Fulgent Genetics, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also presents unaudited fourth-quarter results. Fulgent provides genetic testing to physicians, primarily through hospitals and medical institutions. The company completed its reorganization on September 30, 2016 and separated its pharmaceutical business in April 2016; that business is reported as discontinued operations.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $18.276 million | $9.576 million |
| Gross profit / margin | $11.554 million / 63.2% | $4.507 million / 47.1% |
| Operating income (loss) | $918,000 | ($5.012 million) |
| Continuing-operations net loss | ($5.388 million) | ($4.985 million) |
| Net loss, including discontinued operations | ($5.347 million) | ($8.314 million) |
| Cash from continuing operating activities | $4.436 million | $2.026 million |
- Revenue increased 91%, alongside billable tests rising 83% to 12,507. Average revenue per billable test was approximately $1,461; reported internal cost averaged approximately $537.
- Gross margin improved from 47.1% to 63.2%, partly because equity-based compensation included in 2015 cost of revenue did not recur at the same level. Operating margin was approximately 5.0%; the continuing-operations net loss reflected substantial other expense and tax expense.
- Other expense was $5.386 million, primarily a $5.472 million charge tied to the Xi Long financing. The company also recorded $920,000 of income tax expense after becoming a taxable entity upon reorganization.
- At year-end, cash and cash equivalents were $7.897 million and marketable securities were $38.568 million. Total assets were $58.040 million and total liabilities were $3.561 million. The balance sheet does not disclose interest-bearing debt.
- Current assets were $26.138 million and current liabilities were $3.316 million. Cash used in investing activities was $42.795 million, principally purchases of marketable securities ($39.017 million) and fixed assets ($3.788 million).
- Financing activities provided $45.789 million, including approximately $36.0 million of net IPO proceeds and approximately $15.0 million of net proceeds from the Xi Long financing, partly offset by distributions. Management said existing liquidity and expected operating cash flow should cover anticipated needs for at least 12 months.
Fourth quarter
Q4 2016 revenue was $5.854 million, versus $2.901 million in Q4 2015. Operating income was $1.259 million, compared with an operating loss of $7.344 million; net income was $813,000, versus a net loss of $7.337 million. The unusually large Q4 2015 loss included elevated equity-based compensation.
Material changes and unusual items
- FY 2016 revenue rose by $8.7 million, driven mainly by higher test volume, broader test offerings and increased sales to existing customers. Non-U.S. revenue reached $10.0 million, or about 55% of total revenue; China contributed $3.241 million, with Canada contributing $3.798 million.
- Two customers each represented 15% of 2016 revenue. The filing notes that customer orders generally are not supported by long-term purchase commitments.
- Equity-based compensation was $4.654 million in 2016 versus $8.156 million in 2015. Reorganization-related option expense and the treatment of profits interests contributed to 2016 compensation expense; the filing says comparable levels of fully vested award expense are not expected to recur.
- The company raised capital through its October 2016 IPO and the May 2016 Xi Long transaction. The Xi Long financing included a $5.5 million expense for the difference between the units’ stated fair value and the effective issuance price.
Outlook, commentary and risks
No numerical revenue or earnings guidance is provided. Management plans to expand sales and marketing, broaden testing in areas including oncology, cardiology, pediatrics and prenatal care, grow internationally, and pursue payer coverage and reimbursement. It also described a potential China commercial relationship with Xi Long, but said terms were not finalized and the arrangement might not proceed.
- Management identified reimbursement, market adoption, customer concentration, competition, and the ability to scale laboratory capacity and hire qualified personnel as important business challenges.
- Fulgent relies on a single laboratory in Temple City and on Illumina as the sole supplier of its sequencers and associated reagents. Disruption could impair testing operations.
- Regulatory uncertainty includes possible future FDA oversight of laboratory-developed tests, state and foreign laboratory licensing, and changes to Medicare laboratory reimbursement under PAMA.
- Other material risks include patient-data privacy and cybersecurity, test accuracy and potential liability claims, international operations, and protection of trade secrets. The company reported no material legal proceedings and no material off-balance-sheet arrangements.
- Management concluded disclosure controls were effective as of year-end. The filing does not include management’s assessment or auditor attestation of internal control over financial reporting, citing applicable transition rules for newly public companies and emerging growth companies.
Key facts for investors to verify
- Whether revenue and test-volume growth can continue while maintaining average pricing, cost per test and gross margin.
- Customer concentration, receivable collection, and the durability of major customer relationships; approximately 86% of billings generated and due in 2016 were paid during that year.
- Progress in obtaining adequate payer coverage and reimbursement, including the effects of PAMA and any future FDA requirements for the company’s tests.
- Cash-flow sustainability after the IPO and financing proceeds, planned growth spending, and whether management’s liquidity expectations remain valid.
- Whether the proposed Xi Long China relationship is finalized and produces meaningful business, and how international revenue concentration and associated risks evolve.
- The effects of the Xi Long transaction charge, reorganization-related compensation, and discontinued pharmaceutical operations on period-to-period comparability.