Fulgent Genetics, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2023. Fulgent operates clinical diagnostic testing and therapeutic development businesses and describes its aim as becoming a fully integrated precision medicine company. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $67.9 | $125.3 | $134.0 | $445.6 |
| Gross profit | $20.6 | $65.3 | $39.4 | $307.8 |
| Gross margin | 30.3% | 52.1% | 29.4% | 69.1% |
| Operating income (loss) | $(19.8) | $12.8 | $(44.6) | $214.7 |
| Net income (loss) attributable to Fulgent | $(11.2) | $11.5 | $(26.6) | $165.5 |
| Diluted earnings (loss) per share | $(0.38) | $0.37 | $(0.90) | $5.30 |
Q2 operating expenses were $40.4 million, including $9.7 million of research and development and $18.0 million of general and administrative expense. Interest and other income, net, was $5.1 million in Q2 and $8.9 million for the six-month period. The company recorded income tax benefits of $3.1 million and $8.3 million, respectively.
Cash flow and liquidity. Six-month operating cash flow was $1.8 million, versus $199.5 million in the prior-year period. Investing activities used $5.5 million and financing activities used $17.4 million. Cash and cash equivalents were $58.3 million at June 30, down from $79.5 million at year-end 2022. Cash, cash equivalents and marketable securities totaled $846.8 million, compared with $852.9 million at year-end. Current assets were $528.3 million and current liabilities were $64.8 million.
Debt and obligations. Fulgent had no outstanding margin borrowing at quarter-end, after repaying $15.0 million during the first half. Notes payable totaled approximately $7.6 million, including $4.2 million owed to Xilong Scientific and due December 31, 2023, and $3.4 million related to a building installment sale contract. Noncancelable purchase obligations were $59.5 million, of which $28.8 million was payable within 12 months. Total liabilities were $91.3 million.
Material changes versus the prior comparable period
- Revenue fell 46% in Q2 and 70% in the first half, primarily because of lower COVID-19 testing orders. The company reported no revenue from the HRSA COVID-19 Uninsured Program in 2023, compared with $106.7 million in the first half of 2022.
- Gross margin declined, which management attributed to changes in product mix and the reduced contribution from COVID-19 testing.
- First-half R&D expense rose 51% to $19.5 million, primarily reflecting higher personnel costs and continued therapeutic-candidate development.
- First-half G&A expense decreased 29% to $39.8 million, mainly due to lower credit-loss provisions and acquisition-related costs. Prior-year G&A included a $18.7 million first-half credit-loss provision; the 2023 period included a $2.0 million decrease in the provision.
- Interest and other income increased substantially, primarily reflecting interest earned on marketable securities. First-half operating cash flow dropped sharply alongside the lower earnings and revenue.
- International revenue increased 48% in Q2 and 41% in the first half, with management attributing the increase primarily to traditional genetic testing sales in China through its joint venture.
Outlook, risks and unusual items
- Management stated that existing cash, cash equivalents and short-term marketable securities should be sufficient for anticipated cash requirements for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- The company’s business includes therapeutic development, which requires continued R&D investment; management also noted that operating cash flow can fluctuate with test demand, product mix, pricing, billing and collection timing, and payment commitments.
- Fulgent disclosed a Department of Justice Civil Investigative Demand concerning allegations of medically unnecessary testing, improper billing, and remuneration potentially implicating the Anti-Kickback Statute and Stark Law. The SEC is also conducting a non-public formal investigation that appears related. The company said it is cooperating and does not presently expect a material adverse impact, but cannot predict the outcome, timing, or ultimate impact.
- Unrealized losses on available-for-sale debt securities were $24.4 million at June 30, 2023. The filing reported no credit losses on those securities during the quarter or first half.
- One customer represented 13% of Q2 revenue; no customer exceeded 10% of first-half revenue. A single customer represented 12% of receivables at June 30.
- Management reported that disclosure controls and procedures were effective as of June 30, 2023, with no material change in internal control over financial reporting during the quarter. The board adopted amended bylaws on August 1, 2023 addressing universal proxy rules.
Important facts for investors to verify
- How much of the continuing revenue decline reflects the ongoing reduction in COVID-19 testing, and whether non-COVID diagnostic growth can offset it.
- Trends in gross margin, operating losses and operating cash flow as COVID-related revenue recedes.
- Developments and potential financial, regulatory or reputational consequences of the DOJ and SEC investigations.
- The collectability and concentration of receivables, given the customer concentration disclosed in the filing.
- The liquidity, duration and valuation risks of the marketable-securities portfolio, including the private-company preferred-stock investment.
- The timing and funding of the $59.5 million purchase commitments and the $4.2 million note due to Xilong Scientific in December 2023.