Great. Thanks.

Good afternoon, and welcome to the Fulgent Genetics Fourth Quarter 2018 Financial Results Conference Call. On the call today is Ming Hsieh, Chief Executive Officer; and Paul Kim, Chief Financial Officer.

The company’s press release discussing its financial results is available in the Investor Relations section of the company’s website, fulgentgenetics.com. An audio replay of this call will be available shortly after the call concludes.

Please visit the Investor Relations section of the company’s website to access the audio replay. Management’s prepared remarks and answers to your questions on today’s call will contain forward-looking statements.

These forward-looking statements represent management’s estimates based on current views and assumptions, which may prove to be incorrect. As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties and changes in circumstances that may cause actual results to differ from those described in the forward-looking statements.

The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements as predictions of future events and should listen to management’s remarks today with the understanding that actual events, including the company’s actual future results may be materially different in what is described in or implied by these forward-looking statements.

Please review the more detailed discussions related to these forward-looking statements, including the discussions of some of the risk factors that may cause results to differ from those described in these forward-looking statements contained in the company’s filings with the Securities and Exchange Commission, including the previously filed 10-Q for the third quarter of 2018, which is available on the company’s Investor Relations website. Management’s prepared remarks, including discussions of earnings and earnings per share, contain the financial measures not prepared in according with the accounting principles generally accepted in the United States or GAAP.

Management has presented these non-GAAP financial measures because it believes they may be useful for investors for various reasons, but they should not be viewed as a substitute for or superior to the company’s financial results prepared in accordance with GAAP. Please see the company’s press release discussing its financial results for the fourth quarter 2018 for more information, including the description of how the company calculates non-GAAP earnings and earnings per share and a reconciliation of these financial measures to earnings and earnings per share, the most directly comparable GAAP financial measures.

With that, I’d now like to turn the call over to Ming.

Thank you, Nicole. Good afternoon, and thank you for joining us on our call today to discuss our fourth quarter and the full year 2018 results.

I will spend a few minutes discussing the highlights of the fourth quarter before Paul discusses our financial results in detail. We continue to demonstrate growth across our businesses in the fourth quarter.

Revenue grew 33% year-over-year to $5.7 million, with solid growth in billable tests, which were up 52% year-over-year to a record of 6,400. Our ASP was $886, down 12% compared to the third quarter of 2018 due to product mix.

Non-GAAP gross margin in the third quarter were 53.6%, up 979 basis points from the fourth quarter last year and down 215 basis points sequentially. GAAP loss was $935,000 and non-GAAP loss was $193,000.

Non-GAAP loss per share was about $0.01 in the fourth quarter. Adjusted EBITDA was a positive $50,000 in the fourth quarter.

We were pleased with the growth we saw in the fourth quarter and the full year 2018 as we have continued to execute well capitalization on our market opportunities over the course of the year. We consistently demonstrated revenue and billable test growth.

Direction in gross margins have improved and the loss remain narrowed. Our focus this year was on stabilizing our business by expanding into new areas, such as reproductive health, cancer as well as sequencing-as-a-service.

With additional traction from new areas, while preserving our foothold from core pediatrics distribution, we believe our business is on a solid footing and poised for acceleration in 2019. With the new initiative, our sequencing service packaged with data analysis are driving the strongest volume growth as we have seen momentum with our existing customers, while adding new pharma companies and the research organizations to our client base.

We have also continued to do well with our Beacon carrier test and have added new partnerships and customers, which will drive further growth in this business. One particular exciting partnership for our carrier screen test is with Columbia University Irving Medical Center, which we announced in early January.

This partnership in Columbia University was able to offer their patients expand the carrier screening test, which provide more accurate view on patients genetic condition. This partnership was outcome of highly competitive situation, where Columbia selected Fulgent due to our superior technology and comprehensive screening capability.

This partnership will give us opportunity to business in New York state, which is a new market for the Fulgent. This partnership would also give us the opportunity to leverage Columbia’s expertise in genetical medicine to codevelop additional tests in future.

We are wildly excited about this collaboration and also, we’re still in the early stage of implementation. We expect this to be a driver for the growth for us ahead.

Recently, we also executed a research initiative agreement with a permanent medical foundation, where we will provide a full service of genetic testing service. This contract was awarded after facing stiff competition from large genetic testing companies.

Much like our win with Columbia, we were selected because of our superior technical, operational and service capabilities. This is a multiyear, multimillion dollar contract.

We expect to begin executing on this contract in the later half of 2019. This partnership is example of type of relationship we are looking – we’re working on exciting Beacon screen service.

We are evaluating and pursuing collaborations on an ongoing basis, and have a number of sizable promising opportunities inside. These large opportunities that leverage our capabilities across our offerings include genome, exome and rare diseases screening.

Many of these opportunities are partnership with a large organization, which address the ongoing needs in the application for genetic testing. We look forward to provide update on these partnership opportunities in the quarter ahead.

