Fulgent Genetics, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2022. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2022. Internal Control over Financial Reporting Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting during the year ended December 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In 2022, we completed the acquisition of Inform Diagnostics and Fulgent Pharma. See Note 15 of "Notes to Consolidated Financial Statements" for more information. We are currently integrating Inform Diagnostics and Fulgent Pharma into our operations and internal control processes. As we complete this integration, we are analyzing, evaluating, and where necessary, making changes in control and procedures related to the business of Inform Diagnostics and Fulgent Pharma, which we expect to complete within one year after the date of acquisition. Pursuant to the SEC’s guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the scope of our assessment of the effectiveness of our internal controls over financial reporting at December 31, 2022 excludes Inform Diagnostics and Fulgent Pharma to the extent that they are not yet integrated into our internal controls environment. Management’s Annual Report on Internal Control over Financial Reporting . Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2022. Management reviewed the results of its assessment with our Audit and Compliance Committee. The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report, which is included in Item 8 of this Annual Report on Form 10-K. As permitted by the Securities and Exchange Commission, companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition. In 2022, we acquired Inform Diagnostics and Fulgent Pharma. Pursuant to applicable rules, because we have not yet fully incorporated the internal controls and procedures of the acquired entity into our internal control over financial reporting, management excluded the acquired businesses from our assessment of the effectiveness of internal control over financial reporting as of December 31, 2022. The Inform Diagnostics and Fulgent Pharma business represented 14% of our revenue and 20% of our total assets as of and for the year ended December 31, 2022. 61 Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of these inherent limitations, our disclosure and internal controls may not prevent or detect all instances of fraud, misstatements or other control issues. In addition, projections of any evaluation of the effectiveness of disclosure or internal controls to future periods are subject to risks, including, among others, that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Fulgent Genetics, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Fulgent Genetics, Inc. and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated February 28, 2023, expressed an unqualified opinion on those financial statements. As described in "Management’s Annual Report on Internal Control over Financial Reporting,"management excluded from its assessment the internal control over financial reporting at Inform Diagnostics, Inc. and Fulgent Pharma Holdings, Inc. which were acquired on April 26, 2022 and November 7, 2022, respectively, and whose financial statements constitute 14% of revenues and 20% of total assets of the consolidated financial statement amounts as of and for the year ended December 31, 2022. Accordingly, our audit did not include the internal control over financial reporting at Inform Diagnostics, Inc. and Fulgent Pharma Holdings, Inc. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management’s Annual Report on Internal Control over Financial Reporting".Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 62 /s/ DELOITTE & TOUCHE LLP Los Angeles, California February 28, 2023 Item 9B. Other Information. None Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. None 63 PART III Item 10. Directors, Executive Off icers and Corporate Governance. The information required by this item is incorporated by reference to the definitive proxy statement for our 2023 annual meeting of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2022. Item 11. Executiv e Compensation. The information required by this item is incorporated by reference to the definitive proxy statement for our 2023 annual meeting of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2022. Item 12. Security Ownership of Certain Beneficial Own ers and Management and Related Stockholder Matters. The information required by this item is incorporated by reference to the definitive proxy statement for our 2023 annual meeting of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2022. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item is incorporated by reference to the definitive proxy statement for our 2023 annual meeting of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2022. Item 14. Principal Accou nting Fees and Services. The information required by this item is incorporated by reference to the definitive proxy statement for our 2023 annual meeting of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2022. 64 PART IV Item 15. Exhibits and Financ ial Statement Schedules. (a)(1) Consolidated Financial Statements. The following financial statements are included immediately following the signature page hereof and are filed as part of this report: Report of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) F- 2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F- 4 Consolidated Statements of Income for the Years Ended December 31, 2022, 2021 and 2020 F- 5 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020 F- 6 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 F- 7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 F- 10 Notes to Consolidated Financial Statements F- 11 (a)(2) Financial Statement Schedules. All financial statement schedules have been omitted, as they are not required, not applicable, or the required information is otherwise included. (a)(3) Exhibits. The information required by this Item 15(a)(3) is set forth on the Exhibit Index immediately preceding the signature page of this report and is incorporated herein by reference. Item 16. Form 10-K Summary. None. 65 EXHIBIT INDEX Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith 2.1 Agreement and Plan of Merger, dated September 16, 2016, by and among the registrant, Fulgent MergerSub, LLC and Fulgent Therapeutics LLC. S-1/A 333-213469 2.1 9/19/2016 3.1 Certificate of Incorporation of the registrant, dated May 13, 2016. 10-Q 001-37894 3.1 8/14/2017 3.1.1 Certificate of Amendment to Certificate of Incorporation of the registrant, dated August 2, 2016 . 10-Q 001-37894 3.1.1 8/14/2017 3.1.2 Certificate of Amendment to Certificate of Incorporation of the registrant, dated May 17, 2017 . 10-Q 001-37894 3.1.2 8/14/2017 3.2 Bylaws of the registrant. S-1/A 333-213469 3.2 9/26/2016 4.1 Form of Certificate of Common Stock of the registrant . S-1/A 333-213469 4.1 9/19/2016 4.2 Investor’s Rights Agreement, dated May 17, 2016, by and between Fulgent Therapeutics LLC and Xi Long USA, Inc. S-1 333-213469 4.2 9/2/2016 4.3 Description of the registrant’s securities. X 10.1# Form of Indemnification Agreement between the registrant and each of its officers and directors. S-1 333-213469 10.1 9/2/2016 10.2# Amended and Restated 2015 Equity Incentive Plan of Fulgent Therapeutics LLC. S-1 333-213469 10.2 9/2/2016 10.3# Form of Notice of Option Grant and Option Agreement under the Amended and Restated 2015 Equity Incentive Plan of Fulgent Therapeutics LLC. S-1 333-213469 10.3 9/2/2016 10.4# Form of Notice of Profits Interest Grant and Profits Interest Agreement under the Amended and Restated 2015 Equity Incentive Plan of Fulgent Therapeutics LLC. S-1 333-213469 10.4 9/2/2016 10.5# Form of Notice of Restricted Share Unit Grant and Restricted Share Unit Agreement under the Amended and Restated 2015 Equity Incentive Plan of Fulgent Therapeutics LLC. S-1 333-213469 10.5 9/2/2016 10.6# 2016 Omnibus Incentive Plan of the registrant. S-1/A 333-213469 10.6 9/26/2016 10.7# Form of Notice of Stock Option Award and Stock Option Award Agreement under the 2016 Omnibus Incentive Plan of the registrant. S-1 333-213469 10.7 9/2/2016 10.8# Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement under the 2016 Omnibus Incentive Plan of the registrant. 10-K 001-37894 10.8 3/17/2017 10.9# Form of Option Substitution Award under the 2016 Omnibus Incentive Plan of the registrant. S-1 333-213469 10.9 9/2/2016 66 Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith 10.10# Form of Notice of Restricted Stock Unit Substitution Award and Restricted Stock Unit Agreement under the 2016 Omnibus Incentive Plan of the registrant. S-1 333-213469 10.10 9/2/2016 10.11# Employment Agreement, dated May 25, 2016, by and among Fulgent Therapeutics LLC, the registrant and Ming Hsieh. S-1 333-213469 10.11 9/2/2016 10.12# Employment Agreement, dated May 25, 2016, by and among Fulgent Therapeutics LLC, the registrant and Paul Kim. S-1 333-213469 10.12 9/2/2016 10.13# Amended and Restated Employment Agreement, dated May 25, 2016, by and among Fulgent Therapeutics LLC, the registrant and Han Lin Gao. S-1 333-213469 10.13 9/2/2016 10.14# Severance Agreement, dated July 7, 2016, by and among Fulgent Therapeutics LLC, the registrant and Ming Hsieh. S-1 333-213469 10.14 9/2/2016 10.15# Severance Agreement, dated July 7, 2016, by and among Fulgent Therapeutics LLC, the registrant and Paul Kim. S-1 333-213469 10.15 9/2/2016 10.16# Severance Agreement, dated July 7, 2016, by and among Fulgent Therapeutics LLC, the registrant and Han Lin Gao. S-1 333-213469 10.16 9/2/2016 10.17 Contribution and Allocation Agreement, dated May 19, 2016, by and among Fulgent Therapeutics LLC, Fulgent Pharma LLC and Ming Hsieh. S-1 333-213469 10.17 9/2/2016 10.18 Form of Fourth Amended and Restated Operating Agreement of Fulgent Therapeutics LLC, to be in effect upon completion of the Reorganization. S-1/A 333-213469 2.1 9/19/2016 10.19 Commercial Leases, dated April 14, 2015, April 28, 2016, March 24, 2016 and August 1, 2016, by and between E & E Plaza LLC and Fulgent Therapeutics LLC. S-1 333-213469 10.19 9/2/2016 10.20 Director Compensation Program of the registrant, effective as of September 28, 2016 and amended November 2, 2017. 10-K 001-37894 10.20 3/20/2018 10.21§ Cooperation Agreement on the Establishment of Fujian Fujun Gene Biotech Co., Ltd., dated April 25, 2017, by and among Shenzhen Fujin Gene Science & Technology Co., Ltd., Xilong Scientific Co., Ltd. and Fuzhou Jinqiang Investment Partnership (LP). 10-Q 001-37894 10.1 8/14/2017 10.22§ Supplemental Agreement to Cooperation Agreement, dated April 10, 2019, by and among Fulgent Genetics, Inc., Shenzhen Fujin Gene Technology Co., Ltd., Xilong Science Co., Ltd. and Fuzhou Jinqiang Investment Partnership (Limited). 10-Q 001-37894 10.1 8/12/2019 10.23 Commercial Lease, dated January 31, 2018, by and between E & E Plaza LLC and Fulgent Therapeutics LLC. 10-K 001-37894 10.23 3/22/2019 67 Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith 10.24 Equity Distribution Agreement, dated August 30, 2019, by and between Fulgent Genetics, Inc. and Piper Jaffray & Co. 8-K 001-37894 1.1 8/30/2019 10.25 Purchase Agreement, dated as of November 13, 2019, by and between Fulgent Genetics, Inc. and Piper Jaffray & Co. 8-K 001-37894 1.1 11/14/2019 10.26 Amendment No. 1 to Equity Distribution Agreement, dated August 4, 2020, by and between Fulgent Genetics, Inc. and Piper Sandler & Co. 8-K 001-37894 1.1 8/5/2020 10.27 Equity Distribution Agreement, dated as of September 24, 2020, by and between Fulgent Genetics, Inc. and Piper Sandler & Co. 8-K 001-37894 1.1 9/25/2020 10.28 Equity Distribution Agreement, dated as of November 20, 2020, by and between Fulgent Genetics, Inc. and Piper Sandler & Co., BTIG, LLC, and Oppenheimer & Co. Inc. 8-K 001-37894 1.1 11/20/2020 10.29 Fulgent Genetics, Inc. Amended and Restated 2016 Omnibus Incentive Plan 8-K 001-37894 10.1 5/21/2018 10.30 Fulgent Genetics, Inc. Amended and Restated 2016 Omnibus Incentive Plan 8-K 001-37894 10.1 9/18/2020 10.31^ Agreement for Purchase and Sale of Property, dated July 23, 2020 8-K 001-37894 2.1 10/21/2020 10.32^ Aircraft Purchase Agreement, dated August 18, 2020, by and between ServiceMaster Acceptance Corporation and the Company 10-Q 001-37894 10.2 11/9/2020 10.33 Commercial Sublease Agreement, dated July 1 st , 2020, between Medscan Laboratories Inc. and Fulgent Genetics, Inc.; Commercial Lease Agreement, dated June 17, 2020, by and between Medscan Laboratories Inc. and Ten-Voss Ltd. 10-K 001-37894 10.34 3/8/2021 10.34 Commercial Lease Assignment & Assumption, dated January 11, 2021 by and between Ten-Voss Ltd., Medscan Laboratories, Inc. and Fulgent Genetics, Inc. 10-K 001-37894 10.35 3/8/2021 10.35 Commercial Lease Addendum, dated February 1, 2021, by and between E & E Plaza LLC and Fulgent Genetics, Inc. 10-K 001-37894 10.36 3/8/2021 10.36# Employment Agreement, dated March 8, 2021, by and among Fulgent Therapeutics, LLC, Fulgent Genetics, Inc. and Jian Xie. 10-K 001-37894 10.37 3/8/2021 10.37# Severance Agreement, dated March 8, 2021, by and among Fulgent Therapeutics LLC, Fulgent Genetics, Inc. and Jian Xie. 10-K 001-37894 10.38 3/8/2021 10.38#^ Amended and Restated Non-Employee Director Compensation Policy . 10-Q 001-37894 10.1 5/7/2021 10.39§ Restructuring Agreement of Fujian Fujun Gene Biotech Co., Ltd. 10-Q 001-37894 10.1 8/10/2021 10.40^ Amended and Restated Commercial Lease Agreement, dated May 6, 2016, by and 10-K 001-37894 10.41 2/28/2022 68 Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith between Store Master Funding IX, LLC and Cytometry Specialists, Inc. 10.41# Fulgent Genetics, Inc. Incentive Compensation Recoupment Policy. 8-K 001-37894 10.1 3/29/2022 10.42 Agreement and Plan of Merger by and among Fulgent Therapeutics LLC, solely for purpose of Section 6.20, Fulgent Genetics, Inc., Ducks Acquisition Sub, Inc., Symphony Buyer, Inc., solely in its capacity as the representative of Symphony’s securityholders, Avista Capital Partners IV GP, L.P. and solely for purposes of Section 6.21, Article VIII and Section 10.14, those company stockholders set forth on the signature page thereto, dated as of April 16, 2022. 8-K 001-37894 2.1 4/26/2022 10.43 # Amended and Restated Non-Employee Director Compensation Policy, dated as of August 1, 2022. 