Fulgent Genetics, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2023. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2023. Internal Control over Financial Reporting Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting during the year ended December 31, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 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. Management reviewed the results of its assessment with our Audit and Compliance Committee. The effectiveness of our internal control over financial reporting as of December 31, 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. Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of these inherent limitations, our disclosure and internal controls may not prevent or detect all instances of fraud, misstatements or other control issues. In addition, projections of any evaluation of the effectiveness of disclosure or internal controls to future periods are subject to risks, including, among others, that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Fulgent Genetics, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Fulgent Genetics, Inc. and subsidiaries (the “Company”) as of December 31, 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, 86 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. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Los Angeles, California February 28, 2024 Item 9B. 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. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. None 87 PART III Item 10. Directors, Executive Off icers and Corporate Governance. The information required by this item is incorporated by reference to the definitive proxy statement for our 2024 annual meeting of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2023. Item 11. Executiv e Compensation. The information required by this item is incorporated by reference to the definitive proxy statement for our 2024 annual meeting of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2023. Item 12. Security Ownership of Certain Beneficial Own ers and Management and Related Stockholder Matters. The information required by this item is incorporated by reference to the definitive proxy statement for our 2024 annual meeting of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2023. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item is incorporated by reference to the definitive proxy statement for our 2024 annual meeting of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2023. Item 14. Principal Accou nting Fees and Services. The information required by this item is incorporated by reference to the definitive proxy statement for our 2024 annual meeting of stockholders or an amendment to this report, in either case to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2023. 88 PART IV Item 15. Exhibits and Financ ial Statement Schedules. (a)(1) Consolidated Financial Statements. The following financial statements are included immediately following the signature page hereof and are filed as part of this report: Report of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) F- 2 Consolidated Balance Sheets as of December 31, 2023 and 2022 F- 5 Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022 and 2021 F- 6 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023, 2022 and 2021 F- 7 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023, 2022 and 202 1 F- 8 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021 F- 9 Notes to Consolidated Financial Statements F- 10 (a)(2) Financial Statement Schedules. All financial statement schedules have been omitted, as they are not required, not applicable, or the required information is otherwise included. (a)(3) Exhibits. The information required by this Item 15(a)(3) is set forth on the Exhibit Index immediately preceding the signature page of this report and is incorporated herein by reference. Item 16. Form 10-K Summary. None. 89 EXHIBIT INDEX Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith 2.1 Agreement and Plan of Merger, dated September 16, 2016, by and among the registrant, Fulgent MergerSub, LLC and Fulgent Therapeutics LLC. S-1/A 333-213469 2.1 9/19/2016 3.1 Certificate of Incorporation of the registrant, dated May 13, 2016. 10-Q 001-37894 3.1 8/14/2017 3.1.1 Certificate of Amendment to Certificate of Incorporation of the registrant, dated August 2, 2016. 10-Q 001-37894 3.1.1 8/14/2017 3.1.2 Certificate of Amendment to Certificate of Incorporation of the registrant, dated May 17, 2017. 10-Q 001-37894 3.1.2 8/14/2017 3.2 Amended and Restated Bylaws. 10-Q 001-37894 3.2 8/4/2023 4.1 Form of Certificate of Common Stock of the registrant. S-1/A 333-213469 4.1 9/19/2016 4.2 Description of the registrant’s securities. X 10.1# Form of Indemnification Agreement between the registrant and each of its officers and directors. S-1 333-213469 10.1 9/2/2016 10.2# Amended and Restated 2015 Equity Incentive Plan of Fulgent Therapeutics LLC. S-1 333-213469 10.2 9/2/2016 10.3# Form of Notice of Option Grant and Option Agreement under the Amended and Restated 2015 Equity Incentive Plan of Fulgent Therapeutics LLC. S-1 333-213469 10.3 9/2/2016 10.4# Form of Notice of Profits Interest Grant and Profits Interest Agreement under the Amended and Restated 2015 Equity Incentive Plan of Fulgent Therapeutics LLC. S-1 333-213469 10.4 9/2/2016 10.5# Form of Notice of Restricted Share Unit Grant and Restricted Share Unit Agreement under the Amended and Restated 2015 Equity Incentive Plan of Fulgent Therapeutics LLC. S-1 333-213469 10.5 9/2/2016 10.6# 2016 Omnibus Incentive Plan of the registrant. S-1/A 333-213469 10.6 9/26/2016 10.7# Form of Notice of Stock Option Award and Stock Option Award Agreement under the 2016 Omnibus Incentive Plan of the registrant. S-1 333-213469 10.7 9/2/2016 10.8# Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement under the 2016 Omnibus Incentive Plan of the registrant. 10-K 001-37894 10.8 3/17/2017 10.9# Form of Option Substitution Award under the 2016 Omnibus Incentive Plan of the registrant. S-1 333-213469 10.9 9/2/2016 10.10# Form of Notice of Restricted Stock Unit Substitution Award and Restricted Stock Unit Agreement under the 2016 Omnibus Incentive Plan of the registrant. S-1 333-213469 10.10 9/2/2016 10.11# Employment Agreement, dated May 25, 2016, by and among Fulgent Therapeutics LLC, the registrant and Ming Hsieh. S-1 333-213469 10.11 9/2/2016 10.12# Employment Agreement, dated May 25, 2016, by and among Fulgent Therapeutics LLC, the registrant and Paul Kim. S-1 333-213469 10.12 9/2/2016 10.13# Amended and Restated Employment Agreement, dated May 25, 2016, by and among Fulgent Therapeutics LLC, the registrant and Han Lin Gao. S-1 333-213469 10.13 9/2/2016 10.14# Severance Agreement, dated July 7, 2016, by and among Fulgent Therapeutics LLC, the registrant and Ming Hsieh. S-1 333-213469 10.14 9/2/2016 10.15# Severance Agreement, dated July 7, 2016, by and among Fulgent Therapeutics LLC, the registrant and Paul Kim. S-1 333-213469 10.15 9/2/2016 10.16# Severance Agreement, dated July 7, 2016, by and among Fulgent Therapeutics LLC, the registrant and Han Lin Gao. S-1 333-213469 10.16 9/2/2016 10.17 Contribution and Allocation Agreement, dated May 19, 2016, by and among Fulgent Therapeutics LLC, Fulgent Pharma LLC and Ming Hsieh. S-1 333-213469 10.17 9/2/2016 10.18 Form of Fourth Amended and Restated Operating Agreement of Fulgent Therapeutics LLC, to be in effect upon completion of the Reorganization. S-1/A 333-213469 2.1 9/19/2016 10.20 Director Compensation Program of the registrant, effective as of September 28, 2016 and amended November 2, 2017. 10-K 001-37894 10.20 3/20/2018 90 Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith 10.21§ Cooperation Agreement on the Establishment of Fujian Fujun Gene Biotech Co., Ltd., dated April 25, 2017, by and among Shenzhen Fujin Gene Science & Technology Co., Ltd., Xilong Scientific Co., Ltd. and Fuzhou Jinqiang Investment Partnership (LP). 10-Q 001-37894 10.1 8/14/2017 10.22 Equity Distribution Agreement, dated August 30, 2019, by and between Fulgent Genetics, Inc. and Piper Jaffray & Co. 8-K 001-37894 1.1 8/30/2019 10.23 Purchase Agreement, dated as of November 13, 2019, by and between Fulgent Genetics, Inc. and Piper Jaffray & Co. 8-K 001-37894 1.1 11/14/2019 10.24 Amendment No. 1 to Equity Distribution Agreement, dated August 4, 2020, by and between Fulgent Genetics, Inc. and Piper Sandler & Co. 8-K 001-37894 1.1 8/5/2020 10.25 Equity Distribution Agreement, dated as of September 24, 2020, by and between Fulgent Genetics, Inc. and Piper Sandler & Co. 8-K 001-37894 1.1 9/25/2020 10.26 Equity Distribution Agreement, dated as of November 20, 2020, by and between Fulgent Genetics, Inc. and Piper Sandler & Co., BTIG, LLC, and Oppenheimer & Co. Inc. 8-K 001-37894 1.1 11/20/2020 10.27 Fulgent Genetics, Inc. Amended and Restated 2016 Omnibus Incentive Plan 8-K 001-37894 10.1 5/21/2018 10.28 Fulgent Genetics, Inc. Amended and Restated 2016 Omnibus Incentive Plan 8-K 001-37894 10.1 9/18/2020 10.29^ Agreement for Purchase and Sale of Property, dated July 23, 2020 8-K 001-37894 2.1 10/21/2020 10.30^ Aircraft Purchase Agreement, dated August 18, 2020, by and between ServiceMaster Acceptance Corporation and the Company 10-Q 001-37894 10.2 11/9/2020 10.31# Employment Agreement, dated March 8, 2021, by and among Fulgent Therapeutics, LLC, Fulgent Genetics, Inc. and Jian Xie. 10-K 001-37894 10.37 3/8/2021 10.32# Severance Agreement, dated March 8, 2021, by and among Fulgent Therapeutics LLC, Fulgent Genetics, Inc. and Jian Xie. 10-K 001-37894 10.38 3/8/2021 10.33#^ Amended and Restated Non-Employee Director Compensation Policy. 