I would like now to provide additional color into some of these areas. First, our sequencing packaged with data analysis-as-a-service business.

The size and the [indiscernible] have continued to increase. And we are working with a number of our customers who are leveraging our capabilities on a more consistent basis.

Our technology and operational efficiency give us an advantage in this agreement as we are able to process complex projects more quickly and efficiently than other genetic sequencing companies. Second, we have continued to grow our international business and have had a particular good result with our Beacon carrier test internationally.

Third, we have several new wins in exome sequencing business, and looking forward to serve these customers in 2019. Finally, we are beginning to see increasing stability on our bottom line as the investment we have made over the last year in technology, operation and the sales force are being paying off.

The progress we have made this year is a testament of our superior technology, broad test menu, operation efficient and improving execution of our sales organization. We are pleased with the momentum we saw this year and look forward to building on it in the quarter ahead.

I would like to now hand the call over to Paul to provide the details on our financial performance in the fourth quarter. He will also provide our financial outlook for the full year 2019.

Paul?

Thank you, Ming. Fourth quarter revenue totaled $5.7 million, an increase of 33% compared to the fourth quarter of 2017 and up 1% sequentially.

Our international business outside China remained strong and in the fourth quarter international revenues excluding China grew 19% year-over-year. At the same time, we’re seeing strong momentum in our U.S.

business, which grew 42% year-over-year in the fourth quarter. Activity through our China JV remains relatively low, but the facility is fully operational and we’re beginning to see more business there, which is reflected in their top line revenue.

Though the numbers are relatively small, revenue in the JV grew nicely from $90,000 in 2017 to $1.3 million in 2018. Long term, we remain confident that the JV uniquely positions us to capture the large China market.

As a reminder, we’re using the equity method of accounting for the JV investment, which is being carried on our balance sheet and not on the top line. Billable tests were 6,408 in the fourth quarter, an increase of 52% over fourth quarter of last year.

Our ASP was $886, down slightly from the third quarter, but more consistent with what we saw in the second quarter of this year. This drop was due to product mix as our sequencing business contributed to a substantial portion of revenue in the quarter.

Cost per test for the quarter was $431 on a GAAP basis and $412 excluding equity-based compensation of $127,000. Cost per test has begun to stabilize at lower levels due to operational efficiency, higher volume, better productivity and the introduction of our enhanced probes, which happened earlier this year.

Non-GAAP gross margin was down 215 basis points sequentially, but improved 979 basis points year-over-year. Gross margin has generally improved throughout the year and has stabilized as cost per test has improved with increased efficiencies.

For operating expenses, we have remained focused on controlling expenses, while investing in different areas of our business for growth. Our operating margin improved 30 percentage points year-over-year and was down 285 basis points sequentially.

We’ve seen improving leverage in our business over the last year, but we will continue to see quarterly fluctuations in the near term as we scale. Sales and marketing expense on a GAAP basis was $1.1 million for the quarter, flat with what we saw in the third quarter.

R&D expense in the fourth quarter was $1.4 million, also flat with what we saw in the third quarter. We continue to invest in all areas of R&D from probes to bioinformatics and in test offerings, whether it be germline or somatic.

We believe we can be aggressive in our R&D investments while still maintaining a business model that is able to demonstrate improvements and leverage over time. Lastly, G&A expense was $1.4 million, up from $1.3 million in the third quarter.

Total GAAP operating expenses were $3.9 million for the fourth quarter, flat with last quarter. Non-GAAP operating expense totaled $3.5 million, up from $3.4 million last quarter.

Adjusted EBITDA for the fourth quarter was a positive $50,000 compared to $281,000 in the third quarter. On a non-GAAP basis and excluding equity-based compensation expense, loss for the quarter was $193,000 or $0.01 per share based on 18.1 million weighted common average shares outstanding.

The GAAP and non-GAAP tax rate end of the fourth quarter was 23%. Turning to the balance sheet, we remain well-capitalized to support our growth, and we’re comfortable with our cash position.

Cash provided by operating activities was approximately $778,000 compared to $105,000 used last quarter. Positive cash flow was driven by strong accounts receivable collection and some changes in the working capital in the fourth quarter.

We’ve continued to manage our business around cash flow breakeven with the goal of achieving sustainable cash flow generation next year. We ended the fourth quarter with $37.4 million in cash, cash equivalents and marketable securities with no debt.

This equates to over $2 in cash, cash equivalents and marketable securities per share. Now moving on to our outlook and guidance for the year.

As Ming discussed, we made very good progress this year and saw much improving stability across our business. In 2018, our goal was to achieve top line revenue of at least $20 million and we surpassed this goal by achieving $21.4 million in the year.

Based on the progress we made in 2018 in terms of growth and stability in our core business, combined with collaborations that we executed and announced and with numerous opportunities in various stages in the pipeline, we feel very good about our positioning for 2019. We expect revenue for the full year 2019 to be at least $26 million, which represents year-over-year growth of at least 22%.