10-Q 001-37894 10.1 11/7/2022 10.44# Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement under the Fulgent Pharma Holdings, Inc. 2022 Omnibus Incentive Plan 10-Q 001-37894 10.2 11/7/2022 10.45^ Agreement and Plan of Merger, by and among Fulgent Genetics, FG Merger Sub, Inc., Fulgent Pharma Holdings, Inc. and solely for purposes of Section 2.4, Section 5.5, Article VI, Section 7.8 and Section 7.14, those company stockholders set forth on the signature page thereto, dated November 7, 2022 10-Q 001-37894 10.3 11/7/2022 10.46 Rule 10b5-1 Issuer Repurchase Plan, by and between Fulgent Genetics, Inc. and Piper Sandler & Co., dated December 15, 2022 X 10.47 Commercial Lease Addendum (II), dated January 6, 2023, by and between Fulgent Therapeutics LLC and E&E Plaza LLC 8-K 001-37894 1.1 1/12/2023 10.48^ Commercial Lease Agreement, dated October 20, 2008, by and between Inform Diagnostics, Inc. and iSTAR CTL I, L.P. X 10.49 Commercial Lease Amendment (I), dated December 30, 2013, by and between Inform Diagnostics, Inc. and LC Med Property TT, LLC X 10.50^ Commercial Lease Amendment (II), dated February 3, 2014, by and between Inform Diagnostics, Inc. and LC Med Property TT, LLC X 10.51 Commercial Lease Agreement by and between Inform Diagnostics and Crawford Street DE, LLC X 10.52# 2022 Fulgent Pharma Holdings, Inc. Omnibus Incentive Plan X 21.1 Subsidiaries of the registrant. X 69 Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith 23.1 Consent of Deloitte & Touche LLP, independent registered public accounting firm, relating to the financial statements of the registrant. X 24.1 Power of Attorney (included on the signature page hereto) X 31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1* Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. X 101.SCH Inline XBRL Taxonomy Extension Schema Document X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document X 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) X * This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation by reference language in such filing. # Management contract or compensatory plan, contract or arrangement. § Confidential treatment has been granted with respect to portions of this exhibit pursuant to Rule 24b-2 under the Exchange Act, and these confidential portions have been redacted from the version of this agreement that is incorporated by reference in this report. A complete copy of this exhibit, including the redacted portions, has been separately furnished to the SEC. ^ Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplementally a copy of any omitted exhibit or schedule upon request by the SEC. 70 SIGNAT URES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FULGENT GENETICS, INC. Date: February 28, 2023 By: /s/ Ming Hsieh Ming Hsieh Chief Executive Officer POWER OF ATTORNEY IN WITNESS WHEREOF, each person whose signature appears below constitutes and appoints Ming Hsieh and Paul Kim as his true and lawful agent, proxy and attorney-in-fact, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to (i) act on and sign any amendments to this report, with exhibits thereto and other documents in connection therewith, (ii) act on and sign such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith, and in each case file the same with the SEC, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Name and Signature Title Date /s/ Ming Hsieh Chief Executive Officer and Chairman of the Board February 28, 2023 Ming Hsieh (principal executive officer) /s/ Paul Kim Chief Financial Officer February 28, 2023 Paul Kim (principal financial and accounting officer) /s/ Michael Nohaile Director February 28, 2023 Michael Nohaile /s/ Regina Groves Director February 28, 2023 Regina Groves /s/ Linda Marsh Director February 28, 2023 Linda Marsh 71 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 34) F- 2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F- 4 Consolidated Statements of Income for the Years Ended December 31, 2022, 2021 and 2020 F- 5 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020 F- 6 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 F- 7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 F- 10 Notes to Consolidated Financial Statements F- 11 F- 1 REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Fulgent Genetics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Fulgent Genetics, Inc. and subsidiaries (the "Company") as of December 31, 2022, and 2021, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Business Combinations—Inform Diagnostics Acquisition — Refer to Notes 2 and 15 to the financial statements Critical Audit Matter Description The Company completed the acquisition of Symphony Buyer, Inc., or Inform Diagnostics on April 26, 2022, and accounted for the transaction under the acquisition method of accounting for business combinations. The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on their respective fair values, including a customer relationship intangible asset in the amount of $54.0 million. Management estimated the fair value of the customer relationship intangible asset using the multi-period excess earnings method, which is a specific discounted cash flow method. The fair value determination of the customer relationship intangible asset required management to make significant estimates and assumptions related to future cash flows and the of the discount rate. We identified the customer relationship intangible asset for Inform Diagnostics as a critical audit matter because of the significant estimates and assumptions management makes to fair value this asset. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s forecasts of future cash flows and the selection of the discount rate for the customer relationship intangible asset. How the Critical Audit Matter Was Addressed in the Audit F- 2 Our audit procedures related to forecasts of future cash flows and the selection of the discount rate for the customer relationship intangible asset included the following, among others: • We tested the effectiveness of controls over the valuation of the customer relationship intangible asset, including management’s controls over forecasts of future cash flows and selection of the discount rate. • We assessed the reasonableness of management’s forecasts of future cash flows by comparing the projections to historical results and certain peer companies. • With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by: • We evaluated whether the estimated future cash flows were consistent with evidence obtained in other areas of the audit. Business Combinations—Fulgent Pharma Holdings, Inc. — Refer to Notes 2 and 15 to the financial statements The Company completed the acquisition of Fulgent Pharma Holdings, Inc. on November 7, 2022, and accounted for the transaction under the acquisition method of accounting for business combination. The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on their respective fair values, which included an in-process research and development (“IPR&D”) intangible asset, in the amount of $64.6 million. Management estimated the fair value of the IPR&D intangible asset using the multi-period excess earnings method, which is a specific discounted cash flow method. The fair value determination of the IPR&D intangible asset required management to make significant estimates and assumptions related to future cash flows and the selection of the discount rate. We identified the IPR&D intangible asset for Fulgent Pharma Holdings, Inc. as a critical audit matter because of the significant estimates and assumptions management makes to fair value this asset. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s future cash flows and the selection of the discount rate for the IPR&D intangible asset. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to forecasts of future cash flows and the selection of the discount rate for the IPR&D intangible asset included the following, among others: • We tested the effectiveness of controls over the valuation of the IPR&D intangible asset, including management’s controls over forecasts of future cash flows and selection of the discount rate. • We assessed the reasonableness of management’s forecasts of future cash flows by comparing the projections to relevant peer companies and third-party industry reports. • With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by: • We evaluated whether the estimated future cash flows were consistent with evidence obtained in other areas of the audit. /s/ DELOITTE & TOUCHE LLP Los Angeles, California February 28, 2023 We have served as the Company's auditor since 2016. F- 3 CONSOLIDATED FINANCIAL STATEMENTS FULGENT GENETICS, INC. Consolidated Balance Sheets (in thousands, except par value data) December 31, 2022 2021 Assets Current assets Cash and cash equivalents $ 79,506 $ 164,894 Marketable securities 446,729 285,605 Trade accounts receivable, net of allowance for credit losses of $ 41,205 and $ 11,217 52,749 138,912 Other current assets 48,889 22,549 Total current assets 627,873 611,960 Marketable securities, long-term 326,648 485,047 Redeemable preferred stock investment 12,385 21,965 Fixed assets, net 81,353 62,287 Intangible assets, net 150,643 35,914 Goodwill 143,027 50,897 Other long-term assets 44,124 10,650 Total assets $ 1,386,053 $ 1,278,720 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 23,093 $ 20,494 Accrued liabilities 24,981 17,689 Income tax payable — 787 Contract liabilities 3,199 14,570 Customer deposit 10,895 19,806 Investment margin loan 14,999 15,137 Contingent consideration — 10,000 Notes payable, current portion 5,639 6,147 Other current liabilities 5,301 680 Total current liabilities 88,107 105,310 Unrecognized tax benefits 9,836 725 Other long-term liabilities 18,235 6,805 Total liabilities 116,178 112,840 Commitments and contingencies (Note 8) Stockholders’ equity Common stock, $ 0.0001 par value per share, 50,000 shares authorized, 31,248 shares issued and 29,438 shares outstanding and 30,160 shares issued and outstanding 3 3 Preferred stock, $ 0.0001 par value per share, 1,000 shares authorized, no shares issued or outstanding — — Additional paid-in capital 486,585 501,908 Accumulated other comprehensive loss ( 20,903 ) ( 759 ) Retained earnings 801,000 657,597 Total Fulgent stockholders' equity 1,266,685 1,158,749 Noncontrolling interest 3,190 7,131 Total stockholders’ equity 1,269,875 1,165,880 Total liabilities and stockholders’ equity $ 1,386,053 $ 1,278,720 The accompanying notes are an integral part of these consolidated financial statements. F- 4 CONSOLIDATED FINANCIAL STATEMENTS FULGENT GENETICS, INC. Consolidated Statem ents of Income (in thousands, except per share) Year Ended December 31, 2022 2021 2020 Revenue $ 618,968 $ 992,584 $ 421,712 Cost of revenue 252,067 215,533 89,807 Gross profit 366,901 777,051 331,905 Operating expenses: Research and development 28,910 24,219 11,580 Selling and marketing 38,918 24,439 14,952 General and administrative 111,074 50,732 15,215 Amortization of intangible assets 6,497 1,708 — Restructuring costs 2,975 — — Total operating expenses 188,374 101,098 41,747 Operating income 178,527 675,953 290,158 Interest and other income, net 5,498 1,347 1,526 Income before income taxes, equity loss in investee and gain (loss) on equity-method investments 184,025 677,300 291,684 Provision for income taxes 42,102 174,795 72,532 Income before equity loss in investee and gain (loss) on equity-method investments 141,923 502,505 219,152 Equity loss in investee — — ( 488 ) Gain (loss) on equity-method investments — 3,734 ( 4,354 ) Net income from consolidated operations 141,923 506,239 214,310 Net loss attributable to noncontrolling interests 1,480 1,125 — Net income attributable to Fulgent $ 143,403 $ 507,364 $ 214,310 Net income per common share attributable to Fulgent: Basic $ 4.76 $ 17.25 $ 9.44 Diluted $ 4.63 $ 16.38 $ 8.91 Weighted-average common shares: Basic 30,097 29,408 22,694 Diluted 30,964 30,976 24,056 The accompanying notes are an integral part of these consolidated financial statements. F- 5 FULGENT GENETICS, INC. Consolidated Statements of Comprehensive Income (in thousands) Year Ended December 31, 2022 2021 2020 Net income from consolidated operations $ 141,923 $ 506,239 $ 214,310 Other comprehensive income (loss): Foreign currency translation (loss) gain ( 2,665 ) 456 20 Net (loss) gain on available-for-sale debt securities, net of tax ( 19,940 ) ( 1,548 ) 272 Comprehensive income from consolidated operations 119,318 505,147 214,602 Net loss attributable to noncontrolling interest 1,480 1,125 — Foreign currency translation loss (gain) attributable to noncontrolling interest 2,461 ( 105 ) — Comprehensive loss attributable to noncontrolling interest 3,941 1,020 — Comprehensive income attributable to Fulgent $ 123,259 $ 506,167 $ 214,602 The accompanying notes are an integral part of these consolidated financial statements. F- 6 FULGENT GENETICS, INC. Consolidated Statement s of Stockholders’ Equity (in thousands) F- 7 Fulgent Stockholders' Equity Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Accumulated Deficit) Fulgent Stockholders' Equity Noncontrolling Interest Total Equity Balance at January 1, 2020 21,483 $ 2 $ 146,058 $ 146 $ ( 63,429 ) $ 82,777 $ — $ 82,777 Equity-based compensation — — 8,157 — — 8,157 — 8,157 Exercise of common stock options 56 — 104 — — 104 — 104 Restricted stock awards 655 — — — — — — — Issuance of common stock at an average of $ 38.50 per share, net 1,108 — 42,655 — — 42,655 — 42,655 Issuance of common stock at an average of $ 42.90 per share, net 2,846 1 122,102 — — 122,103 — 122,103 Issuance of common stock at an average of $ 48.70 per share, net 2,034 — 99,051 — — 99,051 — 99,051 Common stock withholding for employee tax obligations ( 4 ) — ( 62 ) — — ( 62 ) — ( 62 ) Other comprehensive gain, net — — — 292 — 292 — 292 Net income — — — — 214,310 214,310 — 214,310 Balance at December 31, 2020 28,178 3 418,065 438 150,881 569,387 — 569,387 Equity-based compensation — — 15,882 — — 15,882 — 15,882 Exercise of common stock options 76 — 86 — — 86 — 86 Restricted stock awards 836 — — — — — — — Issuance of common stock at an average of $ 64.83 per share, net 1,111 — 72,030 — — 72,030 — 72,030 Common stock withholding for employee tax obligations ( 41 ) — ( 4,155 ) — — ( 4,155 ) — ( 4,155 ) Cumulative effect of accounting change — — — — ( 887 ) ( 887 ) — ( 887 ) Cumulative tax effect of accounting change — — — — 239 239 — 239 Noncontrolling interest assumed related to acquisitions — — — — — — 8,151 8,151 Other comprehensive loss, net — — — ( 1,197 ) — ( 1,197 ) 105 ( 1,092 ) Net income (loss) — — — — 507,364 507,364 ( 1,125 ) 506,239 F- 8 Balance at December 31, 2021 30,160 3 501,908 ( 759 ) 657,597 1,158,749 7,131 1,165,880 Equity-based compensation — — 32,640 — — 32,640 — 32,640 Exercise of common stock options 5 — 31 — — 31 — 31 Restricted stock awards 699 — — — — — — — Common stock withholding for employee tax obligations ( 32 ) — ( 1,768 ) — — ( 1,768 ) — ( 1,768 ) Repurchase of common stock ( 1,810 ) — ( 74,337 ) — — ( 74,337 ) — ( 74,337 ) Common stock issued in a business combination (1) 416 — 28,111 — — 28,111 — 28,111 Other comprehensive loss, net — — — ( 20,144 ) — ( 20,144 ) ( 2,461 ) ( 22,605 ) Net income (loss) — — — — 143,403 143,403 ( 1,480 ) 141,923 Balance at December 31, 2022 29,438 $ 3 $ 486,585 $ ( 20,903 ) $ 801,000 $ 1,266,685 $ 3,190 $ 1,269,875 (1) As of December 31, 2022, 371,006 shares of the Company's common stock were not issued and heldback by the Company as partial security for the indemnification obligations in connection with the business combination of Fulgent Pharma. The accompanying notes are an integral part of these consolidated financial statements. F- 9 FULGENT GENETICS, INC. Consolidated Statem ents of Cash Flows (in thousands) Year Ended December 31, 2022 2021 2020 Cash flow from operating activities: Net income from consolidated operations $ 141,923 $ 506,239 $ 214,310 Adjustments to reconcile net income to net cash provided by operating activities: Equity-based compensation 32,640 15,882 8,157 Depreciation and amortization 32,662 11,004 2,962 Provision for credit losses 32,596 8,931 1,170 Noncash lease expense 4,913 1,154 409 Loss on disposal of fixed asset 502 850 672 Amortization of premium of marketable securities 4,767 7,596 857 Deferred taxes ( 8,280 ) ( 8,188 ) ( 1,775 ) Unrecognized tax benefits 9,111 348 377 Net loss on marketable securities 692 1,186 90 Equity loss in investee — — 488 (Gain) loss in equity-method investments — ( 3,734 ) 4,354 Other ( 11 ) ( 15 ) 8 Changes in operating assets and liabilities: Trade accounts receivable 68,638 42,300 ( 178,480 ) Other current and long-term assets ( 4,337 ) 7,804 ( 21,149 ) Accounts payable ( 25,339 ) ( 12,206 ) 22,617 Accrued liabilities and other liabilities ( 31,299 ) 13,081 32,655 Income tax payable ( 827 ) ( 52,532 ) 53,295 Operating and finance lease liabilities ( 4,831 ) ( 1,123 ) ( 389 ) Net cash provided by operating activities 253,520 538,577 140,628 Cash flow from investing activities: Purchases of fixed assets ( 18,775 ) ( 23,812 ) ( 35,130 ) Purchases of intangible assets — ( 32 ) — Proceeds from sale of fixed assets 412 63 8 Purchase of marketable securities ( 417,982 ) ( 710,490 ) ( 324,359 ) Purchase of preferred stock of privately held company ( 15,000 ) — — Contingent consideration payout related to a business acquisition ( 10,000 ) — — Purchase of redeemable preferred stock — ( 20,000 ) — Maturities of marketable securities 232,534 83,842 19,919 Proceeds from sale of marketable securities 140,176 185,749 17,095 Acquisition of businesses, net of cash acquired ( 172,679 ) ( 61,868 ) — Investment in equity-method investees — — ( 3,971 ) Net cash used in investing activities ( 261,314 ) ( 546,548 ) ( 326,438 ) Cash flow from financing activities: Repurchase of common stock ( 74,337 ) — — Common stock withholding for employee tax obligations ( 1,768 ) ( 4,155 ) ( 62 ) Proceeds from public offerings of common stock, net of issuance costs — 89,475 246,190 Proceeds from noncontrolling interest — 10 — Proceeds from exercise of stock options 31 86 104 Principal paid for finance leases ( 700 ) ( 7 ) — Repayment of notes payable ( 367 ) ( 4 ) — Borrowing under margin account — — 15,019 Net cash (used in) provided by financing activities ( 77,141 ) 85,405 261,251 Effect of exchange rate changes on cash and cash equivalents ( 453 ) 34 20 Net (decrease) increase in cash and cash equivalents ( 85,388 ) 77,468 75,461 Cash and cash equivalents at beginning of period 164,894 87,426 11,965 Cash and cash equivalents at end of period $ 79,506 $ 164,894 $ 87,426 Supplemental disclosures of cash flow information: Income taxes paid $ 56,193 $ 237,069 $ 20,612 Supplemental disclosures of non-cash investing and financing activities: Stock consideration in a business combination $ 28,111 $ — $ — Maturities of marketable securities in other current assets $ 19,120 $ — $ — Purchases of fixed assets in notes payable $ 3,833 $ — $ — Purchases of fixed assets in accounts payable $ 2,989 $ 1,075 $ 3,402 Finance lease right-of-use assets obtained in exchange for lease liabilities $ 573 $ 1,693 $ — Operating lease right-of-use assets reduced due to lease modification or termination $ 66 $ 399 $ 1,853 Operating lease right-of-use assets obtained in exchange for lease liabilities $ 52 $ 1,797 $ 402 Contingent consideration for business acquisition included in current liabilities $ — $ 10,000 $ — Public offerings proceeds in other receivable included in other current assets $ — $ — $ 17,799 Public offerings costs included in accounts payable $ — $ 5 $ 359 The accompanying notes are an integral part of these consolidated financial statements. F- 10 FULGENT GENETICS, INC. Notes to Consolidated Financial Statements Note 1. Overview and Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. These financial statements include the assets, liabilities, revenues and expenses of all subsidiaries and entities in which the Company has a controlling financial interest or is deemed to be the primary beneficiary. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company uses the equity method to account for its investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. All intercompany accounts and transactions are eliminated from the accompanying consolidated financial statements. Nature of the Business Fulgent Genetics, Inc., together with its subsidiaries and affiliated professional corporations, or PCs, collectively referred to as the Company, unless otherwise noted or the context otherwise requires, is a technology-based company with a well-established clinical diagnostic business and a therapeutic development business. Its clinical diagnostic business offers molecular diagnostic testing services, comprehensive genetic testing, and high-quality anatomic pathology laboratory services designed to provide physicians and patients with clinically actionable diagnostic information to improve the quality of patient care. Its therapeutic development business is focused on developing drug candidates for treating a broad range of cancers using a novel nanoencapsulation and targeted therapy platform designed to improve the therapeutic window and pharmacokinetic profile of new and existing cancer drugs. The Company aims to transform from a genomic diagnostic business into a fully integrated precision medicine company. Note 2. Summary of Significant Accounting Policies Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, judgments and assumptions are based on historical data and experience available at the date of the accompanying consolidated financial statements, as well as various other factors management believes to be reasonable under the circumstances, including but not limited to the potential impacts arising from the recent global pandemic related to COVID-19. The Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from these estimates. On an on-going basis, management evaluates its estimates, primarily those related to: (i) revenue recognition criteria, (ii) accounts receivable and allowances for credit losses, (iii) the useful lives of fixed assets and intangible assets, (iv) estimates of tax liabilities, (v) valuation of intangible assets and goodwill at time of acquisition and on a recurring basis, and (vi) valuation of investments. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries and PC. All intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include cash held in banks and money market accounts. Cash equivalents are stated at fair value. Cash and cash equivalent as of December 31, 2022 includes $ 5.0 million restricted cash related to a share transfer agreement entered by Fulgent Pharma Holdings, Inc., or Fulgent Pharma, pre-acquisition, see Note 15, Business Combinations . Marketable Securities All marketable debt securities, which consist of corporate debt securities, municipal bonds, U.S. government and agency debt securities, U.S. treasury bills, and Yankee debt securities issued by foreign governments or entities and denominated in U.S. dollars have been classified as “available-for-sale,” and are carried at fair value. Net unrealized gains and losses, net of any related tax effects, F- 11 are excluded from earnings and are included in other comprehensive income (loss) and reported as a separate component of stockholders’ equity until realized. Realized gains and losses on marketable debt securities are included in interest and other income, net, in the accompanying Consolidated Statements of Income. The cost of any marketable debt securities sold is based on the specific-identification method. The amortized cost of marketable debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest on marketable debt securities is included in interest and other income, net. In accordance with the Company’s investment policy, management invests to diversify credit risk and only invests in securities with high credit quality, including U.S. government securities. The Company’s investments in marketable equity securities are measured at fair value with the related gains and losses, realized and unrealized, recognized in interest and other income, net, in the accompanying Consolidated Statements of Income. The cost of any marketable equity securities sold is based on the specific-identification method. For available-for-sale debt securities, in an unrealized loss, the Company determines whether a credit loss exists. The credit loss is estimated by considering available information relevant to the collectability of the security and information about past events, current conditions, and reasonable and supportable forecasts. The Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows to be collected is less than the amortized basis of the security, a credit loss exists, and an allowance for credit losses is recorded for the credit loss, limited by the amount of unrealized loss. Changes in the allowance are recorded in the period of changes as credit loss expense. If the Company has an intent to sell, or if it is more likely than not that the Company will be required to sell a debt security in an unrealized loss position before recovery of its amortized cost basis, the Company will write down the security to its fair value and record the corresponding charge as a component of interest and other income, net. Trade Accounts Receivable and Allowance for Credit Losses Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains an allowance for credit losses for expected uncollectible trade accounts receivable, which is recorded as an offset to trade accounts receivable, and changes in allowance for credit losses are classified as a general and administrative expense in the accompanying Consolidated Statements of Income. The Company assesses collectability by reviewing trade accounts receivable on a collective basis where similar risk characteristics exist and on an individual basis when it identifies specific customers that have deterioration in credit quality such that they may no longer share similar risk characteristics with the other receivables. In determining the amount of the allowance for credit losses, the Company uses a probability-of-default and loss given default model, which allows the ability to define a point of default and measure credit losses for receivables that have reached the point of default for purposes of calculating the allowance for credit losses. Loss given default represents the likelihood that a receivable that has reached the point of default will not be collected in full. The Company updates its probability-of-default and loss given default factors annually to incorporate the most recent historical data and adjusts the quantitative portion of the reserve through its qualitative reserve overlay. The Company looks at qualitative factors such as general economic conditions in determining expected credit losses. A roll-forward of the activity in the Company’s allowance for credit losses is as follows: December 31, 2022 2021 2020 (in thousands) Allowance for credit losses at beginning of year $ 11,217 $ 1,898 $ 751 Impact of ASU 2016-13 adoption — 887 — Current period provision 32,596 8,931 1,170 Write-downs ( 2,608 ) ( 499 ) ( 23 ) Allowance for credit losses at end of year $ 41,205 $ 11,217 $ 1,898 Redeemable Preferred Stock Investment The redeemable preferred stock investment of $ 12.4 million of December 31, 2022 represents the fair value of redeemable preferred stock of a private company that the Company purchased in July 2021. The investment is classified as available-for-sale debt securities. The fair value of available-for-sale debt security is included in the Consolidated Statement of Balance Sheets. Unrealized losses of $ 9.6 million were excluded from earnings and reported in other comprehensive income (loss) for the year ended December 31, 2022. Unrealized gains of $ 2.0 million are excluded from earnings and reported in other comprehensive income (loss) for the year ended December 31, 2021. Since the Company intends on holding the preferred stock, and the preferred stock is not redeemable until July 2027 , the investment is recorded as a long-term investment. F- 12 Fixed Assets Fixed assets are recorded at cost, net of accumulated depreciation and amortization. