu and continually expand and improve its proprietary genetic reference library, while maintaining accessible pricing, high accuracy and competitive turnaround times. Combining next generation sequencing, or NGS, with our technology platform, the Company performs full-gene sequencing with deletion/duplication analysis in single-gene tests; pre-established, multi-gene, disease-specific panels; and customized panels that can be tailored to meet specific customer needs. The Company believes its test menu offers more genes for testing than its competitors in today’s market, which enables it to provide expansive options for test customization and clinically actionable results. A cornerstone of the Company’s business is its ability to provide expansive options and flexibility for all clients’ unique genetic testing needs.

Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s audited consolidated financial statements as of and for the fiscal year ended December 31, 2019, which are included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2019 (the “2018 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, 2018 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 2018 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 2018 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 and disclosure of contingent 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. Actual results could differ 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 doubtful accounts, (iii) the useful lives of fixed assets, (iv) estimates of tax liabilities and (v) equity method investments.

6


 

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 other comprehensive income (loss) in the accompanying condensed consolidated statements of stockholders’ equity. Gains and losses from these translations were not significant in the first quarters of 2019 and 2018. The Company and its subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and nonmonetary assets and liabilities at historical rates. Losses from these remeasurements were not significant in the first quarters of 2019 and 2018.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included as operating lease right-of-use (“ROU”) assets, operating lease liabilities, short-term, and operating lease liabilities, long-term, on the Company’s condensed consolidated balance sheets.

ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating ROU lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, including options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments since our leases do not provide an implicit rate. The ROU lease asset includes any base rent payments made and excludes lease incentives and variable operating expenses. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Concentration of Customers

In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue. In the first quarter of 2019 , after aggregating customers that are under common control or are affiliates, two customers contributed 20% and 11% of our revenue. In the in the first quarter of 2018 , after aggregating customers that are under common control or are affiliates, one customer contributed 13% of our revenue. One customer comprised 12% and 18% of total accounts receivable as of March 31, 2019 and December 31, 2018, respectively.

Revenue from Contracts with Customers

Disaggregation of Revenue

The Company classifies its customers into three payor types, Clinical Institutional, Patients who pay directly or Clinical Insurance, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors. The following table summarizes revenue from contracts with customers by payor type for the in the first quarters of 2019 and 2018 .

 

 

Three months ended March 31,

 

 

2019

 

 

2018

 

 

(in thousands)

 

Genetic Testing Services by payor

 

 

 

 

 

 

 

Institutional

$

5,119

 

 

$

4,477

 

Patient

 

102

 

 

 

103

 

Insurance

 

149

 

 

 

73

 

Total Revenue

$

5,370

 

 

$

4,653

 

 

Contract Balances

Receivables from contracts with customers   - As of March 31, 2019 and December 31, 2018, receivables from contracts with customers were approximately $4.6 million and $5.9 million and are included within Trade accounts receivable on the Condensed Consolidated Balance Sheets.

7


 

Contracts assets and liabilities - As of March 31, 2019 and December 31, 2018, contract assets and liabilities from contracts with customers were not material.

Transaction Price Allocated to Future Performance Obligations

The Company does not have material future obligations associated with Genetic Testing Services that extend beyond one year.

Recent Accounting Pronouncements Adopted

ASU No. 2016-02

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes ASC 840, Leases . The FASB has issued subsequent amendments to improve and clarify the implementation guidance of Topic 842. The new standard requires an entity to recognize leases on the balance sheet and to disclose key information about the entity's leasing arrangements. The Company adopted this standard as of January 1, 2019 using the modified retrospective transition approach, including certain practical expedients, for all leases existing as of January 1, 2019, the effective and initial application date. Prior period financial statements were not recast under the new guidance. The Company elected to apply practical expedients, to not separate non-lease components from lease components, and to not reassess lease classification, treatment of initial direct costs, or whether an existing or expired contract contains a lease. The Company also elected to use the short-term exemption for all class assets. The adoption of the new standard resulted in recognition of operating lease liabilities of approximately $3.0 million with corresponding right-of-use assets of approximately the same amount. There was no impact to retained earnings upon adoption. This standard had a material impact on the condensed consolidated balance sheets and did not have a material impact on the Company’s condensed consolidated statements of operations and consolidated statements of cash flows.

