Fulgent Genetics, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Fulgent provides genetic testing services, primarily to hospitals and medical institutions. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $5.370 million | $4.653 million |
| Gross profit / gross margin | $2.402 million / 44.7% | $1.881 million / 40.4% |
| Operating expenses | $4.225 million | $4.075 million |
| Operating loss | $1.823 million | $2.194 million |
| Net loss / diluted loss per share | $1.908 million / $0.10 | $1.910 million / $0.11 |
| Cash provided by (used in) operations | $1.055 million | $(1.291) million |
At March 31, 2019, cash and cash equivalents were $5.288 million and marketable securities were $33.122 million, including $8.983 million classified as long-term. Total current assets were $36.301 million and current liabilities were $3.203 million. Stockholders’ equity was $49.961 million. The filing reports no borrowings or other interest-bearing debt; lease liabilities were $2.881 million in total, of which $0.393 million was current.
Cash decreased $1.448 million during the quarter. Investing activities used $2.522 million, principally reflecting purchases of marketable securities net of maturities; financing activities provided $4,000. The company had $5.0 million of non-cancelable reagent purchase obligations at quarter-end. No off-balance-sheet arrangements were reported.
Changes versus the prior comparable period
- Revenue rose 15%, while billable tests delivered increased 63% to 7,530. Management attributed volume growth to test-menu expansion, higher orders from some existing customers, sequencing-as-a-service orders, and broader market adoption.
- Average revenue per billable test fell 29% to $713, reflecting product and customer mix, more lower-priced tests, and price reductions amid competition. Cost per test declined 34% to $394.
- Gross margin improved 4.3 percentage points. Cost of revenue increased 7%, slower than revenue growth; management cited increased testing volume and operating leverage.
- Operating loss narrowed by $371,000, but net loss was essentially unchanged, as the tax benefit recorded in Q1 2018 did not recur and the equity-method loss from the China joint venture increased to $279,000.
- Operating cash flow improved by $2.346 million, primarily due to a $1.414 million reduction in accounts receivable, largely reflecting collection timing.
Outlook, commentary, and risks
- Management expects existing cash, operating cash flows, and any equity-financing proceeds to cover anticipated cash requirements for at least the next 12 months. This is an expectation, not a quantified earnings or revenue forecast; the company said additional financing may be needed if its assumptions prove incorrect.
- Management reported 10% compound quarterly growth in billable tests over the last eight completed fiscal quarters, while cautioning that operating results and cash flows can fluctuate and that historical growth may not continue.
- Two affiliated customer groups accounted for 20% and 11% of Q1 2019 revenue. A single customer represented 12% of receivables at quarter-end.
- Fulgent held a 30% equity-method interest in FF Gene Biotech, which recorded a $279,000 quarterly equity loss for Fulgent. Fulgent had approximately RMB 40.3 million (about $6.0 million) remaining in its equipment-contribution commitment. The joint venture may not generate returns sufficient to recover the investment and could compete with Fulgent’s direct sales in Asia.
- Key risks include continued genetic-test price pressure and customer concentration; uncertain reimbursement and collections; evolving laboratory and genetic-testing regulation; reliance on a single U.S. laboratory and Illumina for sequencers and associated reagents; and the possibility that growth investments increase costs without producing sufficient demand.
- The company adopted lease accounting guidance on January 1, 2019, recognizing right-of-use assets and lease liabilities of approximately $3.0 million at adoption, with no retained-earnings impact. Management said the change materially affected the balance sheet but not operations or cash flows.
- Management said no current legal proceeding was expected to have a material effect. Disclosure controls were assessed as effective as of March 31, 2019.
Important facts for investors to verify
- Whether higher test volumes can offset falling realized prices and sustain gross-margin improvement.
- The durability and collection quality of revenue, especially given customer concentration and the quarter’s reliance on receivables collections to support operating cash flow.
- The remaining timing and cost of the approximately $6.0 million FF Gene Biotech contribution commitment, and the joint venture’s operating performance and potential impact on direct Asian sales.
- Whether the stated liquidity outlook remains adequate after reagent purchase obligations, lease payments, and planned growth spending.
- Whether evolving reimbursement, regulatory, and supplier conditions affect test demand, pricing, or the ability to maintain laboratory operations.