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the shorter of their expected lives or the applicable lease term, including renewal options, if available. Major replacements and improvements are capitalized, while general repairs and maintenance are expensed as incurred. See Note 5, Fixed Assets , for useful lives for each major class of fixed assets. Intangible assets Intangible assets, unless determined to be indefinite-lived, are amortized over their estimated useful lives. The Company amortizes intangible assets on a straight-line basis with definite lives generally over periods ranging from five to fourteen years . In-process research and development costs, or IPR&D, are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If and when development is complete, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time. During this period, the assets will not be amortized but will be tested for impairment on an annual basis and between annual tests if we become aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts. See Note 17, Goodwill and Intangible Assets , for details of intangible assets. Business Combinations The Company uses the acquisition method of accounting and allocates the fair value of purchase consideration to the assets acquired and liabilities assumed from an acquiree based on their respective fair values as of the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth and margins, future changes in technology, expected cost and time to develop in-process research and development, brand awareness and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability. Goodwill Goodwill is not amortized but is subject to impairment tests on an annual basis or more frequently if indicators of potential impairment exist, and compares the fair value of the reporting unit in which the goodwill resides to its carrying value. Goodwill is written down when it is determined to be impaired. Impairment of Long-Lived Assets The Company evaluates the carrying amount of its long-lived assets whenever events or changes in circumstances indicate that the assets may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of an asset and its eventual disposition is less than the carrying amount of the asset. Reagents and Supplies The Company maintains reagents and other consumables primarily used in testing which are valued at the lower of cost or net realizable value. Cost is determined using actual costs on a first-in, first-out basis. The reagents and other consumables were included in other current assets in the accompanying Consolidated Balance Sheets. Fair Value of Financial Instruments The Company's financial instruments consist principally of cash and cash equivalents, marketable securities, trade accounts receivable, redeemable preferred stock investment, accounts payable, accrued liabilities, investment margin loan, and contingent consideration. The carrying amounts of certain of these financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, investment margin loan, and contingent consideration approximate fair value due to their short maturities. Fair value of marketable securities and redeemable preferred stock investment is disclosed in Note 4, Fair Value Measurements, to the accompanying consolidated financial statements. F- 13 Concentrations of Credit Risk, Customers and Suppliers Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, trade accounts receivable and marketable securities, which consist of debt securities and equity securities. As of December 31, 2022, substantially all of the Company’s cash and cash equivalents were deposited in accounts at financial institutions, and amounts may exceed federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial strength of the depository institutions in which its cash and cash equivalents are held. In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue. Aggregating customers under common control, one customer comprised 19 % and 26 % of total revenue in the years ended December 31, 2022 and 2021, respectively, and two customers comprised 28 % and 10 % of total revenue in the year ended December 31, 2020. One customer comprised 17 % of total accounts receivable, net, as of December 31, 2022, and no customer comprised at least 10 % of total accounts receivable, net, as of December 31, 2021. The Company relies on a limited number of suppliers for its test collection kits and certain laboratory substances used in the chemical reactions incorporated into its processes, referred to as reagents, as well as for the sequencers and various other equipment and materials it uses in its laboratory operations. In particular, the Company relies on a sole supplier for the next generation sequencers and associated reagents it uses to perform its genetic tests and as the sole provider of maintenance and repair services for these sequencers. The Company’s laboratory operations would be interrupted if it encountered delays or difficulties securing these test collection kits, reagents, sequencers, other equipment or materials or maintenance and repair services, which could occur for a variety of reasons, including if the Company needs a replacement or temporary substitute for any of its limited or sole suppliers and is not able to locate and make arrangements with an acceptable replacement or temporary substitute. The Company believes there are currently only a few other manufacturers that are capable of supplying and servicing some of the equipment and other materials necessary for its laboratory operations, including collection kits, sequencers and various associated reagents. Equity Method Investments The Company uses the equity method to account for investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. The Company’s 25 % interest in BostonMolecules was accounted for using the equity method, and the carrying value was zero as of December 31, 2022 and 2021 due to the impairment loss recorded in 2020. The Company's proportionate share of the net income or loss of these companies were included in consolidated net earnings. Judgments regarding the level of influence over each equity method investment include consideration of key factors such as the Company's ownership interest, representation on the board of directors or other management body and participation in policy-making decisions. The Company evaluates any equity method investments for impairment whenever events or changes in circumstances would indicate that a decline in value has occurred that is other than temporary. Evidence considered in this evaluation would include, but would not necessarily be limited to, the financial condition and near-term prospects of the investee, recent operating trends and forecasted performance of the investee, market conditions in the geographic area or industry in which the investee operates and the Company’s strategic plans for holding the investment in relation to the period of time expected for an anticipated recovery of its carrying value. If the investments were determined to have a decline in value deemed to be other than temporary it is written down to estimated fair value. Leases The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Operating and finance lease right-of-use assets, or ROU assets, short-term lease liabilities, and long-term lease liabilities are included in other long-term assets, accrued liabilities, and other long-term liabilities, respectively, in the accompanying Consolidated Balance Sheets. Lease ROU assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, including options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company uses its incremental borrowing rate based on the information available at the commencement date, including inquiries with its bank, in determining the present value of lease payments when its leases do not provide an implicit or explicit rate. Lease ROU assets consist of initial measurement of lease liabilities, any lease payments made to lessor on or before the lease commencement date, minus any lease incentive received, and any initial direct F- 14 costs incurred by the Company. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term. For finance lease, ROU assets are amortized on a straight-line basis from the commencement date to the earlier of the end of useful life of the ROU assets or the end of the lease term. Amortization of ROU assets and interest on the lease liability for finance leases are included as charges to the accompanying Consolidated Statements of Income. Lease ROU assets and liabilities arising from business combinations are recognized and measured at the acquisition dates as if an acquired lease were a new lease at the date of acquisition using the Company’s incremental borrowing rate unless the discount rate is implicit in the lease. The Company elects to not to recognize assets or liabilities as of the acquisition dates for leases that, on the acquisition dates, have a remaining lease term of 12 months or less. The Company also retains the acquirees’ classification of the leases if there are no modifications as part of the business combinations. The Company leases out space in buildings it owns to third-party tenants or subtenants under noncancelable operating leases. The Company recognizes lease payments as income over the lease terms on a straight-line basis and recognizes variable lease payments as income in the period in which the changes in facts and circumstances on which the variable lease payments are based occur. The net rental income is included in the interest and other income, net, in the accompanying Consolidated Statements of Income. Software for Internal Use The Company capitalizes certain costs incurred to purchase computer software for internal use. These costs include purchased software packages for Company use. Capitalized computer software costs are amortized over the estimated useful life of the computer software, which is generally one to five years . Internally developed software costs are capitalized after management has committed to funding the project, it is probable that the project will be completed and the software will be used for its intended function. Costs that do not meet that criteria and costs incurred on projects in the preliminary and post-implementation phases are expensed as incurred. Reporting Segment and Geographic Information Reporting segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company views its operations and manages its business in one reporting segment. Revenue Recognition The Company generates revenue from sales of its testing services. The Company currently receives payments from primarily three different customer types: insurance, institutional customers, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, and patients who pay directly. The Company recognizes revenue in an amount that reflects the consideration to which it expects to be entitled in exchange for the transfer of promised goods or services to its customers. To determine revenue recognition for contracts with customers, the Company performs the following steps described in the Accounting Standards Codification, or ASC 606, Revenue from Contracts with Customers : (1) identifies the contract with the customer, or Step 1, (2) identifies the performance obligations in the contract, or Step 2, (3) determines the transaction price, or Step 3, (4) allocates the transaction price to the performance obligations in the contract, or Step 4, and (5) recognizes revenue when (or as) the entity satisfies a performance obligation, or Step 5. The Company’s test results are primarily delivered electronically. The Company bills certain customers for shipping and handling fees incurred by the Company, and shipping and handling fees billed to customers are included in revenue, and shipping and handling fees incurred are included in cost of revenue in the accompanying Consolidated Statements of Income. Performance Obligations Institutional and Patient Direct Pay The Company’s institutional contracts for its testing services typically have a single performance obligation to deliver testing services to the ordering facility or patient. Some arrangements involve the delivery of genetic testing services to research institutions, which the Company refers to as “sequencing as a service.” In arrangements with institutions, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, and patients who pay directly, the transaction price is stated within the contract and is therefore fixed consideration. For most of the Company’s testing volume, the Company identified the institutions, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, and patients as the customer in Step 1 and have determined a contract exists with those customers in Step 1. As these contracts F- 15 typically have a single performance obligation, no allocation of the transaction price is required in Step 4. Control over testing services is transferred to the Company’s ordering facility at a point in time. Specifically, the Company determined the customer obtains control of the promised service upon delivery of test results. Insurance The Company’s insurance contracts for testing services typically have a single performance obligation to deliver testing services to the ordering facility or patient. For most of the Company’s insurance volume, the Company identified the patient as the customer in Step 1 and determined a contract exists with the patient in Step 1. In arrangements with insurance patients, the transaction price is typically stated within the contract, however, the Company may accept payments from third-party payors that are less than the contractually stated price and is therefore variable consideration. In developing the estimate of variable consideration, the Company utilizes the expected value method under a portfolio approach. The Company’s estimate requires significant judgment and is developed using known reimbursement rates and historical reimbursement data from payors and patients. As these contracts typically have a single performance obligation, no allocation of the transaction price is required in Step 4. Control over testing services is transferred to the Company’s ordering parties at a point in time. Specifically, the Company determined the customer obtains control of the promised service upon delivery of the test results. Certain incremental costs pertaining to both insurance and institutional, such as commissions, are incurred in obtaining contracts. Contract costs are capitalized if the Company expects to recover them, and amortization of contract costs is classified in the general and administrative expense in the Consolidated Statements of Income. Historically contract costs have not been significant to the financial statements. Significant Judgments and Contract Estimates Accounting for insurance contracts includes estimation of the transaction price, defined as the amount the Company expects to be entitled to receive in exchange for providing the services under the contract. Due to the Company’s out-of-network status with the majority of insurance payors for COVID-19 tests, estimation of the transaction price represents variable consideration. Contract Liabilities Contract liabilities are recorded when the Company receives payment or bills prior to completing its obligation to transfer goods or services to a customer, and the Company subsequently recognizes contract liabilities as revenue in the period in which the applicable revenue recognition criteria, as described above, are met. Customer Deposit Customer deposit in the accompanying Consolidated Balance Sheets consists of payments received from customers in excess of their outstanding trade accounts receivable balances. These deposits will be offset against future testing receivables or refunded to the customers. Overhead Expenses The Company allocates overhead expenses, such as rent and utilities, to cost of revenue and operating expense categories based on headcount. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category. Cost of Revenue Cost of revenue reflects the aggregate costs incurred in delivering test results and consists of: personnel costs, including salaries, employee benefit costs, bonuses and equity-based compensation expenses; costs of laboratory supplies; depreciation of laboratory equipment; amortization of leasehold and building improvements and allocated overhead. Costs associated with performing tests are recorded as tests are processed. Research and Development Expenses Research and development expenses represent costs incurred to develop the Company’s technology and future tests. These costs consist of: personnel costs, including salaries, employee benefit costs, bonuses and equity-based compensation expenses; laboratory supplies; consulting costs and allocated overhead. The Company expenses all research and development costs in the periods in which they are incurred. F- 16 Selling and Marketing Expenses Selling and marketing expenses consist of: personnel costs, including salaries, employee benefit costs, bonuses and equity-based compensation expenses; customer service expenses; direct marketing expenses; educational and promotional expenses; market research and analysis and allocated overhead. The Company expenses all selling and marketing costs as incurred. General and Administrative Expenses General and administrative expenses include executive, finance and accounting, legal and human resources functions. These expenses consist of: personnel costs, including salaries, employee benefit costs, bonuses and equity-based compensation expenses; audit and legal expenses; consulting costs and allocated overhead. The Company expenses all general and administrative expenses as incurred. Restructuring Costs Restructuring costs represent one-time employee termination benefits provided to employees associated with a newly acquired entity that were involuntarily terminated. A plan of termination was approved and authorized by management in the second quarter of 2022. The plan identified specific employees to be terminated and established terms of benefits those employees would receive upon termination. No additional costs are expected to be incurred under the plan of termination post 2022, and the payable balance is expected to be paid off by August 2023 . Income Taxes Income taxes are accounted for under the asset and liability method. The Company provides for federal, state and foreign income taxes currently payable, as well as for taxes deferred due to timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount with a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. For income tax positions where it is not more likely than not that a tax benefit will be sustained, the Company does not recognize a tax benefit in its consolidated financial statements. The Company records interest and penalties related to uncertain tax positions, if applicable, as a component of income tax expense. Equity-Based Compensation The Company grants various types of equity-based awards to its employees, consultants and non-employee directors. Equity-based compensation costs are reflected in the accompanying Consolidated Statements of Income based upon each award recipient’s role with the Company. The Company primarily grants to its employees restricted stock unit awards, or RSU awards, that generally vest over a specified period of time upon the satisfaction of service-based conditions. The Company measures compensation expense for equity-based awards granted to employees based on the fair value of the award on the grant date of the award. Compensation expense for employee RSU awards with a service-based vesting condition is recognized ratably over the vesting period of the award. Foreign Currency Translation and Foreign Currency Transactions The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation gain (loss) included in the accompanying Consolidated Statements of Comprehensive Income. The Company and its subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and nonmonetary assets and liabilities at historical rates. Gains and losses from these measurements are included in interest and other income, net, in the accompanying Consolidated Statements of Income. Losses from foreign currency exchange were not significant in 2022, 2021 and 2020. Comprehensive Income (Loss) F- 17 Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of net unrealized gain or loss on available-for-sale debt securities, net of tax, and foreign currency translation adjustments from its subsidiaries not using the U.S. dollar as their functional currency. Reclassifications from other comprehensive income (loss) to net earnings were not significant in 2022 or 2021. The Company did not have reclassifications from other comprehensive income (loss) to net loss in 2020. The tax effects related to net unrealized loss on available-for-sale debt securities were $ 7.2 million and $ 437,000 in 2022 and 2021, respectively. The tax effects related to net unrealized gain on the available-for-sale debt securities were $ 147,000 in 2020. Basic and Diluted Net Income or Loss per Share Basic net income or loss per common share is computed by dividing the net income or loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income or loss per common share is computed by dividing the net income or loss attributable to common stockholders by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. Disaggregation of Revenue The Company classifies its customers into three payor types: (i) Insurance, including claim reimbursement from HRSA for uninsured individuals, (ii) Institutional, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, or (iii) Patients who pay directly, as the Company believes this best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. The following table summarizes revenue from contracts with customers by payor type for the years ended December 31, 2022, 2021 and 2020. Year Ended December 31, 2022 2021 2020 (in thousands) Testing Services by payor Insurance $ 377,873 $ 555,762 $ 257,587 Institutional 239,961 435,688 163,083 Patient 1,134 1,134 1,042 Total Revenue $ 618,968 $ 992,584 $ 421,712 The insurance revenue category above includes $ 83.1 million and $ 310.4 million for the years ended December 31, 2022 and 2021, respectively, for services related to claims covered by the HRSA COVID-19 Uninsured Program. There was no material variable consideration recognized in the current period that relates to performance obligations that were completed in the prior period. Collection of the Company’s net revenues from insurers is normally a function of providing complete and correct billing information within the various filing deadlines. Provided the Company has billed insurers accurately with complete information prior to the established filing deadline. If there has been a delay in billing, the Company determines if the amounts in question will likely go past the filing deadline, and if so, the Company will reserve accordingly for the billing. Contract Balances Receivables from contracts with customers - Receivables from contracts with customers are included within trade accounts receivable on the Consolidated Balance Sheets. Receivable from Insurance and Institutional customers represented 14 % and 86 %, respectively, as of December 31, 2022 and 47 % and 53 %, respectively, as of December 31, 2021. Contracts assets and liabilities - Contract assets from contracts with customers associated with contract execution and certain costs to fulfill a contract are included in other current assets in the accompanying Consolidated Balance Sheets. Contract liabilities are recorded when the Company receives payment prior to completing its obligation to transfer goods or services to a customer. Contract liabilities are included in the Consolidated Balance Sheets. Revenues of $ 14.4 million , $ 26.4 million and $ 257,000 for the years ended December 31, 2022, 2021, and 2020, respectively, related to contract liabilities at the beginning of the respective periods were recognized. F- 18 Transaction Price Allocated to Future Performance Obligations ASC 606, Revenue from Contracts with Customers , issued by the Financial Accounting Standards Board, or FASB, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as December 31, 2022. ASC 606 provides certain practical expedients that limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations. The Company applied the practical expedient to no t disclose the amount of transaction price allocated to unsatisfied performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less. The Company does not have material future obligations associated with COVID 19, molecular diagnostic or genetic testing services that extend beyond one year. Recent Accounting Pronouncements The Company evaluates all ASUs issued by FASB for consideration of their applicability. ASUs not included in the Company’s disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s consolidated financial statements or disclosures. Note 3. Equity and Debt Securities The Company’s equity and debt securities consisted of the following: December 31, 2022 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Equity securities: Long-term Preferred stock of privately held company $ 15,000 $ — $ — $ 15,000 Total equity securities 15,000 — — 15,000 Available-for-sale debt securities Short-term U.S. government debt securities 189,333 — ( 3,373 ) 185,960 Corporate debt securities 120,480 — ( 2,222 ) 118,258 U.S. treasury bills 69,991 — ( 193 ) 69,798 U.S. agency debt securities 68,411 — ( 342 ) 68,069 Money market accounts 27,455 — — 27,455 Municipal bonds 7,371 — ( 80 ) 7,291 Yankee debt securities 2,347 — ( 5 ) 2,342 Less: Cash equivalents ( 32,444 ) — — ( 32,444 ) Total debt securities due within 1 year 452,944 — ( 6,215 ) 446,729 After 1 year through 5 years U.S. government debt securities 152,435 2 ( 6,349 ) 146,088 U.S. agency debt securities 92,054 — ( 3,435 ) 88,619 Corporate debt securities 80,647 — ( 4,756 ) 75,891 Municipal bonds 12,065 — ( 217 ) 11,848 Yankee debt securities 753 — ( 85 ) 668 Redeemable preferred stock investment 20,000 — ( 7,615 ) 12,385 Total debt securities due after 1 year through 5 years 357,954 2 ( 22,457 ) 335,499 After 5 years through 10 years Municipal bonds 3,617 — ( 83 ) 3,534 Total debt securities due after 5 years through 10 years 3,617 — ( 83 ) 3,534 Total available-for-sale debt securities 814,515 2 ( 28,755 ) 785,762 Total equity and debt securities $ 829,515 $ 2 $ ( 28,755 ) $ 800,762 F- 19 December 31, 2021 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Equity securities: Short-term Bond funds $ 99,314 $ — $ ( 515 ) $ 98,799 Exchange traded funds 35,174 — ( 174 ) 35,000 Total equity securities 134,488 — ( 689 ) 133,799 Available-for-sale debt securities Short-term Corporate debt securities 92,116 24 ( 148 ) 91,992 Money market accounts 77,067 — — 77,067 U.S. government debt securities 51,318 — ( 81 ) 51,237 Municipal bonds 4,980 — ( 12 ) 4,968 Yankee debt securities 3,615 — ( 6 ) 3,609 Less: Cash equivalents ( 77,067 ) — — ( 77,067 ) Total debt securities due within 1 year 152,029 24 ( 247 ) 151,806 After 1 year through 5 years Corporate debt securities 242,421 29 ( 1,913 ) 240,537 U.S. government debt securities 147,699 7 ( 786 ) 146,920 U.S. agency debt securities 70,069 — ( 535 ) 69,534 Municipal bonds 11,920 13 ( 11 ) 11,922 Yankee debt securities 8,633 — ( 89 ) 8,544 Total debt securities due after 1 year through 5 years 480,742 49 ( 3,334 ) 477,457 After 5 years through 10 years Municipal bonds 7,633 — ( 43 ) 7,590 Redeemable preferred stock investment 20,000 1,965 — 21,965 Total debt securities due after 5 years through 10 years 27,633 1,965 ( 43 ) 29,555 Total available-for-sale debt securities 660,404 2,038 ( 3,624 ) 658,818 Total equity and debt securities $ 794,892 $ 2,038 $ ( 4,313 ) $ 792,617 Gross unrealized losses on the Company’s equity and debt securities were $ 28.8 million and $ 4.3 million as of December 31, 2022 and 2021, respectively. The Company did not recognize any credit losses for its available-for-sale debt securities in 2022 and 2021. The Company’s marketable securities of $ 472.8 million, managed by the custodian of the Company’s marketable debt security investment account, of which the Company has an outstanding margin loan, is used as collateral for the margin account borrowing. See Note 8, Debt, Commitments and Contingencies , for more information on the margin loan. F- 20 Note 4. Fair Value Measurements The authoritative guidance on fair value measurements establishes a framework with respect to measuring assets and liabilities at fair value on a recurring basis and non-recurring basis. Under the framework, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as of the measurement date. The framework also establishes a three-tier hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability and are developed based on the best information available in the circumstances. The hierarchy consists of the following three levels: Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Inputs are unobservable for the asset or liability. The following tables present information about the Company’s financial assets measured at fair value on a recurring basis, based on the three-tier fair value hierarchy: December 31, 2022 Total Level 1 Level 2 Level 3 (in thousands) Equity securities, debt securities and cash equivalents: U.S. government debt securities $ 332,048 $ — $ 332,048 $ — Corporate debt securities 194,149 — 194,149 — U.S. agency debt securities 156,688 — 156,688 — U.S. treasury bills 69,798 69,798 — — Money market accounts 27,455 27,455 — — Municipal bonds 22,673 — 22,673 — Preferred stock of privately held company 15,000 — — 15,000 Redeemable preferred stock investment 12,385 — — 12,385 Yankee debt securities 3,010 — 3,010 — Total equity securities, debt securities and cash equivalents $ 833,206 $ 97,253 $ 708,568 $ 27,385 December 31, 2021 Total Level 1 Level 2 Level 3 (in thousands) Equity securities, debt securities and cash equivalents: Corporate debt securities $ 332,529 $ — $ 332,529 $ — U.S. government debt securities 198,157 — 198,157 — Bond funds 98,799 98,799 — — U.S. agency debt securities 69,534 — 69,534 — Exchange traded funds 35,000 35,000 — — Municipal bonds 24,480 — 24,480 — Yankee debt securities 12,153 — 12,153 — Redeemable preferred stock investment 21,965 — — 21,965 Money market accounts 77,067 77,067 — — Total equity securities, debt securities and cash equivalents $ 869,684 $ 210,866 $ 636,853 $ 21,965 The Company’s Level 1 assets include U.S. treasury bills, money market instruments, bond funds, and exchange traded funds and are valued based upon observable market prices. Level 2 assets consist of U.S. government and U.S. agency debt securities, municipal bonds, corporate debt securities and Yankee debt securities. Level 2 securities are valued based upon observable inputs that include reported trades, broker/dealer quotes, bids and offers. As of December 31, 2022, the Company had preferred stock of a privately held company, which was included in other long-term assets in the accompanying Consolidated Balance Sheets, and F- 21 redeemable preferred stock of a private company that were measured using unobservable (Level 3) inputs. The fair value of redeemable preferred stock as of December 31, 2022 and 2021 was based on valuation performed by a third-party valuation company utilizing the guideline public company method under market approach and the discounted cash flow method under income approach. For the value of the investment in private equity securities, the Company elected to measure it at cost minus impairment, as the preferred stock of the privately held company did not have a readily determinable fair value, and no impairment loss was recorded as of December 31, 2022. There were no transfers between fair value measurement levels in 2022, 2021, and 2020. Note 5. Fixed Assets Major classes of fixed assets consisted of the following: December 31, Useful Lives 2022 2021 (in thousands) Medical lab equipment 5 months to 12 Years $ 53,503 $ 35,930 Leasehold improvements Shorter of lease term or estimated useful life 11,804 4,003 Computer software 1 to 5 Years 6,982 1,408 Computer hardware 1 to 5 Years 6,979 5,661 Building 39 Years 6,731 6,731 Aircraft 7 Years 6,400 6,503 Building improvements 6 months to 39 Years 5,865 3,936 Furniture and fixtures 1 to 5 Years 4,248 2,255 Land improvements 5 to 15 Years 904 403 Automobile 2 to 7 Years 797 825 General equipment 3 to 5 Years 44 44 Land 7,500 7,500 Assets not yet placed in service 12,877 6,718 Total 124,634 81,917 Less: Accumulated depreciation ( 43,281 ) ( 19,630 ) Fixed assets, net $ 81,353 $ 62,287 Depreciation expense on fixed assets totaled $ 25.5 million , $ 9.3 million and $ 3.