Fulgent Genetics, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. Fulgent’s continuing business is genetic testing for physicians and institutions. Comparisons are with the same 2016 periods.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4.503 million | $5.011 million | $14.449 million | $12.422 million |
| Gross profit | $2.235 million | $2.868 million | $8.443 million | $7.564 million |
| Gross margin | 49.6% | 57.2% | 58.4% | 60.9% |
| Operating loss | $1.481 million | $695,000 | $1.412 million | $340,000 |
| Net loss | $1.093 million | $1.107 million | $886,000 | $6.160 million |
| Basic and diluted loss per share | $0.06 | $0.44 | $0.05 | $1.17 |
| Cash provided by operating activities | — | $2.572 million | $3.151 million |
Billable tests increased 19% in Q3 to 4,072 and 43% for the nine months to 12,365. Average revenue per billable test fell to $1,106 in Q3 from $1,466, and to $1,168 for the nine months from $1,440. Management attributed the declines to test and customer mix, lower prices on certain tests, and competitive pricing pressure.
At September 30, cash and cash equivalents were $9.478 million and marketable securities were $34.430 million, totaling about $43.9 million. Current assets were $32.038 million and current liabilities $3.151 million. The balance sheet reports no borrowings; total liabilities were $3.399 million. Cash increased $1.581 million from year-end 2016. Investing activities used $286,000 and financing activities used $774,000 during the nine months.
Changes and notable items
- Q3 revenue fell 10% year over year, primarily reflecting lower average test prices and reduced orders from certain PRC customers, partly offset by higher test volume and research-service revenue. Nine-month revenue rose 16%, principally on test-volume growth.
- Gross margin declined in both comparison periods. Cost of revenue rose 6% in Q3 and 24% for the nine months, with added personnel, supplies and laboratory-equipment depreciation contributing.
- Nine-month net loss improved substantially from 2016, but the comparison is affected by a $5.5 million 2016 expense tied to the Xi Long financing and higher 2016 equity-compensation charges. Operating loss was larger in 2017 in both periods.
- Fulgent recorded $172,000 of Q3 and $277,000 of nine-month equity-method losses from its 30% interest in FF Gene Biotech, a PRC joint venture formed in 2017. It contributed $2.5 million of equipment and had approximately RMB43.6 million, or $6.6 million, remaining under its contribution commitment.
Outlook, risks and contingencies
Management stated existing cash, operating cash flow and financing proceeds were expected to cover anticipated cash needs for at least the next 12 months; it also cautioned that additional funding might be needed and was not committed. No quantified revenue or earnings guidance was provided. Management expected sales and marketing, research and development, and general and administrative spending to increase as the business grows. Planned developments included expanding test offerings, including Beacon carrier screening, and a planned somatic cancer-testing launch in the first half of 2018.
Risks highlighted include pricing pressure and margin deterioration, volatile orders and customer concentration, dependence on reimbursement and collections, competition, regulatory changes affecting laboratory-developed tests, and reliance on a single U.S. laboratory and key suppliers. Three customers each accounted for 11% of revenue in the nine-month period, according to the filing. The FF Gene Biotech investment carries funding and execution risks, and the venture could divert direct Asian customer sales. Purchase obligations for reagents and equipment were $2.4 million. Operating leases extend through July 2022; the company also entered an El Monte office lease in August 2017. Management reported no material pending legal proceedings and no off-balance-sheet arrangements.
The company planned to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method; its analysis had not identified material differences to date, but was ongoing. Disclosure controls were assessed as effective at September 30, 2017.
Key facts for investors to verify
- Whether test volume growth can offset lower average prices and restore gross margins.
- How much revenue and collection exposure remains with concentrated customers, especially customers whose PRC orders declined.
- The timing, cash requirements and expected returns of the remaining FF Gene Biotech contribution commitment, and the venture’s operating progress.
- Whether operating cash flow remains positive as investment and operating expenses rise, and whether the stated 12-month liquidity expectation holds.
- Progress on reimbursement access, new test launches and any material regulatory developments affecting the company’s testing services.