Operator
Good afternoon, ladies and gentlemen, and welcome to the Fulton Genetics Q3 2026 conference call and webcast call. At this time, all lines are in listen-only mode, and following the presentation, we will conduct a question-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, November 5, 2026. I would now turn a call over to Lauren Sloan. Please go ahead.
Good afternoon, and welcome to Fulgent's third quarter 2026 Financial Results Conference Call. On the call are Ming Shea, Chief Executive Officer, Paul Kim, Chief Financial Officer, and Brandon Perthies, Chief Commercial Officer. The company's press release discussing the financial results is available on the Investor Relations section of the company's website, ir.fulgentgenetics.com. A replay of this call will be available shortly after the call concludes on the investor relations section of the company's website. Management's prepared remarks and answers to your questions on today's call will contain forward-looking statements. These forward-looking statements represent management's estimates based on current views, expectations, and assumptions, which may prove to be incorrect. As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties, and changes in circumstances that may cause actual results to differ from those described in the forward-looking statements. The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements as predictions of future events and should listen to management's remarks today with the understanding that actual events, including the company's actual future results, may be material different from what is described in or implied by these forward-looking statements. Please review the more detailed discussions related to these forward-looking statements, including the discussions of some of the risk factors that may cause results to differ from those described in the forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10K for the year-ended December 31, 2025, and subsequently filed reports, which are available on the company's investor relations website. Management's remarks, including discussions of non-GAAP profit, loss, operating expense, margin, earnings, and earnings per share, and adjusted EBITDA, contain financial measures not prepared in accordance with accounting principles generally accepted in the United States, or GAAP. Management has presented these non-GAAP financial measures because it believes they may be useful for investors for various reasons, but these measures should not be viewed as a substitute for or superior to the company's financial results in accordance with GAAP. Please see the company's press release discussing its financial results for the third quarter of 2026 for more information, including the description of how the company calculates non-GAAP income and loss, non-GAAP earnings and loss per share, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating profit and loss, and margin and adjusted EBITDA, and a reconciliation of these financial measures to income and loss, earnings loss per share, and operating margin. The most directly comparable GAAP financial measures. The company does not provide reconciliation of forward-looking non-GAAP measures to the most directly comparable GAAP measures because the information necessary to calculate such reconciliations, including equity-based compensation, tax effects, acquisition-related items, and potential impairments, any of which may be material, is unavailable on a forward-looking basis without unreasonable effort, and the probable significance of those items cannot be predicted. With that, I'd now like to turn the call over to Ming. Please, go ahead.
Thank you, Lauren. I will start with some comments on our two business ones. Then, Brandon will reveal our product and go-to-market updates for our laboratory service business. And Paul will conclude with the financials and outlook before we take your questions. I am pleased with the momentum in our therapeutic development business as we progress on our clinical pipeline. We are seeing encouraging clinical data from our proprietary nano drug delivery platform, which powers both FID-07 and FID-022. Let me share the recent updates from FID-07 and then share the progress we have made with FID-022. As a reminder, Fulgen has taken a different approach with FID07. FID07 is a nano-encapsulated peptic texel developed under Fulgen's clean chemo platform. The platform is designed to reduce toxicity typically associated with conventional chemotherapy while maintaining or improving efficacy. A profile is preferable in combination oncology regimens. Starting with FID-007, with the majority of phase two complete, we have the end of a phase two meeting with the FDA in August. We look forward to sharing more with you later this year. Our phase three study is in preparation. We are encouraged by our clinical trial progress achieved so far, and I believe entering the phase three registration trial is an important step toward the potential commercialization of FID07 for the treatment of a recurrence or metastatic head and net tecumas cell carcinoma patients who currently have very few effective treatment options. We continue to approach conversations with partners who bring both resources and strategies in alignment. In the third quarter, we are pleased with the momentum of our second clinical committee, FID022. With the phase one dosing escalation at the phase dosing level ongoing, we expect to determine the maximum tolerant dose level in the first half of next year. FID-022 is a nano-encapsulate SN38 for treatment of solid tumor, including potentially colon, pancreatic, oren, and bile duct cancers. Please note, both FID-07 and FID-022 are derived from the same proprietary clean chemo delivery platform, patent and fully owned by Folgen. Similarly to FID. FID 07, FID 022 can also be used in various oncology drug combinations. In conclusion, we believe our common platform strategy is making meaningful progress. We're seeing greater potential in commercializing FID 07 and FID 022 to drive a large and growing market. In laboratory service business, we continue to see our AI and digital pathology solution work at an accelerated pace and are continuing to expand our AI portfolios. We are pleased with the progress we have made to address billing and revenue cycling management delays, which continue to affect our third quarter results. And our team's ability to work effectively to deliver the improvement to our collection rates. I would like to thank our employees, partners, and stakeholders for your hard work and loyalty. I will now turn over the call to Brandon Perthius, our Chief Commercial Officer, to talk more about our laboratory service business.
