Fulgent Genetics, Inc. (NASDAQ:FLGT) Q1 2019 Results Earnings Conference Call May 7, 2019 4:30 PM ET Company Participants Nicole Borsje - Head of Investor Relations Ming Hsieh - Chief Executive Officer Paul Kim - Chief Financial Officer Conference Call Participants Operator Good day, ladies and gentlemen, and welcome to the Q1 2019 Fulgent Genetics Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce your host for conference cal ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | --- | --- | |---------------------------------------------------------------------------------|-------------------------------| | | | | For the transition period from | to | | Commission Fi ...

PART I [Business](index=5&type=section&id=Item%201.%20Business) Fulgent Genetics is a technology company specializing in comprehensive genetic testing, utilizing a proprietary platform to offer a broad and customizable test menu primarily to hospitals and medical institutions - Fulgent offers an extensive test menu, including approximately **18,000 single-gene tests** and over **900 multi-gene panels**, covering about **7,600 genetic conditions**[16](index=16&type=chunk) - The company's primary customers are hospitals and medical institutions, with approximately **78% of 2018 test billings** from these institutions paid during that year[43](index=43&type=chunk)[313](index=313&type=chunk) - Fulgent established a joint venture, FF Gene Biotech, in April 2017 to offer genetic testing services in the People's Republic of China (PRC), aiming to expand its presence in the Asian market[45](index=45&type=chunk) Key Operational Metrics (2017-2018) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Billable Tests Delivered | 22,298 | 16,578 | | Average Price per Test | ~$958 | ~$1,130 | | Average Cost per Test | ~$480 | ~$516 | [Our Technology Platform](index=6&type=section&id=Our%20Technology%20Platform) The company's integrated technology platform is built on four proprietary pillars: custom-designed gene probes, advanced database algorithms, adaptive learning software, and proprietary Laboratory Information Management Systems (LIMS) - Fulgent develops its own proprietary gene probes, which it believes allows for sequencing of DNA regions that commercial probes cannot, thereby improving test data detection rates[25](index=25&type=chunk) - The platform uses advanced data comparison and suppression algorithms to automate and simplify the curation process, highlighting pathogenic mutations and reducing irrelevant data noise[26](index=26&type=chunk) - Adaptive learning software automatically incorporates data from each completed test into the company's genetic reference library, enabling continuous improvement and operational efficiencies[27](index=27&type=chunk) [Competition](index=10&type=section&id=Competition) Fulgent faces intense competition from dozens of molecular genetic testing companies, characterized by rapid technological change and price pressure - Principal competitors include Ambry Genetics, Inc., Roche, GeneDx (a subsidiary of OPKO Health, Inc.), Invitae Corporation, and Myriad Genetics, Inc[58](index=58&type=chunk) - Competitive factors in the market include breadth of genetic content, test customization flexibility, price, quality and accuracy of results, turnaround time, and brand recognition[61](index=61&type=chunk) [Regulation](index=12&type=section&id=Regulation) The company operates in a highly regulated industry, subject to federal (CLIA, FDA, HIPAA), state, and foreign laws, with potential changes in FDA oversight posing a significant risk - The company's laboratory is **CLIA-certified** and accredited by the College of American Pathologists (CAP), ensuring quality standards for accuracy, reliability, and timeliness of test results[70](index=70&type=chunk)[73](index=73&type=chunk) - Fulgent's tests are considered Laboratory Developed Tests (LDTs), which have historically not been subject to FDA enforcement, but potential future FDA regulation could increase costs and delay market access[83](index=83&type=chunk)[85](index=85&type=chunk)[86](index=86&type=chunk) - The Protecting Access to Medicare Act of 2014 (PAMA) has changed how clinical laboratory services are paid under Medicare, basing rates on private payor data, which could impact future reimbursement levels[94](index=94&type=chunk)[95](index=95&type=chunk) - The company is subject to various privacy and security laws, including HIPAA in the U.S. and the GDPR in the European Union, which impose strict rules on handling protected health and personal information[100](index=100&type=chunk)[108](index=108&type=chunk) [Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks, including a history of losses, intense competition, reliance on limited suppliers, and regulatory uncertainties, particularly regarding potential FDA oversight of LDTs - The company has a history of losses and may not achieve or sustain profitability, despite achieving it in Q1 2017[144](index=144&type=chunk) - Fulgent relies on Illumina, Inc. as the sole supplier for its next-generation sequencers and associated reagents, creating a significant supplier dependency risk[184](index=184&type=chunk) - A primary regulatory risk is the potential for the FDA to change its enforcement discretion over Laboratory Developed Tests (LDTs), which could subject the company's tests to lengthy and expensive premarket clearance or approval processes[214](index=214&type=chunk) - The company relies on trade secrets rather than patents to protect its core technology, which may not provide effective protection against competitors independently developing similar technologies[242](index=242&type=chunk)[243](index=243&type=chunk) - A significant portion of the company's voting stock is controlled by its founder and CEO, Ming Hsieh, and other principal stockholders, allowing them to exert significant control over corporate matters[261](index=261&type=chunk) [Properties](index=46&type=section&id=Item%202.%20Properties) Fulgent's corporate headquarters and sole laboratory are located in a leased 12,000 square foot facility in Temple City, California, with additional leased office space for non-laboratory activities - The company's main facility, including its laboratory, is a **12,000 sq. ft. leased space** in Temple City, CA, with leases expiring in January 2021[274](index=274&type=chunk) [Legal Proceedings](index=46&type=section&id=Item%203.