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Item 9A. Controls and Procedures

2024-02-28 compared with 2023-02-28 · 552 added, 432 removed, 931 unchanged (51% of the section changed)

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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.

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, 2023.

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There has been no change in our internal control over financial reporting during the year ended December 31, 2023, 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, 2023.

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The effectiveness of our internal control over financial reporting as of December 31, 2023 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.

Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting

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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.

and subsidiaries (the “Company”) as of December 31, 2023, 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, 2023, 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, 2023, of the Company and our report dated February 28, 2024, 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.

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.

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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.

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Other Information.

Rule 10b5-1 trading arrangements

During the three months ended December 31, 2023, none of our directors or officers adopted or terminated “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

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Consolidated Balance Sheets as of December 31, 2023 and 2022

Consolidated Statements of Income for the Years Ended December 31, 2022, 2021 and 2020

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020

Consolidated Statements of Stockholders’

Equity for the Years Ended December 31, 2022, 2021 and 2020

Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023, 2022 and 202 1

Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021

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Certificate of Amendment to Certificate of Incorporation of the registrant, dated May 17, 2017.

Bylaws of the registrant.

Amended and Restated Bylaws.

Form of Certificate of Common Stock of the registrant.

Investor’s Rights Agreement, dated May 17, 2016, by and between Fulgent Therapeutics LLC and Xi Long USA, Inc.

Description of the registrant’s securities.

Form of Indemnification Agreement between the registrant and each of its officers and directors.

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Form of Option Substitution Award under the 2016 Omnibus Incentive Plan of the registrant.

Incorporated by

Reference Exhibit

Form of Notice of Restricted Stock Unit Substitution Award and Restricted Stock Unit Agreement under the 2016 Omnibus Incentive Plan of the registrant.

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Form of Fourth Amended and Restated Operating Agreement of Fulgent Therapeutics LLC, to be in effect upon completion of the Reorganization.

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.

Director Compensation Program of the registrant, effective as of September 28, 2016 and amended November 2, 2017.

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).

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).

Commercial Lease, dated January 31, 2018, by and between E & E Plaza LLC and Fulgent Therapeutics LLC.

Incorporated by

Reference Exhibit

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).

Equity Distribution Agreement, dated August 30, 2019, by and between Fulgent Genetics, Inc.

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Aircraft Purchase Agreement, dated August 18, 2020, by and between ServiceMaster Acceptance Corporation and the Company

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.

Commercial Lease Assignment & Assumption, dated January 11, 2021 by and between Ten-Voss Ltd., Medscan Laboratories, Inc.

and Fulgent Genetics, Inc.

Commercial Lease Addendum, dated February 1, 2021, by and between E & E Plaza LLC and Fulgent Genetics, Inc.

Employment Agreement, dated March 8, 2021, by and among Fulgent Therapeutics, LLC, Fulgent Genetics, Inc.

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Restructuring Agreement of Fujian Fujun Gene Biotech Co., Ltd.

Amended and Restated Commercial Lease Agreement, dated May 6, 2016, by and

Incorporated by

Reference Exhibit

between Store Master Funding IX, LLC and Cytometry Specialists, Inc.

Amended and Restated Commercial Lease Agreement, dated May 6, 2016, by and between Store Master Funding IX, LLC and Cytometry Specialists, Inc.

Fulgent Genetics, Inc.

Incentive Compensation Recoupment Policy.

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.

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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

Incorporated by

Reference Exhibit

Rule 10b5-1 Issuer Repurchase Plan, by and between Fulgent Genetics, Inc.

and Piper Sandler & Co., dated December 12, 2023

Commercial Lease Addendum (II), dated January 6, 2023, by and between Fulgent Therapeutics LLC and E&E Plaza LLC

Commercial Lease Agreement, dated October 20, 2008, by and between Inform Diagnostics, Inc.

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Omnibus Incentive Plan

10.47*^#

Amended and Restated Non-Employee Director Compensation Policy, dated as of February 23, 2023.

Executive Officer Incentive Plan

Amended and Restated 2016 Omnibus Incentive Plan of the registrant

Amended and Restated Executive Officer Incentive Plan

Subsidiaries of the registrant.

Incorporated by

Reference Exhibit

Consent of Deloitte & Touche LLP, independent registered public accounting firm, relating to the financial statements of the registrant.

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Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Inline XBRL Instance Document –

the instance document does not appear in

Amended and Restated Incentive Compensation Recoupment Policy

Inline XBRL Instance Document – the instance document does not appear in

the Interactive Data File because XBRL tags are embedded within the Inline

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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.

IN WITNESS WHEREOF, each person whose signature appears below constitutes and appoints Ming Hsieh and Paul Kim as his or her true and lawful agent, proxy and attorney-in-fact, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her 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.

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Consolidated Balance Sheets as of December 31, 2023 and 2022

Consolidated Statements of Income for the Years Ended December 31, 2022, 2021 and 2020

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020

Consolidated Statements of Stockholders’

Equity for the Years Ended December 31, 2022, 2021 and 2020

Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021

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REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Fulgent Genetics, Inc.

To the shareholders 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").

We have audited the accompanying consolidated balance sheets of Fulgent Genetics, Inc., and subsidiaries (the “ Company ” ) as of December 31, 2023, and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, 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, 2023, and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

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.

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, 2023, 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, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

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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

Goodwill—Laboratory Services and Therapeutic Development Reporting Units—Refer to Notes 2 and 17 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.

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value.

The Company used the discounted cash flow model to estimate fair value, which requires management to make significant estimates and assumptions related to discount rates and forecasts of future revenues and EBITDA (defined as earnings before interest, income taxes, depreciation and amortization) margin, as well as timing of commercial success for the Therapeutic Development Reporting Unit.

Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both.

The goodwill balance was $142.3 million as of December 31, 2023, of which $120.2 million was allocated to the Laboratory Services Reporting Unit and $22.1 million was allocated to the Therapeutic Development Reporting Unit.

The carrying value of the Laboratory Services Reporting Unit exceeded its fair value as of the measurement date, resulting in a full impairment of goodwill as of December 31, 2023.

The fair value of the Therapeutic Development Reporting Unit exceeded its carrying value by 15% as of the measurement date and, therefore, no impairment was recognized as of December 31, 2023.

We identified goodwill as a critical audit matter because of the significant judgments made by management to estimate the fair value of each reporting unit and the difference between its fair value and carrying value.

This required a high degree of auditor judgment and an increased extent of effort, including the need to involve professionals in our firm having fair value expertise when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rate and forecasts of future revenue and EBITDA margin for the Laboratory Services Reporting Unit and assumptions related to selection of the discount rate and forecasts of future revenue and timing of commercial success for the Therapeutic Development Reporting Unit.

