Fulgent Genetics, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparative periods ended June 30, 2016. The filing was signed August 14, 2017. Fulgent focuses on genetic testing, serving primarily hospitals and medical institutions. The former Pharma business is reported as discontinued operations.
Financial and operating highlights
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $4.64 million | $3.97 million | $9.95 million | $7.41 million |
| Gross profit / margin | $2.76 million / 59.5% | $2.56 million / 64.5% | $6.21 million / 62.4% | $4.70 million / 63.4% |
| Operating income (loss) | ($150,000) | $970,000 | $69,000 | $355,000 |
| Net income (loss) | ($25,000) | ($4.51 million) | $207,000 | ($5.05 million) |
| Billable tests | 3,871 | 2,781 | 8,293 | 5,209 |
- Revenue increased 17% in Q2 and 34% in the first half, principally reflecting test-volume growth. Test counts rose 39% and 59%, respectively. Average revenue per test declined to about $1,198 in Q2 and $1,199 for the half, from $1,428 and $1,423 a year earlier, reflecting test/customer mix and lower pricing.
- Gross margin contracted as cost of revenue grew faster than revenue, including higher personnel and laboratory depreciation costs. Operating expenses rose 83% in Q2 and 41% for the half; selling and marketing expense increased notably as the company expanded commercial efforts.
- The prior-year periods included approximately $5.5 million of expense related to the 2016 Xi Long financing, substantially affecting the earnings comparison. Q2 2017 also included $105,000 of equity-method loss from FF Gene Biotech; first-half 2017 profitability was modest.
- First-half cash from operating activities was $2.07 million, compared with $2.38 million in 2016. Investing activities provided $2.28 million, largely reflecting marketable-security activity, while fixed-asset purchases were $1.52 million. Financing activities used $778,000, mainly for IPO costs.
- At June 30, cash and cash equivalents were $11.47 million and marketable securities were $34.64 million. Current assets were $34.73 million and current liabilities $2.83 million. Total liabilities were $3.07 million; the filing reports no borrowings or debt balance. Working capital was approximately $31.90 million.
Business developments, outlook and risks
- International sales were a growing part of the business: non-U.S. revenue was $5.6 million, or 56% of first-half revenue. China contributed $2.0 million for the half, including $522,000 in Q2; Canada contributed $2.2 million for the half.
- In April 2017, Fulgent established FF Gene Biotech in China, holding a 30% interest and accounting for it under the equity method. Fulgent committed to contribute sequencing and other equipment costing up to RMB 60 million (about $8.9 million) over three years. It had contributed none by June 30, then contributed $2.5 million in equipment after quarter-end. The joint venture had generated minimal royalties for Fulgent through June 30.
- Management stated that existing cash, operating cash flow and financing proceeds were expected to meet anticipated cash needs for at least the next 12 months. The company also cautioned that cash flows may fluctuate, further capital may be needed, and financing may not be available on acceptable terms. No specific revenue or earnings guidance was provided.
- Key risks include pricing pressure and limited third-party reimbursement; reliance on a small number of customers without long-term purchase commitments; international and currency exposure; execution and funding risks from the China joint venture; regulatory uncertainty for laboratory-developed tests; reliance on a single laboratory and key sequencing suppliers; and the ability to scale sales, laboratory capacity and qualified staffing.
- Purchase obligations for reagents and equipment were $3.1 million at June 30. Management said ordinary-course legal matters were not expected to have a material effect. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported for the quarter.
Investor verification points
- Confirm whether test-volume growth can offset falling average price per test and lower gross margins.
- Track operating profitability and cash generation as research, sales and marketing, and public-company costs rise.
- Review customer concentration and the reported reduction in orders from certain significant international customers in Q2.
- Monitor FF Gene Biotech’s performance, governance, related-party relationships, equipment contributions, royalties and potential effect on Fulgent’s direct Asian sales.
- Assess reimbursement progress, applicable regulatory developments, and exposure to foreign currencies and market-specific requirements.