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. Note 6. Other Significant Balance Sheet Accounts Other current assets consisted of the following: December 31, 2022 2021 (in thousands) Other receivable $ 19,836 $ 1,403 Prepaid income taxes 15,434 1,716 Prepaid expenses 6,814 4,244 Reagents and supplies 4,280 12,206 Marketable securities interest receivable 2,525 2,743 Contract assets — 237 Total $ 48,889 $ 22,549 Other receivable as of December 31, 2022 includes $ 19.1 million of maturities of marketable securities that did not settle until after period-end. Other current liabilities primarily includes $ 5.0 million payable pursuant to a share transfer agreement, see Note 15, Business Combinations. Other long-term liabilities primarily includes operating and finance lease liabilities, long-term, see Note 9, Leases , and notes payable, long-term, See Note 8, Debt, Commitments and Contingencies . F- 22 Note 7. Reporting Segment and Geographic Information The Company views its operations and manages its business in one reporting segment. All long-lived assets were located in the United States as of December 31, 2022 and 2021 with an insignificant amount located in China and Canada. Revenue by region for the years ended December 31, 2022, 2021 and 2020 were as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Revenue: United States $ 603,148 $ 978,978 $ 415,334 Foreign 15,820 13,606 6,378 Total $ 618,968 $ 992,584 $ 421,712 Note 8. Debt, Commitments and Contingencies Debt As of December 31, 2022, the Company had an outstanding borrowing of $ 15.0 million under its margin account with the custodian of the Company’s marketable debt security investment account, Pershing Advisor Solutions, LLC, a BNY Mellon Company. The outstanding balance is included in the Consolidated Balance Sheets. Margin account borrowings were used for the purchase of real property located in El Monte, California in 2020. The securities in the brokerage account were used as collateral for the margin loan. The custodian can issue a margin call at any time. The interest rate on the margin loan was the effective federal funds rate, or EFFR, plus a spread. EFFR and/or the spread can be changed by BNY Mellon at any time. The interest was 1 % at the time of withdrawal of $ 15.0 million from the margin account, and the interest rate at December 31, 2022 was 4.59 % . The related interest expenses in 2022, 2021 and 2020 were $ 346,000 , $ 117,000 and $ 20,000 , respectively. Notes payable as of December 31, 2022, consisted of $ 3.8 million of notes payable related to an installment sale contract the Company entered in February 2022 for a building and $ 5.2 million of notes payable to Xilong Scientific Co., or Xilong Scientific, by Fujian Fujun Gene Biotech Co., Ltd., or FF Gene Biotech. The notes payable related to the installment sale are due in February 2030, and the interest rate is 1.08 %. The current portion and noncurrent portion are $ 461,000 and $ 3.4 million , respectively, and the noncurrent portion is included in the other long-term liabilities in the accompanying Consolidated Balance Sheets. The notes payable to Xilong Scientific is due on March 31, 2023, and the interest rate on the loan is 4.97 %. The related interest expenses in 2022 and 2021 were $ 304,000 and $ 177,000 , respectively. The Company did no t have the installment sale contract in 2021. Operating and Finance Leases See Note 9, Leases , for further information. Purchase Obligations As of December 31, 2022, the Company had non-cancelable purchase obligations of $ 10.1 million , of which, $ 3.2 million for computer software and hardware, $ 2.5 million for reagents and other supplies, $ 1.1 million for services and $ 746,000 for medical lab equipment are payable within twelve months. $ 2.2 million for computer software and $ 381,000 for services are payable within the next thirty-six months. Contingencies From time to time, the Company may be subject to legal proceedings and claims arising in the ordinary course of business. Management does not believe that the outcome of any of these matters will have a material effect on the Company’s consolidated financial position, results of operations or cash flows. The Company has received a CID issued by the U.S. Department of Justice pursuant to the False Claims Act related to its investigation of allegations of medically unnecessary laboratory testing, improper billing for laboratory testing, and remuneration received or provided in violation of the Anti-Kickback Statute and the Stark Law. This CID requests information and records relating to certain of the Company’s customers named in the CID, which represent a small portion of the Company’s revenues. The Company is fully cooperating with the U.S. Department of Justice to promptly respond to the requests for information in this CID, and does not presently expect this CID or resulting investigation to have a material adverse impact. However, the Company cannot predict when the F- 23 investigation will be resolved, the outcome of the investigation or its potential impact, which may ultimately be greater than the Company currently expects. Note 9. Leases Lessee The Company is party as a lessee to various non-cancelable operating leases with varying terms through March 2028 primarily for laboratory and office space and equipment. The Company has options to renew some of these leases after their expirations. On a lease-by-lease basis, the Company considers such options, which may be elected at the Company’s sole discretion, in determining the lease term. The Company also has various finance leases for lab equipment with varying terms through December 2026 , of which, some were acquired in business combinations. The Company does not have any leases with variable lease payments. The Company’s operating lease agreements do not contain any residual value guarantees, material restrictive covenants, bargain purchase options or asset retirement obligations. The Company’s headquarters are located in Temple City, California, which is comprised of various corporate offices and a laboratory certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, accredited by the College of American Pathologists, or CAP, and licensed by the State of California Department of Public Health. Other CLIA-certified laboratories are located in El Monte, California; Houston and Irving, Texas; Needham, Massachusetts; Phoenix, Arizona; Alpharetta, Georgia; and New York, New York. The operating and finance lease right-of-use asset, short-term lease liabilities, and long-term lease liabilities as of December 31, 2022, and 2021 were as follows: December 31, 2022 2021 (in thousands) Operating lease ROU asset, net $ 14,784 $ 7,141 Operating lease liabilities, short term $ 6,132 $ 1,842 Operating lease liabilities, long term $ 8,795 $ 5,344 Finance lease ROU asset, net $ 2,784 $ 1,735 Finance lease liabilities, short term $ 943 $ 332 Finance lease liabilities, long term $ 1,818 $ 1,398 The following was operating and finance lease expense: Year Ended December 31, 2022 2021 2020 (in thousands) Operating lease cost $ 5,429 $ 1,262 $ 566 Finance lease cost: Amortization of ROU assets 683 7 — Interest on lease liabilities 95 1 — Short-term lease cost 1,528 296 142 Total lease cost $ 7,735 $ 1,566 $ 708 Supplemental information related to leases was the following: December 31, 2022 Weighted average remaining lease term - operating leases 3.24 years Weighted average discount rate - operating leases 3.81 % Weighted average remaining lease term -finance leases 3.10 years Weighted average discount rate - finance leases 3.98 % F- 24 The following is a maturity analysis of operating and finance lease liabilities using undiscounted cash flows on an annual basis with renewal periods included: Operating Leases Financing Leases (in thousands) Year Ending December 31, 2023 $ 6,590 $ 986 2024 4,072 1,033 2025 2,118 547 2026 1,522 366 2027 1,360 — Thereafter 217 — Total lease payments 15,879 2,932 Less imputed interest ( 952 ) ( 171 ) Total $ 14,927 $ 2,761 Lessor The Company leases out space in buildings it owns to third-party tenants under noncancelable operating leases. As of December 31, 2022, the remaining lease terms left range from 1 year to 2 years, including renewal options and may include rent escalation clauses. Lease income primarily represents fixed lease payments from tenants recognized on a straight-line basis over the application lease term. Variable lease income represents tenant payments for real estate taxes, insurance and maintenance. The lease income was included in interest and other income, net, in the accompanying Consolidated Statements of Income. Total lease income was as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Lease income $ 269 $ 413 $ 144 Variable lease income 12 7 1 Total lease income $ 281 $ 420 $ 145 Future fixed lease payments from tenants for all noncancelable operating leases as of December 31, 2022 are as follows: Lease Payments from Tenants (in thousands) Year Ending December 31, 2023 $ 181 2024 94 Total $ 275 Note 10. Equity-Based Compensation The Company has included equity-based compensation expense as part of cost of revenue and operating expenses in the accompanying Consolidated Statements of Income as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Cost of revenue $ 8,704 $ 3,563 $ 1,452 Research and development 10,449 6,326 2,693 Selling and marketing 4,373 2,513 2,092 General and administrative 9,114 3,480 1,920 Total $ 32,640 $ 15,882 $ 8,157 F- 25 The actual tax benefit realized from windfall tax deductions related to awards vested or exercised were $ 2.1 million , $ 13.3 million, and $ 2.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. Award Activity Option Awards The following table summarizes activity for options to acquire shares of the Company’s common stock in the years ended December 31, 2022, 2021 and 2020: Number of Shares Subject to Options (in thousands) Weighted- Average Exercise Price Weighted- Average Grant Date Fair Value Weighted- Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) (1) Balance at December 31, 2019 341 $ 1.27 6.4 $ 3,960 Granted 10 $ 15.82 $ 11.45 Exercised ( 56 ) $ 1.86 $ 5.04 Canceled ( 8 ) $ 4.18 $ 4.68 Balance at December 31, 2020 287 $ 1.59 5.5 $ 14,484 Granted 5 $ 73.64 $ 56.34 Exercised ( 76 ) $ 1.13 $ 8.40 Canceled — $ — $ — Balance at December 31, 2021 216 $ 3.42 4.6 $ 20,965 Granted 10 $ 59.54 $ 44.56 Exercised ( 5 ) $ 7.16 $ 7.41 Canceled ( 9 ) $ 43.30 $ 33.53 Balance at December 31, 2022 212 $ 4.21 3.7 $ 5,420 Exercisable as of December 31, 2022 196 $ 1.22 3.3 $ 5,608 (1) Aggregate intrinsic value is calculated as the difference between (i) the exercise price of options and (ii) the market value of the Company’s common stock as of the applicable date. The total fair value of options that vested during the years ended December 31, 2022, 2021 and 2020 was $ 126,000 , $ 76,000 and $ 223,000 , respectively. As of December 31, 2022, the remaining unrecognized compensation expense related to all outstanding option awards was $ 433,000 and is expected to be recognized over a weighted-average period of 3.4 years. RSU Awards RSUs are awards that entitle the holder to receive shares of the Company’s common stock upon satisfaction of vesting conditions. Each RSU represents the contingent right to receive one share of the Company’s common stock upon vesting and settlement. F- 26 The following table summarizes activity for RSUs relating to shares of the Company’s common stock in the years ended December 31, 2022, 2021, and 2020: Number of Shares (in thousands) Weighted-Average Grant Date Fair Value Balance at December 31, 2019 1,511 $ 6.54 Granted 1,389 $ 24.86 Vested and settled ( 655 ) $ 7.97 Forfeited ( 160 ) $ 11.17 Balance at December 31, 2020 2,085 $ 17.93 Granted 477 $ 95.33 Vested and settled ( 836 ) $ 15.43 Forfeited ( 107 ) $ 37.83 Balance at December 31, 2021 1,619 $ 40.74 Granted 1,895 $ 49.98 Vested and settled ( 699 ) $ 34.01 Forfeited ( 184 ) $ 61.11 Balance at December 31, 2022 2,631 $ 47.76 The RSU awards granted in the years ended December 31, 2022, 2021 and 2020 will result in aggregate equity-based compensation expense of $ 94.8 million , $ 45.5 million and $ 34.5 million, respectively, to be recognized over the vesting periods from the grant date of each award granted in the period. The RSU awards granted in the year ended December 31, 2022 included 663,013 shares of RSU awards assumed as part of the Fulgent Pharma acquisition, see more details in Note 14, Related Party, and Note 15, Business Combinations . As of December 31, 2022, the remaining unrecognized compensation expense related to all outstanding RSU awards was $ 110.6 million and is expected to be recognized over a weighted-average period of 3.0 years. Fair Value Assumptions for Option Awards The Company uses the Black-Scholes option-pricing model to measure the fair value of option awards. The Black-Scholes option-pricing model requires the input of various assumptions, each of which is subjective and requires significant judgment. These assumptions include the following: • Expected Term. The expected term represents the period that the Company’s equity-based awards are expected to be outstanding. The Company determines the expected term assumption based on the vesting terms, exercise terms and contractual terms of the options. • Risk-Free Interest Rate. The Company determines the risk-free interest rate by using the equivalent to the expected term based on the U.S. Treasury yield curve in effect as of the date of grant. • Dividend Yield. The assumed dividend yield is based on the Company’s expectation that it will not pay dividends in the foreseeable future, which is consistent with its history of not paying dividends. • Expected Volatility. The Company calculates expected volatility based on historical volatility data of its stock that is publicly traded. • Forfeiture Rate. The Company accounts for forfeitures as they occur. Awards to Employees The table below sets forth the weighted-average assumptions used in the Black-Scholes option-pricing model to estimate the fair value of options to acquire shares of the Company’s common stock granted to employees during the years ended December 31, 2022, 2021 and 2020. Year Ended December 31, 2022 2021 2020 Expected term (in years) 6.1 6.1 6.1 Risk-free interest rates 2.6 % 1.1 % 0.4 % Dividend yield — — — Expected volatility 88.7 % 94.6 % 87.5 % F- 27 Determination of Fair Value on Grant Dates The fair value of the shares of the Company’s common stock underlying option and RSU awards is determined by the Company’s board of directors or the compensation committee thereof based on the closing sales price of the Company’s common stock on the date of grant as reported by the Nasdaq Global Market. Note 11. Income Taxes Provision for income taxes consists of U.S. federal and state income taxes. A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences, operating losses and tax credit carryforwards. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The following table summarizes income (loss) before income taxes, equity loss in investee and gain (loss) on equity-method investments: Year Ended December 31, 2022 2021 2020 (in thousands) U.S. income before income taxes, equity loss in investee and gain (loss) on equity-method investments $ 189,406 $ 681,403 $ 291,739 Foreign loss before income taxes, equity loss in investee and gain (loss) on equity-method investments ( 5,381 ) ( 4,103 ) ( 55 ) Income before income taxes, equity loss in investee and gain (loss) on equity-method investments $ 184,025 $ 677,300 $ 291,684 Income tax expense consisted of the following: Year Ended December 31, 2022 2021 2020 (in thousands) Current: Federal $ 31,140 $ 131,907 $ 53,794 State 19,242 51,076 20,513 Total Current 50,382 182,983 74,307 Deferred: Federal ( 3,763 ) ( 7,471 ) ( 248 ) State ( 4,517 ) ( 717 ) ( 14 ) Foreign 224 669 — Change in valuation allowance ( 224 ) ( 669 ) ( 1,513 ) Total Deferred ( 8,280 ) ( 8,188 ) ( 1,775 ) Total income tax expense $ 42,102 $ 174,795 $ 72,532 Reconciliation of the difference between the federal statutory income tax rate and the effective income tax rate is as follows: Year Ended December 31, 2022 2021 2020 Tax provision at federal statutory rate 21.00 % 21.00 % 21.00 % State taxes 7.01 % 5.99 % 5.68 % Uncertain tax positions 0.92 % 0.05 % 0.13 % Stock based compensation - 1.12 % - 1.96 % - 0.92 % Return to provision - 3.92 % - 0.17 % - 0.11 % Other permanent differences 1.33 % 1.09 % 0.02 % Research & development credit - 2.98 % - 0.33 % - 0.40 % Other 0.34 % 0.19 % - 0.01 % Change in valuation allowance 0.12 % - 0.10 % - 0.52 % Effective tax rate 22.70 % 25.76 % 24.87 % F- 28 The following table summarizes the elements of the deferred tax assets (liabilities). Net deferred tax assets are included in other long-term assets in the Consolidated Balance Sheets. As of December 31, 2022 2021 (in thousands) Deferred tax assets Accrued vacation and other accrued expenses $ 1,488 $ 1,486 Provision for credit losses 10,255 2,755 Net operating losses 16,345 199 Stock based compensation 2,550 1,739 State income taxes 4,892 10,991 Excess tax basis in FF Gene Biotech net assets 2,032 — Foreign — 1,808 Lease liability 4,086 1,643 Unrealized gain/loss on available-for-sale debt securities 7,664 437 Section 174 research & experimental expenditures 6,573 — Equity loss in investment 503 700 Other 199 162 Gross deferred tax assets 56,587 21,920 Less: Valuation allowance ( 2,832 ) ( 2,609 ) Net deferred tax assets 53,755 19,311 Deferred tax liabilities Intangible assets 39,199 8,083 Depreciation 5,500 7,371 Right of use asset 4,056 1,640 Other 1,496 1,458 Total deferred tax liabilities 50,251 18,552 Net deferred tax assets $ 3,504 $ 759 As of December 31, 2022, the Company has $ 58.8 million estimated federal net operating loss, or NOL, carryforwards and estimated state NOL carryforwards of $ 66.0 million . The Company’s state NOLs are scheduled to begin expiring in 2037 . The Company also has foreign NOL carryforwards of $ 13.8 million which are scheduled to expire from 2023 through 2027 . ASC 740-10-30-5 requires that deferred income tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred income tax assets will not be realized. The Company has evaluated the realizability of its deferred tax assets and has concluded that it is more likely than not that the Company may not realize the benefit of certain deferred tax assets. These deferred tax assets consist primarily of equity losses in joint ventures and foreign net operating loss carryforwards; accordingly, a valuation allowance of $ 2.8 million and $ 2.6 million has been recorded on these deferred tax assets as of December 31, 2022 and 2021. The increase in the valuation allowance of $ 224,000 for the years ended December 31, 2022 was primarily due to an increase in foreign deferred tax assets that are more likely than not to expire unrealized. During 2020, the Company recorded a deferred tax asset related to the impairment of its investment in BostonMolecules, Inc. When realized, the asset will generate a capital loss which may only be used to offset capital gain income; therefore, the Company has recorded a full valuation allowance against this asset. Uncertain Tax Positions The Company is subject to income taxation by the United States government and certain states in which the Company's activities give rise to an income tax filing requirement. The Company does not have any significant income tax filing requirements in any foreign jurisdiction. As of December 31, 2022, there were no pending tax audits in any jurisdiction. The tax returns are subject to statutes of limitations that vary by jurisdiction. At December 31, 2022, the Company remains subject to income tax examinations in the U.S. and various states for tax years 2019 through 2022 ; certain other states remain subject to examination for tax years 2018 through 2022. However, due to the Company’s NOL carryforwards in various jurisdictions, tax authorities have the ability to adjust carryforwards related to closed years until the statute expires on the year(s) in which the NOL carryforwards are utilized. A reconciliation of the Company’s gross unrecognized tax benefits is as follows: F- 29 Year Ended December 31, 2022 2021 2020 (in thousands) Balance at beginning of year $ 710 $ 377 $ — Increases to prior year positions 2,843 — 141 Increases for current year positions 6,189 333 236 Balance at end of year $ 9,742 $ 710 $ 377 As of December 31, 2022, the Company has $ 9.7 million of gross unrecognized tax benefits, of which, $ 2.3 million of unrecognized tax benefits would affect the effective tax rate if recognized. The Company has accrued $ 94,000 and $ 15,000 for interest at December 31, 2022 and 2021, respectively, and has recognized interest expense of $ 94,000 and $ 15,000 for the years ended December 31, 2022 and 2021, respectively. Although it is possible that the amount of unrecognized benefits with respect to our uncertain tax positions will increase or decrease in the next twelve months, the Company does not expect material changes. While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could differ from the Company's accrued positions. Accordingly, additional provisions on federal, state and foreign tax-related matters could be recorded in future periods as revised estimates are settled or otherwise resolved. Note 12. Income per Share The following is a reconciliation of the basic and diluted income per share computations: Year Ended December 31, 2022 2021 2020 (in thousands, except per share data) Net income attributable to Fulgent $ 143,403 $ 507,364 $ 214,310 Weighted-average common shares - outstanding, basic 30,097 29,408 22,694 Weighted-average common shares - outstanding, diluted 30,964 30,976 24,056 Net income per common share, basic $ 4.76 $ 17.25 $ 9.44 Net income per common share, diluted $ 4.63 $ 16.38 $ 8.91 The following securities have been excluded from the calculation of diluted income per share because their effect would have been anti-dilutive: Year Ended December 31, 2022 2021 2020 (in thousands) Options 10 5 10 RSUs 728 182 347 The anti-dilutive shares described above were calculated using the treasury stock method. Note 13. Retirement Plans The Company offers a 401(k) retirement savings plan, or the 401 (k) Plan, for its employees, including its executive officers, who satisfy certain eligibility requirements. The Internal Revenue Code of 1986, as amended, allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) Plan. The Company matches contributions to the 401(k) Plan based on the amount of salary deferral contributions the participant makes to the 401(k) Plan. The Company will match up to 3 % of an employee’s compensation that the employee contributes to his or her 401(k) Plan account. Total Company matching contributions to the 401(k) Plan were $ 2.5 million , $ 697,000 and $ 422,000 in the years ended December 31, 2022, 2021 and 2020, respectively. Note 14. Related Party Linda Marsh, who is a member of the Company’s board of directors, is currently the Senior Executive Vice President of AHMC Healthcare Inc., or AHMC. The Company performs genetic testing and other testing services, on an arms-length basis, for AHMC, and the Company recognized $ 1.5 million , $ 3.4 million and $ 3.1 million in revenue in the years ended December 31, 2022, 2021 and F- 30 2020. As of December 31, 2022 and 2021, $ 93,000 and $ 556,000 was owed to the Company by AHMC, respectively, which is included in trade accounts receivable, net, in the accompanying Consolidated Balance Sheets, in connection with this relationship. On November 7, 2022, the Company acquired Fulgent Pharma. See Note 15, Business Combinations . Prior to the acquisition, the Company and Fulgent Pharma LLC were parties to shared services arrangements where research and development, administrative services and office space and equipment are provided between the companies, on an arms-length basis. Until April 2022, Ming Hsieh was the manager and a member of Fulgent Pharma LLC. In April 2022, Fulgent Pharma LLC became a wholly-owned subsidiary of Fulgent Pharma which was 100 % owned by Ming Hsieh, the Chief Executive Officer and Chairman of the Company’s board of directors, and the Hsieh Family Dynasty Trust, dated January 27, 2010, or the Hsieh Trust, of which Mr. Hsieh is the grantor. Mr. Hsieh and Paul Kim, the Chief Financial Officer and Treasurer of Fulgent, also served as executive officers of Fulgent Pharma as its (i) President and Chief Executive Officer and (ii) Treasurer and Secretary, respectively. The cost of research and development services rendered by Fulgent Pharma LLC for the Company was no t significant in 2022 prior to the acquisition. In the years ended December 31, 2021 and 2020, the research development service rendered by Fulgent Pharma LLC was $ 330,000 and $ 427,000 , respectively. Costs allocated to Fulgent Pharma LLC were no t significant in 2022 prior to the acquisition, 2021 and 2020. As of December 31, 2021, $ 679,000 was owed to Fulgent Pharma LLC by the Company, which is recorded in other current liabilities in the accompanying Consolidated Balance Sheet, in connection with these relationships. As part of the acquisition, RSUs to acquire shares of common stock of Fulgent Pharma held by Paul Kim, the Company’s Chief Financial Officer, Jian Xie, the Company’s President and Chief Operating Officer, Hanlin Gao, the Company’s Chief Scientific Officer and other employees of the Company and consultants of Fulgent Pharma LLC were assumed by the Company and became RSUs to acquire 77,585 , 129,309 , 51,723 , 117,398 , and 286,998 shares of common stock of the Company, respectively. Ming Hsieh, is the owner of PTJ Associates Inc., or PTJ. PTJ provides flight services to the Company on an arms-length basis. In the years ended December 31, 2022, 2021 and 2020, the Company incurred $ 235,000 , $ 142,000 and $ 343,000 , respectively, in expenses for flights between California and Texas to transport employees and supplies. As of December 31, 2022 and 2021, no amount was owed to PTJ by the Company. Ming Hsieh is also on the board of directors and a 20 % owner of ANP Technologies, Inc., or ANP, from which the Company purchased COVID-19 antigen rapid test kits and entered into certain drug-related licensing and development service agreements. The President and Chief Scientific Officer of Fulgent Pharma, Ray Yin, is the Founder, President, and Chief Technology Officer of ANP. In the year ended December 31, 2022, the Company incurred $ 1.2 million related to the purchase of COVID-19 antigen rapid tests kits and licensing and development services. No costs were incurred in the years ended December 31, 2021 and 2020. As of December 31, 2022, $ 607,000 was owed to ANP by the Company in connection with these relationships, and no amount was owed to ANP as of December 31, 2021. Note 15. Business Combinations Inform Diagnostics On April 26, 2022, the Company completed the acquisition of 100 % of the outstanding equity of Symphony Buyer, Inc., or Inform Diagnostics, a leading national independent pathology laboratory based in Irving, Texas. Under the terms of the Agreement and Plan of Merger, dated April 16, 2022, or the Inform Merger Agreement, the total purchase price payable to the securityholders of Symphony Buyer, Inc. was approximately $ 170 million, as adjusted for closing cash, closing indebtedness, closing working capital, closing transaction expenses and other transaction matters. With the addition of Inform Diagnostics, the Company will further expand the Company’s genomic testing footprint and extend its test menu into breast pathology, gastrointestinal