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 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.

Our audit procedures related to the discount rate and forecasts used by management to estimate the fair value of the Laboratory Services and Therapeutic Development Reporting Unit included the following, among others:

• We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the Laboratory Services and Therapeutic Development Reporting Unit, such as controls related to management’s selection of the discount rate and forecasts of future revenue, EBITDA margin, and the timing of commercial success.

• We evaluated management’s ability to accurately forecast future revenues, EBITDA margin, and timing of commercial success by comparing actual results to management’s historical forecasts.

• We evaluated the reasonableness of management’s revenue, EBITDA margin, and the timing of commercial success forecasts by comparing the forecasts to:

o Historical revenues, EBITDA margin, and previous assumptions related to timing of commercial success.

o Internal communications to management and the Board of Directors.

o Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies.

o Relevant regulatory approvals supporting timing of commercial success.

• With the assistance of professionals in our firm having fair value expertise , we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by:

o Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.

o Developing a range of independent estimates and comparing those to the discount rate selected by management.

Intangible Assets – IPR&D — Refer to Notes 2 and 17 to the financial statements

Critical Audit Matter Description

The Company has in-process research & development (“IPR&D”) that are indefinite-lived intangible assets.

As of December 31, 2023, the carrying value of the IPR&D is $64.6 million.

Management estimates the fair value of IPR&D annually on its elected assessment date of December 31, 2023, using a multi-period excess earnings method, which is a specific discounted cash flow method.

The determination of the fair value requires management to make significant estimates and assumptions related to forecasts of future revenues, timing of commercial success and discount rates to estimate the net present value of revenues.

Changes in these assumptions could have a significant impact on the fair value of IPR&D and a significant change in fair value could cause a significant impairment.

The fair value of the IPR&D exceeded its carrying value by 11% as of the measurement date and therefore, no impairment was recognized.

Given the determination of fair value of IPR&D requires management to make significant estimates and assumptions relating to the forecasts of future revenues, timing of commercial success, and the selection of the discount rates, performing audit procedures to evaluate the reasonableness of such estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve professionals in our firm having fair value expertise.

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.

Our audit procedures related to the forecasts of future revenues, timing of commercial success, and selection of the discount rates for IPR&D included the following, among others:

• We tested the effectiveness of controls over management’s intangible asset impairment evaluation, including those over the determination of the IPR&D, such as controls related to management’s forecasts of future revenues, timing of commercial success, and selection of the discount rates.

• We evaluated the reasonableness of management’s forecasts of future revenues and timing of commercial success by:

o Comparing management’s forecasts with:

o Internal communications to management and the Board of Directors.

o Forecasted information included in Company press releases as well as in industry reports and external studies.

o Relevant regulatory approvals.

• With the assistance of professionals in our firm having fair value expertise, we evaluated the reasonableness of the discount rates by:

o Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.

o Developing a range of independent estimates and comparing those to the discount rate selected by management.

/s/ DELOITTE & TOUCHE LLP

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February 28, 2024

We have served as the Company's auditor since 2016.

CONSOLIDATED FINANCIAL STATEMENTS

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Intangible assets, net

Goodwill, net

Other long-term assets

Liabilities and Stockholders’

Liabilities and Stockholders’ Equity

Current liabilities

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Accrued liabilities

Income tax payable

Contract liabilities

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Investment margin loan

Contingent consideration

Notes payable, current portion

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Unrecognized tax benefits

Deferred tax liabilities

Other long-term liabilities

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Commitments and contingencies (Note 8)

Stockholders’

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

Stockholders’ equity

Common stock, $ 0.0001 par value per share, 50,000 shares authorized, 32,416 shares issued and 29,653 shares outstanding and 31,248 shares issued and 29,438 shares outstanding

Preferred stock, $ 0.0001 par value per share, 1,000 shares authorized, no shares issued or outstanding

Additional paid-in capital

Accumulated other comprehensive loss

Accumulated other comprehensive income (loss)

Retained earnings

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Noncontrolling interest

Total stockholders’

Total liabilities and stockholders’

Total stockholders’ equity

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of these consolidated financial statements.

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FULGENT GENETICS, INC.

Consolidated Statem ents of Income

Consolidated Statem ents of Operations

(in thousands, except per share)

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Amortization of intangible assets

Goodwill impairment loss

Restructuring costs

Total operating expenses

Operating income

Operating (loss) income

Interest and other income, net

Income before income taxes, equity loss in investee and gain (loss) on equity-method investments

(Loss) income before income taxes and gain on equity-method investments

Provision for income taxes

Income before equity loss in investee and gain (loss) on equity-method investments

Equity loss in investee

Gain (loss) on equity-method investments

Net income from consolidated operations

(Loss) income before gain on equity-method investments

Gain on equity-method investments

Net (loss) income from consolidated operations

Net loss attributable to noncontrolling interests

Net income attributable to Fulgent

Net income per common share attributable to Fulgent:

Net (loss) income attributable to Fulgent

Net (loss) income per common share attributable to Fulgent:

Weighted-average common shares:

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FULGENT GENETICS, INC.

Consolidated Statements of Comprehensive Income

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

Year Ended December 31,

Net income from consolidated operations

Net (loss) income from consolidated operations

Other comprehensive income (loss):

Foreign currency translation (loss) gain

Net (loss) gain on available-for-sale debt securities, net of tax

Comprehensive income from consolidated operations

Net gain (loss) on available-for-sale debt securities, net of tax

Comprehensive (loss) income from consolidated operations

Net loss attributable to noncontrolling interest

Foreign currency translation loss (gain) attributable to noncontrolling interest

Foreign currency translation (gain) loss attributable to noncontrolling interest

Comprehensive loss attributable to noncontrolling interest

Comprehensive income attributable to Fulgent

Comprehensive (loss) income attributable to Fulgent

The accompanying notes are an integral part of these consolidated financial statements.

FULGENT GENETICS, INC.

Consolidated Statement s of Stockholders’

Consolidated Statement s of Stockholders’ Equity

(in thousands)

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Issuance of common stock at an average of $ 64.83 per share, net

Issuance of common stock at an average of $ 42.90 per share, net

Issuance of common stock at an average of $ 48.70 per share, net

Common stock withholding for employee tax obligations

Other comprehensive gain, net

Cumulative effect of accounting change

Cumulative tax effect of accounting change

Noncontrolling interest assumed related to acquisitions

Other comprehensive income (loss), net

Net income (loss)

Balance at December 31, 2021

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Restricted stock awards

Issuance of common stock at an average of $ 64.83 per share, net

Common stock withholding for employee tax obligations

Cumulative effect of accounting change

Cumulative tax effect of accounting change

Noncontrolling interest assumed related to acquisitions

Repurchase of common stock

Common stock issued in a business combination (1)

Other comprehensive loss, net

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Common stock issued in a business combination (1)

Other comprehensive loss, net

Net income (loss)

Other comprehensive income, net

Balance at December 31, 2023

(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.