10-Q 001-37894 10.1 5/7/2021 10.34§ Restructuring Agreement of Fujian Fujun Gene Biotech Co., Ltd. 10-Q 001-37894 10.1 8/10/2021 10.35^ Amended and Restated Commercial Lease Agreement, dated May 6, 2016, by and between Store Master Funding IX, LLC and Cytometry Specialists, Inc. 10-K 001-37894 10.41 2/28/2022 10.36# Fulgent Genetics, Inc. Incentive Compensation Recoupment Policy. 8-K 001-37894 10.1 3/29/2022 10.37 Agreement and Plan of Merger by and among Fulgent Therapeutics LLC, solely for purpose of Section 6.20, Fulgent Genetics, Inc., Ducks Acquisition Sub, Inc., Symphony Buyer, Inc., solely in its capacity as the representative of Symphony’s securityholders, Avista Capital Partners IV GP, L.P. and solely for purposes of Section 6.21, Article VIII and Section 10.14, those company stockholders set forth on the signature page thereto, dated as of April 16, 2022. 8-K 001-37894 2.1 4/26/2022 10.38# Amended and Restated Non-Employee Director Compensation Policy, dated as of August 1, 2022. 10-Q 001-37894 10.1 11/7/2022 10.39# Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement under the Fulgent Pharma Holdings, Inc. 2022 Omnibus Incentive Plan 10-Q 001-37894 10.2 11/7/2022 10.40^ Agreement and Plan of Merger, by and among Fulgent Genetics, FG Merger Sub, Inc., Fulgent Pharma Holdings, Inc. and solely for purposes of Section 2.4, Section 5.5, Article VI, Section 7.8 and Section 7.14, those company stockholders set forth on the signature page thereto, dated November 7, 2022 10-Q 001-37894 10.3 11/7/2022 91 Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith 10.41 Rule 10b5-1 Issuer Repurchase Plan, by and between Fulgent Genetics, Inc. and Piper Sandler & Co., dated December 12, 2023 X 10.42^ Commercial Lease Agreement, dated October 20, 2008, by and between Inform Diagnostics, Inc. and iSTAR CTL I, L.P. 10-K 001-37894 10.48 2/28/2023 10.43 Commercial Lease Amendment (I), dated December 30, 2013, by and between Inform Diagnostics, Inc. and LC Med Property TT, LLC 10-K 001-37894 10.49 2/28/2023 10.44^ Commercial Lease Amendment (II), dated February 3, 2014, by and between Inform Diagnostics, Inc. and LC Med Property TT, LLC 10-K 001-37894 10.50 2/28/2023 10.45 Commercial Lease Agreement by and between Inform Diagnostics and Crawford Street DE, LLC 10-K 001-37894 10.51 2/28/2023 10.46# 2022 Fulgent Pharma Holdings, Inc. Omnibus Incentive Plan 10-K 001-37894 10.52 2/28/2023 10.47*^# Amended and Restated Non-Employee Director Compensation Policy, dated as of February 23, 2023. 10-Q 001-37894 10.1 5/5/2023 10.48 Executive Officer Incentive Plan 10-Q 001-37894 10.3 5/5/2023 10.49 Amended and Restated 2016 Omnibus Incentive Plan of the registrant 8-K 001-37894 10.1 5//18/2023 10.50^# Amended and Restated Executive Officer Incentive Plan 10-Q 001-37894 10.2 11/3/2023 21.1 Subsidiaries of the registrant. X 23.1 Consent of Deloitte & Touche LLP, independent registered public accounting firm, relating to the financial statements of the registrant. X 24.1 Power of Attorney (included on the signature page hereto) X 31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1* Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 97.1^# Amended and Restated Incentive Compensation Recoupment Policy 10-Q 001-37894 10.1 11/3/2023 101.INS Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. X 101.SCH Inline XBRL Taxonomy Extension Schema Document X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document X 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) X * This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation by reference language in such filing. # Management contract or compensatory plan, contract or arrangement. 92 § Confidential treatment has been granted with respect to portions of this exhibit pursuant to Rule 24b-2 under the Exchange Act, and these confidential portions have been redacted from the version of this agreement that is incorporated by reference in this report. A complete copy of this exhibit, including the redacted portions, has been separately furnished to the SEC. ^ Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplementally a copy of any omitted exhibit or schedule upon request by the SEC. 93 SIGNAT URES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FULGENT GENETICS, INC. Date: February 28, 2024 By: /s/ Ming Hsieh Ming Hsieh Chief Executive Officer POWER OF ATTORNEY IN WITNESS WHEREOF, each person whose signature appears below constitutes and appoints Ming Hsieh and Paul Kim as his 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. Name and Signature Title Date /s/ Ming Hsieh Chief Executive Officer and Chairman of the Board February 28, 2024 Ming Hsieh (principal executive officer) /s/ Paul Kim Chief Financial Officer February 28, 2024 Paul Kim (principal financial and accounting officer) /s/ Michael Nohaile Director February 28, 2024 Michael Nohaile /s/ Regina Groves Director February 28, 2024 Regina Groves /s/ Linda Marsh Director February 28, 2024 Linda Marsh 94 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 34) F- 2 Consolidated Balance Sheets as of December 31, 2023 and 2022 F- 5 Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022 and 2021 F- 6 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023, 2022 and 2021 F- 7 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021 F- 8 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021 F- 9 Notes to Consolidated Financial Statements F- 10 F- 1 REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM 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, 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. 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 These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Goodwill—Laboratory Services and Therapeutic Development Reporting Units—Refer to Notes 2 and 17 to the financial statements Critical Audit Matter Description 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. F- 2 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 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 the forecasts of future revenues, timing of commercial success, and selection of the discount rates for IPR&D included the following, among others: F- 3 • 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 Los Angeles, California February 28, 2024 F- 4 CONSOLIDATED FINANCIAL STATEMENTS FULGENT GENETICS, INC. Consolidated Balance Sheets (in thousands, except par value data) December 31, 2023 2022 Assets Current assets Cash and cash equivalents $ 97,473 $ 79,506 Marketable securities 326,681 446,729 Trade accounts receivable, net of allowance for credit losses of $ 25,226 and $ 41,205 51,132 52,749 Other current assets 32,559 48,889 Total current assets 507,845 627,873 Marketable securities, long-term 423,571 326,648 Redeemable preferred stock investment 20,438 12,385 Fixed assets, net 83,464 81,353 Intangible assets, net 143,053 150,643 Goodwill, net 22,055 143,027 Other long-term assets 34,902 44,124 Total assets $ 1,235,328 $ 1,386,053 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 15,360 $ 23,093 Accrued liabilities 30,737 24,981 Contract liabilities 2,874 3,199 Customer deposit 22,700 10,895 Investment margin loan — 14,999 Notes payable, current portion 1,183 5,639 Other current liabilities 164 5,301 Total current liabilities 73,018 88,107 Unrecognized tax benefits 5,978 9,836 Deferred tax liabilities 7,962 — Other long-term liabilities 15,084 18,235 Total liabilities 102,042 116,178 Commitments and contingencies (Note 8) 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 3 3 Preferred stock, $ 0.0001 par value per share, 1,000 shares authorized, no shares issued or outstanding — Additional paid-in capital 501,718 486,585 Accumulated other comprehensive income (loss) 1,205 ( 20,903 ) Retained earnings 633,175 801,000 Total Fulgent stockholders' equity 1,136,101 1,266,685 Noncontrolling interest ( 2,815 ) 3,190 Total stockholders’ equity 1,133,286 1,269,875 Total liabilities and stockholders’ equity $ 1,235,328 $ 1,386,053 The accompanying notes are an integral part of these consolidated financial statements. F- 5 CONSOLIDATED FINANCIAL STATEMENTS FULGENT GENETICS, INC. Consolidated Statem ents of Operations (in thousands, except per share) Year Ended December 31, 2023 2022 2021 Revenue $ 289,213 $ 618,968 $ 992,584 Cost of revenue 184,757 252,067 215,533 Gross profit 104,456 366,901 777,051 Operating expenses: Research and development 41,440 28,910 24,219 Selling and marketing 41,467 38,918 24,439 General and administrative 88,999 111,074 50,732 Amortization of intangible assets 7,845 6,497 1,708 Goodwill impairment loss 120,234 — — Restructuring costs — 2,975 — Total operating expenses 299,985 188,374 101,098 Operating (loss) income ( 195,529 ) 178,527 675,953 Interest and other income, net 21,444 5,498 1,347 (Loss) income before income taxes and gain on equity-method investments ( 174,085 ) 184,025 677,300 Provision for income taxes 1,154 42,102 174,795 (Loss) income before gain on equity-method investments ( 175,239 ) 141,923 502,505 Gain on equity-method investments — — 3,734 Net (loss) income from consolidated operations ( 175,239 ) 141,923 506,239 Net loss attributable to noncontrolling interests 7,414 1,480 1,125 Net (loss) income attributable to Fulgent $ ( 167,825 ) $ 143,403 $ 507,364 Net (loss) income per common share attributable to Fulgent: Basic $ ( 5.63 ) $ 4.76 $ 17.25 Diluted $ ( 5.63 ) $ 4.63 $ 16.38 Weighted-average common shares: Basic 29,784 30,097 29,408 Diluted 29,784 30,964 30,976 The accompanying notes are an integral part of these consolidated financial statements. F- 6 FULGENT GENETICS, INC. Consolidated Statements of Comprehensive Income (Loss) (in thousands) Year Ended December 31, 2023 2022 2021 Net (loss) income from consolidated operations $ ( 175,239 ) $ 141,923 $ 506,239 Other comprehensive income (loss): Foreign currency translation (loss) gain ( 1,200 ) ( 2,665 ) 456 Net gain (loss) on available-for-sale debt securities, net of tax 24,717 ( 19,940 ) ( 1,548 ) Comprehensive (loss) income