See Note 9, Leases, for further information.

ASU No. 2017-08

In March 2017, the FASB issued ASU No. 2017-08, Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20) . Under the ASU, entities must amortize to the earliest call date the premium on certain purchased callable debt securities. The ASU does not require any accounting change for debt securities held at a discount. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company’s marketable security portfolio amortizes to the earliest call date the premium on certain purchased callable debt securities. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements or disclosure.

ASU No. 2018-02

In February 2018, the FASB issued ASU 2018-02 Income Statement - Reporting Comprehensive Income (ASC 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Act related to items in Additional Other Comprehensive Income (AOCI) that the FASB refers to as having been “stranded” in AOCI.  The guidance is effective for annual and interim periods beginning after December 15, 2018, and is applicable to the Company in fiscal year 2019; however, early adoption is permitted. The Company adopted ASU 2018-02 as of January 1, 2019 and elected not to reclassify the income tax effect of the Tax Act from AOCI to retained earnings. The adoption of ASU 2018-02 resulted in no impact to the Company's financial statements.

Recent Accounting Pronouncements

The Company evaluates all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (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 its Condensed Consolidated Financial Statements.

8


 

ASU No. 2016-13

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments . ASU No. 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those reporting periods. Early adoption is permitted. The Company has not yet evaluated the effect this ASU will have on its consolidated financial statements and related disclosures.

ASU No. 2018-15

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which provides new guidance on the accounting for implementation, set-up, and other upfront costs incurred in a hosted cloud computing arrangement. Under the new guidance, entities will apply the same criteria for capitalizing implementation costs as they would for an internal-use software license arrangement. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. This ASU can be adopted prospectively to eligible costs incurred on or after the date of adoption or retrospectively. The Company does not expect the adoption of the new guidance under the standard to materially affect its financial position or results of operations.

 

Note 3. Marketable Securities

The Company’s marketable securities consisted of the following:

 

 

March 31, 2019

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

(in thousands)

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

$

500

 

 

$

 

 

$

 

 

$

500

 

United States Treasury

 

995

 

 

 

 

 

 

 

 

 

995

 

U.S. government agency securities

 

793

 

 

 

1

 

 

 

 

 

 

794

 

Corporate debt securities

 

22,379

 

 

 

14

 

 

 

(43

)

 

 

22,350

 

Less: Cash equivalents

 

(500

)

 

 

 

 

 

 

 

 

(500

)

Total short-term marketable securities

 

24,167

 

 

 

15

 

 

 

(43

)

 

 

24,139

 

Corporate debt securities

 

8,932

 

 

 

52

 

 

 

(1

)

 

 

8,983

 

Total long-term marketable securities

 

8,932

 

 

 

52

 

 

 

(1

)

 

 

8,983

 

Total marketable securities

$

33,099

 

 

$

67

 

 

$

(44

)

 

$

33,122

 

 

 

December 31, 2018

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

(in thousands)

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

$

2,692

 

 

$

 

 

$

 

 

$

2,692

 

United States Treasury

 

990

 

 

 

 

 

 

 

 

 

990

 

U.S. government agency securities

 

790

 

 

 

 

 

 

 

 

 

790

 

Corporate debt securities

 

22,613

 

 

 

1

 

 

 

(96

)

 

 

22,518

 

Less: Cash equivalents

 

(2,692

)

 

 

 

 

 

 

 

 

(2,692

)

Total short-term marketable securities

 

24,393

 

 

 

1

 

 

 

(96

)

 

 

24,298

 

Corporate debt securities

 

6,383

 

 

 

11

 

 

 

(8

)

 

 

6,386

 

Total long-term marketable securities

 

6,383

 

 

 

11

 

 

 

(8

)

 

 

6,386

 

Total marketable securities

$

30,776

 

 

$

12

 

 

$

(104

)

 

$

30,684

 

9


 

 

Management determined that the gross unrealized losses of $44,000 on the Company’s marketable securities as of March 31, 2019 were temporary in nature. Gross unrealized losses on the Company’s marketable securities were $104,000 as of December 31, 2018. The Company currently does not intend to sell these securities prior to maturity and does not consider these investments to be other-than-temporarily impaired as of March 31, 2019.

