Fulgent Genetics, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; interim financial statements are unaudited. Fulgent provides genetic testing, primarily to hospitals and medical institutions. The Pharma business was spun off in April 2016 and is presented as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $5.306 million | $3.440 million |
| Gross profit / margin | $3.447 million / 65.0% | $2.136 million / 62.1% |
| Operating income (loss) | $219,000 | $(615,000) |
| Continuing operations income (loss) | $232,000 | $(602,000) |
| Net income (loss) | $232,000 | $(543,000) |
| Diluted EPS | $0.01 | $(0.05) |
| Operating cash flow | $707,000 | $892,000 |
- Revenue increased 54%; billable tests rose 82% to 4,422. Management cited expanded test offerings, higher sales to existing customers, and market growth. Average revenue per billable test declined to about $1,200 from $1,417, mainly due to test mix; management estimated cost per test at about $420.
- Operating expenses increased 17% to $3.228 million. Selling and marketing rose 196% to $891,000, while R&D rose 52% to $851,000. G&A declined 21% to $1.486 million, partly because a large fully vested equity award had increased Q1 2016 expense.
- Cash and cash equivalents were $6.734 million and marketable securities totaled $40.276 million at March 31, 2017. Total liabilities were $3.524 million; the filing reports no borrowings or debt balance. Cash plus marketable securities were approximately $47.0 million.
- Cash decreased $1.163 million during the quarter. Operating activities provided $707,000; investing activities used $1.870 million, primarily for net purchases of marketable securities. No financing cash flow was reported.
Material changes and business developments
- Non-U.S. revenue was $3.216 million, or approximately 61% of revenue, including $1.525 million from China, compared with no China revenue in Q1 2016. Four customers, aggregating affiliates and commonly controlled customers, accounted for 15%, 14%, 11%, and 10% of Q1 2017 revenue.
- On April 25, 2017, after quarter-end, the company entered a China joint venture, FF Gene Biotech. Fulgent agreed to contribute sequencing and other equipment costing up to RMB 60 million (approximately $8.7 million) over three years for a 30% interest. It also licensed technology and its genetic reference library to the venture in return for revenue-based royalties and agreed to provide technical services.
- The joint venture involves related-party connections: Xilong Scientific is affiliated with a large Fulgent stockholder, and FJIP is owned by venture management, including Fulgent’s Chief Scientific Officer, who owns approximately 25% of FJIP. Fulgent appoints one of three venture directors; Xilong appoints two.
Outlook, risks, and contingencies
- Management said available cash, operating cash flow, and financing proceeds were expected to meet anticipated cash needs for at least the next 12 months. The filing provides no formal revenue or earnings guidance.
- Management planned to continue investing in R&D and sales and marketing, with a goal of more than doubling the sales and marketing team over the next 12 months. It expected to offer somatic cancer testing in late 2017.
- Key risks include dependence on a small number of customers without long-term purchase commitments; uncertain third-party reimbursement; competition and pricing pressure; reliance on Illumina as the sole supplier of sequencing equipment and related reagents; dependence on one laboratory director for test approval; regulatory uncertainty around laboratory-developed tests; and international, privacy, cybersecurity, and intellectual-property risks.
- The company had $3.2 million of purchase obligations for reagents and equipment at quarter-end, in addition to the subsequent-event JV contribution commitment. Operating leases ran through July 2018, with renewal options. Management did not expect ordinary-course legal matters to materially affect results; no material legal proceedings were reported.
- Management identified no material change in contractual obligations during the quarter and no material off-balance-sheet arrangements. Disclosure controls were deemed effective as of March 31, 2017.
Important facts for investors to verify
- Whether billable-test growth and improved gross margin persist as test mix and average prices change.
- How much revenue and cash flow depend on the four largest customers, and the collection performance of institutional and international customers.
- The JV’s actual funding requirements, governance and related-party safeguards, royalty terms, and ability to generate returns on Fulgent’s investment.
- Progress on reimbursement coverage, sales-force expansion, laboratory capacity, and licensing additional laboratory directors.
- Whether cash generation remains sufficient as operating investment and the JV commitment are funded; management’s liquidity outlook is not a guarantee.