from consolidated operations ( 151,722 ) 119,318 505,147 Net loss attributable to noncontrolling interest 7,414 1,480 1,125 Foreign currency translation (gain) loss attributable to noncontrolling interest ( 1,409 ) 2,461 ( 105 ) Comprehensive loss attributable to noncontrolling interest 6,005 3,941 1,020 Comprehensive (loss) income attributable to Fulgent $ ( 145,717 ) $ 123,259 $ 506,167 The accompanying notes are an integral part of these consolidated financial statements. F- 7 FULGENT GENETICS, INC. Consolidated Statement s of Stockholders’ Equity (in thousands) Fulgent Stockholders’ Equity Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Accumulated Deficit) Fulgent Stockholders’ Equity Noncontrolling Interest Total Equity Balance at January 1, 2021 28,178 $ 3 $ 418,065 $ 438 $ 150,881 $ 569,387 — $ 569,387 Equity-based compensation — — 15,882 — — 15,882 — 15,882 Exercise of common stock options 76 — 86 — — 86 — 86 Restricted stock awards 836 — — — — — — — Issuance of common stock at an average of $ 64.83 per share, net 1,111 — 72,030 — — 72,030 — 72,030 Common stock withholding for employee tax obligations ( 41 ) — ( 4,155 ) — — ( 4,155 ) — ( 4,155 ) Cumulative effect of accounting change — — — — ( 887 ) ( 887 ) — ( 887 ) Cumulative tax effect of accounting change — — — — 239 239 — 239 Noncontrolling interest assumed related to acquisitions — — — — — — 8,151 8,151 Other comprehensive income (loss), net — — — ( 1,197 ) — ( 1,197 ) 105 ( 1,092 ) Net income (loss) — — — — 507,364 507,364 ( 1,125 ) 506,239 Balance at December 31, 2021 30,160 3 501,908 ( 759 ) 657,597 1,158,749 7,131 1,165,880 Equity-based compensation — — 32,640 — — 32,640 — 32,640 Exercise of common stock options 5 — 31 — — 31 — 31 Restricted stock awards 699 — — — — — — — Common stock withholding for employee tax obligations ( 32 ) — ( 1,768 ) — — ( 1,768 ) — ( 1,768 ) Repurchase of common stock ( 1,810 ) — ( 74,337 ) — — ( 74,337 ) — ( 74,337 ) Common stock issued in a business combination (1) 416 — 28,111 — — 28,111 — 28,111 Other comprehensive loss, net — — — ( 20,144 ) — ( 20,144 ) ( 2,461 ) ( 22,605 ) Net income (loss) — — — — 143,403 143,403 ( 1,480 ) 141,923 Balance at December 31, 2022 29,438 3 486,585 ( 20,903 ) 801,000 1,266,685 3,190 1,269,875 Equity-based compensation — — 42,922 — — 42,922 — 42,922 Exercise of common stock options 9 — 3 — — 3 — 3 Restricted stock awards 1,066 — — — — — — — Common stock withholding for employee tax obligations ( 93 ) — ( 2,732 ) — — ( 2,732 ) — ( 2,732 ) Repurchase of common stock ( 953 ) — ( 25,060 ) — — ( 25,060 ) — ( 25,060 ) Common stock issued in a business combination (1) 186 — — — — — — — Other comprehensive income, net — — — 22,108 — 22,108 1,409 23,517 Net loss — — — — ( 167,825 ) ( 167,825 ) ( 7,414 ) ( 175,239 ) Balance at December 31, 2023 29,653 $ 3 $ 501,718 $ 1,205 $ 633,175 $ 1,136,101 $ ( 2,815 ) $ 1,133,286 (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. F- 8 FULGENT GENETICS, INC. Consolidated Statem ents of Cash Flows (in thousands) Year Ended December 31, 2023 2022 2021 Cash flow from operating activities: Net (loss) income from consolidated operations $ ( 175,239 ) $ 141,923 $ 506,239 Adjustments to reconcile net income to net cash provided by operating activities: Goodwill impairment loss 120,234 — — Equity-based compensation 42,922 32,640 15,882 Depreciation and amortization 26,143 32,662 11,004 Provision (gain) for credit losses ( 880 ) 32,596 8,931 Noncash lease expense 6,412 4,913 1,154 Loss on disposal of fixed asset 305 502 850 Amortization (Discount) of premium of marketable securities ( 3,911 ) 4,767 7,596 Deferred taxes 11,466 ( 8,280 ) ( 8,188 ) Unrecognized tax benefits ( 3,858 ) 9,111 348 Net loss on marketable securities 589 692 1,186 Gain in equity-method investments — — ( 3,734 ) Other ( 21 ) ( 11 ) ( 15 ) Changes in operating assets and liabilities: Trade accounts receivable 2,388 68,638 42,300 Other current and long-term assets ( 572 ) ( 4,337 ) 7,804 Accounts payable ( 6,896 ) ( 25,339 ) ( 12,206 ) Accrued liabilities and other liabilities 14,208 ( 31,299 ) 13,081 Income tax payable — ( 827 ) ( 52,532 ) Operating and finance lease liabilities ( 6,287 ) ( 4,831 ) ( 1,123 ) Net cash provided by operating activities 27,003 253,520 538,577 Cash flow from investing activities: Purchases of fixed assets ( 22,207 ) ( 18,775 ) ( 23,812 ) Purchases of intangible assets — — ( 32 ) Proceeds from sale of fixed assets 775 412 63 Purchase of marketable securities ( 491,914 ) ( 417,982 ) ( 710,490 ) Purchase of preferred stock of privately held company — ( 15,000 ) — Contingent consideration payout related to a business acquisition — ( 10,000 ) — Purchase of redeemable preferred stock — — ( 20,000 ) Maturities of marketable securities 508,558 232,534 83,842 Proceeds from sale of marketable securities 44,085 140,176 185,749 Acquisition of businesses, net of cash acquired ( 399 ) ( 172,679 ) ( 61,868 ) Net cash provided by (used in) investing activities 38,898 ( 261,314 ) ( 546,548 ) Cash flow from financing activities: Repurchase of common stock ( 25,060 ) ( 74,337 ) — Common stock withholding for employee tax obligations ( 2,732 ) ( 1,768 ) ( 4,155 ) Proceeds from public offerings of common stock, net of issuance costs — — 89,475 Proceeds from noncontrolling interest — — 10 Proceeds from exercise of stock options 3 31 86 Principal paid for finance leases ( 730 ) ( 700 ) ( 7 ) Repayment of notes payable ( 4,266 ) ( 367 ) ( 4 ) Re-payment for the margin account ( 15,000 ) — — Net cash (used in) provided by financing activities ( 47,785 ) ( 77,141 ) 85,405 Effect of exchange rate changes on cash and cash equivalents ( 149 ) ( 453 ) 34 Net increase (decrease) in cash and cash equivalents 17,967 ( 85,388 ) 77,468 Cash and cash equivalents at beginning of period 79,506 164,894 87,426 Cash and cash equivalents at end of period $ 97,473 $ 79,506 $ 164,894 Supplemental disclosures of cash flow information: Income taxes paid $ 3,261 $ 56,193 $ 237,069 Cash paid for interest $ 960 $ — $ — Supplemental disclosures of non-cash investing and financing activities: Stock consideration in a business combination $ — $ 28,111 $ — Maturities of marketable securities in other current assets $ — $ 19,120 $ — Purchases of fixed assets in notes payable $ — $ 3,833 $ — Purchases of fixed assets in accounts payable $ 1,799 $ 2,989 $ 1,075 Finance lease right-of-use assets obtained in exchange for lease liabilities $ — $ 573 $ 1,693 Operating lease right-of-use assets reduced due to lease modification or termination $ 142 $ 66 $ 399 Operating lease right-of-use assets obtained in exchange for lease liabilities $ 2,661 $ 52 $ 1,797 Finance lease right-of-use assets reduced due to lease modification or termination $ 696 $ — $ — Contingent consideration for business acquisition included in current liabilities $ — $ — $ 10,000 Public offerings costs included in accounts payable $ — $ — $ 5 The accompanying notes are an integral part of these consolidated financial statements. F- 9 FULGENT GENETICS, INC. Notes to Consolidated Financial Statements Note 1. Overview and Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. These financial statements include the assets, liabilities, revenues and expenses of all subsidiaries and entities in which the Company has a controlling financial interest or is deemed to be the primary beneficiary. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company uses the equity method to account for its investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. All intercompany accounts and transactions are eliminated from the accompanying consolidated financial statements. Nature of the Business Fulgent Genetics, Inc., together with its subsidiaries and affiliated professional corporations, or PCs (collectively referred to as the Company, unless otherwise noted or the context otherwise requires), is a technology-based company with a well-established 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. The Company aims to transform from a genomic diagnostic business into a fully integrated precision medicine company. Note 2. Summary of Significant Accounting Policies Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, judgments and assumptions are based on historical data and experience available at the date of the accompanying consolidated financial statements, as well as various other factors management believes to be reasonable under the circumstances. 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 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. All intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include cash held in banks and money market accounts. Cash equivalents are stated at fair value. Marketable Securities All marketable debt securities, which consist of U.S. government and agency debt securities, U.S. 