Fulgent Genetics, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended September 30, 2020. Fulgent provides genetic testing and, since March 2020, COVID-19 testing. The surge in COVID-19 testing drove a sharp expansion in operations; the company opened a CLIA-certified Houston laboratory and increased headcount from 154 in March to 473 in September.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $101.7 million | $10.3 million | $126.7 million | $24.1 million |
| Gross profit / margin | $75.5 million / 74.2% | $6.5 million / 62.5% | $88.7 million / 70.0% | $13.7 million / 56.6% |
| Operating income (loss) | $63.5 million | $1.5 million | $64.2 million | $(19,000) |
| Net income (loss) | $46.6 million | $1.5 million | $48.0 million | $(115,000) |
| Diluted EPS | $1.98 | $0.08 | $2.07 | $(0.01) |
| Operating cash flow | Not stated for the quarter | Not stated for the quarter | $6.4 million | $5.6 million |
- Q3 revenue rose 883% year over year; nine-month revenue rose 425%. Billable tests delivered were 1.035 million in Q3 and 1.229 million for the nine months, versus 21,000 and 45,000, respectively, in 2019.
- Average revenue per billable test fell to $98 in Q3 and $103 for the nine months, from $493 and $536, respectively, mainly reflecting the lower-priced COVID-19 test mix, customer/payor mix, and price reductions. Cost per test also declined substantially, to $25 and $31, respectively.
- COVID-19 testing was the primary growth driver. Q3 revenue included $66.1 million from insurance payors, $34.5 million from institutional customers and $1.1 million from patients. Insurance revenue for the nine months was $66.9 million.
- At September 30, cash and cash equivalents were $53.0 million and marketable securities were $50.9 million; total current assets were $195.6 million and current liabilities were $57.7 million. No borrowings are reported at quarter-end; operating lease liabilities totaled $2.7 million.
- Nine-month cash from operations was $6.4 million, while net income was $48.0 million. Accounts receivable rose to $90.7 million from $6.6 million at year-end 2019, and the cash flow statement reflects an $84.6 million use of cash from receivables. Investing used $7.7 million; financing provided $42.3 million, mainly from stock offerings.
Material changes versus prior period
- Profitability and revenue increased markedly alongside the COVID-19 testing ramp. Gross margin improved, with management citing higher volume, lower cost per test and economies of scale.
- Operating expenses increased: Q3 total operating expenses were $11.9 million, up 141%; nine-month expenses were $24.5 million, up 79%. Growth included staffing, equity compensation, sales and marketing, and COVID-related operating costs.
- Common shares outstanding increased to 23.307 million from 21.483 million at December 31, 2019. Q3 equity offerings raised approximately $50.5 million net in total. The company also authorized a further at-the-market program of up to $125 million.
Outlook, risks and unusual items
- Management said it was expanding COVID-19 capacity to address anticipated demand over at least the next two quarters, but expects demand eventually to decrease after an effective vaccine is developed and widely deployed. The filing gives no numerical earnings or revenue guidance and emphasizes substantial uncertainty.
- Management believes cash and equity-financing proceeds will cover anticipated requirements for at least 12 months, while noting that operating cash flows fluctuate and additional financing may be needed.
- COVID-19 demand has been a material benefit, but traditional genetic testing orders previously declined during the pandemic. Key risks include changing test demand and pricing, competition, reimbursement and collection uncertainty, operational capacity and staffing, supply-chain dependence, and evolving regulation. COVID-19 tests operate under FDA EUAs; the filing notes the authorizations and regulatory framework may change.
- One customer accounted for 37% of Q3 revenue and 35% of nine-month revenue. Two customers represented 29% and 26% of receivables at quarter-end. The filing also identifies CARES Act reimbursement for uninsured COVID-19 testing as an important collection factor.
- The company recorded a $2.6 million impairment of its 25% BostonMolecules investment after concluding recoverability was not expected. It also recorded $631,000 of nine-month equity-method losses on its 30% FF Gene Biotech investment; approximately $4.4 million of its remaining contribution commitment was outstanding.
- As of September 30, non-cancelable purchase obligations were $13.1 million, payable within 12 months. Management said ordinary-course legal matters were not expected to have a material effect.
- Subsequent events: On October 20, the company bought California property for $15.4 million. The remaining approximately $15.0 million was financed with a margin loan secured by marketable securities; the custodian may make a margin call, and the interest rate may change. Subsequent to quarter-end, it sold 940,018 shares under its at-the-market program for $40.9 million gross proceeds.
Most important facts for investors to verify
- How much of the exceptional growth and margin performance depends on COVID-19 testing, and how demand, pricing and capacity utilization evolve.
- Collection timing and credit quality for the $90.7 million receivables balance, including exposure to concentrated customers and third-party/CARES Act reimbursement.
- The terms, collateral exposure and ongoing balance of the post-quarter margin loan, alongside the property purchase and subsequent equity proceeds.
- Further dilution under the $125 million equity distribution program and the effect of increased share count.
- The remaining FF Gene Biotech contribution commitment and whether the impaired BostonMolecules investment or related distribution arrangement produces value.