As many SA authors covered Fulgent (NASDAQ:FLGT) bull case quite extensively, I’ll make mine brief.
Fulgent has 2 business segments: Covid and Core. His “covid” line of business was a lucrative high-margin business that did a total of $1.1B in trades income since the outbreak of Covid. Its “core” line of business posted LTM revenues of ~$180Mn, growing at a brisk ~100% YoY. This is your segment revenue for the last 18 months.
At ~$35/share, 30.8 million shares, and ~$0.9 billion net cash, his enterprise value is just $200 million.
That values his fast-growing core business at ~1.1x EV/Sales, excluding his entire covid business. To be fair, their covid business unit has shrunk rapidly and revenue is trending towards zero.
from bull to bear
While my bull case is brief, the bear case is littered with recent red flags surrounding corporate misgovernance and was cemented last week by its questionable takeover during its 3Q22 ER. Let me explain:
Red Flag 1 – Stock Pledges
Mr. Hsieh, CEO of Fulgent, pledged 800,000 shares (10% of total shares he owns) for ~$29 million in cash in a variable term agreement in September 2022.
For those unfamiliar with variable futures contracts, it is a derivative instrument that allows you to receive payments in advance and transfer ownership of equity at a future date, at a variable price determined by the contract and the price of the stock in question. the time of settlement.
Mr. Hsieh is paid a minimum of ~$36/share. He could benefit from price appreciation (at settlement dates in September 2026) from $41 to $55 by giving up fewer shares, with earnings capped at $55 per share. In short, he’s downside risk and upside profits are capped at between $41 and $55 at the time of settlement.
For those interested in the details, here is the footnote.
4. On September 14, 2022, the Trust entered into a master confirmation with respect to a prepaid variable term contract (the “Contract”) with an unaffiliated bank (the “Bank”) relating to 800,000 shares of common stock and binding the Trust deliver to the Bank up to 800,000 common shares (or, at the election of the Trust, an equivalent amount in cash) to settle the Contract.
5. In exchange for entering into the Agreement and assuming the obligations thereunder, the Trust received a cash payment of $28,955,274.40. The Trust pledged 800,000 common shares (the “Pledged Shares”) to secure its obligations under the Agreement, and retained voting rights in the Pledged Shares during the term of the pledge (and thereafter if the Trust settles the Agreement in cash). .
6. Under the Agreement, on each of the eight settlement dates in September 2026, the Trust will be required to deliver to the Bank a number of common shares determined as follows (or, at the Trust’s election, an equivalent number of cash): (A) if the closing price of the Common Shares on the respective valuation date (the “Settlement Price”) is less than or equal to $41.0261 (the “Floor Price”), the Trust will deliver to the Bank 100,000 shares (that is, the nominal part of the Pledged Shares to be delivered on each settlement date). 7. (footnote 6 continued) (B) if the Settlement Price is between the Floor Price and $55.1572 (the “Cap Price”), the Trust will deliver to the Bank an amount of common shares equal to 100,000 shares multiplied by a fraction whose numerator is the Floor Price and whose denominator is the Settlement Price; and (C) if the Settlement Price is greater than the Cap Price, the Trust will deliver to the Bank the number of common shares equal to the product of (i) 100,000 shares and (II) a fraction (A) whose numerator is the sum of (X) the Floor Price and (y) the Settlement Price minus the Cap Price, and (B) whose denominator is the Settlement Price.
As I dig deeper, Mr. Hsieh made a similar comment agreement committing 750k in September 2021, with minimum and maximum prices set at $83 and $129 per share, settlement dates in September 2025.
One might wonder why that is a red flag.
With that agreement, he effectively sold that shareholding, keeping the voting power until the liquidation date. It’s also worth noting that while it requires Form 4 sec filing, most internal transaction monitors don’t capture it, so it effectively reduced negative public impression, especially when the provision is sizable.
The pledging of shares through variable term agreements is often associated with negative connotations. Fulgent actually went so far as to highlight it in his own 2021 proxy filing to justify why the Board made an exception for Mr. Hsieh’s 750k pledge in 2021:
Hedging and Pledges: Our insider trading policy also prohibits future pledging and hedging of our common stock. We made a single exception to our hedging policy for our chief executive officer to enter into a prepaid forward contract with respect to 750,000 shares of our capital stock in light of his long-term ownership of these shares and because these shares later represented less than 2.5 % of our common shares then issued and outstanding. Previously, we have also allowed exceptions to the stock pledge prohibition, as noted in the section titled “Security Ownership of Certain Beneficial Owners and Management.”
So the Board made an exception in September 2021, then made another exception in September 2022. Each time, Mr. Hsieh pledged ~10% of his total shares while holding the underlying voting rights until Y25-Y26.
Red Flag 2 – Resignation of the members of the Board of Directors
June 25, 2022 – Yun Yen resigned from the Board after 6 years of service since the IPO:
Sep 24, 2022 – John Bolger resigned from the Board after 6 years of service since the IPO:
Oct 31, 2022 – Leonard Post resigned from the Board and Chairman of the Corporate Governance Committee (was nominated and became a member of the board in July 2022):
The recent resignation of Leonard Post is particularly worrying and curious. Mr. Post joined the Board in July 2022 (after Yun Yen resigned), and it is worth noting that his 8k submission did not include the standard language “the decision to resign was not due to any disagreement… “that the other 2 resigned ads have.
A moment of thesis change in 3T22 ER
The company announced during its 3Q22 earnings release that it has completed the acquisition of Fulgent Pharma for a total purchase price of approximately $100 million.
The name was not a coincidence. In 2016, Fulgent Therapeutics was divided into two separate entities: Fulgent Pharma and Fulgent Genetics.
Mr. Hsieh is the manager and majority shareholder of Fulgent Pharma.
For those curious about the economics of this acquisition, here is a comment from CFO Paul Kim (3Q22 emergency call). It is not cumulative and is projected to have a consumption rate of 15-17Mn over the next few years.
connecting the dots
2 (long-term) Board members resigned in June and September this year. One newcomer quit a week before 3Q22 earnings.
The company then announced that it acquired a business where Mr. Hsieh is the majority owner of the equity for $100 million with no final contribution in sight.
I don’t have any additional insider information, but it’s not too hard to connect the dots and question whether these 2 events are related.
Not to mention that Mr. Hsieh also committed (effectively sold) 20% of his equity interest in 2 variable futures contracts during the last 15 months.
It began to paint a picture of the largest shareholder (and key decision maker) thinking of innovative ways to extract value from the company and its shareholdings, without taking public shareholders into account.
That is not a pretty picture.
I call this a case of heartbroken bear as I have been a fan of Fulgent, Mr. Hsieh and their management team for a long time. If you’ve ever heard of any of his prior income conference calls, I’d be hard-pressed if anyone disagreed. And I’ve been a shareholder for quite some time.
I must admit how difficult it was to consider going out at $35 a share, knowing how ridiculously cheap it is and knowing all the potential it has, particularly its highly efficient and battlefield-tested infrastructure built during Covid. Imagine God forbid if there ever was another pandemic, Fulgent argues.
In the meantime, it’s hard for me to come to terms with the notion that its largest shareholder and main decision maker is in an ‘exit’ mode, and circling around to find ‘innovative’ ways to benefit himself, with little public shareholding. interest in mind.
It is even less comforting and increasingly clear that Mr. Hsieh has a commanding voice on the Board. Unless there is a strong activist voice with significant share ownership, a bet on Fulgent today is a bet on Hsieh.
Reluctantly, that’s no longer a bet I’m willing to take given the red flags that have come up recently. I sold the majority at a considerable loss and intend to exit the entire position soon.