Fulgent Genetics, Inc. quarterly report, Q1 FY2023

Fulgent Genetics, Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023. Unaudited results compared with Q1 2022. Fulgent operates a clinical diagnostics business and a therapeutic-development business, with a stated aim of becoming an integrated precision-medicine company.

Key financial metrics

Metric	Q1 2023	Q1 2022
Revenue	$66.2 million	$320.3 million
Gross profit / gross margin	$18.8 million / 28.4%	$242.5 million / 75.7%
Operating income (loss)	($24.8 million)	$201.9 million
Net income (loss) attributable to Fulgent	($15.3 million); ($0.52) diluted EPS	$154.0 million; $4.93 diluted EPS
Net cash from (used in) operating activities	($7.9 million)	$188.4 million

• Revenue fell 79%, primarily because of lower COVID-19 testing orders. The HRSA COVID-19 Uninsured Program contributed no revenue in Q1 2023, versus $106.7 million in Q1 2022.
• Cash, cash equivalents and marketable securities totaled $871.3 million at March 31, 2023. Cash and cash equivalents alone were $66.2 million; current and long-term marketable securities were $438.3 million and $366.8 million.
• Total assets were $1.377 billion and stockholders’ equity was $1.269 billion. Total liabilities were $107.8 million.
• Borrowings included a $15.0 million margin loan and notes payable; the filing describes approximately $8.6 million of notes payable. The margin loan carried a 5% rate at quarter-end, was secured by marketable securities, and is callable by the custodian. The company reported $478.0 million of securities managed by that custodian as collateral.
• Investing cash outflow was $4.4 million and financing cash outflow was $1.1 million. Purchases and maturities of marketable securities were the principal investing cash movements.

Changes and management commentary

• Gross profit and operating results deteriorated sharply year over year as COVID-19 test demand declined. Cost of revenue fell 39%, less than the revenue decline; management attributed the lower gross margin primarily to product-mix changes.
• Research and development expense rose 63% to $9.8 million, mainly from higher personnel costs and continued therapeutic-product development. Selling and marketing expense rose 27% to $10.1 million. General and administrative expense declined 15% to $21.8 million, mainly due to lower credit-loss provisions, partly offset by higher personnel and facility costs.
• Interest and other income, net, was $3.8 million, compared with $45,000 in Q1 2022, primarily reflecting interest on investments, net of borrowing interest expense.
• Management said existing cash, cash equivalents and short-term marketable securities should cover anticipated cash needs for at least 12 months. It also noted possible future capital raising and risks including dilution, financing restrictions, and unavailability of funding on acceptable terms. No specific revenue or earnings guidance was provided.

Risks, contingencies and unusual items

• The U.S. Department of Justice issued a Civil Investigative Demand concerning allegations involving medically unnecessary testing, billing, and remuneration under anti-kickback and Stark laws. The SEC is also conducting a non-public formal investigation apparently related to these matters and prior reports. Fulgent said it is cooperating and does not presently expect a material adverse impact, but cannot predict the outcome, timing, or ultimate impact.
• The company recorded a $5.2 million income-tax benefit in Q1 2023, versus a $48.4 million tax provision in Q1 2022; the reported effective tax rates were negative 25% and 24%, respectively. Management cautioned that interim tax provisions may be volatile.
• Unrealized losses on available-for-sale debt securities were $22.5 million at quarter-end. The filing reported no credit losses on these securities in Q1 2023.
• No shares were repurchased in Q1 2023; approximately $175.7 million remained under the $250 million authorization. Management reported effective disclosure controls as of March 31, 2023 and no material change in internal control over financial reporting.

Important facts for investors to verify

• Whether non-COVID testing demand and revenue can offset the continued decline in COVID-19 testing, and how product mix affects margins.
• Cash generation, receivable collections and customer exposure; one customer represented 21% of net receivables at March 31, 2023, although no customer generated 10% or more of Q1 revenue.
• Marketable-securities valuation and collateral exposure, including the margin lender’s ability to issue a call and the loan’s variable rate.
• Developments and potential financial or operational consequences of the DOJ and SEC investigations.
• Execution, funding needs and returns from therapeutic development and acquisition-related investments. The filing also reports that an executive officer incentive plan was approved on May 2, 2023, after quarter-end.