Brandon? Thank you, Ming. We ended the quarter at $90.4 million, an increase of 8% year over year and 6% sequentially. We continued integration efforts for Baco and Strata DX during the third quarter, which contributed to the overall performance. Breaking it down further, precision diagnostics ended at $41.8 million, a decrease of 18% year-over-year, but an increase of 1% sequentially. Anatomic pathology came in at $40.9 million, an increase of 57% year-over-year and 9% sequentially, and biopharma services ended the quarter at $7.7 million, an increase of 5% year-over-year and 19% sequentially. Last quarter, we discussed managing the final phase of the transition of our billing and revenue cycle management system. We originally undertook this transition to achieve greater consistency across our operations and to drive long-term efficiency. While this transition continued to have a negative impact on the third quarter, we are pleased to announce we have made significant progress and have seen a positive sequential trend in reimbursement, which has contributed to improvements in our total revenue and gross margins as compared to the second quarter. While there is still additional effort needed to finalize the remaining customizations, and we cannot predict more precise timing for future improvements, we believe we have a clear line of sight into what is needed to return to historical collection rates. We continue to monitor developments related to PAMA and any potential changes to the clinical lab fee schedule. Based on what we know today, we expect the impact to our business to be minimal. Our primary CPT codes have limited exposure to the reimbursement reductions currently contemplated under PAMA. As a result, we do not currently view PAMA as a material headwind to our revenue or earnings outlook. We'll remain engaged with the evolving reimbursement landscape, but at this point, we feel comfortable with our positioning. We continue to make significant progress integrating artificial intelligence into our pathology workflow. During the third quarter, our AI platform analyzed approximately 255,000 slide images, representing a 23% increase from the second quarter. Importantly, as utilization has scaled, the technical reliability of the platform has improved substantially, with failed analysis declining to just 0.01% during the quarter. We now have four AI modules in production with our Prostate Cancer Detection and Grading module undergoing pathologist evaluation. During the quarter, we also transitioned our production environment to a new AI analysis platform designed to improve speed, reliability, and scalability. The new architecture has meaningfully reduced processing times across several of our highest volume applications and provides the infrastructure to efficiently support additional AI modules as they move into production. We are particularly encouraged by the continued development of our prostate cancer application. In internal testing across 262 cases, the module identified 768 of 770 cancer-containing parts. Looking ahead, we expect to continue expanding the platform with five additional AI applications planned for deployment in the fourth quarter. We believe these investments can improve diagnostic consistency, enhance pathologist productivity, and create meaningful operating leverage as testing volumes grow. Overall, we are pleased with our progress during the third quarter, especially around the improvements in revenue cycle management and the use of AI to scale our business. I'll now turn the call over to our key financial officer, Paul Kim. Paul?
Thank you, Brandon. Revenue in the third quarter of 2026 totaled $90.4 million, including $21.8 million from BACO Diagnostics and Strata DX, compared to $85.4 million in the second quarter of 2026, which included $16.4 million from BACO Diagnostics and Strata DX. The increase in our Q3 revenue is primarily due to the integration of BACO Diagnostics and StrategyX. Gap gross margin was 35.3%, and non-gap gross margin for the third quarter was 36.3%. The increase sequentially in gross margin reflects fixed cost spread over a higher revenue base, driven by better collection rates. We expect gross margins to normalize their collection rate returns to historic norms And as revenue increases. Now turning to operating expenses. Total gap operating expenses were $54.5 million for the third quarter, down from $61.8 million in the second quarter. Decreasing operating expenses was driven by a $3.2 million of bad debt expense recovery to the third quarter of 2026. And the absence of a one-time 2.2 million impairment charge recorded in the second quarter on a customer relationship and tangible asset following the loss of our customer in our therapeutic development segment. Non-gap operating expenses were $44.8 million in the third quarter, down from $49.2 million in the second quarter. Gap operating margin improved to a minus 24.9% in Q3 compared to a minus 42.3% in Q2. Non-gap operating margin improved sequentially to a minus 13.2% in Q3 compared to a minus 26.2% in Q2.