(1) 185,503 and 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 a s of December 31, 2023, and 2022, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

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Cash flow from operating activities:

Net income from consolidated operations

Net (loss) income from consolidated operations

Adjustments to reconcile net income to net cash provided by operating activities:

Goodwill impairment loss

Equity-based compensation

Depreciation and amortization

Provision for credit losses

Provision (gain) for credit losses

Noncash lease expense

Loss on disposal of fixed asset

Amortization of premium of marketable securities

Amortization (Discount) of premium of marketable securities

Deferred taxes

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Net loss on marketable securities

Equity loss in investee

(Gain) loss in equity-method investments

Gain in equity-method investments

Changes in operating assets and liabilities:

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Acquisition of businesses, net of cash acquired

Investment in equity-method investees

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flow from financing activities:

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Repayment of notes payable

Borrowing under margin account

Re-payment for the margin account

Net cash (used in) provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

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Income taxes paid

Cash paid for interest

Supplemental disclosures of non-cash investing and financing activities:

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Operating lease right-of-use assets obtained in exchange for lease liabilities

Finance lease right-of-use assets reduced due to lease modification or termination

Contingent consideration for business acquisition included in current liabilities

Public offerings proceeds in other receivable included in other current assets

Public offerings costs included in accounts payable

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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.

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 laboratory services business and a therapeutic development business.

Its laboratory services business – to which the Company formerly referred as its clinical diagnostic business, includes technical laboratory services and professional interpretation of laboratory results by licensed physicians.

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.

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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.

(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 goodwill and indefinite-lived intangible assets 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.

The accompanying consolidated financial statements include the accounts of the Company.

All intercompany transactions and balances have been eliminated in consolidation.

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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.

All marketable debt securities, which consist of 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,

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.

treasury bills, corporate debt securities, municipal bonds, 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, 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 Operations.

The cost of any marketable debt securities sold is based on the specific-identification method.

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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.

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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.

In determining the amount of the allowance for credit losses, the Company uses a loss rate model or probability-of-default and loss given default model.

Following the loss rate method, expected credit losses are determined based on an estimated historical loss rate.

The probability of default method 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 updates its loss rate and 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:

(in thousands)

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Impact of ASU 2016-13 adoption

Current period provision

Current period (gain) provision

Allowance for credit losses at end of year

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 redeemable preferred stock investment of $ 20.4 million as of December 31, 2023 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.

Unrealized gain of $ 8.1 million were excluded from earnings and reported in other comprehensive income (loss) for the year ended December 31, 2023.

Unrealized losses of $ 9.6 million are excluded from earnings and reported in other comprehensive income (loss) for the year ended December 31, 2022.

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.

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.

Fixed assets are recorded at cost, net of accumulated depreciation and amortization.

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See Note 5, Fixed Assets , for useful lives for each major class of fixed assets.

Intangible assets

Finite-Lived 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.

The Company amortizes intangible assets on a straight-line basis with definite lives generally over periods ranging from three to fourteen years .

See Note 17, Goodwill and Intangible Assets , for details of intangible assets.

Business Combinations

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.

Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability.

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

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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.

Goodwill and Indefinite-lived Intangibles

In-process research & 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.

The Company assesses goodwill and indefinite-lived intangibles for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

The Company may choose to bypass a qualitative assessment of impairment for any reporting unit and proceed directly to performing a quantitative assessment.

An impairment loss would be recognized for the amount by which the reporting unit's carrying amount exceeds its fair value.

The Company’s quantitative assessment includes estimating the fair value of each reporting unit and comparing it to its carrying value.

The Company estimates the fair value of reporting units using both income-based and market-based valuation methods and typically engages a third-party appraisal firm to assist with the valuation.

The estimated fair value for each reporting unit is determined based upon the range of estimated values developed from the income and market-based methods.

If the estimated fair value of a reporting unit exceeds its carrying value, the goodwill is not impaired, and no further review is required.

The income-based fair value methodology is based on a reporting unit’s forecasted future cash flows that are discounted to the present value using the reporting unit’s weighted average cost of capital, or WACC.

Under the income-based approach, it requires management's assumptions and judgments regarding economic conditions in the markets in which the company operates and conditions in the capital markets, many of which are outside of management's control.

The market-based fair value methodology looks at the guideline public company valuation method to determine the prices of comparable public companies and looks at merger and acquisition methods, similar businesses that were sold recently, to estimate the value of the reporting units.

Under the market-based approach, judgment is required in evaluating market multiples and recent transactions.

The Company performed an annual goodwill and intangible asset impairment test on December 31, 2023, and elected to bypass the optional qualitative test and perform the quantitative assessments for both the laboratory services and therapeutic development reporting units, which includes an indefinite-lived intangible asset.

Reagents and Supplies

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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.

Fair value of marketable securities and redeemable preferred stock investment is disclosed in Note 4, Fair Value Measurement s, to the accompanying consolidated financial statements.

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.

As of December 31, 2023, 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 certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue.

For the laboratory services segment, aggregating customers under common control, one customer comprised of $ 35.7 million or 12 % of total revenue in the years ended December 31, 2023, and a different customer comprised of $ 115.6 million or 19 % and $ 260.2 million or 26 % of total revenue in the year ended December 31, 2022 and 2021, respectively.

One customer comprised 13 % of total accounts receivable, net, as of December 31, 2023, and a different customer comprised 17 % of total accounts receivable, net, as of December 31, 2022.

For the therapeutic development segment, the Company doesn't have customers or revenue as it does not have any commercialized or approved product candidates.

The Company’s therapeutic development business relies on ANP Technologies, Inc.

for certain laboratory services, equipment, tools, and drug intermediates in connection with research and development efforts.

The Company also relies on a limited number of suppliers for 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’s laboratory operations would be interrupted if it encountered delays or difficulties securing these 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's development efforts could also be delayed or interrupted if is unable to procure items needed for its therapeutic development activities.

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.

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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 recognizes its share of the earnings or losses of an investee in net earnings or loss in the periods for which they are reported by the investee.

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.

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.

The Company’s 25 % interest in Boston Molecules was originally accounted for using the equity method, and the Company discontinued applying the equity method since the investment was reduced to zero in 2020 due to the full impairment loss recorded.

The Company did not record any additional losses.

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 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

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.

Amortization of ROU assets and interest on the lease liability for finance leases are included as charges to the accompanying Consolidated Statements of Operations.

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 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.

The net rental income is included in the interest and other income, net, in the accompanying Consolidated Statements of Operations.