 

 

Note 4. Fair Value Measurements

The authoritative guidance on fair value measurements establishes a framework with respect to measuring assets and liabilities at fair value on a recurring basis and non-recurring basis. Under the framework, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as of the measurement date. The framework also establishes a three-tier hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability and are developed based on the best information available in the circumstances. The hierarchy consists of the following three levels:

 

 

Level 1:

Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

 

 

Level 2:

Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

 

Level 3:

Inputs are unobservable inputs for the asset or liability.

 

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis, based on the three-tier fair value hierarchy:

 

 

March 31, 2019

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(in thousands)

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

31,333

 

 

$

 

 

$

31,333

 

 

$

 

United States Treasury

 

995

 

 

 

 

 

 

995

 

 

 

 

U.S. government agency securities

 

794

 

 

 

 

 

 

794

 

 

 

 

Money market accounts

 

500

 

 

 

500

 

 

 

 

 

 

 

Total marketable securities

$

33,622

 

 

$

500

 

 

$

33,122

 

 

$

 

 

 

December 31, 2018

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(in thousands)

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

28,904

 

 

$

 

 

$

28,904

 

 

$

 

United States Treasury

 

990

 

 

 

 

 

 

990

 

 

 

 

U.S. government agency securities

 

790

 

 

 

 

 

 

790

 

 

 

 

Money market accounts

 

2,692

 

 

 

2,692

 

 

 

 

 

 

 

Total marketable securities

$

33,376

 

 

$

2,692

 

 

$

30,684

 

 

$

 

 

The Company’s Level 1 assets include money market instruments and are valued based upon observable market prices. Level 2 assets consist of United States Treasury, U.S. government agency securities, and corporate debt securities. Level 2 securities are valued based upon observable inputs that include reported trades, broker/dealer quotes, bids and offers. As of March 31, 2019, the Company had no investments that were measured using unobservable (Level 3) inputs.

There were no transfers between fair value measurement levels during the first quarter of 2019.

10


 

Gross unrealized gains or losses for cash equivalents and marketable securities as of March 31, 2019 were not material. As of March 31, 2019 , unrealized losses for securities in an unrealized loss positio n for more than 12 months were $41,000. During the three months ended March 31, 2019, the Company did not recognize other-than-temporary impairment losses related to its marketable securities.

 

 

 

Note 5. Fixed Assets

Major classes of fixed assets consisted of the following:

 

 

 

 

March 31,

 

 

December 31,

 

 

Useful Lives

 

2019

 

 

2018

 

 

 

 

(in thousands)

 

Computer hardware

3 Years

 

$

1,683

 

 

$

1,579

 

Computer software

3 Years

 

 

497

 

 

 

495

 

Medical lab equipment

5 Years

 

 

8,136

 

 

 

8,136

 

Furniture and fixtures

5 Years

 

 

234

 

 

 

233

 

Leasehold improvements

Shorter of lease term or estimated useful life

 

 

802

 

 

 

802

 

Assets not yet placed in service

 

 

 

1,117

 

 

 

1,087

 

Total

 

 

 

12,469

 

 

 

12,332

 

Less: Accumulated depreciation

 

 

 

(6,423

)

 

 

(5,886

)

Property and equipment, net

 

 

$

6,046

 

 

$

6,446

 

 

Depreciation expense on fixed assets totaled $535,000 and $516,000 for the first quarters of 2019 and 2018, respectively.