Our gap loss in the current quarter was
$13.2 million, a decrease from the prior quarter's gap loss of $29.5 million and a gap loss of $0.48 per share based on $27.7 million weighted average diluted shares outstanding. On a non-GAAP basis, And excluding equity-based compensation expense, an intangible asset amortization, loss for the quarter was approximately $2.4 million, or $0.09 per share, based on $27.7 million weighted average diluted shares outstanding. Adjusted EBITDA for the third quarter was a loss of approximately $7.5 million, compared to a loss of $17.1 million in the prior quarter. In the third quarter, we repurchased just over 15,000 shares. Under our stock repurchase program. Since the inception of the stock repurchase program in March 2022, a total of over 7.5 million shares of common stock has been repurchased under our program, with approximately 75.6 million currently remaining available for future purchases of our common stock. Turning to the balance sheet, we ended the third quarter with approximately $652.4 million in cash, cash equivalents, restricted cash, and marketable securities. The $100.9 million increase in cash from the previous quarter was primarily driven by a receipt of $112.3 million federal tax refunds and related interest partially offset by $11.4 million cash used in operations and CapEx.
We are reaffirming our full-year revenue
guidance and continue to expect total revenue to be in the range of $330 to $340 million for 2026, representing year-over-year growth of 2.3 to 5.4%. We estimate precision diagnostics revenues of approximately $161 to $165 million, anatomic pathology of approximately $146 to $150 million, and biopharma services to be approximately $23 to $25 million. On margins, we expect full-year non-gap gross margins to be in the mid-30% range, reflecting product mix shifts tied to our changing customer composition And lower collection rates associated with the transition to our new revenue cycle management and billing system. We expect non-GAAP operating margins to be in the low negative 20% range for the year, an improvement from our prior expectation of the mid negative 20% range. We continue to prioritize our investment across two key areas, R&D, where we're advancing both our laboratory testing capabilities and clinical study pipeline, and the integration of Baco Diagnostics and Strata DX, where we are aligning our expanded sales organization, cross-selling our broad testing menu, and consolidating operations to drive productivity and operating efficiency. Our billing system transition is still underway, and we saw encouraging improvements in the third quarter that we expect will support more consistent collections, along with... Targeted upgrades to our laboratory infrastructure, these investments are designed to strengthen our competitive position and enhance throughput capacity. We believe our technology platform is highly scalable and positions us to drive operating leverage and margin expansion as volumes grow. Our clinical programs continue to progress, and we updated the timing of related spending accordingly. We now expect approximately $21 million in therapeutic development investment in 2026 as we continue advancing trials for FID 022 and FID 007. We now expect a full year 2026 non-GAAP loss of $1.65 to $1.75 per share, an improvement from our prior guidance of a loss of $2.22 to $2.35 per share. This reflects disciplined spending across the business, which has lowered our operating expenses. This excludes stock-based compensation, impairment loss, acquisition-related costs, amortization of intangible assets, as well as other charges or gains that we believe are not representative of our operations. Our per-share guidance reflects the 4.1 million shares repurchased year-to-date and assumes no further repurchases. Finally, our cash position remains strong. During the third quarter, we received approximately $112.3 million in federal tax refunds and related interests that were delayed due to constrained resources at the IRS. For fiscal year 2026, assuming capital purchases of $13 million, spend on our therapeutic development business of $21 million, and excluding any future stock repurchases or other expenditures outside the ordinary course, which could include additional M&A, we're anticipating ending the year with approximately $630 million of cash, cash equivalents, restricted cash, and investments in marketable securities.
The increase from our prior forecast of
$610 million is attributed to the improved operating outlook and lower therapeutic development spend. We are pleased with our results for the quarter and are encouraged by the operational progress. We made executing against our strategic initiatives to drive AI and digital solutions across our laboratory services business and are proud of the momentum on our pharmaceutical pipeline. We believe we're well-positioned for longer-term growth and strategic investments, innovations, and expanded offerings that deliver value. Thank you for joining our call today. Operator, you may now open it up for questions.
Operator
Thank you. Ladies and gentlemen, we'll now begin the question-answer session. Should you have a question, please press the star followed by the one on your touchstone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. And if you are using a speaker phone, please let the handset before pressing any keys. Just one moment, please, while we pile up questions. And your first question comes from David Westberg from Piper Sandler. Please go ahead.
Hey, guys. This is Karan Patel on for David Westenberg. Thanks for taking the call. Congrats on the sequential improvement here. To start off, I had a couple questions on the billing transition. It sounds like there's still some work to be done, but we have seen improvement. I guess, can you maybe quantify what inning we may be in there and what kind of... You know, site we have into, into when that may be done and fully transitioned. And also, can you parse out maybe collection rates today versus historical levels and the step up in revenue is any of that from catch up claims from prior periods or, or not? Thank you. Thank you for the question.
This is Brent. Go ahead. Go ahead, Paul. No, I'll let Brandon tee it up, and then I'll put some numbers around it. Go ahead, Brandon.