Software for Internal Use

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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

Reportable 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.

The Company’s chief operating decision maker is its Chief Executive Officer.

The Company reports its business in two segments, a laboratory services business and a therapeutic development business.

For further financial information about these segments, including information for each of the last three fiscal years regarding revenue, operating income (loss), and other important information, see Note 7, Reportable Segment and Geographic Information .

Revenue Recognition

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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.

insurance payors, 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 :

To determine revenue recognition for contracts with customers, the Company performs the following steps described in ASC 606:

(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.

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 such shipping and handling fees incurred are included in cost of revenue in the accompanying Consolidated Statements of Operations.

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

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.

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 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, 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 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.

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.

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 revenue, the Company identified the patient as the customer in Step 1 and determined a contract exists with the patient in Step 1.

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.

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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.

In the absence of Medicare coverage, contractually established reimbursement rates or other coverage, we have concluded that our contracts include variable consideration because the amounts paid by Medicare or commercial health insurance carriers may be paid at less than our standard rates or not paid at all, with such differences considered implicit price concessions.

Variable consideration attributable to these price concessions measured at the expected value using the “most likely amount” method under ASC 606.

The amounts are determined by the historical average collection rates by test type and payor category taking into

consideration the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as the judgment and actions of third parties.

Such variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved.

Variable consideration may be constrained and excluded form the transaction price in situations where there is no contractually agreed upon reimbursement coverage or in the absence of a predictable pattern and history of collectability with a payor.

The Company re-assesses its estimated transaction price at the end of each reporting period, including an assessment of whether the estimate variable consideration is constrained to the extent that is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved.

The Company records any necessary adjustments in the current period’s revenue.

$ 23.0 million variable consideration was recognized as additional revenue in the year ended December 31, 2023 that related to collections for COVID-19 tests completed in the prior period.

Contract Liabilities

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Overhead Expenses

The Company allocates overhead expenses, such as rent and utilities, to cost of revenue and operating expense categories based on headcount.

The Company allocates overhead expenses, such as facility, rent, and utilities, to cost of revenue and operating expense categories based on headcount or square footage.

As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category.

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Research and Development Expenses

Research and development expenses represent costs incurred to develop the Company’s technology and future tests.

These costs consist of:

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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 .

No additional costs are expected to be incurred under the plan of termination post 2022, and the full amount was paid off by August 2023 .

Income taxes are accounted for under the asset and liability method.

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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.

Equity-based compensation costs are reflected in the accompanying Consolidated Statements of Operations 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 or performance conditions.

Compensation expense for employee RSU awards with a service-based vesting condition is recognized ratably over the vesting period of the award.

Compensation expense for employee RSU awards with a performance condition is based on the probable outcome of that performance condition.

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.

Foreign Currency Translation and Foreign Currency Transactions

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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.

Gains and losses from these translations are recognized in foreign currency translation gain (loss) included in the accompanying Consolidated Statements of Comprehensive Income (Loss).

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.

Gains and losses from these measurements are included in interest and other income, net, in the accompanying Consolidated Statements of Operations.

Losses from foreign currency exchange were not significant in 2023, 2022 and 2021.

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The Company did not have reclassifications from other comprehensive income (loss) to net loss in 2021.

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.

The tax effects related to net unrealized gain or loss on available-for-sale debt securities were zero , $ 7.2 million, and $ 437,000 in 2023, 2022, and 2021, respectively.

Basic and Diluted Net Income or Loss per Share

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Total Revenue

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.

The insurance revenue category above includes zero , $ 83.1 million, and $ 310.4 million for the years ended December 31, 2023, 2022, and 2021, respectively, for services related to claims covered by the HRSA COVID-19 Uninsured Program.

$ 23.0 million variable consideration was recognized in the year ended December 31, 2023 that related to COVID-19 tests completed in the prior periods due to the recent collection efforts, which was included as revenue from insurance in the table above.

During the year ended December 31, 2023, the Company experienced a change in estimate related to variable consideration.

This change resulted in a cumulative catch-up adjustment of $ 23.0 million.

The Company estimates variable consideration using the expected value method.

Any changes in variable consideration estimates that affect transactions are accounted for on a cumulative catch-up basis.

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.

Receivables from Insurance and Institutional customers represented 39 % and 61 %, respectively, as of December 31, 2023 and 14 % and 86 %, respectively, as of December 31, 2022.

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.

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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.

Revenues of $ 2.2 million , $ 14.4 million and $ 26.4 million for the years ended December 31, 2023, 2022, and 2021, respectively, related to contract liabilities at the beginning of the respective periods were recognized.

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 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, 2023.

ASC 606 provides certain practical expedients that limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations.

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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.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segments .

This update improves reportable segment disclosure requirements and requires enhanced disclosures related to significant segment expenses regularly provided to CODM, the amount for other segment items with descriptions of the composition, segment profit or loss, and clarification on if the CODM uses more than one measurement of a segment's profit or loss in assessing segment performance and deciding how to allocate resources.

Amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

The Company is currently evaluating the impacts of this amendment on the consolidated financial statements and related disclosure.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvement to Income Tax Disclosures .

The update requires more detailed information on certain income tax disclosures including the income tax rate reconciliation and income taxes paid.

Amendments in this update are effective for annual periods beginning December 15, 2024 for public entities, and early adoption is permitted.

The Company is currently evaluating the impacts of this amendment on the consolidated financial statements and related disclosure.

The Company does not expect that any other recently issued accounting guidance will have a significant effect on its consolidated financial statements.

Equity and Debt Securities

The Company’s equity and debt securities consisted of the following:

December 31, 2023

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government debt securities

Corporate debt securities

treasury bills

agency debt securities

treasury bills

Corporate debt securities

Money market accounts

Municipal bonds

Yankee debt securities

Cash equivalents

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Equity securities:

Exchange traded funds

Preferred stock of privately held company

Total equity securities

Available-for-sale debt securities

government debt securities

Corporate debt securities

treasury bills

agency debt securities

Money market accounts

government debt securities

Municipal bonds

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After 1 year through 5 years

Corporate debt securities

government debt securities

agency debt securities

Corporate debt securities

Municipal bonds

Yankee debt securities

Redeemable preferred stock investment

Total debt securities due after 1 year through 5 years

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Municipal bonds

Redeemable preferred stock investment

Total debt securities due after 5 years through 10 years

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Total equity and debt securities

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.

Gross unrealized losses on the Company’s equity and debt securities were $ 5.9 million and $ 28.8 million as of December 31, 2023 and 2022, respectively.

The Company did not recognize any credit losses for its available-for-sale debt securities in 2023 and 2022.

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.

