Fulgent Genetics, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 3, 2023. Fulgent operates clinical diagnostic testing and therapeutic development businesses, and reports one operating segment.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $84.7 | $105.7 | $218.7 | $551.3 |
| Gross profit / margin | $39.8 / 47.0% | $46.1 / 43.6% | $79.2 / 36.2% | $353.9 / 64.2% |
| Operating income (loss) | $0.2 | $0.4 | $(44.4) | $215.1 |
| Net income (loss) attributable to Fulgent | $(13.1) | $1.7 | $(39.7) | $167.2 |
| Diluted EPS | $(0.44) | $0.06 | $(1.33) | $5.38 |
| Operating cash flow | Not separately provided for the quarter | $12.1 | $220.3 |
Liquidity, debt and balance sheet
- At September 30, 2023, cash and cash equivalents were $84.1 million and marketable securities totaled $767.4 million; together, $851.5 million, versus $852.9 million at December 31, 2022.
- Total assets were $1.358 billion; current assets were $549.9 million and current liabilities $61.4 million. Stockholders’ equity totaled $1.262 billion.
- Notes payable totaled approximately $5.9 million, including current and long-term portions. No margin-loan borrowing remained at quarter-end; the $15.0 million margin loan was repaid during the first nine months.
- Nine-month investing cash flow was positive $14.6 million, primarily reflecting net maturities of marketable securities, partly offset by $19.1 million of fixed-asset purchases. Financing cash flow was negative $21.8 million.
Material changes and drivers
- Revenue fell 20% in Q3 and 60% for the first nine months year over year, primarily because of lower COVID-19 testing demand and the absence of $92.7 million of HRSA COVID-19 Uninsured Program revenue recognized in the first nine months of 2022.
- Q3 revenue included an $18.9 million cumulative catch-up adjustment for variable consideration on COVID-19 tests completed in prior periods, following collection efforts. The filing says no HRSA program revenue was recognized in 2023.
- Q3 gross margin improved year over year to 47.0%, which management attributed to product mix and the prior-period COVID-19 revenue adjustment. Nine-month gross margin declined to 36.2%, primarily due to product mix.
- Research and development expense increased 33% in Q3 and 45% year to date, reflecting personnel, equity compensation and research supplies. General and administrative expense declined, largely because of lower credit-loss provisions and prior-period acquisition costs.
- Interest and other income rose to $6.6 million in Q3 and $15.5 million year to date, primarily because of higher interest rates on investments.
Outlook, risks and other notable items
- Management stated that existing cash, cash equivalents and short-term marketable securities should meet anticipated cash requirements for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- The company recorded a full valuation allowance on net deferred tax assets at September 30, 2023, concluding it was more likely than not that some or all would not be realized, primarily in light of year-to-date operating losses. The Q3 tax provision was $20.3 million; the reported effective tax rate was 296%.
- The Department of Justice issued a Civil Investigative Demand concerning allegations involving medically unnecessary testing, billing and remuneration under anti-kickback and Stark laws. The SEC is also conducting a non-public formal investigation that appears related to the CID and company reports for 2018–2020. The company is cooperating and does not presently expect a material adverse impact, but says timing, outcome and ultimate impact cannot be predicted.
- One customer contributed 14% of Q3 revenue and 11% of nine-month revenue. Noncancelable purchase obligations were $51.1 million, including $24.0 million due within 12 months.
- The board’s $250 million repurchase program had approximately $173.5 million remaining at quarter-end. In October 2023, the company repurchased 533,000 shares for $13.7 million.
- Management concluded disclosure controls and procedures were effective as of September 30, 2023; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- How much of future revenue and collections depends on legacy COVID-19 testing, including the $18.9 million prior-period catch-up, and whether that adjustment is repeatable.
- The underlying trajectory of the core diagnostic and therapeutic businesses, given the sharp year-over-year revenue decline and continued nine-month operating loss.
- The basis and potential future effects of the full deferred-tax-asset valuation allowance.
- Developments, potential costs and financial or reputational exposure from the DOJ and SEC investigations.
- Marketable-security duration, valuation sensitivity and liquidity, alongside debt maturities, purchase commitments and planned capital spending.