Yeah, thanks, Paul, and thanks, Karan, for the question. Interesting analogy to ask kind of what inning it's in, using the baseball analogy, and perhaps a little bit hard to say, but I think we're pretty deep into the game. I think as I addressed, you know, last quarter, we had challenges related to implementation of customizations that were needed in the new RCM system to maximize reimbursement. Since we've noticed that, we've made progress implementing a number of these required customizations, and, you know, we're seeing the impact of those customizations on our improved collection rate. That was reflected, you know, in the third quarter performance. We still have some fine-tuning to do, but we're pretty encouraged with the progress so far.
Hi, Karam. This is Paul Kim. Yes, the uptick in the gross margins, you know, aside from the higher revenues for Q3, we were pleased to see that. Actually, the uptick in the gross margins, that happened quicker than we thought. And as Brandon indicated, we're not done yet. We've gotten started this quarter, but we did make it a priority for the company. To optimize the collection rates as much as possible. So we believe with additional work that we have in terms of policies and focus, that there's ample amount for gross margins to continue to grind higher. The other thing that I like to point out is, you know, given the fact that it's the end of Q3, when we take a look at our overall forecast, The cash forecast for the year, it's actually coming in a lot more favorable than we thought. So we raised our ending cash forecast from 610 to 630 million. And the narrowing of the EPS as well. If you take a look at the operating expenses, the operating expenses, particularly for like the GNA, you'll see that is lower than our historical run rate. And that's because even on the operating expense side, we shored up a lot of... Bad debt that we had. We continue to go after some of the old balances, and we had favorable collections, even on the bad debt side. The last thing that I will comment on is the revenue range. The revenue range, we left it the same as how we had it last quarter between 3.30 and 3.40, but we anticipate that Q4, you know, should be a nice quarter for the company as well, and just leaving the range from 3.30 to 3.40 gives a sample room, you know, for us to, you know, reach a target that we'll be satisfied with.
That's very helpful. Thank you. And I guess maybe to ask one more here on the range. I think the guide held implies 4Q between the range of, what, $82 million to $92 million. Maybe could you help us force out puts and takes to the upside, downside there? Um, and separately. This does imply sequential deceleration, if I'm not mistaken. Maybe could you speak to that if it's in terms of timing of some orders or seasonality, et cetera? Thank you.
Yeah, so I will tee it up in terms of the numbers. We'll go in reverse order, and then I'll turn it over to Brandon. So if you take a look at our forecast for Q4, if you look at the midpoint of the 330 to 340, if we came at the midpoint of that, which is 335, Um, it says that Q4, um, if you back into that number, um, is about flat, uh, you know, in terms of our revenues, uh, uh, you know, compared to Q3. But we don't, we're not shooting for that, right? We're shooting for a number, um, that's, um, higher than that. Um, so if you take a look at the upper end of the range, right, of the 330 to 340, uh, the, um, That leaves us room to have a sequential increase from Q3 to Q4, and we always reserve the right to, you know, come in even higher than that. But I'll turn it over to Brandon, who can talk about the dynamics of what he sees in terms of customer orders and flow, right, in November and December, to give you additional comfort that, you know, we're doing everything possible to expand our footprint. We're doing everything possible to continue to increase our, you know, revenues, and then all in the meanwhile, you know, improving our, you know, gross margins and our overall spend. Go ahead, Brandon.
Yeah, well, Paul, I think you covered it really well. In addition to what Paul said, we still do have some fine-tuning to do on this RCM system, our revenue cycle management system. Again, we're really proud of the progress that we've made so far, but still additional work to do there. So, you know, taking a prudent approach to the range as we really get this system where we want it. In terms of seasonality, I think at this point, you know, with our diversified business across, you know, pathology, rare disease, women's health, you know, our biopharma services, you know, we see some seasonality, but we're coming a little bit more sort of shielded from it. As Paul mentioned, we're going to shoot for a good Q4. I think we have the opportunities we need, hopefully, to be at the higher end of that range. But like I said, still some work to do in certain areas, but feeling pretty good about where we are from a business perspective.
That's very helpful. Thank you. And maybe one last one for me. I guess on BACO and AI, that was very good detail. But, you know, as we kind of think about, I guess, the modules that are already implemented, the ones that are planned for 4Q and future AI efforts, can you maybe speak to how this has maybe shown up in the P&L or any sort of? KPI in terms of productivity or margin, turnaround time, et cetera. And in respect to BACO integration, if that's, you know, how that's going. And yeah, that'd be great. Thank you.
Yeah, thank you for the questions. I think with AI, definitely help us increase the efficiency, but more importantly would be quality. We have a second level of quality assurance to assisting our pathologists, getting there more speed and less errors. So I think we will see the productivity improvement as well as the future growth margin improvements.
Thanks, guys. That would be it for me.
Operator, if we're not seeing any more questions, we can conclude the call.
We appreciate everyone for joining our conference call. We look forward to updating you on our next quarter results. And when we report next quarter results, we also look forward to giving out our guidance for 2027. Thank you very much.