Fair Value Measurements

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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:

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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, 2023

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government debt securities

Corporate debt securities

agency debt securities

Corporate debt securities

treasury bills

Money market accounts

Municipal bonds

Preferred stock of privately held company

Redeemable preferred stock investment

Preferred stock of privately held company

Municipal bonds

Yankee debt securities

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Equity securities, debt securities and cash equivalents:

Corporate debt securities

government debt securities

Corporate debt securities

agency debt securities

Exchange traded funds

treasury bills

Money market accounts

Municipal bonds

Yankee debt securities

Preferred stock of privately held company

Redeemable preferred stock investment

Money market accounts

Yankee debt securities

Total equity securities, debt securities and cash equivalents

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.

The Company’s Level 1 assets include U.S.

treasury bills and money market instruments and are valued based upon observable market prices.

Level 2 assets consist of U.S.

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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

redeemable preferred stock of a private company that were measured using unobservable (Level 3) inputs.

As of December 31, 2023 and 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 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, 2023 and 2022 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.

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Computer software

Computer hardware

Building improvements

6 months to 39 Years

Computer hardware

Furniture and fixtures

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(in thousands)

Other receivable

Prepaid income taxes

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Marketable securities interest receivable

Contract assets

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 .

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:

Other receivable

Other receivables as of December 31, 2022 included $ 19.1 million of maturities of marketable securities that did not settle until after period-end.

Accrued liabilities consisted of the following:

(in thousands)

Accrued legal liabilities

Accrued bonus and commission

Payroll liabilities

Other accrued liabilities

Operating lease liabilities - short term

Vacation accrual

Accrued legal liabilities included $ 6.9 million in connection with the Company’s voluntary disclosure process as described in Note 8, Debt, Commitments and Contingencies .

Other accrued liabilities included short term fina nce lease liabilities, health insurance liabilities, and third-party billing services.

Other long-term liabilities consisted of the following:

(in thousands)

Operating lease liabilities, long term

Other long-term liabilities

Notes payable, long term

Other long-term liabilities included long term finance lease liabilities and long-term liabilities assumed from a business combination in 2022.

Reportable Segment and Geographic Information

In the 2022 financial statements, the Company viewed and managed its operations in one reportable segment.

Given the advancement of the therapeutic development business, the Company made certain changes, including the bifurcation of financial information for the Company’s budget and forecast planning process in December 2023.

The chief operating decision maker, or CODM, manages the operations of the Company and reviews discrete financial information to make resource decisions for its two operating segments separately.

These are laboratory services and therapeutic development.

The laboratory services operating segment offers technical laboratory services and professional interpretation of laboratory results by licensed physicians who specialize in pathology and oncology.

The therapeutic development operating segment is a pharmaceutical research and development entity that the Company acquired in November 2022.

These operating segments do not meet the aggregation criteria and therefore represent the Company’s reportable segments.

There is no inter-segment allocation of interest expense and income taxes.

There is no inter-segment revenue and operating income or loss.

Information regarding the Company’s operations and assets for its reporting segments as well as geographic information are as follows:

Year Ended December 31,

(in thousands)

Revenue from services:

Laboratory services:

Precision diagnostics

Anatomic pathology

BioPharma services

Total laboratory services

Therapeutic development

Year Ended December 31,

(in thousands)

Operating (loss) income:

Laboratory services

Therapeutic development

Year Ended December 31,

(in thousands)

Depreciation and amortization:

Laboratory services

Therapeutic development

(in thousands)

Laboratory services

Therapeutic development

Geographic distribution of revenue:

Year Ended December 31,

(in thousands)

United States

Geographic distribution of property, plant and equipment, net:

(in thousands)

Fixed assets:

Unites States

Debt, Commitments and Contingencies

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.

Notes payable as of December 31, 2023, consisted of $ 3.4 million of notes payable related to an installment sale contract the Company entered in February 2022 for a building and $ 775,000 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 %.

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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.

The Company entered certain purchase commitments with its vendors, which primarily consist of services, reagent and supplies, computer software, and medical lab equipment.

As of December 31, 2023, the Company had purchase obligations of $ 51.9 million , of which $ 29.7 million is payable within twelve months, and the remainder, $ 22.2 million , is payable within the next five years.

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.

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 Civil Investigative Demand, or 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.

Among other things, 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.

As disclosed in the Company’s prior filings, the U.S.

Securities and Exchange Commission, or the SEC is also conducting a non-public formal investigation, which appears to relate to the matters raised in the CID requests and our Exchange Act reports filed for 2018 through 2020.

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

investigation will be resolved, the outcome of the investigation or its potential impact, which may ultimately be greater than the Company currently expects.

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.

Department of Justice and the SEC to promptly respond to the requests for information in this CID and investigation.

The Company cannot predict when these matters will be resolved, the outcome of these matters, or their potential impact, which may ultimately be greater than what the Company currently expects.

Similar to other laboratories in the industry, the Company is currently being audited by HRSA with respect to its reimbursement for COVID-19 tests furnished to patients believed to be uninsured.

The Company recorded approximately $ 548.9 million of reimbursements from HRSA under the Uninsured Program during the years ending December 31, 2022, 2021, and 2020.

The Company is fully cooperating and working with HRSA’s auditors to resolve any issues, including any reimbursed amounts that may need to be returned to HRSA.

There is uncertainty with respect to the methodology HRSA will use and whether and how they will extrapolate audit results.

The results of the HRSA audit may materially and adversely affect the Company’s business, prospects, and financial condition.

The Company cannot reasonably estimate the loss or range of loss, if any, that may result from any material government investigations, audits and reviews in which it is currently involved given the inherent difficulty in predicting regulatory action, fines and penalties, if any, and the various remedies and levels of judicial review available to the Company in the event of an adverse finding.

As a result, the Company has not recorded any liability related to these matters.

In relation to a recent advisory opinion issued by the Office of Inspector General of the Department of Health and Human Services (the “OIG”), the Company’s subsidiary, Symphony Buyer, Inc., or Inform Diagnostics, initiated a voluntary disclosure process with the appropriate government contact.

The Company currently has estimated and recorded $ 6.9 million as a liability in its financial statements in connection with this voluntary disclosure.

This estimate may be incorrect, and the actual amount of liability may be lower or may materially exceed this estimate.

The Company is party as a lessee to various non-cancelable operating leases with varying terms through April 2033 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;

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 El Monte, California, which is comprised of various corporate offices and two laboratories 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 Irving, Texas;

Needham, Massachusetts;

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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.

As of December 31, 2023, the remaining lease term is 1 year, including renewal options and may include rent escalation clauses.

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.

The lease income was included in interest and other income, net, in the accompanying Consolidated Statements of Operations.