And we expect the year to be back-end weighted as it will take time to ramp on a number of these agreements that Ming has discussed. We also remain focused on improving leverage, while investing for growth.

As we continue to scale, we expect to return to GAAP profitability in the latter part of 2019. We’re pleased with what we accomplished this year and look forward to building on our momentum in 2019.

Operator, now you can open it up for questions.

Great, thanks and good afternoon everybody.

Good afternoon, Bill.

So I guess, first question is a clarifying question. So Paul, you mentioned the JV revenue was $1.3 million.

Forgive me, was that for the fourth quarter of 2018 or was that for the full year 2018?

Yes, I’m sorry. The number was for the full year.

That was full year, okay, perfect. And then also, a couple of guidance questions.

So first and foremost, how are you guys thinking about any impact to the business concerning some of the changes that CMS has made with respect to hereditary cancer reimbursement? I think many of us expect them to change the language, but at this point, it does look like it’s punishing companies using next-generation sequencing for that.

This is a very good question. As you may know, we are starting seeing the increased sample size for the cancer-related testing.

I think that since we are new player in this market, actually it will be more beneficial to us. Also, in general, we always are dealing with cash paying customers.

So from another sense, at the present time, it doesn’t give us too much impact, but overall, in long term, it gives us the support for long-term business. Paul?

Okay. That’s very helpful.

And then last question for me is just thinking about the growth in 2019, obviously your ASP has been moving around quite a bit due to mix, and so should we be thinking that the growth in 2019 is predominantly volume based, not price based? And what I’m trying to ask is that should we assume that price is going to trend down and it’s going to be more than offset by increasing volumes?

Thank you, Bill. We do see that volume increase due to the product mix.

You will see some of ASP decline, but overall, as the volume increase, we continue to see the benefit for us to improving our business operations. So Paul, if you can give any color?

Yes, so I’ll give a little bit of color. So that’s a very good question.

Product mix, and I’ll make a commentary on gross margins as well. The ASPs, our assumption for 2019 is some degradation on a comparative basis, but it’s going to be largely driven by our product mix.

I think the thing that makes it really encouraging for us is not necessarily ASP, we also take a look at our gross margins as well. Meaning that if you take a look at the first quarter of 2018, our revenues in the first quarter was $4.6 million, our ASPs were over $1,000.

And now in the fourth quarter, ASPs are $886, so clearly below $1,000. But our gross margins are up 10 points from the first quarter.

So if you take a look at the overall business in the fourth quarter of 2017 and in the first quarter of 2018, those, we believe, were the low points financially for the company. Since the first quarter of 2018, our top line has sequentially increased and the other thing that has also happened directionally is gross margins were uplifted by about 10 points, actually over 10 points.

As we take a look at 2019, the thing that makes it really encouraging for us is these wins, a couple of them that Ming has mentioned, and the opportunities that we’re seeing, they’re much deeper opportunities than getting a sample here and a sample there. We are collaborating with genetic testing organizations and institutions.

And we think that, that will compound the diversity and the stability that we have in the base. In 2018, we talked about the diversification from our core business into, for example, the carrier testing business, where we made a lot of traction.

In the sequencing service area, that business has grown multiple 100% in 2018. And as we look out into 2019, we believe these opportunities that really capture what we do well, which is the technology and the operational efficiencies, whether it be cash pay or reimbursement, we like the opportunities that we see, and in each of these opportunities, we see ourselves making money.

I think that what this will do is, it’ll not only sustain the business and provide stability, it will really give us a view into the pipeline of the business as well as visibility. So we really look forward to the results that we’re going to be posting in 2019.

That’s great. Thanks very much for all the color guys.

Thank you, Bill.

Great, thanks. I’m curious to how or where we stand as it relates to the sales force and the investments made there more recently, and does it set the stage for more profitable growth in 2019, or how should we be thinking about incremental cost in the coming quarters?

Erin, thank you for asking the question. We do see a stability and are starting to see the results from our investment for the – our sales organization.

It did take a little bit longer for this new sales organization to adopt our philosophies or our business practice. But as we’ve seen in 2019, this situation becomes more organized and more efficient.

And they are also looking for all the large opportunities. So we’re very pleased with our investment in our sales forces and we do see the – a big sort of scale go up very well.

Okay. Great.

And then when I think about some of these new partnerships and contracts, how are they structured? Are they exclusive contracts, or how did the conversations go when you were kind of negotiating them and are they longer-term contracts?

And how do these partnerships more broadly influence the test mix dynamics?

Erin, if you take a look at some of those contracts we are involved, this also is a multiyear larger contract and involve the more of technology and collaborations. For most of those contracts we win, we are now the lowest cost provider, but we provide much, much superior technology and provide benefit for our partners to be go step forward in terms of how much we can push in the genetic testing and private label to our patients.

So it is always the multiyear contract we’re looking for and it also has to be profitable and robust for us to believe we can expand this program to the other areas.

Okay, great. Thank you.