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 F- 10 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. The amortized cost of marketable debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest on marketable debt securities is included in interest and other income, net. In accordance with the Company’s investment policy, management invests to diversify credit risk and only invests in securities with high credit quality, including U.S. government securities. The Company’s investments in marketable equity securities are measured at fair value with the related gains and losses, realized and unrealized, recognized in interest and other income, net, in the accompanying Consolidated Statements of Operations. The cost of any marketable equity securities sold is based on the specific-identification method. For available-for-sale debt securities, in an unrealized loss, the Company determines whether a credit loss exists. The credit loss is estimated by considering available information relevant to the collectability of the security and information about past events, current conditions, and reasonable and supportable forecasts. The Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows to be collected is less than the amortized basis of the security, a credit loss exists, and an allowance for credit losses is recorded for the credit loss, limited by the amount of unrealized loss. Changes in the allowance are recorded in the period of changes as credit loss expense. If the Company has an intent to sell, or if it is more likely than not that the Company will be required to sell a debt security in an unrealized loss position before recovery of its amortized cost basis, the Company will write down the security to its fair value and record the corresponding charge as a component of interest and other income, net. Trade Accounts Receivable and Allowance for Credit Losses Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains an allowance for credit losses for expected uncollectible trade accounts receivable, which is recorded as an offset to trade accounts receivable, and changes in allowance for credit losses are classified as a general and administrative expense in the accompanying Consolidated Statements of Operations. 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 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 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: December 31, 2023 2022 2021 (in thousands) Allowance for credit losses at beginning of year $ 41,205 $ 11,217 $ 1,898 Impact of ASU 2016-13 adoption — — 887 Current period (gain) provision ( 880 ) 32,596 8,931 Write-downs ( 15,099 ) ( 2,608 ) ( 499 ) Allowance for credit losses at end of year $ 25,226 $ 41,205 $ 11,217 Redeemable Preferred Stock Investment 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 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. F- 11 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 Fixed assets are recorded at cost, net of accumulated depreciation and amortization. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the shorter of their expected lives or the applicable lease term, including renewal options, if available. Major replacements and improvements are capitalized, while general repairs and maintenance are expensed as incurred. See Note 5, Fixed Assets , for useful lives for each major class of fixed assets. 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 three to fourteen years . See Note 17, Goodwill and Intangible Assets , for details of intangible assets. Impairment of Long-Lived Assets The Company evaluates the carrying amount of its long-lived assets whenever events or changes in circumstances indicate that the assets may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of an asset and its eventual disposition is less than the carrying amount of the asset. 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. F- 12 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 The Company maintains reagents and other consumables primarily used in testing which are valued at the lower of cost or net realizable value. Cost is determined using actual costs on a first-in, first-out basis. The reagents and other consumables were included in other current assets in the accompanying Consolidated Balance Sheets. Fair Value of Financial Instruments The Company’s financial instruments consist principally of cash and cash equivalents, marketable securities, trade accounts receivable, redeemable preferred stock investment, accounts payable, accrued liabilities, investment margin loan, and contingent consideration. The carrying amounts of certain of these financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, investment margin loan, and contingent consideration approximate fair value due to their short maturities. Fair value of marketable securities and redeemable preferred stock investment is disclosed in Note 4, Fair Value 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, 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. 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 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. Equity Method Investments The Company uses the equity method to account for investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. 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, F- 13 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. Leases The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Operating and finance lease right-of-use assets, or ROU assets, short-term lease liabilities, and long-term lease liabilities are included in other long-term assets, accrued liabilities, and other long-term liabilities, respectively, in the accompanying Consolidated Balance Sheets. Lease ROU assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, including options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company uses its incremental borrowing rate based on the information available at the commencement date, including inquiries with its bank, in determining the present value of lease payments when its leases do not provide an implicit or explicit rate. Lease ROU assets consist of initial measurement of lease liabilities, any lease payments made to lessor on or before the lease commencement date, minus any lease incentive received, and any initial direct 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 Operations. Lease ROU assets and liabilities arising from business combinations are recognized and measured at the acquisition dates as if an acquired lease were a new lease at the date of acquisition using the Company’s incremental borrowing rate unless the discount rate is implicit in the lease. The Company elects to not to recognize assets or liabilities as of the acquisition dates for leases that, on the acquisition dates, have a remaining lease term of 12 months or less. The Company also retains the acquirees’ classification of the leases if there are no modifications as part of the business combinations. The Company leases out space in buildings it owns to third-party tenants or subtenants under noncancelable operating leases. The Company recognizes lease payments as income over the lease terms on a straight-line basis and recognizes variable lease payments as income in the period in which the changes in facts and circumstances on which the variable lease payments are based occur. The net rental income is included in the interest and other income, net, in the accompanying Consolidated Statements of Operations. Software for Internal Use The Company capitalizes certain costs incurred to purchase computer software for internal use. These costs include purchased software packages for Company use. Capitalized computer software costs are amortized over the estimated useful life of the computer software, which is generally one to five years . Internally developed software costs are capitalized after management has committed to funding the project, it is probable that the project will be completed and the software will be used for its intended function. Costs that do not meet that criteria and costs incurred on projects in the preliminary and post-implementation phases are expensed as incurred. 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 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 . F- 14 Revenue Recognition The Company generates revenue from sales of its testing services. The Company currently receives payments from primarily three different customer types: 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 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 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 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. Insurance The Company’s insurance contracts for testing services typically have a single performance obligation to deliver testing services to the ordering facility or patient. For most of the Company’s insurance revenue, 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, therefore estimation of the transaction price is considered variable consideration. In developing the estimate of variable consideration, the Company utilizes the expected value method under a portfolio approach. 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 Operations. Historically contract costs have not been significant to the financial statements. Significant Judgments and Contract Estimates Accounting for insurance contracts includes estimation of the transaction price, defined as the amount the Company expects to be entitled to receive in exchange for providing the services under the contract. Due to the Company’s out-of-network status with the majority of insurance payors for COVID-19 tests, estimation of the transaction price represents variable consideration. 