Fulgent Genetics, Inc. — 2016 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. Fulgent provides genetic testing to hospitals, medical institutions and other customers. On September 30, it completed a reorganization that made Fulgent Therapeutics LLC its wholly owned subsidiary. The pharmaceutical business had been split off in April and is reported as discontinued operations.
Financial performance and liquidity
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue, 2016 (2015) | $5.011m ($2.905m), up 72% | $12.422m ($6.675m), up 86% |
| Gross profit; gross margin, 2016 (2015) | $2.868m; 57% (68%) | $7.564m; 61% (65%) |
| Operating income (loss), 2016 (2015) | $(0.695)m ($1.180m income) | $(0.340)m ($2.332m income) |
| Net income (loss), 2016 (2015) | $(1.107)m ($0.359m income) | $(6.160)m ($0.231m income) |
| Billable tests, 2016 (2015) | 3,419 (2,052), up 67% | 8,628 (4,814), up 79% |
- Nine-month interest and other expense was $5.444m, primarily a non-cash charge from the Xi Long financing. The company recorded $4.119m in equity-based compensation for the nine months, including charges triggered by the reorganization.
- Cash at September 30 was $8.205m, versus $0.489m at December 31, 2015. Continuing operations provided $3.182m in cash; capital expenditures used $3.379m. Total operating cash flow, including discontinued operations, was $3.151m.
- Current assets were $17.494m and current liabilities $5.010m. Total liabilities were $5.513m; the filing does not show a debt balance. Fixed assets, net, were $5.178m.
- After quarter-end, the October IPO raised approximately $36.3m net: 4.83m shares sold at $9 per share. IPO proceeds are not included in September 30 cash or results.
Changes and material items
- Revenue growth primarily reflected more tests delivered, an expanded test menu and increased sales to existing customers. Average revenue per test was approximately $1,470 in Q3 2016 versus $1,420 a year earlier; nine-month averages were $1,440 versus $1,400.
- Operating expenses rose substantially year over year, including research and development, sales and marketing, and general and administrative expenses. Equity compensation contributed to lower gross margins and higher operating costs.
- The May Xi Long transaction generated approximately $27.2m of gross proceeds for Class D-2 preferred units, but the difference between their estimated fair value and effective issuance price produced a $5.5m expense. The filing describes this as a transaction cost.
- Fulgent accrued approximately $1.3m in tax distributions to former LLC members and distributed $4.6m to founder Ming Hsieh as a return of capital in September.
- One customer represented 23% of Q3 revenue and 26% of accounts receivable at September 30. International sales represented 49% of nine-month revenue, according to the market-risk disclosure.
Outlook, risks and contingencies
- Management said existing cash, operating cash flows and IPO proceeds should meet anticipated cash needs for at least 12 months. The company expected to pay the approximately $1.3m tax distribution in Q4 2016. It cautioned that forecasts could be wrong and additional financing might be needed.
- No specific financial guidance was provided. Management expected research and development, sales and marketing, and general and administrative expenses to increase as the business grows; it planned to more than double the sales and marketing team over the next 12 months.
- Growth plans include expanding test offerings and international markets. A proposed China joint venture with Xi Long was not finalized, and Fulgent expected to be a minority partner if it proceeded. The company also described a U.S. Army hospital-network arrangement with an approximately $400,000 annual minimum for three years; other referenced customer and payer relationships generally did not commit to minimum order volumes.
- Key risks include uncertain adoption and reimbursement for genetic tests, intense competition, regulatory uncertainty over laboratory-developed tests, dependence on a single California laboratory and Illumina equipment and reagents, customer concentration and collection risks, data privacy and security, and the need to expand staffing and infrastructure. The company also highlighted potential foreign-exchange exposure as international operations grow.
- Management reported disclosure controls were effective as of September 30 and no material change in internal control over financial reporting during the quarter. The filing reported no material legal proceedings, no material off-balance-sheet arrangements, and no contingency expected by management to materially affect financial position, results or cash flows.
Important facts for investors to verify
- Whether test-volume growth and customer diversification continue, particularly given the Q3 customer concentration and accounts-receivable exposure.
- Whether gross margins recover as equity-compensation effects and laboratory costs change, and whether operating expenses grow more slowly than revenue.
- How much of reported operating cash flow reflects sustainable collections versus timing of payables; monitor receivables and customer payment cycles.
- Actual use of IPO proceeds, cash runway, and any subsequent financing or capital needs.
- Progress on payer coverage and reimbursement, regulatory requirements for laboratory-developed tests, and the status and terms of the proposed China joint venture.