pathology, dermatopathology, urologic pathology, neuropathology, and hematopathology. The financial results of Inform Diagnostics are included in the consolidated financial statements from the date of acquisition. The Company all ocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on estimated fair values. The following tables summarizes the consideration paid and the updated amounts of the assets acquired and liabilities assumed recognized at the acquisition date: F- 31 Amounts (in thousands) Consideration Cash, net of cash received $ 137,755 Recognized amounts of identifiable assets acquired and liabilities assumed Net working capital $ ( 15,024 ) Fixed assets 20,242 ROU assets - operating 12,653 ROU assets - finance 1,183 Deferred tax assets 3,410 Other long-term assets 4,711 Identifiable intangible assets 57,060 Operating lease liabilities ( 12,653 ) Finance lease liabilities ( 1,183 ) Income tax payable ( 40 ) Other long-term liabilities ( 4,449 ) Recognized amounts of identifiable assets acquired and liabilities assumed, net 65,910 Goodwill 71,845 Total $ 137,755 The goodwill of $ 71.8 million arising from the acquisition is attributed to the expected synergies, assembled workforce, other benefits that will be potentially generated from the combination and deferred tax. The goodwill recognized is not deductible for tax purposes. The identified intangible assets acquired consisted of $ 54.0 million customer relationships with an estimated amortization life of 14 years, $ 2.7 million trade name with an estimated amortization life of 7 years, and $ 360,000 in-place lease intangible asset to be amortized over the remaining lease term of 5 years. The fair value of the customer relationship was estimated using the Multiperiod Excess Earnings Method, or MPEEM, of the income approach. Under the MPEEM, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable only to the subject intangible asset after deducting contributory asset charges. The incremental after-tax cash flows attributable to the customer relationships are then discounted to their present value at a risk-adjusted rate of return. The fair value of the trade name was estimated using the relief from royalty, or RFR, method. The RFR method estimates the portion of the Company's earnings attributable to an intangible asset based on the royalty rate the Company would have paid for the use of the asset if it did not own it. The fair value of in-place lease intangible asset was estimated using the discounted cash flow under the income approach. The useful lives of the intangible assets for amortization purposes were determined by considering the period of expected cash flows used to measure the fair values of the intangible assets adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic and other factors that may limit the useful life. The customer relationships and trade name are amortized on a straight-line basis over their estimated useful lives. Revenue and operating loss from the Inform Diagnostics acquisition since the acquisition date are $ 83.6 million and $ 17.0 million, respectively, which are included in the accompanying Consolidated Statements of Income. The transaction costs associated with the acquisition of Inform Diagnostics consisted primarily of legal, regulatory and financial advisory fees of approximately $ 6.6 million for the year ended December 31, 2022, respectively. These transaction costs were expensed as incurred as general and administrative expense in the respective period. Unaudited Pro Forma Financial Information The following unaudited pro forma financial information summarizes the combined results of operations of Fulgent and Inform Diagnostics as if the companies had been combined as of the beginning of 2021. The pro forma financial information has been adjusted for the following: Acquisition-related costs - Acquisition-related costs incurred by both Fulgent and Inform Diagnostics were excluded from the net income attributable to Fulgent, and total costs were $ 9.6 million for the year ended December 31, 2022. F- 32 Other adjustments to the net income attributable to Fulgent were $ 772,000 and $ 2.3 million for the year ended December 31, 2022 and 2021, respectively. Other adjustments to revenue were $ 962,000 and $ 3.9 million for or the year ended December 31, 2022 and 2021, respectively. Year Ended December 31, 2022 2021 (in thousands) Revenue $ 659,386 $ 1,140,184 Net income attributable to Fulgent $ 140,288 $ 493,313 Basic earnings per common share attributable to Fulgent $ 4.66 $ 16.77 Diluted earnings per common share attributable to Fulgent $ 4.53 $ 15.93 Fulgent Pharma Holdings, Inc On November 7, 2022, the Company completed the acquisition of 100 % of the outstanding equity of Fulgent Pharma, a clinical-stage, therapeutics development company focused on perfecting drug candidates for treating a broad range of cancers. Under the terms of the Agreement and Plan of Merger, dated November 7, 2022, or the Pharma Merger Agreement, the total merger consideration was paid in a combination of cash, the Company's common stock, or the Stock Consideration, and assumed restricted stock units, or RSUs, subject to customary adjustments for closing cash, closing indebtedness, transaction expenses and other transaction matters. A portion of the Stock Consideration was held back for a duration of time after the closing of the transaction to satisfy certain indemnification obligations of the Pharma Stockholders as described in the Pharma Merger Agreement. The RSUs are subject to vesting over the four-year period immediately following the date of their original grant, subject to the holder’s continuing service. The integrated companies plan to offer a vertically integrated solution to combat cancer with the potential to unlock significant long-term upsides for both the therapeutic and diagnostic businesses, while effectively managing risk. The financial results of Pharma are included in the consolidated financial statements from the date of acquisition. The Company all ocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on estimated fair values. The following tables summarizes the consideration paid and the updated amounts of the assets acquired and liabilities assumed recognized at the acquisition date: Amounts (in thousands) Considerations Cash, net of cash received $ 39,924 Stock 28,111 Total considerations $ 68,035 Recognized amounts of identifiable assets acquired and liabilities assumed Debt-free net working capital $ ( 3,679 ) Restricted cash 5,000 Fixed assets 1,310 Identifiable intangible assets 64,590 Deferred tax liabilities ( 16,172 ) Long-term or non-operating liabilities ( 5,069 ) Recognized amounts of identifiable assets acquired and liabilities assumed, net 45,980 Goodwill 22,055 Total $ 68,035 The goodwill of $ 22.1 million arising from the acquisition is attributed to Fulgent Pharma's rights to intellectual property, expected synergies, assembled workforce, and other benefits that will potentially be generated from the combination and deferred tax. The goodwill recognized is not deductible for tax purposes. The identified intangible assets acquired consisted of $ 64.6 million in IPR&D. Fulgent Pharma has developed a novel nanoencapsulation and targeted therapy platform, which is designed to improve the therapeutic window and pharmacokinetic profile of new and existing cancer drugs. The lead drug candidate, FID-007, has achieved proof-of-concept in preliminary human clinical trials for the treatment of various cancer types, including head and neck, ampullary, pancreatic, non-small cell lung cancer , and breast. The fair value of the IPR&D was estimated using MPEEM. The method involves forecasting after-tax operating income from existing clients, subtracting the portions attributable to a contributory asset, and discounting the remaining earnings to present value. The useful life of IPR&D is indefinite. F- 33 Revenue and operating loss from the Fulgent Pharma acquisition since the acquisition date are zero and $ 816,000 , respectively, which are included in the accompanying Consolidated Statements of Income. The transaction costs associated with the acquisition of Pharma consisted primarily of legal, regulatory and financial advisory fees of approximately $ 1.4 million for the year ended December 31, 2022. These transaction costs were expensed as incurred as general and administrative expense in the respective period. The $ 5.0 million restricted cash received represents cash consideration payable pursuant to the share transfer agreement Fulgent Pharma entered prior to Fulgent Pharma acquisition date. The cash consideration was not paid as of Fulgent Pharma acquisition date and was included in noncurrent or non-operating liabilities in above table. Note 16. Stock Repurchase Program In March 2022, the Company's Board authorized a $ 250.0 million stock repurchase program. Under the stock repurchase program, the Company may repurchase shares from time to time in the open market or in privately negotiated transactions. The stock repurchase program has no expiration from the date of authorization. During the year ended December 31, 2022, the Company repurchased 1.8 million shares of its common stock at an aggregate cost of $ 74.3 million under the stock repurchase program. As of December 31, 2022, a total of approximately $ 175.7 million remained available for future repurchases of its common stock under the stock repurchase program. Note 17. Goodwill and Intangible Assets Summaries of goodwill and intangible assets balances as of December 31, 2022 and 2021 were as follows: December 31, Weighted-Average Amortization Period 2022 2021 (in thousands) Goodwill $ 143,027 $ 50,897 In-process research & development n/a $ 64,590 $ — Royalty-free technology 10 Years 5,364 5,803 Less: accumulated amortization ( 894 ) ( 387 ) Royalty-free technology, net 4,470 5,416 Customer relationships 13 Years 82,750 28,845 Less: accumulated amortization ( 6,215 ) ( 1,125 ) Customer relationships, net 76,535 27,720 Trade name 8 Years 3,790 1,090 Less: accumulated amortization ( 412 ) ( 45 ) Trade name, net 3,378 1,045 In-place lease intangible assets 5 Years 360 — Less: accumulated amortization ( 46 ) — In-place lease intangible assets, net 314 — Laboratory information system platform 5 Years 1,860 1,860 Less: accumulated amortization ( 527 ) ( 155 ) Laboratory information system platform, net 1,333 1,705 Purchased patent 10 Years 29 31 Less: accumulated amortization ( 6 ) ( 3 ) Purchased patent, net 23 28 Total intangible assets, net $ 150,643 $ 35,914 Acquisition-related intangibles included in the above tables are generally finite-lived and are carried at cost less accumulated amortization, except for IPR&D, which is related to our 2022 acquisition of Fulgent Pharma and has an indefinite life until research F- 34 and development efforts are completed or abandoned. All other finite-lived acquisition-related intangibles related to the business combinations in 2022 and 2021 are amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized. Changes in the carrying amount of goodwill for the year ended December 31, 2022 and 2021 are as follows: 2022 2021 (in thousands) Balance as of January 1, Goodwill $ 50,897 $ — Accumulated impairment losses — — 50,897 — Goodwill acquired during year Inform Diagnostics 71,845 — Fulgent Pharma 22,055 — CSI — 27,484 FF Gene Biotech — 23,082 93,900 50,566 Net exchange differences FF Gene Biotech ( 1,770 ) 331 Balance as of December 31, Goodwill 143,027 50,897 Accumulated impairment losses — — $ 143,027 $ 50,897 Based on the carrying value of intangible assets recorded as of December 31, 2022, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for intangible assets is expected to be as follows: Amounts (in thousands) 2023 $ 7,864 2024 7,864 2025 7,864 2026 7,554 2027 7,225 Thereafter 47,682 Total $ 86,053 F- 35 Note 18. Selected Quarterly Financial Data (Unaudited) The tables below set forth the Company’s quarterly Consolidated Statements of Income data for the eight quarters ended December 31, 2022. In the opinion of management, this quarterly data has been prepared on the same basis as the accompanying consolidated financial statements and includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations for the periods presented. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the report in which these consolidated financial statements are included for descriptions of the effects of any extraordinary, unusual or infrequently occurring items recognized in any of the periods covered by this data. The results for any one quarter are not indicative of the results to be expected in the current period or any future period. Three Months Ended Dec. 31, 2022 Sept. 30, 2022 June 30, 2022 Mar. 31, 2022 Dec. 31, 2021 Sept. 30, 2021 June 30, 2021 Mar. 31, 2021 (dollars in thousands, except per share data) Statement of Operations Data: Revenue $ 67,704 $ 105,655 $ 125,341 $ 320,268 $ 251,671 $ 227,868 $ 153,616 $ 359,429 Cost of revenue 54,717 59,560 60,065 77,725 62,134 43,466 35,858 74,075 Gross profit 12,987 46,095 65,276 242,543 189,537 184,402 117,758 285,354 Operating expenses: Research and development 8,509 7,507 6,905 5,989 7,464 6,021 5,312 5,422 Selling and marketing 10,253 9,859 10,866 7,940 8,200 6,012 5,219 5,008 General and administrative 28,793 26,266 30,240 25,775 22,102 12,299 8,329 8,002 Amortization of intangible assets 2,010 2,006 1,575 906 911 797 — — Restructuring costs ( 26 ) 105 2,896 — — — — — Total operating expenses 49,539 45,743 52,482 40,610 38,677 25,129 18,860 18,432 Operating (loss) income ( 36,552 ) 352 12,794 201,933 150,860 159,273 98,898 266,922 Interest and other income (expense), net 3,090 1,405 958 45 ( 35 ) 496 604 282 (Loss) income before income taxes and gain on equity method investment ( 33,462 ) 1,757 13,752 201,978 150,825 159,769 99,502 267,204 (Benefit from) provision for income taxes ( 9,386 ) 414 2,653 48,421 47,148 37,545 23,589 66,513 (Loss) income before gain on equity method investment ( 24,076 ) 1,343 11,099 153,557 103,677 122,224 75,913 200,691 Gain on equity method investment — — — — — — 3,734 — Net (loss) income from consolidated operations ( 24,076 ) 1,343 11,099 153,557 103,677 122,224 79,647 200,691 Net loss attributable to noncontrolling interests 244 376 438 422 662 298 165 — Net (loss) income attributable to Fulgent $ ( 23,832 ) $ 1,719 $ 11,537 $ 153,979 $ 104,339 $ 122,522 $ 79,812 $ 200,691 Net (loss) income per common share attributable to Fulgent: Basic $ ( 0.80 ) $ 0.06 $ 0.38 $ 5.09 $ 3.48 $ 4.13 $ 2.74 $ 6.96 Diluted $ ( 0.80 ) $ 0.06 $ 0.37 $ 4.93 $ 3.34 $ 3.93 $ 2.59 $ 6.52 Note 19. Subsequent Event As of February 27, 2023, no subsequent events are being reported. F- 36