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 F- 15 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 Contract liabilities are recorded when the Company receives payment or bills prior to completing its obligation to transfer goods or services to a customer, and the Company subsequently recognizes contract liabilities as revenue in the period in which the applicable revenue recognition criteria, as described above, are met. Customer Deposit Customer deposit in the accompanying Consolidated Balance Sheets consists of payments received from customers in excess of their outstanding trade accounts receivable balances. These deposits will be offset against future testing receivables or refunded to the customers. Overhead Expenses The Company allocates overhead expenses, such as 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. Cost of Revenue Cost of revenue reflects the aggregate costs incurred in delivering test results and consists of: personnel costs, including salaries, employee benefit costs, bonuses, and equity-based compensation expenses; costs of laboratory supplies; depreciation of laboratory equipment; amortization of leasehold and building improvements and allocated overhead. Costs associated with performing tests are recorded as tests are processed. Research and Development Expenses Research and development expenses represent costs incurred to develop the Company’s technology and future tests. These costs consist of: personnel costs, including salaries, employee benefit costs, bonuses, and equity-based compensation expenses; laboratory supplies; consulting costs and allocated overhead. The Company expenses all research and development costs in the periods in which they are incurred. Selling and Marketing Expenses Selling and marketing expenses consist of: personnel costs, including salaries, employee benefit costs, bonuses, and equity-based compensation expenses; customer service expenses; direct marketing expenses; educational and promotional expenses; market research and analysis and allocated overhead. The Company expenses all selling and marketing costs as incurred. General and Administrative Expenses General and administrative expenses include executive, finance and accounting, legal and human resources functions. These expenses consist of: personnel costs, including salaries, employee benefit costs, bonuses, and equity-based compensation expenses; audit and legal expenses; consulting costs and allocated overhead. The Company expenses all general and administrative expenses as incurred. F- 16 Restructuring Costs Restructuring costs represent one-time employee termination benefits provided to employees associated with a newly acquired entity that were involuntarily terminated. A plan of termination was approved and authorized by management in the second quarter of 2022. The plan identified specific employees to be terminated and established terms of benefits those employees would receive upon termination. No additional costs are expected to be incurred under the plan of termination post 2022, and the full amount was paid off by August 2023 . Income Taxes Income taxes are accounted for under the asset and liability method. The Company provides for federal, state and foreign income taxes currently payable, as well as for taxes deferred due to timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount with a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. For income tax positions where it is not more likely than not that a tax benefit will be sustained, the Company does not recognize a tax benefit in its consolidated financial statements. The Company records interest and penalties related to uncertain tax positions, if applicable, as a component of income tax expense. Equity-Based Compensation The Company grants various types of equity-based awards to its employees, consultants, and non-employee directors. Equity-based compensation costs are reflected in the accompanying Consolidated Statements of 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 The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation gain (loss) included in the accompanying Consolidated Statements of Comprehensive Income (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 Operations. Losses from foreign currency exchange were not significant in 2023, 2022 and 2021. Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of net unrealized gain or loss on available-for-sale debt securities, net of tax, and foreign currency translation adjustments from its subsidiaries not using the U.S. dollar as their functional currency. Reclassifications from other comprehensive income (loss) to net earnings were not significant in 2023 or 2022. The Company did not have reclassifications from other comprehensive income (loss) to net loss in 2021. 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. F- 17 Basic and Diluted Net Income or Loss per Share Basic net income or loss per common share is computed by dividing the net income or loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income or loss per common share is computed by dividing the net income or loss attributable to common stockholders by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. Disaggregation of Revenue The Company classifies its customers into three payor types: (i) Insurance, including claim reimbursement from HRSA for uninsured individuals, (ii) Institutional, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, or (iii) Patients who pay directly, as the Company believes this best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. The following table summarizes revenue from contracts with customers by payor type for the years ended December 31, 2023, 2022 and 2021. Year Ended December 31, 2023 2022 2021 (in thousands) Testing Services by payor Insurance $ 151,946 $ 377,873 $ 555,762 Institutional 134,191 239,961 435,688 Patient 3,076 1,134 1,134 Total Revenue $ 289,213 $ 618,968 $ 992,584 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. 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. Contract liabilities are recorded when the Company receives payment prior to completing its obligation to transfer goods or services to a customer. Contract liabilities are included in the Consolidated Balance Sheets. Revenues of $ 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 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. The Company applied the practical expedient to no t disclose the amount of transaction price allocated to unsatisfied performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less. The Company does not have material future obligations associated with COVID-19, molecular diagnostic or genetic testing services that extend beyond one year. F- 18 Recent Accounting Pronouncements The Company evaluates all ASUs issued by FASB for consideration of their applicability. ASUs not included in the Company’s disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s consolidated financial statements or disclosures. 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. F- 19 Note 3. Equity and Debt Securities The Company’s equity and debt securities consisted of the following: December 31, 2023 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Equity securities: Long-term Preferred stock of privately held company $ 15,000 $ — $ — $ 15,000 Total equity securities 15,000 — — 15,000 Available-for-sale debt securities Short-term U.S. government debt securities 119,739 8 ( 1,765 ) 117,982 U.S. agency debt securities 72,310 — ( 1,414 ) 70,896 U.S. treasury bills 69,214 36 — 69,250 Corporate debt securities 63,810 — ( 792 ) 63,018 Money market accounts 38,291 — — 38,291 Municipal bonds 5,557 1 ( 23 ) 5,535 Less: Cash equivalents ( 38,291 ) — — ( 38,291 ) Total debt securities due within 1 year 330,630 45 ( 3,994 ) 326,681 After 1 year through 5 years U.S. government debt securities 247,104 1,262 ( 578 ) 247,788 U.S. agency debt securities 156,150 161 ( 490 ) 155,821 Corporate debt securities 12,885 — ( 765 ) 12,120 Municipal bonds 6,337 2 ( 48 ) 6,291 Yankee debt securities 752 — ( 60 ) 692 Redeemable preferred stock investment 20,000 438 — 20,438 Total debt securities due after 1 year through 5 years 443,228 1,863 ( 1,941 ) 443,150 After 5 years through 10 years Municipal bonds 868 1 ( 10 ) 859 Total debt securities due after 5 years through 10 years 868 1 ( 10 ) 859 Total available-for-sale debt securities 774,726 1,909 ( 5,945 ) 770,690 Total equity and debt securities $ 789,726 $ 1,909 $ ( 5,945 ) $ 785,690 F- 20 December 31, 2022 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Equity securities: Long-term Preferred stock of privately held company $ 15,000 $ — $ — $ 15,000 Total equity securities 15,000 — — 15,000 Available-for-sale debt securities Short-term U.S. government debt securities 189,333 — ( 3,373 ) 185,960 Corporate debt securities 120,480 — ( 2,222 ) 118,258 U.S. treasury bills 69,991 — ( 193 ) 69,798 U.S. agency debt securities 68,411 — ( 342 ) 68,069 Money market accounts 27,455 — — 27,455 Municipal bonds 7,371 — ( 80 ) 7,291 Yankee debt securities 2,347 — ( 5 ) 2,342 Less: Cash equivalents ( 32,444 ) — — ( 32,444 ) Total debt securities due within 1 year 452,944 — ( 6,215 ) 446,729 After 1 year through 5 years U.S. government debt securities 152,435 2 ( 6,349 ) 146,088 U.S. agency debt securities 92,054 — ( 3,435 ) 88,619 Corporate debt securities 80,647 — ( 4,756 ) 75,891 Municipal bonds 12,065 — ( 217 ) 11,848 Yankee debt securities 753 — ( 85 ) 668 Redeemable preferred stock investment 20,000 — ( 7,615 ) 12,385 Total debt securities due after 1 year through 5 years 357,954 2 ( 22,457 ) 335,499 After 5 years through 10 years Municipal bonds 3,617 — ( 83 ) 3,534 Total debt securities due after 5 years through 10 years 3,617 — ( 83 ) 3,534 Total available-for-sale debt securities 814,515 2 ( 28,755 ) 785,762 Total equity and debt securities $ 829,515 $ 2 $ ( 28,755 ) $ 800,762 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. Note 4. Fair Value Measurements The authoritative guidance on fair value measurements establishes a framework with respect to measuring assets and liabilities at fair value on a recurring basis and non-recurring basis. Under the framework, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as of the measurement date. The framework also establishes a three-tier hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability and are developed based on the best information available in the circumstances. The hierarchy consists of the following three levels: Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Inputs are unobservable for the asset or liability. F- 21 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 Total Level 1 Level 2 Level 3 (in thousands) Equity securities, debt securities and cash equivalents: U.S. government debt securities $ 365,770 $ — $ 365,770 $ — U.S. agency debt securities 226,717 — 226,717 — Corporate debt securities 75,138 — 