Fulgent Genetics, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless stated otherwise. Fulgent provides genetic testing services using a proprietary sequencing and analytics platform. Figures below are in U.S. dollars; financial-statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $7.753 | $5.370 | +44% |
| Gross profit / margin | $3.696 / 47.7% | $2.402 / 44.7% | Margin +3.0 percentage points |
| Operating expenses | $5.610 | $4.225 | +33% |
| Operating loss | $(1.914) | $(1.823) | Loss widened $0.091 |
| Net loss | $(1.956) | $(1.908) | Loss widened $0.048 |
| Net loss per share, basic and diluted | $(0.09) | $(0.10) | — |
| Operating cash flow | $1.366 | $1.055 | +$0.311 |
- Billable tests delivered rose 75% to 13,163, while average revenue per test fell 17% to $589. Cost per test declined 22% to $308.
- Operating expenses increased across research and development, selling and marketing, and general and administrative. Drivers included higher staffing and equity compensation, COVID-19 testing research and supplies, and increased bad-debt and professional fees.
- Interest and other income, net, was $0.241 million, including $0.326 million of interest income and $0.085 million of other losses. The equity-method loss from FF Gene Biotech was $0.249 million.
Balance sheet and liquidity
- At March 31, 2020, cash and cash equivalents were $9.302 million and marketable securities were $61.322 million, totaling approximately $70.624 million in cash and investments. Total assets were $89.325 million.
- Current assets were $37.025 million and current liabilities were $5.810 million. Total liabilities were $7.953 million, including $2.574 million in operating lease liabilities. The balance sheet reports no borrowings or other debt.
- Cash declined $2.663 million during the quarter. Operating activities provided $1.366 million; investing activities used $3.862 million, primarily for securities purchases and $0.796 million of fixed assets; financing activities used $0.164 million.
- Management said existing cash, operating cash flows and prior equity financing were expected to fund anticipated requirements for at least 12 months. It also cautioned that cash needs or operating cash flows could differ from expectations and future financing might be needed.
Changes, outlook and risks
- Revenue growth reflected higher test volume, attributed to new and existing customers, an expanded test menu and increased sequencing-as-a-service orders. Lower prices per test reflected test and customer mix, revenue-recognition and collectability patterns, and competitive price pressure.
- Management reported no material negative COVID-19 impact on Q1 operating results or liquidity through March 31, 2020. The company continued operating as an essential business, launched COVID-19 tests, submitted them to the FDA for validation and emergency-use authorization, and had temporary New York State approval to test New York specimens. It said it could process thousands of COVID-19 samples per day.
- Management warned that public-health measures and healthcare-resource shifts could reduce traditional genetic-test orders, while COVID-19 test pricing and margins were uncertain. Workforce, supply-chain and broader economic disruptions could also affect operations and results. The filing provides no numerical financial guidance.
- Material commitments include $3.2 million of non-cancelable reagent and supply purchase obligations, mostly payable within 12 months, and a remaining FF Gene Biotech contribution obligation of RMB 39.3 million, approximately $5.5 million. The company had contributed equipment with an aggregate fair value of $3.1 million. It cautioned that the joint venture may not generate sufficient returns.
- Key risks include continued losses and uncertainty around sustained profitability; genetic-test price competition and reimbursement; customer demand and collections; COVID-19 effects; reliance on a single California laboratory and key suppliers; regulatory changes affecting laboratory-developed tests; and privacy, cybersecurity and international-operation risks. Management reported effective disclosure controls as of March 31, 2020 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether test-volume growth and improved gross margin can offset declining average prices and rising operating expenses.
- How COVID-19 testing demand, realized pricing and margins develop, and whether traditional genetic-test volumes are affected.
- Whether positive operating cash flow is sustainable, given that Q1 2020 benefited from a $1.907 million increase in accounts payable and was partly offset by higher other assets.
- How the company will meet its remaining FF Gene Biotech contribution commitment and whether the venture can produce economic returns.
- Whether receivable collectability, reimbursement conditions and purchase commitments change materially; the allowance for doubtful accounts was $0.862 million at quarter-end.