Fulgent Genetics, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement figures are in thousands unless otherwise noted. Fulgent provides genetic testing services and began commercially offering SARS-CoV-2 tests in March 2020.
Key financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $17.3 million | $8.4 million | $25.0 million | $13.8 million |
| Gross profit | $9.5 million | $4.8 million | $13.2 million | $7.2 million |
| Gross margin | 55.3% | 57.0% | 52.9% | 52.2% |
| Operating income (loss) | $2.6 million | $0.3 million | $0.7 million | $(1.5) million |
| Net income (loss) | $3.3 million | $0.3 million | $1.4 million | $(1.6) million |
| Diluted EPS | $0.14 | $0.02 | $0.06 | $(0.09) |
- Billable tests delivered rose to 180,513 in Q2 and 193,676 in the first half, from 16,369 and 23,899, respectively, in 2019. Management attributed the increase primarily to COVID-19 testing, expanded test offerings, and higher sales to existing and new customers.
- Average revenue per billable test declined to $96 in Q2 and $129 in the first half, from $515 and $577, respectively, reflecting the mix and lower price points of COVID-19 tests, customer mix, and price reductions on certain genetic tests.
- Operating cash flow was negative $3.0 million in the first half, versus positive $1.7 million a year earlier. The filing attributes the outflow mainly to a $7.4 million increase in receivables and $3.8 million increase in other current assets, partly offset by noncash expenses and liabilities.
- Investing cash flow was negative $6.3 million; financing cash flow was negative $0.2 million. Cash and equivalents fell to $2.4 million from $12.0 million at year-end 2019. Marketable securities were $63.9 million, up from $58.3 million.
- At June 30, total assets were $95.9 million, total liabilities $8.9 million, and stockholders’ equity $87.0 million. No borrowings or debt balance are reported; operating lease liabilities totaled $2.9 million.
Material changes and financial position
- Q2 revenue increased 105% year over year; first-half revenue increased 81%. COVID-19 testing drove a substantial rise in volume and helped return the company to profitability in Q2.
- Despite higher gross profit, Q2 gross margin declined year over year. First-half margin improved modestly. Selling and marketing expenses increased 150% in Q2, largely due to COVID-19-related marketing materials and projects.
- One affiliated customer group accounted for 45% of Q2 revenue and 31% of first-half revenue; one customer represented 49% of accounts receivable at quarter-end.
- Fulgent had $9.0 million in non-cancelable purchase obligations, mostly payable within 12 months, and approximately $5.6 million remaining in equipment contributions committed to its 30%-owned FF Gene Biotech joint venture.
Outlook, commentary, risks, and unusual items
- Management stated that cash, marketable securities, and expected resources should meet anticipated cash needs for at least the next 12 months. It cautioned that operating cash flows may fluctuate and additional financing could be needed; no future financing commitment was in place.
- The company said the pandemic had not materially harmed first-half operating results or liquidity as of June 30, but warned that reduced traditional genetic testing, workplace or supply-chain disruption, and changing demand for COVID-19 tests could adversely affect future results. Management gave no specific revenue or earnings guidance.
- COVID-19 tests were marketed under FDA Emergency Use Authorizations, which are conditional and may be revoked; continued demand, pricing, margins, and testing capacity are uncertain. The company also cited competition, customer concentration, price pressure, reimbursement and collection challenges, regulatory change, and reliance on suppliers and its single laboratory as material risks.
- The first-half tax benefit included a partial release of the valuation allowance on deferred tax assets, tied to projected taxable income from COVID-19 testing. This contributed to unusually negative effective tax rates of 21% for Q2 and 45% for the first half.
- After quarter-end, Fulgent signed a conditional agreement to purchase a California property for $15.4 million in cash, subject to a 60-day due-diligence period and other agreement terms.
- Management reported effective disclosure controls as of June 30, 2020, and no material change in internal control over financial reporting during Q2. It reported no material pending legal proceeding.
Important facts for investors to verify
- Whether COVID-19 testing demand, realized pricing, margins, and capacity persisted after the quarter, and how much traditional genetic testing was affected.
- The concentration and collectability of revenue and receivables, particularly the large customer exposure, alongside the timing of cash collections.
- Whether operating cash flow improved and whether marketable securities are available when needed, considering purchase commitments and the FF Gene Biotech contribution obligation.
- The status and final cost of the proposed $15.4 million property purchase, and the company’s funding plan for it.
- The ongoing validity and conditions of FDA authorizations, as well as any regulatory or reimbursement developments affecting the company’s tests.