75,138 — U.S. treasury bills 69,250 69,250 — — Money market accounts 38,291 38,291 — — Redeemable preferred stock investment 20,438 — — 20,438 Preferred stock of privately held company 15,000 — — 15,000 Municipal bonds 12,685 — 12,685 — Yankee debt securities 692 — 692 — Total equity securities, debt securities and cash equivalents $ 823,981 $ 107,541 $ 681,002 $ 35,438 December 31, 2022 Total Level 1 Level 2 Level 3 (in thousands) Equity securities, debt securities and cash equivalents: U.S. government debt securities $ 332,048 $ — $ 332,048 $ — Corporate debt securities 194,149 — 194,149 — U.S. agency debt securities 156,688 — 156,688 — U.S. treasury bills 69,798 69,798 — — Money market accounts 27,455 27,455 — — Municipal bonds 22,673 — 22,673 — Preferred stock of privately held company 15,000 — — 15,000 Redeemable preferred stock investment 12,385 — — 12,385 Yankee debt securities 3,010 — 3,010 — Total equity securities, debt securities and cash equivalents $ 833,206 $ 97,253 $ 708,568 $ 27,385 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. government and U.S. agency debt securities, municipal bonds, corporate debt securities and Yankee debt securities. Level 2 securities are valued based upon observable inputs that include reported trades, broker/dealer quotes, bids and offers. As of December 31, 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. For the value of the investment in private equity securities, the Company elected to measure it at cost minus impairment, as the preferred stock of the privately held company did not have a readily determinable fair value, and no impairment loss was recorded as of December 31, 2023. There were no transfers between fair value measurement levels in 2023, 2022, and 2021. F- 22 Note 5. Fixed Assets Major classes of fixed assets consisted of the following: December 31, Useful Lives 2023 2022 (in thousands) Medical lab equipment 5 months to 10 Years $ 56,025 $ 53,503 Leasehold improvements Shorter of lease term or estimated useful life 11,222 11,804 Building 39 Years 9,781 6,731 Computer software 1 to 5 Years 7,982 6,982 Building improvements 6 months to 39 Years 7,748 5,865 Computer hardware 1 to 5 Years 6,805 6,979 Aircraft 7 Years 6,400 6,400 Furniture and fixtures 1 to 5 Years 3,860 4,248 Land improvements 5 to 15 Years 904 904 Automobile 2 to 5 Years 445 797 General equipment 3 to 5 Years 115 44 Land 8,800 7,500 Assets not yet placed in service 15,010 12,877 Total 135,097 124,634 Less: Accumulated depreciation ( 51,633 ) ( 43,281 ) Fixed assets, net $ 83,464 $ 81,353 Depreciation expense on fixed assets totaled $ 17.5 million , $ 25.5 million and $ 9.3 million for the years ended December 31, 2023, 2022 and 2021, respectively. Note 6. Other Significant Balance Sheet Accounts Other current assets consisted of the following: December 31, 2023 2022 (in thousands) Prepaid income taxes $ 12,675 $ 15,434 Prepaid expenses 7,744 6,814 Reagents and supplies 5,827 4,280 Marketable securities interest receivable 4,994 2,525 Other receivable 1,319 19,836 Total $ 32,559 $ 48,889 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: December 31, 2023 2022 (in thousands) Accrued legal liabilities $ 7,026 $ 1,276 Accrued bonus and commission 6,255 5,558 Payroll liabilities 5,741 6,667 Other accrued liabilities 4,215 2,134 Operating lease liabilities - short term 3,957 6,132 Vacation accrual 3,543 3,214 Total $ 30,737 $ 24,981 F- 23 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: December 31, 2023 2022 (in thousands) Operating lease liabilities, long term $ 7,147 $ 8,795 Other long-term liabilities 4,973 6,068 Notes payable, long term 2,964 3,372 Total $ 15,084 $ 18,235 Other long-term liabilities included long term finance lease liabilities and long-term liabilities assumed from a business combination in 2022. Note 7. 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, 2023 2022 2021 (in thousands) Revenue from services: Laboratory services: Precision diagnostics $ 131,990 $ 93,685 $ 82,565 Anatomic pathology 104,655 74,799 — COVID-19 27,152 437,507 899,699 BioPharma services 25,416 12,977 10,320 Total laboratory services 289,213 618,968 992,584 Therapeutic development — — — Total $ 289,213 $ 618,968 $ 992,584 Year Ended December 31, 2023 2022 2021 (in thousands) Operating (loss) income: Laboratory services $ ( 180,585 ) $ 179,343 $ 675,953 Therapeutic development ( 14,944 ) ( 816 ) — Total $ ( 195,529 ) $ 178,527 $ 675,953 F- 24 Year Ended December 31, 2023 2022 2021 (in thousands) Depreciation and amortization: Laboratory services $ 25,453 $ 32,557 $ 11,004 Therapeutic development 690 105 — Total $ 26,143 $ 32,662 $ 11,004 December 31, 2023 2022 (in thousands) Assets: Laboratory services $ 1,146,192 $ 1,292,821 Therapeutic development 89,136 93,232 Total $ 1,235,328 $ 1,386,053 Geographic distribution of revenue: Year Ended December 31, 2023 2022 2021 (in thousands) Revenue: United States $ 268,977 $ 603,148 $ 978,978 Foreign 20,236 15,820 13,606 Total $ 289,213 $ 618,968 $ 992,584 Geographic distribution of property, plant and equipment, net: December 31, 2023 2022 (in thousands) Fixed assets: Unites States $ 77,938 $ 72,617 Foreign 5,526 8,736 Total $ 83,464 $ 81,353 Note 8. Debt, Commitments and Contingencies Debt 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 %. The current portion and noncurrent portion are $ 408,000 and $ 3.0 million , respectively, and the noncurrent portion is included in the other long-term liabilities in the accompanying Consolidated Balance Sheets. The notes payable to Xilong Scientific is due on March 31, 2024, and the interest rate on the loan is 4.97 %. The related interest expenses in 2023, 2022 and 2021 were $ 37,000 , $ 304,000 , and $ 177,000 , respectively. The Company did no t have the installment sale contract in 2021. Operating and Finance Leases See Note 9, Leases , for further information. Purchase Obligations 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. F- 25 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 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. 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 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. Note 9. Leases Lessee 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 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; Phoenix, Arizona; Alpharetta, Georgia; and New York, New York. The operating and finance lease right-of-use asset, short-term lease liabilities, and long-term lease liabilities as of December 31, 2023, and 2022 were as follows: F- 26 December 31, 2023 2022 (in thousands) Operating lease ROU asset, net $ 10,838 $ 14,784 Operating lease liabilities, short term $ 3,957 $ 6,132 Operating lease liabilities, long term $ 7,147 $ 8,795 Finance lease ROU asset, net $ 1,316 $ 2,784 Finance lease liabilities, short term $ 544 $ 943 Finance lease liabilities, long term $ 760 $ 1,818 The following was operating and finance lease expense: Year Ended December 31, 2023 2022 2021 (in thousands) Operating lease cost $ 6,875 $ 5,429 $ 1,262 Finance lease cost: Amortization of ROU assets 758 683 7 Interest on lease liabilities 80 95 1 Short-term lease cost 1,758 1,528 296 Total lease cost $ 9,471 $ 7,735 $ 1,566 Supplemental information related to leases was the following: December 31, 2023 Weighted average remaining lease term - operating leases 4.37 years Weighted average discount rate - operating leases 4.02 % Weighted average remaining lease term -finance leases 2.66 years Weighted average discount rate - finance leases 3.74 % The following is a maturity analysis of operating and finance lease liabilities using undiscounted cash flows on an annual basis with renewal periods included: Operating Leases Financing Leases (in thousands) Year Ending December 31, 2024 $ 4,309 $ 532 2025 2,358 470 2026 1,782 366 2027 1,693 — 2028 550 — Thereafter 1,550 — Total lease payments 12,242 1,368 Less imputed interest ( 1,138 ) ( 64 ) Total $ 11,104 $ 1,304 Lessor The Company leases out space in buildings it owns to third-party tenants under noncancelable operating leases. As of December 31, 2023, the remaining lease term is 1 year, including renewal options and may include rent escalation clauses. Lease income F- 27 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 Operations. Total lease income was as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Lease income $ 154 $ 269 $ 413 Variable lease income 10 12 7 Total lease income $ 164 $ 281 $ 420 Future fixed lease payments from tenants for all noncancelable operating leases as of December 31, 2023 are as follows: Lease Payments from Tenants (in thousands) Year Ending December 31, 2024 $ 90 Total $ 90 Note 10. Equity-Based Compensation The Company has included equity-based compensation expense as part of cost of revenue and operating expenses in the accompanying Consolidated Statements of Operations as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Cost of revenue $ 9,749 $ 8,704 $ 3,563 Research and development 14,873 10,449 6,326 Selling and marketing 4,964 4,373 2,513 General and administrative 13,336 9,114 3,480 Total $ 42,922 $ 32,640 $ 15,882 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 F- 28 Option Awards 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: Number of Shares Subject to Options (in thousands) Weighted- Average Exercise Price Weighted- Average Grant Date Fair Value Weighted- Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) (1) Balance at December 31, 2020 287 $ 1.59 5.5 $ 14,484 Granted 5 $ 73.64 $ 56.34 Exercised ( 76 ) $ 1.13 $ 8.40 Canceled — $ — $ — Balance at December 31, 2021 216 $ 3.42 4.6 $ 20,965 Granted 10 $ 59.54 $ 44.56 Exercised ( 5 ) $ 7.16 $ 7.41 Canceled ( 9 ) $ 43.30 $ 33.53 Balance at December 31, 2022 212 $ 4.21 3.7 $ 5,420 Granted 20 $ 33.14 $ 24.85 Exercised ( 9 ) $ 0.38 $ 10.76 Canceled — $ — $ — Balance at December 31, 2023 223 $ 6.96 3.3 $ 4,906 Exercisable as of December 31, 2023 196 $ 2.40 2.5 (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. RSU Awards RSUs are awards that entitle the holder to receive shares of the Company’s common stock upon satisfaction of vesting conditions. Each RSU represents the contingent right to receive one share of the Company’s common stock upon vesting and settlement. 