%20Legal%20Proceedings) The company reports that it is not currently a party to any legal proceedings that would have a material effect on its business - As of the report date, Fulgent is not involved in any material legal proceedings[275](index=275&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=47&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Fulgent's common stock began trading on the Nasdaq Global Market on September 29, 2016, and the company does not anticipate paying cash dividends, intending to retain earnings for business development - The company's common stock was listed on the Nasdaq Global Market on **September 29, 2016**[279](index=279&type=chunk) - Fulgent does not plan to pay dividends, retaining future earnings to finance business expansion[283](index=283&type=chunk) - From its IPO, the company has used **$3.0 million** for its FF Gene Biotech joint venture and **$2.9 million** for operations out of the **$36.0 million** net proceeds[286](index=286&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=48&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2018, Fulgent's revenue grew 14% to $21.4 million, driven by a 35% increase in billable tests, though the average price per test declined 15%, leading to a widened operating and net loss Consolidated Statement of Operations Data (2017 vs. 2018) | Metric | 2018 (in thousands) | 2017 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Revenue | $21,351 | $18,730 | 14% | | Gross Profit | $10,654 | $10,179 | 5% | | Operating Loss | $(5,070) | $(3,482) | 46% | | Net Loss | $(5,607) | $(2,510) | 123% | Key Operating Metrics (2017 vs. 2018) | Metric | 2018 | 2017 | YoY Change | | :--- | :--- | :--- | :--- | | Billable tests delivered | 22,298 | 16,578 | 35% | | Average price per billable test | $958 | $1,130 | (15)% | | Cost per billable test | $480 | $516 | (7)% | - The increase in revenue was primarily due to a **35% increase in billable tests delivered**, while the average price per test decreased by **15%** due to changes in test mix and competitive pricing pressure[349](index=349&type=chunk)[351](index=351&type=chunk) - Operating expenses increased by **15% to $15.7 million** in 2018, driven by higher personnel costs from increased headcount and investments in R&D to expand the test menu[354](index=354&type=chunk)[357](index=357&type=chunk)[359](index=359&type=chunk)[360](index=360&type=chunk) - The company adopted the new revenue recognition standard ASC 606 on January 1, 2018, which resulted in recognizing revenue from third-party payors on an accrual basis rather than a cash basis[323](index=323&type=chunk)[489](index=489&type=chunk) [Financial Statements and Supplementary Data](index=60&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the company's audited consolidated financial statements for the fiscal years ended December 31, 2018 and 2017, including balance sheets, statements of operations, and cash flows Consolidated Balance Sheet Highlights (as of Dec 31) | Metric (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $6,736 | $6,490 | | Marketable securities | $30,684 | $34,877 | | Total Assets | $53,904 | $57,184 | | Total Liabilities | $2,752 | $3,006 | | Total Stockholders' Equity | $51,152 | $54,178 | Consolidated Cash Flow Highlights (Year Ended Dec 31) | Metric (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Cash (used in) provided by operating activities | $(675) | $1,331 | | Net cash provided by (used in) investing activities | $950 | $(2,049) | | Net cash provided by (used in) financing activities | $15 | $(770) | [Controls and Procedures](index=60&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2018 - Management concluded that both disclosure controls and procedures and internal control over financial reporting were effective as of **December 31, 2018**[398](index=398&type=chunk)[399](index=399&type=chunk) [Other Information](index=61&type=section&id=Item%209B.%20Other%20Information) The company revised its previously issued earnings release for Q4 and full-year 2018 due to an increased deferred tax valuation allowance, resulting in a higher reported net loss - The company revised its previously announced Q4 and full-year 2018 financial results due to an increased deferred tax valuation allowance[404](index=404&type=chunk) - The revision increased the full-year 2018 net loss from **$4.5 million ($0.25/share)** to **$5.6 million ($0.31/share)**[404](index=404&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=62&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for its 2019 annual meeting of stockholders - Information is incorporated by reference from the **2019 proxy statement**[407](index=407&type=chunk) [Executive Compensation](index=62&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for its 2019 annual meeting of stockholders - Information is incorporated by reference from the **2019 proxy statement**[408](index=408&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=62&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership is incorporated by reference from the company's definitive proxy statement for its 2019 annual meeting of stockholders - Information is incorporated by reference from the **2019 proxy statement**[409](index=409&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=62&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding related party transactions and director independence is incorporated by reference from the company's definitive proxy statement for its 2019 annual meeting of stockholders - Information is incorporated by reference from the **2019 proxy statement**[410](index=410&type=chunk) [Principal Accounting Fees and Services](index=62&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the company's definitive proxy statement for its 2019 annual meeting of stockholders - Information is incorporated by reference from the **2019 proxy statement**[411](index=411&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=63&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the consolidated financial statements filed as part of the report and includes an index of all exhibits filed with the 10-K, such as corporate governance documents and material contracts - This section provides an index of all exhibits filed with the Form 10-K, including material contracts and certifications[416](index=416&type=chunk)[419](index=419&type=chunk)

Fulgent Genetics, Inc. (NASDAQ:FLGT) Q4 2018 Earnings Conference Call February 28, 2019 4:30 PM ET Company Participants Nicole Borsje – Head of Investor Relations Ming Hsieh – Chief Executive Officer Paul Kim – Chief Financial Officer Conference Call Participants Bill Quirk – Piper Jaffray Erin Wright – Credit Suisse Operator Good day, ladies and gentlemen, and welcome to the Fulgent Genetics Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded ...