Fulgent Genetics, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited; financial amounts below are in U.S. dollars. Fulgent provides genetic testing services, primarily to hospitals and medical institutions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $5.63m | $4.50m | $15.68m | $14.45m |
| Gross profit | $3.01m | $2.24m | $7.75m | $8.44m |
| Gross margin | 53.6% | 49.6% | 49.4% | 58.4% |
| Operating loss | $(0.85)m | $(1.48)m | $(4.04)m | $(1.41)m |
| Net loss | $(0.60)m | $(1.09)m | $(3.55)m | $(0.89)m |
| Net loss per share, diluted | $(0.03) | $(0.06) | $(0.20) | $(0.05) |
- Q3 revenue rose 25%; nine-month revenue rose 9%. Billable tests delivered increased 37% in Q3 and 29% year to date. Management attributed volume growth to expanded test offerings, existing-customer orders and sequencing-as-a-service demand.
- Average revenue per billable test fell 9% in Q3 to $1,010 and 15% year to date to $987. Management cited product and customer mix and competitive price reductions.
- Q3 gross margin improved, but the nine-month margin declined as cost of revenue grew faster than revenue. Nine-month operating expenses increased 20%, including higher R&D spending and personnel costs.
Cash, liquidity and obligations
- At September 30, 2018, cash and cash equivalents were $8.49m; marketable securities totaled $28.36m ($24.11m current and $4.25m long-term). Total current assets were $41.05m and current liabilities $2.26m. Total liabilities were $2.27m; the filing reports no borrowings or debt balance.
- For the first nine months, operating cash flow was negative $1.45m, versus positive $2.57m in 2017. The filing attributes the 2018 use chiefly to increased receivables and timing of customer collections. Investing cash flow was positive $3.49m, largely reflecting net marketable-security maturities; capital expenditures were $2.20m. Financing cash flow was $0.01m.
- Management believes existing cash, operating cash flows and equity-financing proceeds will cover anticipated needs for at least 12 months, but notes that cash flows may fluctuate and additional financing may be needed; no future capital commitments are in place.
- Fulgent has an outstanding joint-venture equipment contribution commitment of 40.3 million RMB, estimated at $5.9m, to FF Gene Biotech. It also disclosed $1.4m of reagent purchase obligations payable within 12 months.
Material changes, outlook and risks
- Nine-month net loss widened substantially year over year despite higher revenue, reflecting lower gross profit, higher operating expenses and a larger equity-method loss from the PRC joint venture. Q3 net loss narrowed year over year.
- Revenue from the PRC fell sharply: two significant customers that contributed a combined 18% of nine-month 2017 revenue ordered no tests and generated no revenue in the 2018 nine-month period. Management does not expect meaningful future revenue from those customers. One affiliated customer group represented 13% of revenue in both 2018 comparison periods.
- Fulgent adopted ASC 606 on January 1, 2018 using the modified retrospective method. It now estimates third-party-payor revenue when test results are delivered, rather than generally waiting for payment. Adoption increased opening receivables by $327,000; reported revenue was $83,000 lower for Q3 and $265,000 lower for the nine-month period than it would have been under the prior standard.
- The company recorded a $207,000 return-to-provision tax benefit, primarily related to federal and state research credits. The federal corporate tax rate reduction under the 2017 Tax Act also affected its effective tax rate.
- No specific revenue, earnings or margin guidance was provided. Management cited investment in sales, marketing, R&D and growth, while warning that competition, price pressure, collections, customer concentration, regulatory changes, cybersecurity, international operations and dependence on its single laboratory could adversely affect results. The joint venture may not recover its investment and could reduce direct Asian sales.
- Management reported effective disclosure controls as of September 30, 2018. It said there were no material legal proceedings and that ordinary-course claims were not expected to materially affect the company.
Important facts for investors to verify
- Whether test-volume growth can offset lower realized pricing and sustain gross margins.
- Receivables growth, collection experience and the estimates underlying third-party-payor revenue under ASC 606.
- The cause and persistence of the year-to-date operating cash outflow and the company’s stated 12-month liquidity outlook.
- Progress, remaining funding obligations and commercial performance of FF Gene Biotech, including possible effects on direct PRC sales.
- Customer concentration and the impact of losing the two previously significant PRC customers.