Fulgent Genetics, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 19, 2018. The filing also presents unaudited fourth-quarter results. Fulgent provides genetic testing services, primarily to hospitals and medical institutions, and reports as one operating segment.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $18.730 million | $18.276 million | +2% |
| Gross profit / gross margin | $10.179 million / 54.3% | $11.554 million / 63.2% | Gross profit -12%; margin -8.9 percentage points |
| Operating income (loss) | $(3.482) million | $0.918 million | Declined $4.400 million |
| Net income (loss) | $(2.510) million | $(5.347) million | Loss narrowed $2.837 million |
| Operating cash flow | $1.331 million | $4.436 million | Down $3.105 million |
| Cash and cash equivalents | $6.490 million | $7.897 million | At year-end |
| Marketable securities | $34.877 million | $38.568 million | At year-end |
- Billable tests rose 33% to 16,578, while average revenue per test fell 23% to $1,130. Average cost per test declined 4% to $516.
- Cost of revenue increased 27% to $8.551 million. Research and development rose 19% to $4.223 million; selling and marketing rose 70% to $4.205 million; and general and administrative expense rose 14% to $5.233 million.
- Year-end current assets were $32.927 million and current liabilities were $3.000 million. The balance sheet reports no borrowings or debt; total liabilities were $3.006 million.
- Cash used in investing activities was $2.049 million, including $2.895 million of fixed-asset purchases and $2.461 million of equipment contributed to the China joint venture. Cash used in financing activities was $0.770 million.
Fourth-quarter results
Unaudited Q4 2017 revenue was $4.281 million, compared with $5.854 million in Q4 2016, down approximately 27%. Q4 2017 net loss was $1.624 million, versus net income of $0.813 million a year earlier. Q4 2017 gross profit was $1.736 million, operating expenses were $3.806 million, and operating loss was $2.070 million.
Material changes and notable items
- Revenue growth was modest despite higher test volume, reflecting lower average prices, a greater mix of lower-priced sequencing-as-a-service tests, and reduced orders from certain large China customers. Non-U.S. revenue was $9.7 million versus $10.0 million; PRC revenue declined while Canadian revenue increased.
- Gross margin pressure reflected price reductions and higher personnel costs in cost of revenue. The company attributed increased selling and marketing expense to expanded sales staffing and marketing initiatives.
- FY 2017 included a $1.015 million income-tax benefit and a $0.524 million equity-method loss related to FF Gene Biotech. FY 2016 results included a $5.5 million expense from the Xi Long financing valuation difference and elevated equity-based compensation; these affected year-over-year comparability.
- Fulgent owns 30% of FF Gene Biotech and uses the equity method. It had contributed equipment with a fair value of $2.5 million and reported approximately $6.7 million of remaining contribution obligations at year-end. Joint-venture sales and royalties to Fulgent were minimal in 2017.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor issued an unqualified opinion on the financial statements; the auditor did not provide an internal-control attestation.
Outlook, risks and contingencies
- The filing gives no numerical revenue or earnings guidance. Management stated existing cash, operating cash flows and financing proceeds were expected to cover anticipated requirements for at least the next 12 months, while cautioning that operating cash flows may fluctuate and additional financing might be needed.
- Management planned somatic cancer panels and newborn genetic panels for the first half of 2018 and expected research and development, sales and marketing, and general and administrative spending to increase.
- Beginning January 1, 2018, the company expected to recognize third-party-payor revenue on an accrual basis under the new revenue standard, rather than generally when cash was received. Adoption was expected to increase opening accounts receivable and reduce beginning accumulated deficit by $327,000.
- Key risks include reimbursement and pricing pressure, dependence on a small number of customers, continuing losses, competition, regulatory uncertainty around laboratory-developed tests, and reliance on Illumina as the sole supplier of its sequencing systems and associated reagents.
- All testing is performed at one California laboratory. The company also cites privacy and cybersecurity, clinical-laboratory licensing, international operations and joint-venture execution risks. It reported no material pending legal proceedings and no material off-balance-sheet arrangements.
Investor verification priorities
- Review the audited financial statements and quarterly table for the timing and drivers of 2017 losses, especially the sharp Q4 deterioration.
- Verify whether test-volume growth can translate into revenue and margin improvement given the 23% decline in average price per test and lower gross margin.
- Assess customer concentration and trends in orders from the large PRC customers, along with collections and receivables quality.
- Track cash generation, marketable-security maturities, capital spending, and the remaining FF Gene Biotech contribution commitment.
- Monitor implementation of the new revenue-recognition standard and subsequent payor coverage, reimbursement rates, and regulatory developments.