 

 

Note 6. Significant Balance Sheet Accounts

Other current assets consisted of the following:

 

 

March 31, 2019

 

 

December 31, 2018

 

 

(in thousands)

 

Reagents

$

423

 

 

$

314

 

Prepaid expenses

 

987

 

 

 

706

 

Prepaid income taxes

 

596

 

 

 

1,251

 

Marketable securities interest receivable

 

288

 

 

 

220

 

Other receivable

 

17

 

 

 

70

 

Total

$

2,311

 

 

$

2,561

 

 

Reagents are used for DNA sequencing applications in the Company’s DNA sequencing equipment.

 

 

Note 7. Reporting Segment and Geographic Information

The Company views its operations and manages its business in one reporting segment. All long-lived assets were located in the United States during the first quarters of 2019 and 2018. Revenue by region was as follows:

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

United States

$

3,614

 

 

$

2,527

 

Foreign:

 

 

 

 

 

 

 

Canada

 

538

 

 

 

970

 

Other Countries

 

1,219

 

 

 

1,156

 

Total

$

5,370

 

 

$

4,653

 

 

11


 

 

Note 8. Commitments and Contingencies

Operating Leases

See Note 9, Leases, for further information.

FF Gene Biotech

See Note 14 for a description of the Company’s commitments related to its joint venture, FF Gene Biotech (as defined in Note 14).

Purchase Obligations

As of March 31, 2019, the Company had non-cancelable purchase obligations of $5.0 million for reagents, of which, $4.1 million is payable within the next twenty-four months, and the remaining is payable within the next twelve months.

Contingencies

From time to time, the Company may be subject to legal proceedings and claims arising in the ordinary course of business. Management does not believe that the outcome of any of these matters will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

 

Note 9. Leases

 

The Company has various non-cancelable operating leases with varying terms through August 2023 primarily for office space. The Company has options to renew some of these leases for three years after their expiration. The Company considers these options, which may be elected at the Company’s sole discretion, in determining the lease term on a lease-by-lease basis. The Company does not have any finance leases or leases with variable lease payments.

The determination of whether an arrangement contains a lease is made at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset.

The Company’s headquarters is located in Temple City, California, which is comprised of various corporate offices and a laboratory certified under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”), accredited by the College of American Pathologists (“CAP”) and licensed by the State of California Department of Public Health. Additional offices are located in El Monte, California and Atlanta, Georgia and are used for certain research and development, customer service, report generation and other administrative functions.

Rent expense was approximately $133,000 and $109,000 for the three months ended for the first quarters of 2019 and 2018, respectively.

 

The Company adopted new accounting standard ASC 842 Leases on January 1, 2019. Upon adoption the Company recorded right-of-use (“ROU”) assets of $3.0 million and short-term and long-term lease liabilities of $384,000 and $2.6 million, respectively. The difference between the ROU asset and liability is due to the existing balance of deferred rent at the date of adoption. There was no impact to retained earnings upon adoption.

 

Our incremental borrowing rate was used to determine the present value of lease payments since our leases do not provide an implicit rate. The Company determined its incremental borrowing rate based on inquiries with our bank. The Company’s lease agreements do not contain any residual value guarantees, material restrictive covenants, bargain purchase options or asset retirement obligations. Lease expense for our operating leases is recognized on a straight-line basis over the lease term. Our leases do not contain variable lease payments. The Company does not have any short-term leases and thus has excluded short-term costs from the table below. The Company did not enter into any new leases during the three months ended March 31, 2019.

 

The following was operating lease expense:

 

 

Three months ended March 31, 2019

 

Operating lease cost

$

146

 

12


 

 

Supplemental cash flow information related to leases was the following:

 

 

Three months ended March 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

Operating cash flows from operating leases

$

134

 

 

Supplemental balance sheet information related to leases was the following:

 

 

March 31, 2019

 

Weighted average remaining lease term - operating leases

6.3 years

 

Weighted average discount rate - operating leases

 

6.25

%

 

The following is a maturity analysis of operating lease liabilities using undiscounted cash flows on an annual basis with renewal periods included:

 

 

Operating Leases

 

 

(in thousands)

 

Year Ending December 31,

 

 

 

2019 (remaining 9 months)

$

421

 

2020

 

559

 

2021

 

550

 

2022