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: Number of Shares (in thousands) Weighted-Average Grant Date Fair Value Balance at December 31, 2020 2,085 $ 17.93 Granted 477 $ 95.33 Vested and settled ( 836 ) $ 15.43 Forfeited ( 107 ) $ 37.83 Balance at December 31, 2021 1,619 $ 40.74 Granted 1,895 $ 49.98 Vested and settled ( 699 ) $ 34.01 Forfeited ( 184 ) $ 61.11 Balance at December 31, 2022 2,631 $ 47.76 Granted 853 $ 34.38 Vested and settled ( 1,066 ) $ 43.84 Forfeited ( 208 ) $ 54.72 Balance at December 31, 2023 2,210 $ 43.84 F- 29 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. 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. Fair Value Assumptions for Option Awards The Company uses the Black-Scholes option-pricing model to measure the fair value of option awards. The Black-Scholes option-pricing model requires the input of various assumptions, each of which is subjective and requires significant judgment. These assumptions include the following: • Expected Term. The expected term represents the period that the Company’s equity-based awards are expected to be outstanding. The Company determines the expected term assumption based on the vesting terms, exercise terms and contractual terms of the options. • Risk-Free Interest Rate. The Company determines the risk-free interest rate by using the equivalent to the expected term based on the U.S. Treasury yield curve in effect as of the date of grant. • Dividend Yield. The assumed dividend yield is based on the Company’s expectation that it will not pay dividends in the foreseeable future, which is consistent with its history of not paying dividends. • Expected Volatility. The Company calculates expected volatility based on historical volatility data of its stock that is publicly traded. • Forfeiture Rate. The Company accounts for forfeitures as they occur. Awards to Employees The table below sets forth the weighted-average assumptions used in the Black-Scholes option-pricing model to estimate the fair value of options to acquire shares of the Company’s common stock granted to employees during the years ended December 31, 2023, 2022 and 2021. Year Ended December 31, 2023 2022 2021 Expected term (in years) 6.1 6.1 6.1 Risk-free interest rates 3.8 % 2.6 % 1.1 % Dividend yield — — — Expected volatility 87.3 % 88.7 % 94.6 % F- 30 Determination of Fair Value on Grant Dates The fair value of the shares of the Company’s common stock underlying option and RSU awards is determined by the Company’s board of directors or the compensation committee thereof based on the closing sales price of the Company’s common stock on the date of grant as reported by the Nasdaq Global Market. Note 11. Income Taxes Provision for income taxes consists of 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 and gain on equity-method investments: Year Ended December 31, 2023 2022 2021 (in thousands) U.S. (loss) income before income taxes and gain on equity-method investments $ ( 147,464 ) $ 189,406 $ 681,403 Foreign loss before income taxes and gain on equity-method investments ( 26,621 ) ( 5,381 ) ( 4,103 ) (Loss) income before income taxes and gain on equity-method investments $ ( 174,085 ) $ 184,025 $ 677,300 Income tax expense consisted of the following: Year Ended December 31, 2023 2022 2021 (in thousands) Current: Federal $ ( 5,590 ) $ 31,140 $ 131,907 State ( 4,722 ) 19,242 51,076 Total Current ( 10,312 ) 50,382 182,983 Deferred: Federal ( 12,771 ) ( 3,763 ) ( 7,471 ) State 4,100 ( 4,517 ) ( 717 ) Foreign ( 188 ) 224 669 Change in valuation allowance 20,325 ( 224 ) ( 669 ) Total Deferred 11,466 ( 8,280 ) ( 8,188 ) Total income tax expense $ 1,154 $ 42,102 $ 174,795 F- 31 Reconciliation of the difference between the federal statutory income tax rate and the effective income tax rate is as follows: Year Ended December 31, 2023 2022 2021 Tax provision at federal statutory rate 21.00 % 21.00 % 21.00 % State taxes 0.22 % 9.03 % 6.13 % Uncertain tax positions 0.18 % 0.92 % 0.05 % Stock based compensation - 1.65 % - 1.12 % - 1.96 % Nondeductible compensation - 162(m) - 0.55 % 0.00 % 0.00 % Goodwill impairment - 10.62 % 0.00 % 0.00 % Federal return to provision - 0.21 % - 3.92 % - 0.17 % State return to provision 3.41 % - 2.02 % - 0.14 % Other permanent differences - 1.15 % 1.33 % 1.09 % Research & development credit 3.19 % - 2.98 % - 0.33 % Foreign tax rate differential - 2.42 % 0.00 % 0.00 % Other 0.11 % 0.34 % 0.19 % Change in valuation allowance - 12.20 % 0.12 % - 0.10 % Effective tax rate - 0.69 % 22.70 % 25.76 % The following table summarizes the elements of the deferred tax assets (liabilities). Net deferred tax assets are included in other long-term assets in the Consolidated Balance Sheets. As of December 31, 2023 2022 (in thousands) Deferred tax assets Accrued vacation and other accrued expenses $ 807 $ 1,488 Provision for credit losses 818 10,255 Net operating losses 17,496 16,345 Stock based compensation 906 2,550 State income taxes 211 4,892 Excess tax basis in FF Gene Biotech net assets 2,256 2,032 Lease liability 2,345 4,086 Unrealized gain/loss on available-for-sale debt securities 406 7,664 Research and development credits 1,258 — Section 174 research & experimental expenditures 18,606 6,573 Equity loss in investment 503 503 Other 107 199 Gross deferred tax assets 45,719 56,587 Less: Valuation allowance ( 15,900 ) ( 2,832 ) Net deferred tax assets 29,819 53,755 Deferred tax liabilities Intangible assets 30,558 39,199 Depreciation 3,901 5,500 Right of use asset 2,299 4,056 Other 1,023 1,496 Total deferred tax liabilities 37,781 50,251 Net deferred tax assets $ ( 7,962 ) $ 3,504 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 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 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 F- 32 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 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. 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. 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, 2023 2022 2021 (in thousands) Balance at beginning of year $ 9,742 $ 710 $ 377 Increases to prior year positions ( 3,845 ) 2,843 — Increases for current year positions ( 64 ) 6,189 333 Balance at end of year $ 5,833 $ 9,742 $ 710 As of December 31, 2023, the Company has $ 5.8 million of gross unrecognized tax benefits, of which, $ 2.3 million of unrecognized tax benefits would affect the effective tax rate if recognized. The Company has accrued $ 145,000 and $ 94,000 for interest at December 31, 2023 and 2022, respectively, and has recognized interest expense of $ 145,000 and $ 94,000 for the years ended December 31, 2023 and 2022, respectively. Although it is possible that the amount of unrecognized benefits with respect to our uncertain tax positions will increase or decrease in the next twelve months, the Company does not expect material changes. While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could differ from the Company’s accrued positions. Accordingly, additional provisions on federal, state and foreign tax-related matters could be recorded in future periods as revised estimates are settled or otherwise resolved. F- 33 Note 12. Income (Loss) per Share The following is a reconciliation of the basic and diluted income (loss) per share computations: Year Ended December 31, 2023 2022 2021 (in thousands, except per share data) Net (loss) income attributable to common shareholders $ ( 167,825 ) $ 143,403 $ 507,364 Weighted-average common shares - outstanding, basic 29,784 30,097 29,408 Weighted-average effect of dilutive securities: Stock options — 199 230 Restricted stock units — 613 1,338 Contingently issuable shares — 55 — Weighted-average common shares - outstanding, diluted 29,784 30,964 30,976 (Loss) earnings per share: Basic $ ( 5.63 ) $ 4.76 $ 17.25 Diluted $ ( 5.63 ) $ 4.63 $ 16.38 The following securities have been excluded from the calculation of diluted income per share because their effect would have been anti-dilutive: Year Ended December 31, 2023 2022 2021 (in thousands) Stock Options 224 10 5 Restricted Stock Units 2,210 728 182 Contingently Issuable Shares 186 — — 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. Note 13. Retirement Plans The Company offers a 401(k) retirement savings plan, or the 401 (k) Plan, for its employees, including its executive officers, who satisfy certain eligibility requirements. The Internal Revenue Code of 1986, as amended, allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) Plan. The Company matches contributions to the 401(k) Plan based on the amount of salary deferral contributions the participant makes to the 401(k) Plan. The Company will match up to 3 % of an employee’s compensation that the employee contributes to his or her 401(k) Plan account. Total Company matching contributions to the 401(k) Plan were $ 3.2 million , $ 2.5 million and $ 697,000 in the years ended December 31, 2023, 2022 and 2021, respectively. Note 14. Related Party Linda Marsh, who is a member of the Company’s board of directors, is currently the Senior Executive Vice President of AHMC Healthcare Inc., or AHMC. The Company performs genetic testing and other testing services, on an arms-length basis, for AHMC , and the Company recognized $ 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, 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. F- 34 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. 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. Note 15. Business Combinations Inform Diagnostics 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. With the addition of Inform Diagnostics, the Company will further expand the Company’s genomic testing footprint and extend its test menu into breast pathology, gastrointestinal pathology, dermatopathology, urologic pathology, neuropathology, and hematopathology. The financial results of Inform Diagnostics are included in the consolidated financial statements from the date of acquisition. The Company 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: Amounts (in thousands) Consideration Cash, net of cash received $ 137,755 Recognized amounts of identifiable assets acquired and liabilities assumed Net working capital $ ( 15,024 ) Fixed assets 20,242 ROU assets - operating 12,653 ROU assets - finance 1,183 Deferred tax assets 3,410 Other long-term assets 4,711 Identifiable intangible assets 57,060 Operating lease liabilities ( 12,653 ) Finance lease liabilities ( 1,183 ) Income tax payable ( 40 ) Other long-term liabilities ( 4,449 ) Recognized amounts of identifiable assets acquired and liabilities assumed, net 65,910 Goodwill 71,845 Total $ 137,755 The goodwill of $ 71.8 million arising from the acquisition is attributed to the expected synergies, assembled workforce, other benefits that will be potentially generated from the combination and deferred tax. The goodwill recognized is not deductible for tax purposes. The 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 F- 35 flows attributable only to the subject intangible asset after deducting contributory asset charges. The incremental after-tax cash flows attributable to the customer relationships are then discounted to their present value at a risk-adjusted rate of return. The fair value of the trade name was estimated using the relief from royalty, or RFR, method. The RFR method estimates the portion of the Company’s earnings attributable to an intangible asset based on the royalty rate the Company would have paid for the use of the asset if it did not own it. The fair value of in-place lease intangible asset was estimated using the discounted cash flow under the income approach. The useful lives of the intangible assets for amortization purposes were determined by considering the period of expected cash flows used to measure the fair values of the intangible assets adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic and other factors that may limit the useful life. The customer relationships and trade name are amortized on a straight-line basis over their estimated useful lives. Revenue and operating loss from the Inform Diagnostics acquisition since the acquisition date 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. These transaction costs were expensed as incurred as general and administrative expense in the respective period. Unaudited Pro Forma Financial Information The following unaudited pro forma financial information summarizes the combined results of operations of Fulgent and Inform Diagnostics as if the companies had been combined as of the beginning of 2021. The pro forma financial information has been adjusted for the following: Acquisition-related costs - Acquisition-related costs incurred by both Fulgent and Inform Diagnostics were excluded from the net income attributable to Fulgent, and total costs were $ 9.6 million for the year ended December 31, 2022. Other adjustments to the net income attributable to Fulgent were $ 772,000 and $ 2.3 million for the year ended December 31, 2022 and 2021, respectively. Other adjustments to revenue were $ 962,000 and $ 3.9 million for or the year ended December 31, 2022 and 2021, respectively. Year Ended December 31, 2022 2021 Revenue $ 659,386 $ 1,140,184 Net income attributable to Fulgent $ 140,288 $ 493,313 Basic earnings per common share attributable to Fulgent $ 4.66 $ 16.77 Diluted earnings per common share attributable to Fulgent $ 4.53 $ 15.93 Fulgent Pharma Holdings, Inc On November 7, 2022, the Company completed the acquisition of 100 % of the outstanding equity of Fulgent Pharma, a clinical-stage, 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 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: F- 36 The goodwill of $ 22.1 million arising from the acquisition is attributed to Fulgent Pharma's rights to intellectual property, expected synergies, assembled workforce, and other benefits that will potentially be generated from the combination and deferred tax. The goodwill recognized is not deductible for tax purposes. The identified intangible assets acquired consisted of $ 64.6 million in IPR&D. Fulgent Pharma has developed a novel nanoencapsulation and targeted therapy platform, which is designed to improve the therapeutic window and pharmacokinetic profile of new and existing cancer drugs. The lead drug candidate, FID-007, has achieved proof-of-concept in preliminary human clinical trials for the treatment of various cancer types, including head and neck, ampullary, pancreatic, non-small cell lung cancer, and breast. The fair value of the IPR&D was estimated using MPEEM. The method involves forecasting after-tax operating income from existing clients, subtracting the portions attributable to a contributory asset, and discounting the remaining earnings to present value. The useful life of IPR&D is indefinite. 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 Operations, 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. The $ 5.0 million restricted cash received represents cash consideration payable pursuant to the share transfer agreement Fulgent Pharma entered prior to Fulgent Pharma acquisition date. The cash consideration was not paid as of Fulgent Pharma acquisition date and was included in noncurrent or non-operating liabilities in above table. 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. F- 37 Amounts (in thousands) Considerations Cash $ 18,974 Fair value of the Company’s 30 % equity interest held before the business combination 3,734 $ 22,708 Recognized amounts of identifiable assets acquired and liabilities assumed Financial assets $ 3,181 Reagents and supplies 1,288 Fixed assets 3,874 Other tangible assets 944 Identifiable intangible assets 6,958 Other current liabilities ( 2,585 ) Notes payable ( 5,893 ) Recognized amounts of identifiable assets acquired and liabilities assumed, net 7,767 Noncontrolling interest ( 8,141 ) Goodwill 23,082 Total $ 22,708 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. F- 38 The Company allocated the purchase price to tangible and identified 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 CSI Acquisition date). The following tables summarizes the consideration paid and the amounts of the assets acquired and liabilities assum ed recognized at the CSI Acquisition date: Amounts (in thousands) Considerations Cash $ 43,359 Contingent consideration 10,000 $ 53,359 Recognized amounts of identifiable assets acquired and liabilities assumed Debt-free net working capital $ 4,270 Fixed assets 6,855 ROU assets - operating 4,988 ROU assets - finance 49 Other assets 160 Identifiable intangible assets 30,540 Deferred tax liability ( 9,881 ) Operating lease liabilities ( 4,988 ) Finance lease liabilities ( 49 ) Other liabilities ( 6,069 ) Recognized amounts of identifiable assets acquired and liabilities assumed, net 25,875 Goodwill 27,484 Total $ 53,359 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: Net Sales Operating Income (Loss) FF Gene Biotech $ 6,632 $ ( 3,894 ) CSI 17,390 1,138 Total $ 24,022 $ ( 2,756 ) Note 16. Stock Repurchase Program In March 2022, the Company’ s Board authorized a $ 250.0 million stock repurchase program. Under the stock repurchase program, the Company may repurchase shares from time to time in the open market or in privately negotiated transactions. The stock F- 39 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. As of December 31, 2023, a total of approximately $ 150.7 million remained available for future repurchases of its common stock under the stock repurchase program. Note 17. Goodwill and Intangible Assets 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 $ 120,972 $ 50,897 $ 22,055 $ — Goodwill acquired during year — 71,845 — 22,055 Impairment ( 120,234 ) — — — Foreign currency impact ( 738 ) ( 1,770 ) — — Balance at the end of year $ — $ 120,972 $ 22,055 $ 22,055 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 F- 40 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: December 31, Weighted-Average Amortization Period 2023 2022 (in thousands) Laboratory services: Royalty-free technology 10 Years $ 5,211 $ 5,364 Less: accumulated amortization ( 1,390 ) ( 894 ) Royalty-free technology, net 3,821 4,470 Customer relationships 13 Years 83,119 82,750 Less: accumulated amortization ( 12,586 ) ( 6,215 ) Customer relationships, net 70,533 76,535 Trade name 8 Years 3,790 3,790 Less: accumulated amortization ( 906 ) ( 412 ) Trade name, net 2,884 3,378 In-place lease intangible assets 5 Years 360 360 Less: accumulated amortization ( 116 ) ( 46 ) In-place lease intangible assets, net 244 314 Laboratory information system platform 5 Years 1,860 1,860 Less: accumulated amortization ( 899 ) ( 527 ) Laboratory information system platform, net 961 1,333 Purchased patent 10 Years 28 29 Less: accumulated amortization ( 8 ) ( 6 ) Purchased patent, net 20 23 Total 78,463 86,053 Therapeutic development: In-process research & development n/a 64,590 64,590 Total 64,590 64,590 Total intangible assets, net $ 143,053 $ 150,643 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 F- 41 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: Amounts (in thousands) 2024 $ 7,976 2025 7,976 2026 7,671 2027 7,210 2028 7,175 Thereafter 40,455 Total $ 78,463 Note 18. Subsequent Event As of February 28, 2024, no subsequent events are being reported. F- 42