Fulgent Genetics, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited quarterly results; it is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
Fulgent provides genetic testing services to hospitals, medical institutions, patients and other customers. Its proprietary platform supports a broad, customizable test menu; the company reported approximately 18,000 single-gene tests and more than 900 panels. It delivered 22,298 billable tests in 2018, up from 16,578 in 2017. Most revenue came from institutional customers.
Financial and operating performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $21.351 million | $18.730 million |
| Gross profit / gross margin | $10.654 million / 49.9% | $10.179 million / 54.3% |
| Operating loss | $5.070 million | $3.482 million |
| Net loss | $5.607 million | $2.510 million |
| Net loss per share, basic and diluted | $0.31 | $0.14 |
| Cash from operating activities | $(0.675) million | $1.331 million |
- Revenue rose 14%, while billable tests increased 35%. Average revenue per test fell 15%, to $958, reflecting test and customer mix and lower pricing; average cost per test declined 7%, to $480.
- Cost of revenue grew 25%, faster than revenue, and gross margin fell 4.4 percentage points. Operating expenses increased 15%, including higher R&D spending.
- At year-end, cash and cash equivalents were $6.736 million and marketable securities totaled $30.684 million. Current assets were $39.543 million versus current liabilities of $2.738 million. The balance sheet reports no borrowings; total liabilities were $2.752 million.
- Investing activities provided $0.950 million, primarily reflecting net marketable-security maturities and purchases; financing activities provided $0.015 million.
Changes, outlook and notable items
- U.S. revenue increased to $12.579 million from $9.024 million. Non-U.S. revenue decreased to $8.772 million from $9.706 million, principally as PRC revenue fell to $0.109 million from $2.614 million; revenue from other countries partly offset the decline.
- One customer represented 13% of 2018 revenue. The company noted no long-term purchase commitments with customers. About 78% of 2018 test billings generated and due during the year were paid during that period.
- Management said existing cash, operating cash and equity-financing proceeds were expected to cover anticipated requirements for at least 12 months. It provided no specific revenue or earnings guidance and cautioned that results and collections can fluctuate.
- Fulgent holds a 30% interest in FF Gene Biotech and recorded a $0.935 million equity-method loss in 2018. It had approximately $5.9 million of remaining equipment-contribution obligations to the venture at year-end. The technology license agreement with the venture expired December 31, 2018.
- The company adopted ASC 606 in 2018, recording a $0.327 million opening adjustment to receivables and accumulated deficit. Management also increased the deferred-tax valuation allowance. The filing says the 2018 fourth-quarter net loss was revised from $0.935 million to $2.053 million, and full-year net loss from $4.5 million to $5.607 million, primarily due to that allowance; the revision had no cash-flow impact. Investors should use the financial statements in this 10-K rather than the previously released figures.
- Key risks include competitive price pressure and limited reimbursement, customer concentration and collection uncertainty, potential changes to FDA oversight of laboratory-developed tests, reliance on Illumina as the sole sequencer and reagent supplier, and dependence on a single testing laboratory. The company reported no material pending legal proceedings and said disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether test-volume growth can offset lower average pricing and restore gross margin and operating profitability.
- Receivables, customer payment trends and the adequacy of the doubtful-account allowance, which rose to $0.590 million from $0.287 million.
- The status and economics of FF Gene Biotech, including the remaining contribution commitment and the post-expiry technology-licensing arrangements.
- Potential effects of reimbursement changes, LDT regulation and continued price competition on revenue and margins.
- Whether available liquidity remains adequate given operating cash use, $5.7 million of non-cancelable purchase obligations and planned investment needs.