Fulgent Genetics, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited results are compared with the three months ended March 31, 2020. Fulgent provides genetic testing and, since March 2020, SARS-CoV-2 testing. Management attributed the quarter’s exceptional growth primarily to COVID-19 testing demand.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $359.4 million | $7.8 million |
| Gross profit / gross margin | $285.4 million / 79.4% | $3.7 million / 47.7% |
| Operating income (loss) | $266.9 million | ($1.9 million) |
| Net income (loss) | $200.7 million | ($2.0 million) |
| Diluted EPS | $6.52 | ($0.09) |
| Cash provided by operating activities | $233.2 million | $1.4 million |
- Revenue increased 4,536% year over year; 3.774 million billable tests were delivered versus 13,000. Average revenue per billable test fell to about $95 from $589, while reported cost per test declined to about $20 from $308, reflecting a substantially different test mix and scale.
- Q1 2021 revenue by payor was $207.6 million insurance, $151.6 million institutional, and $0.3 million patient. U.S. revenue was $357.5 million.
- At March 31, cash and cash equivalents were $151.5 million and marketable securities were $545.9 million. Current assets were $659.1 million against current liabilities of $196.5 million. Stockholders’ equity was $801.6 million.
- Debt consisted principally of a $15.0 million margin loan, with an interest rate below 1% at quarter-end. Securities valued at $420.2 million secured the borrowing; the custodian may issue a margin call at any time.
- Capital expenditures were $11.5 million. Cash used in investing activities was $216.5 million, mainly reflecting purchases of marketable securities; financing activities provided $47.3 million net.
Material changes versus the prior comparable period
- The company moved from a net loss to substantial profitability as COVID-19 testing volumes surged. Revenue growth outpaced cost growth, and gross margin rose from 47.7% to 79.4%.
- Operating expenses increased to $18.4 million from $5.6 million, including higher staffing and equity compensation, COVID-19-related software and supplies, and marketing and outside labor.
- Trade receivables rose to $216.5 million from $183.9 million at year-end 2020; the company recorded a $1.1 million provision for credit losses. Income tax payable increased to $120.5 million from $53.3 million.
- One customer, the County of Los Angeles, accounted for 25% of Q1 2021 revenue; no customer accounted for 10% or more in Q1 2020.
Outlook, commentary, risks and unusual items
- Management said existing cash, marketable securities and anticipated operating cash flows should cover expected cash needs for at least 12 months. It also cautioned that operating cash flows may fluctuate and future financing may be needed.
- Management expected near-term demand for COVID-19 tests but anticipated that demand could eventually decline following widespread deployment of effective vaccines. The company was continuing to invest in capacity, without assurance those investments would earn adequate returns.
- Key risks include dependence on pandemic-related testing, price and margin pressure, customer concentration, reimbursement and collection uncertainty, limited suppliers, rapid operational growth, and regulatory change. COVID-19 tests operate under FDA emergency use authorizations subject to conditions and government discretion.
- Non-cancelable purchase obligations totaled $25.4 million, primarily for reagents, supplies and laboratory equipment. The company also had approximately RMB 29.7 million (about $4.5 million) remaining under its FF Gene Biotech equipment contribution commitment.
- The company adopted the expected-credit-loss accounting standard effective January 1, 2021, recording an $887,000 cumulative reduction to retained earnings, partly offset by a $239,000 cumulative tax effect. Its equity-method investments in FF Gene Biotech and BostonMolecules had zero carrying value after impairment losses in 2020.
- Management reported no legal proceedings expected to have a material effect and concluded disclosure controls were effective as of March 31, 2021. The filing states no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much revenue and cash generation are attributable to COVID-19 testing, and how resilient are results if testing demand declines?
- Whether the County of Los Angeles relationship continues at a similar scale, and how customer concentration and receivable collections evolve.
- Whether average test prices, cost per test and gross margins remain sustainable amid changing test mix and competition.
- Whether COVID-19 EUA conditions, reimbursement policies, supply availability and laboratory capacity affect testing operations.
- The terms and collateral exposure of the margin loan, the remaining equity-distribution capacity and potential dilution, and the funding and performance of the FF Gene Biotech commitment.