Fulgent Genetics, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Fulgent provides genetic testing and diagnostic information using next-generation sequencing. This unaudited quarterly report covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $8.42m | $5.40m | $13.79m | $10.05m |
| Gross profit | $4.80m | $2.86m | $7.21m | $4.74m |
| Gross margin | 57.0% | 52.9% | 52.2% | 47.1% |
| Operating income (loss) | $0.30m | $(1.00)m | $(1.53)m | $(3.20)m |
| Net income (loss) | $0.33m | $(1.05)m | $(1.58)m | $(2.96)m |
| Diluted earnings (loss) per share | $0.02 | $(0.06) | $(0.09) | $(0.17) |
- Growth and unit economics: Revenue rose 56% in Q2 and 37% in the first half, driven principally by higher test volume. Billable tests increased 187% to 16,369 in Q2 and 132% to 23,899 in the first half. Average revenue per test declined 46% to $515 in Q2 and 41% to $577 in the first half, reflecting test and customer mix and lower prices. Cost per test fell 50% to $221 in Q2 and 46% to $276 in the first half, which management attributed partly to scale and operating efficiencies.
- Expenses: First-half operating expenses were $8.73m, up 10% year over year, including R&D of $3.00m, selling and marketing of $2.58m, and general and administrative costs of $3.16m. Q2 G&A included $291,000 of legal and professional fees related to a case settlement.
- Cash flow: First-half operating cash flow was positive $1.73m, versus cash use of $1.35m in the prior-year period. Investing activities provided $0.69m, reflecting securities maturities exceeding purchases and $0.63m of fixed-asset purchases. Financing provided $9,000. Cash increased by $2.43m to $9.17m.
- Liquidity and balance sheet: At June 30, cash and cash equivalents were $9.17m and marketable securities totaled $29.52m. Current assets were $34.80m and current liabilities $2.91m. Total liabilities were $5.29m, including $2.79m of operating lease liabilities; the balance sheet reports no borrowings or debt. Stockholders’ equity was $51.14m.
Material changes, outlook and risks
- Q2 returned to profitability, but the company remained loss-making for the first half. Management noted it had recorded losses in most periods since inception and cautioned that Q2 profitability may not continue.
- Management stated existing cash, operating cash flows and financing resources were expected to cover anticipated cash requirements for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Customer and payor concentration is material: two affiliated customer groups represented 32% and 15% of Q2 revenue, and 27% and 10% of first-half revenue. Institutional customers generated $13.28m of first-half revenue, substantially more than patient-pay and insurance channels.
- Price pressure is a key business risk: management cited competitive price reductions and mix shifts as reasons for lower average revenue per test. Results may also fluctuate with test volume, customer mix, billing and collections.
- Fulgent’s 30%-owned FF Gene Biotech joint venture generated a $0.43m first-half equity-method loss. Fulgent had a remaining equipment contribution commitment of RMB 40.3m, approximately $5.9m. Separately, non-cancelable reagent purchase obligations totaled $5.8m, of which $2.1m was due within 12 months.
- The company adopted lease accounting effective January 1, 2019, recognizing approximately $3.0m of lease liabilities and a corresponding right-of-use asset; management reported no material effect on operations or cash flows.
- Management said ordinary-course legal matters were not expected to materially affect the company. It also reported effective disclosure controls as of June 30, 2019.
Important facts for investors to verify
- Whether rapid test-volume growth can offset continued declines in average revenue per test and sustain improved gross margins.
- Whether Q2 profitability is repeatable, given the first-half net loss and ongoing operating investment.
- Concentration and payment terms of major institutional customers, plus collection trends and receivables quality.
- Timing and funding of the remaining FF Gene Biotech contribution commitment, and the joint venture’s path toward profitability.
- Reagent purchase commitments, supplier concentration, and the company’s stated liquidity runway assumptions.