Fulgent Genetics, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Fulgent provides genetic testing services using a proprietary sequencing and analysis platform. Financial amounts below are in U.S. dollars; “m” means million.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $10.35m | $5.63m | $24.14m | $15.68m |
| Gross profit / margin | $6.46m / 62.5% | $3.01m / 53.6% | $13.67m / 56.6% | $7.75m / 49.4% |
| Operating income (loss) | $1.51m | ($0.85m) | ($0.02m) | ($4.04m) |
| Net income (loss) | $1.46m | ($0.60m) | ($0.12m) | ($3.55m) |
| Diluted EPS | $0.08 | ($0.03) | ($0.01) | ($0.20) |
- Q3 revenue rose 84%; nine-month revenue rose 54%. Billable tests increased 272% in Q3 and 181% year to date, while average price per test fell 50% and 45%, respectively. The company attributed growth primarily to higher test volumes, with lower prices reflecting test and customer mix and competitive price reductions.
- Q3 cost per billable test declined to $188 from $469; nine-month cost was $235 versus $499. Management cited greater scale and operating efficiencies. Operating expenses rose 28% in Q3 and 16% year to date, including increased sales and marketing, research and development, and personnel costs.
- Operating cash flow was $5.63m for the first nine months, versus cash use of $1.45m a year earlier. Net loss was offset in part by noncash compensation, depreciation and equity-method losses; collections timing also contributed to the year-over-year cash-flow improvement.
Financial position and liquidity
- At September 30, cash and cash equivalents were $20.52m and marketable securities were $23.08m, or $43.61m combined. Total current assets were $39.21m; current liabilities were $4.25m.
- The filing reports no borrowings or debt. Lease liabilities were $2.78m ($0.41m short-term and $2.37m long-term); total liabilities were $6.62m. Adoption of the lease standard in January 2019 added approximately $3.0m of right-of-use assets and lease liabilities.
- Cash increased $13.79m over the nine-month period. Investing cash flow was $7.03m, mainly reflecting marketable-security maturities net of purchases; financing cash flow was $1.14m, including proceeds from the equity distribution program.
- In August, Fulgent established an at-the-market offering program of up to $30m. It sold 104,390 shares in Q3 at a weighted-average $12.14 per share, receiving $0.98m net proceeds.
Changes, outlook and notable items
- Q3 returned to profitability compared with a year-earlier loss; the first nine months remained slightly loss-making. Management noted profitability in Q2 and Q3 2019 but cautioned that profitability may not be sustained.
- One affiliated customer group accounted for 40% of Q3 revenue and 33% of nine-month revenue, compared with 13% in the comparable 2018 periods. Orders are made test by test, without long-term purchase commitments.
- Management said existing cash, operating cash flow and equity-financing proceeds should be sufficient for anticipated cash requirements for at least 12 months. No specific revenue or earnings guidance was provided. Management cautioned that cash flows and results may fluctuate and additional financing may be needed.
- Fulgent’s 30%-owned FF Gene Biotech joint venture generated a $0.60m equity-method loss for the nine months. Fulgent reported approximately $5.7m of remaining equipment-contribution commitments under the amended agreement. The venture reported $2.13m in nine-month sales and a $2.32m net loss.
- Non-cancelable purchase obligations for reagents and supplies totaled $3.7m, including $3.1m payable within 12 months. Management did not expect ordinary-course legal matters to materially affect the company.
Key risks and investor verification points
- Pricing and mix: Verify whether rapid test-volume growth can offset lower average selling prices and sustain gross margins amid genetic-testing price competition.
- Customer concentration: Monitor the major affiliated customer group’s ordering and payment patterns; it has no long-term volume commitment.
- Profitability and cash conversion: Assess whether recent earnings and operating cash flow are repeatable, given year-to-date net loss and the contribution of noncash items and collection timing.
- Joint venture exposure: Verify the timing and funding of the remaining contribution commitment and whether FF Gene Biotech can reduce losses or provide returns; Fulgent does not control the venture.
- Regulatory and operating risks: The filing highlights uncertainty around FDA oversight of laboratory-developed tests, laboratory licensing, reimbursement, privacy and data security, and reliance on a single U.S. laboratory and key sequencing supplier.
- Capital and dilution: Track any further sales under the $30m equity program and resulting dilution. Management’s liquidity assessment is forward-looking and depends on operating cash flow and access to financing.