Total lease income was as follows:

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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:

The Company has included equity-based compensation expense as part of cost of revenue and operating expenses in the accompanying Consolidated Statements of Operations as follows:

Year Ended December 31,

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General and administrative

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.

The actual tax (expense) benefit realized from tax deductions related to awards vested or exercised were ($ 2.7 ) million , $ 2.1 million, and $ 13.3 million for the years ended December 31, 2023, 2022 and 2021, 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:

The following table summarizes activity for options to acquire shares of the Company’s common stock in the years ended December 31, 2023, 2022 and 2021:

(in thousands)

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Exercisable as of December 31, 2023

(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, 2023, 2022 and 2021 was $ 172,000 , $ 126,000 and $ 76,000 , respectively.

As of December 31, 2023, the remaining unrecognized compensation expense related to all outstanding option awards was $ 695,000 and is expected to be recognized over a weighted-average period of 2.9 years.

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.

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:

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.

The following table summarizes activity for RSUs relating to shares of the Company’s common stock in the years ended December 31, 2023, 2022, and 2021:

(in thousands)

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The RSU awards granted in the years ended December 31, 2023, 2022 and 2021 will result in aggregate equity-based compensation expense of $ 29.3 million , $ 94.8 million and $ 45.5 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, 2023, the remaining unrecognized compensation expense related to all outstanding RSU awards was $ 86.8 million and is expected to be recognized over a weighted-average period of 2.5 years.

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• 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.

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• 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.

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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,

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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.

Provision for income taxes consists of U.S.

federal and state income taxes.

Provision for income taxes consists of United States 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:

The following table summarizes income (loss) before income taxes and gain on equity-method investments:

Year Ended December 31,

(in thousands)

income before income taxes, equity loss in investee and gain (loss) on equity-method investments

Foreign loss before income taxes, equity loss in investee and gain (loss) on equity-method investments

Income before income taxes, equity loss in investee and gain (loss) on equity-method investments

(loss) income before income taxes and gain on equity-method investments

Foreign loss before income taxes and gain on equity-method investments

(Loss) income before income taxes and gain on equity-method investments

Income tax expense consisted of the following:

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Stock based compensation

Return to provision

Nondeductible compensation - 162(m)

Goodwill impairment

Federal return to provision

State return to provision

Other permanent differences

Research & development credit

Foreign tax rate differential

Change in valuation allowance

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Unrealized gain/loss on available-for-sale debt securities

Research and development credits

Section 174 research & experimental expenditures

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As of December 31, 2023, the Company has $ 63.0 million estimated federal net operating loss, or NOL, carryforwards and estimated state NOL carryforwards of $ 63.0 million .

The Company’s state NOLs are scheduled to begin expiring in 2037 .

The Company’s state NOLs are scheduled to begin expiring in 2024 .

The Company also has foreign NOL carryforwards of $ 13.6 million which are scheduled to expire from 2024 through 2028 .

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.

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 and, accordingly, has established a full valuation allowance of $ 15.9 million on its deferred tax assets as of December 31, 2023.

The Company maintained a valuation allowance of $ 2.8 million on certain deferred tax assets related to equity losses in joint ventures and

foreign net operating loss carryforwards as of December 31, 2022.

The increase in the valuation allowance of $ 13.1 million for the year ended December 31, 2023 was primarily due to the establishment of a full valuation allowance on the Company’s deferred tax assets.

The Organization for Economic Cooperation and Development, or OECD, has enacted model rules for a new global minimum tax framework, or BEPS Pillar II.

Various jurisdictions have enacted, or are in the process of enacting, legislation on these rules.

We are closely monitoring developments and are currently evaluating the potential impact in each jurisdiction in which we operate

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 is subject to income taxation by the U.S.

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 ;

The Company’s tax returns are subject to statutes of limitations that vary by jurisdiction.

As of December 31, 2023, the Company remains subject to income tax examinations in the United States, and various states for tax years 2019 through 2023;

certain other states remain subject to examination for tax years 2018 through 2023 .

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:

The Company is under examination by certain tax authorities for the 2020 and 2021 tax years.

While the timing of the conclusion of the examination is uncertain, the Company believes that adequate amounts have been reserved for adjustments that may result.

A reconciliation of the Company’s gross unrecognized tax benefits is as follows:

Year Ended December 31,

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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.

Income per Share

The following is a reconciliation of the basic and diluted income per share computations:

Income (Loss) per Share

The following is a reconciliation of the basic and diluted income (loss) per share computations:

Year Ended December 31,

(in thousands, except per share data)

Net income attributable to Fulgent

Net (loss) income attributable to common shareholders

Weighted-average common shares - outstanding, basic

Weighted-average effect of dilutive securities:

Stock options

Restricted stock units

Contingently issuable shares

Weighted-average common shares - outstanding, diluted

Net income per common share, basic

Net income per common share, diluted

(Loss) earnings per share:

The following securities have been excluded from the calculation of diluted income per share because their effect would have been anti-dilutive:

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(in thousands)

Stock Options

Restricted Stock Units

Contingently Issuable Shares

The anti-dilutive shares described above were calculated using the treasury stock method.

In the year ended December 31, 2023, the Company had outstanding stock options, restricted stock units, and contingently issuable shares for held back related shares to the business combination of Fulgent Pharma that were excluded from the weighted-average share calculation for continuing operations due to the Company’s net loss positions.

Retirement Plans

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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.

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 $ 3.2 million , $ 2.5 million and $ 697,000 in the years ended December 31, 2023, 2022 and 2021, respectively.

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

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.

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.

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 $ 125,000 , $ 1.5 million and $ 3.4 million in revenue in the years ended December 31, 2023, 2022 and 2021, respectively.

As of December 31, 2023 and 2022, $ 13,000 and $ 93,000 , respectively, was owed to the Company by AHMC , which is included in trade accounts receivable, net, in the accompanying Consolidated Balance Sheets, in connection with this relationship.

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.

In the years ended December 31, 2023, 2022, and 2021 the Company incurred zero , $ 235,000 and $ 142,000 , respectively, in expenses for flights between California and Texas to transport employees and supplies.

As of December 31, 2023 and 2022, 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.

Ming Hsieh is also on the board of directors and an approximately 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.

The Company incurred $ 2.4 million and $ 1.2 million, in 2023 and 2022, respectively, related to the licensing and development services and purchase of equipment.

No costs were incurred in the year ended December 31, 2021.

As of December 31, 2023 and 2022, zero and $ 607,000 , respectively, were owed to ANP by the Company in connection with these relationships.

The Company also entered into an employee service agreement with ANP in April 2023, $ 115,000 was recognized in 2023, and $ 29,000 was owed by ANP in connection with the employee service agreement as of December 31, 2023.

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.

On April 26, 2022, the Company completed the acquisition of 100 % of the outstanding equity of 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 Inform Diagnostics was approximately $ 170 million, as adjusted for closing cash, closing indebtedness, closing working capital, closing transaction expenses and other transaction matters.

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 Company allocated 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:

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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 identifiable 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.

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.

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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.

Revenue and operating loss from the Inform Diagnostics acquisition since the acquisition date were $ 83.6 million and $ 17.0 million, respectively, for year ended December 31, 2022, which are included in the accompanying Consolidated Statements of Operating.

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.

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Year Ended December 31,

(in thousands)

Net income attributable to Fulgent

2 unchanged sentences

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.

On November 7, 2022, the Company completed the acquisition of 100 % of the outstanding equity of Fulgent Pharma, a clinical-stage, therapeutic 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 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 financial results of Fulgent Pharma are included in the consolidated financial statements from the date of acquisition.

The Company allocated 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:

(in thousands)

Considerations

Cash, net of cash received

Total considerations

Recognized amounts of identifiable assets acquired and liabilities assumed

Debt-free net working capital

Restricted cash

Identifiable intangible assets

Deferred tax liabilities

Long-term or non-operating liabilities

Recognized amounts of identifiable assets acquired and liabilities assumed, net

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.

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The useful life of IPR&D is indefinite.

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.

The transaction costs associated with the acquisition of Fulgent 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.

1 unchanged sentence

The cash consideration was not paid as of Fulgent Pharma acquisition date and was included in noncurrent or non-operating liabilities in above table.

FF Gene Biotech

In April 2017, the Company acquired a 30 % equity interest in FF Gene Biotech, a newly formed a joint venture with Xilong Scientific and Fuzhou Jinqiang Investment Partnership (LP), or FJIP.

The joint venture was formed under the laws of China to offer genetic testing services to customers in China.

In May 2021, we entered into a restructuring agreement with Xilong Scientific and FJIP, resulting in the Company indirectly acquiring a controlling financial interest of 72 %in FF Gene Biotech.

FF Gene Biotech was founded to bring the Company’s next generation sequencing, or NGS, capabilities to the Chinese genetic testing market through entities separate from the Company’s U.S.

operations, and FF Gene Biotech is pursuing this separate from the Company’s business elsewhere.

As a result of the acquisition of FF Gene Biotech, or the FF Gene Biotech Acquisition, the Company seeks to be more strategically aligned with its geographic expansion strategy.

It also expects to reduce costs through economies of scale.

The Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on estimated fair values.

As additional information becomes available, such as the finalization of the estimated fair value of tax-related items, the Company may further update the preliminary purchase price allocation during the remainder of the measurement period (up to one year from the FF Gene Biotech Acquisition date).

The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed re cognized at the FF Gene Biotech Acquisition date, as well as the fair value of the noncontrolling interest at the FF Gene Biotech Acquisition date.

(in thousands)

Considerations

Fair value of the Company’s 30 % equity interest held before the business combination

Recognized amounts of identifiable assets acquired and liabilities assumed

Financial assets

Reagents and supplies

Other tangible assets

Identifiable intangible assets

Other current liabilities

Notes payable

Recognized amounts of identifiable assets acquired and liabilities assumed, net

Noncontrolling interest

The fair value of the noncontrolling interest, or NCI, in FF Gene Biotech, a private entity, $ 8.1 million, was estimated by applying the income approach and market approach.

The fair value measurement was based on significant inputs that are not observable in the market and thus represents a fair value categorized within Level 3 of the three-tier fair value hierarchy .

The NCI represents a minority interest of 28 % in the post-restructuring FF Gene Biotech.

Since the NCI is the result of the restructuring, the implied value was utilized to value the NCI based on the 42 % effective investment.

After determining the implied value, a discount for lack of marketability was applied to the 28 % interest representing lack of marketability related to the holding period to monetize the NCI in a future initial public offering, or IPO, or sale, and marketability related to market participant acquisition premiums implied in the value of the $ 19.0 million purchase price for a 42 % interest.

The resultant total discount applied was 35 %, which is supported both by the put option analyses related to the potential holding period, and a 10 % discount owed to a market participant acquisition premium.

The Company recognized a gain of $ 3.7 million as a result of remeasuring to fair value its 30 % equity interest held before the FF Gene Biotech Acquisition.

The fair value of the preexisting equity interest was determined based on the characteristics before consummating the FF Gene Biotech Acquisition and estimated by applying income approach and utilized the discounted cash flow method.

The Company did not apply the market approach based on its characteristics before consummating the restructuring.

The gain on the equity-method investment is included in the Company’s Consolidated Statements of Operations for the year ended December 31, 2021.

The goodwill of $ 23.1 million arising from the FF Gene Biotech Acquisition is attributed to the expected synergies and other benefits that will be potentially generated from the combination of the Company and FF Gene Biotech.

The goodwill recognized is not deductible for tax purposes.

The identifiable intangible assets acquired in the FF Gene Biotech Acquisition consisted of a $ 5.7 million royalty-free technology with an estimated amortization life of 10 years and $ 1.2 million customer relationships with an estimated amortization life of 5 years.

The value of these assets was based upon the preliminary fair values as of the closing date of the FF Gene Biotech Acquisition.

The Company concluded FF Gene Biotech is a variable interest entity as FF Gene Biotech lacks sufficient capital to operate independently.

The Company concluded that it alone has the power to direct the most significant activities of FF Gene Biotech and therefore is the primary beneficiary of the entity post the FF Gene Biotech Acquisition.

Judgment regarding the level of influence over FF Gene Biotech includes 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.

CSI Acquisition

In August 2021, the Company acquired 100 % of the outstanding equity of Cytometry Specialist, Inc, or CSI, a multi-site reference laboratory business in the United States.

This acquisition of CSI, or the CSI Acquisition, expands the Company’s national reference laboratory presence in the United States.

The Company allocated 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 amounts of the assets acquired and liabilities assum ed recognized at the CSI Acquisition date:

(in thousands)

Considerations

Contingent consideration

Recognized amounts of identifiable assets acquired and liabilities assumed

Debt-free net working capital

ROU assets - operating

ROU assets - finance

Identifiable intangible assets

Deferred tax liability

Operating lease liabilities

Finance lease liabilities

Other liabilities

Recognized amounts of identifiable assets acquired and liabilities assumed, net

The CSI Acquisition includes a contingent consideration arrangement that requires additional consideration to be paid by the Company based on CSI’s achievement of a minimum level of earnings, for the year ending December 31, 2021, as described in the acquisition agreement.

The range of undiscounted amounts the Company may be required to pay under the contingent consideration agreement is between zero and $ 10.0 million.

The fair value of the contingent consideration recognized on the CSI Acquisition date of $ 10.0 million was estimated by applying the income approach using discounted cash flows.

Given the short-term nature of the contingent consideration, the most significant assumption is the probability weighted cash flow.

The actual contingent consideration paid in 2022 was $ 10.0 million.

The goodwill of $ 27.5 million arising from the CSI 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 identifiable intangible assets acquired in the CSI Acquisition consisted of $ 27.6 million customer relationships with an estimated amortization life of 12 years, $ 1.9 million laboratory information system platform with an estimated amortization life of 5 years, and $ 1.1 million trade name with an estimated amortization life of 10 years.

Prior to the acquisitions, the financial results for FF Gene Biotech and CSI were not significant for pro forma financial information.

Post the acquisitions, the financial results for FF Gene Biotech and CSI are included in the Company’s consolidated financial statements.

Revenue and operating income or loss from both acquisitions since the respective 2021 acquisition dates are included in the accompanying Consolidated Statements of Operations as follows, in thousands, for the year ended December 31, 2021:

Operating Income (Loss)

FF Gene Biotech

Stock Repurchase Program

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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.

repurchase program has no expiration from the date of authorization.

During the year ended December 31, 2023, the Company repurchased 953,000 shares of its common stock at an aggregate cost of $ 25.1 million under the stock repurchase program.

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.

1 unchanged sentence

Goodwill and Intangible Assets

Summaries of goodwill and intangible assets balances as of December 31, 2022 and 2021 were as follows:

Changes in the carrying amount of goodwill, net of impairment, by reporting unit for the years ended December 31, 2023 and 2022 are as follows:

Laboratory Services

Therapeutic Development

December 31, 2023

December 31, 2022

December 31, 2023

December 31, 2022

(in thousands)

Balance as of January 1

Goodwill acquired during year

Foreign currency impact

Balance at the end of year

As of September 30, 2023, the Company had a single reporting unit.

The Company monitors changing business conditions as well as industry and economic factors, among others, for events which could trigger the need for an interim impairment analysis.

During the third quarter, the Company evaluated the significant decrease in its share price which had occurred over a period of about three months, and also performed a market approach supplemental qualitative analysis.

Based on the short duration of the share price decline and the analysis performed, the Company did no t recognize a goodwill impairment charge during the third quarter of 2023.

As of December 1, 2023, the Company has identified its laboratory services business and its therapeutic development business as its two operating segments and the Company determined that the operating segments represented the two reporting units.

The Company has reassigned goodwill to its two reporting units using the relative fair value approach.

The Company tests for goodwill impairment at the reporting unit level on December 31st of each year and more frequently if events or circumstances indicate a potential impairment.

During the fourth quarter of 2023, the Company witnessed a continued decline in its share price and market capitalization which prompted a quantitative impairment analysis as of December 31, 2023.

Laboratory Services

As of December 31, 2023, the fair value for the laboratory services reporting unit was calculated using the (i) income approach (discounted cash flows) weighted at 50 % with an assumed weighted average cost of capital, or WACC, of 13 % and assumed residual revenue growth rate of 2.5 %, and (ii) a market approach weighted at 50 %.

Within the market approach, the Company used two methods, the guideline public company method weighted at 25 % and the merger & acquisition method also weighted at 25 %.

Based on the quantitative results of the impairment analysis, the carrying value exceeded the fair value on the laboratory services reporting unit.

The Company recognized a full goodwill impairment loss and recorded a pre-tax impairment loss of $ 120.2 million in the Consolidated Statements of Operations.

Therapeutic Development

As of December 31, 2023 the fair value for the therapeutic development reporting unit was calculated using the income approach weighted at 100 % with a WACC of 36 %.

This reporting unit includes IPR&D, an intangible asset with an indefinite life that was initially recognized as part of the Fulgent Pharma acquisition in 2022 and which the Company appraised using the income approach known as multi-period excess earnings method.

Based upon the results of the quantitative assessments, the Company concluded that the fair values of the therapeutic development reporting unit and the IPR&D asset, at December 31, 2023, were greater than the carrying values and that there was no impairment.

The fair value of this reporting unit was $ 74.2 million and exceeded the carrying value of $ 64.3 million by approximately 15 %, and the fair value of IPR&D was $ 71.5 million and exceeded the carrying value of $ 64.6 million by approximately 11 %.

There can be no assurance that the estimates and assumptions management made for the purposes of the goodwill or IPR&D impairment analysis will prove to be accurate predictions of future performance.

It is possible that the conclusions regarding impairment or recoverability of goodwill or intangible assets could change in future periods.

Management will continue to monitor the

therapeutic development reporting unit.

For all IPR&D projects, there are major risks and uncertainties associated with the timely and successful completion of development and commercialization of these product candidates, including the ability to confirm their efficacy based on data from clinical trials, the ability to obtain necessary regulatory approvals, and the ability to successfully complete these tasks within budgeted costs.

The Company is not able to market a human therapeutic without obtaining regulatory approvals, and such approvals require completing clinical trials that demonstrate a product candidate is safe and effective.

In addition, the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans, impact the revenues a product can generate.

Consequently, the eventual realized value, if any, of these acquired IPR&D projects may vary from their estimated fair values.

Summaries of intangible assets balances as of December 31, 2023 and 2022 were as follows:

Weighted-Average Amortization Period

(in thousands)

In-process research & development

Laboratory services:

Royalty-free technology

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Purchased patent, net

Therapeutic development:

In-process research & development

Total intangible assets, net

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

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:

(in thousands)

Balance as of January 1,

Accumulated impairment losses

Goodwill acquired during year

Inform Diagnostics

Fulgent Pharma

FF Gene Biotech

Net exchange differences

FF Gene Biotech

Balance as of December 31,

Accumulated impairment losses

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 the acquisition of Fulgent Pharma in 2022 and has an indefinite life until research 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.

Amortization of intangible assets was $ 7.8 million and $ 6.5 million in 2023 and 2022, respectively.

Based on the carrying value of intangible assets recorded as of December 31, 2023, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for intangible assets is expected to be as follows:

(in thousands)

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.

“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

(dollars in thousands, except per share data)

Statement of Operations Data:

Cost of revenue

Operating expenses:

Research and development

Selling and marketing

General and administrative

Amortization of intangible assets

Restructuring costs

Total operating expenses

Operating (loss) income

Interest and other income (expense), net

(Loss) income before income taxes and gain on equity method investment

(Benefit from) provision for income taxes

(Loss) income before gain on equity method investment

Gain on equity method investment

Net (loss) income from consolidated operations

Net loss attributable to noncontrolling interests

Net (loss) income attributable to Fulgent

Net (loss) income per common share attributable to Fulgent:

Subsequent Event

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures