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, 2020. 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, 2020. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company, as this term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. As required by Rules 13a-15(c) and 15d-15(c) 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 internal control over financial reporting as of December 31, 2020, based on the criteria set forth in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2020. This report does not include an attestation report of our independent registered public accounting firm regarding our internal control over financial reporting, in accordance with applicable SEC rules that permit us to provide only management’s report in this report. Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting during the quarter ended December 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 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. Item 9B. Other Information. On March 8, 2021, we entered into an Executive Employment Agreement and Severance Agreement with our Chief Operations Officer, Jian Xie. Pursuant to the Employment Agreement, Mr. Xie will receive an annual base salary of $300,000 which may be adjusted in the sole discretion of the Company and will be eligible to receive cash bonuses and equity awards under our equity incentive plans at any time at the discretion of our board of directors or compensation committee. The Severance Agreement provides that, subject to Mr. Xie’s execution and absence of revocation of a release in favor of us, Mr. Xie is entitled to one year of continuation of his then-current annual base salary following a termination of his employment with us for any reason within one year after a change in control of the Company or Fulgent Therapeutics LLC. 65 PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this item is incorporated by reference to the definitive proxy statement for our 2021 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, 2020. Item 11. Executive Compensation. The information required by this item is incorporated by reference to the definitive proxy statement for our 2021 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, 2020. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item is incorporated by reference to the definitive proxy statement for our 2021 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, 2020. 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 2021 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, 2020. Item 14. Principal Accounting Fees and Services. The information required by this item is incorporated by reference to the definitive proxy statement for our 2021 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, 2020. 66 PART IV Item 15. Exhibits, Financial 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 F-2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 F-4 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020 and 2019 F-5 Consolidated Statements of Stockholders’ Equity for the Years Ended December 2020 and 2019 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F-7 Notes to Consolidated Financial Statements F-8 (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. We have elected not to provide summary information. 67 EXHIBIT INDEX Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith 2.1 Agreement and Plan of Merger, dated September 16, 2016, by and among the registrant, Fulgent MergerSub, LLC and Fulgent Therapeutics LLC. S-1/A 333-213469 2.1 9/19/2016 3.1 Certificate of Incorporation of the registrant, dated May 13, 2016. 10-Q 001-37894 3.1 8/14/2017 3.1.1 Certificate of Amendment to Certificate of Incorporation of the registrant, dated August 2, 2016 . 10-Q 001-37894 3.1.1 8/14/2017 3.1.2 Certificate of Amendment to Certificate of Incorporation of the registrant, dated May 17, 2017 . 10-Q 001-37894 3.1.2 8/14/2017 3.2 Bylaws of the registrant. S-1/A 333-213469 3.2 9/26/2016 4.1 Form of Certificate of Common Stock of the registrant . S-1/A 333-213469 4.1 9/19/2016 4.2 Investor’s Rights Agreement, dated May 17, 2016, by and between Fulgent Therapeutics LLC and Xi Long USA, Inc.. S-1 333-213469 4.2 9/2/2016 4.3 Description of the registrant’s securities. 10-K 001-37894 4.3 3/13/2020 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 68 Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith 10.10# Form of Notice of Restricted Stock Unit Substitution Award and Restricted Stock Unit Agreement under the 2016 Omnibus Incentive Plan of the registrant Form of Notice of Restricted Stock Unit Substitution Award and Restricted Stock Unit Agreement under the 2016 Omnibus Incentive Plan of the registrant. S-1 333-213469 10.10 9/2/2016 10.11# Employment Agreement, dated May 25, 2016, by and among Fulgent Therapeutics LLC, the registrant and Ming Hsieh. S-1 333-213469 10.11 9/2/2016 10.12# Employment Agreement, dated May 25, 2016, by and among Fulgent Therapeutics LLC, the registrant and Paul Kim. S-1 333-213469 10.12 9/2/2016 10.13# Amended and Restated Employment Agreement, dated May 25, 2016, by and among Fulgent Therapeutics LLC, the registrant and Han Lin Gao. S-1 333-213469 10.13 9/2/2016 10.14# Severance Agreement, dated July 7, 2016, by and among Fulgent Therapeutics LLC, the registrant and Ming Hsieh. S-1 333-213469 10.14 9/2/2016 10.15# Severance Agreement, dated July 7, 2016, by and among Fulgent Therapeutics LLC, the registrant and Paul Kim. S-1 333-213469 10.15 9/2/2016 10.16# Severance Agreement, dated July 7, 2016, by and among Fulgent Therapeutics LLC, the registrant and Han Lin Gao. S-1 333-213469 10.16 9/2/2016 10.17 Contribution and Allocation Agreement, dated May 19, 2016, by and among Fulgent Therapeutics LLC, Fulgent Pharma LLC and Ming Hsieh. S-1 333-213469 10.17 9/2/2016 10.18 Form of Fourth Amended and Restated Operating Agreement of Fulgent Therapeutics LLC, to be in effect upon completion of the Reorganization. S-1/A 333-213469 2.1 9/19/2016 10.19 Commercial Leases, dated April 14, 2015, April 28, 2016, March 24, 2016 and August 1, 2016, by and between E & E Plaza LLC and Fulgent Therapeutics LLC. S-1 333-213469 10.19 9/2/2016 10.20 Director Compensation Program of the registrant, effective as of September 28, 2016 and amended November 2, 2017. 10-K 001-37894 10.20 3/20/2018 10.21§ Cooperation Agreement on the Establishment of Fujian Fujun Gene Biotech Co., Ltd., dated April 25, 2017, by and among Shenzhen Fujin Gene Science & Technology Co., Ltd., Xilong Scientific Co., Ltd. and Fuzhou Jinqiang Investment Partnership (LP). 10-Q 001-37894 10.1 8/14/2017 10.22§ Supplemental Agreement to Cooperation Agreement, dated April 10, 2019, by and among Fulgent Genetics, Inc., Shenzhen Fujin Gene Technology Co., Ltd., Xilong Science Co., Ltd. and Fuzhou Jinqiang Investment Partnership (Limited). 10-Q 001-37894 10.1 8/12/2019 69 Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith 10.23 Commercial Lease, dated January 31, 2019, by and between E & E Plaza LLC and Fulgent Therapeutics LLC. 10-K 001-37894 10.23 3/22/2020 10.24 Commercial Lease, dated April 1, 2019, by and between 4401 Santa Anita Corporation and Fulgent Genetics, Inc. 10-K 001-37894 10.24 3/22/2020 10.25 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 10.26 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 10.27 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 10.28 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 10.29 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 10.30 Fulgent Genetics, Inc. Amended and Restated 2016 Omnibus Incentive Plan 8-K 001-37894 10.1 5/21/2018 10.31 Fulgent Genetics, Inc. Amended and Restated 2016 Omnibus Incentive Plan 8-K 001-37894 10.1 9/18/2020 10.32^ Agreement for Purchase and Sale of Property, dated July 23, 2020 8-K 001-37894 2.1 10/21/2020 10.33^ 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 10.34 Commercial Sublease Agreement, dated July 1 st , 2020, between Medscan Laboratories Inc. and Fulgent Genetics, Inc.; Commercial Lease Agreement, dated June 17, 2020, by and between Medscan Laboratories Inc. and Ten-Voss Ltd. X 10.35 Commercial Lease, dated January 11, 2021 by and between Ten-Voss Ltd., Medscan Laboratories, Inc. and Fulgent Genetics, Inc. X 10.36 Commercial Lease Addendum, dated February 1, 2021, by and between E & E Plaza LLC and Fulgent Genetics, Inc. X 10.37# Employment Agreement, dated March 8, 2021, by and among Fulgent Therapeutics, LLC, Fulgent Genetics, Inc. and Jian Xie. X 10.38# Severance Agreement, dated March 8, 2021, by and among Fulgent Therapeutics LLC, Fulgent Genetics, Inc. and Jian Xie. X 21.1 Subsidiaries of the registrant. 10-K 001-37894 21.1 3/22/2020 70 Exhibit Number Description Form File Number Incorporated by Reference Exhibit Filing Date Filed Herewith 23.1 Consent of Deloitte & Touche LLP, independent registered public accounting firm, relating to the financial statements of the registrant. X 24.1 Power of Attorney (included on the signature page hereto) X 31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1* Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS XBRL Instance Document X 101.SCH XBRL Taxonomy Extension Schema Document X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF XBRL Definition Linkbase Document X 101.LAB XBRL Taxonomy Extension Label Linkbase Document X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X * This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation by reference language in such filing. # Management contract or compensatory plan, contract or arrangement. § Confidential treatment has been granted with respect to portions of this exhibit pursuant to Rule 24b-2 under the Exchange Act, and these confidential portions have been redacted from the version of this agreement that is incorporated by reference in this report. A complete copy of this exhibit, including the redacted portions, has been separately furnished to the SEC. 71 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: March 8, 2021 By: /s/ Ming Hsieh Ming Hsieh President, Chief Executive Officer POWER OF ATTORNEY IN WITNESS WHEREOF, each person whose signature appears below constitutes and appoints Ming Hsieh and Paul Kim as his true and lawful agent, proxy and attorney-in-fact, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to (i) act on and sign any amendments to this report, with exhibits thereto and other documents in connection therewith, (ii) act on and sign such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith, and in each case file the same with the SEC, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Name and Signature Title Date /s/ Ming Hsieh President, Chief Executive Officer and Chairman of the Board March 8, 2021 Ming Hsieh (principal executive officer) /s/ Paul Kim Chief Financial Officer March 8, 2021 Paul Kim (principal financial and accounting officer) /s/ John Bolger Director March 8, 2021 John Bolger /s/ Yun Yen Director March 8, 2021 Yun Yen /s/ Linda Marsh Director March 8, 2021 Linda Marsh 72 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 F-4 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020 and 2019 F-5 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F-7 Notes to Consolidated Financial Statements F-8 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Fulgent Genetics, Inc.: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Fulgent Genetics, Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, for the years ended December 31, 2020 and 2019, 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, 2020 and 2019, and the results of its operations and its cash flows for the years ended December 31, 2020 and 2019, in conformity with accounting principles generally accepted in the United States of America . 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 Public Company Accounting Oversight Board (United States) (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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. /s/ DELOITTE & TOUCHE LLP Los Angeles, California March 8, 2021 We have served as the Company's auditor since 2016. F-2 CONSOLIDATED FINANCIAL STATEMENTS FULGENT GENETICS, INC. Consolidated Balance Sheets (in thousands, except par value data) December 31, 2020 2019 Assets Current assets Cash and cash equivalents $ 87,426 $ 11,965 Marketable securities 211,941 16,304 Trade accounts receivable, net of allowance for doubtful accounts of $1,898 and $751, as of December 31, 2020 and 2019, respectively 183,857 6,555 Other current assets 40,392 2,255 Total current assets 523,616 37,079 Marketable securities, long-term 132,502 41,947 Equity method investments — 872 Fixed assets, net 40,199 5,974 Operating lease right-of-use asset 828 2,633 Other long-term assets 3,316 251 Total assets $ 700,461 $ 88,756 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 26,488 $ 1,581 Accrued liabilities 8,446 1,333 Income tax payable 53,319 24 Contract liabilities 26,576 365 Investment margin loan 15,019 — Operating lease liabilities, short-term 267 420 Total current liabilities 130,115 3,723 Operating lease liabilities, long-term 568 2,256 Unrecognized tax benefits 377 — Other long-term liabilities 14 — Total liabilities 131,074 5,979 Commitments and contingencies (Note 8) Stockholders’ equity Common stock, $0.0001 par value per share, 50,000 shares authorized, 28,178 and 21,483 shares issued and outstanding at December 31, 2020 and 2019, respectively 3 2 Preferred stock, $0.0001 par value per share, 1,000 shares authorized, no shares issued or outstanding at December 31, 2020 and 2019 — — Additional paid-in capital 418,065 146,058 Accumulated other comprehensive income 438 146 Retained earnings (accumulated deficit) 150,881 (63,429 ) Total stockholders’ equity 569,387 82,777 Total liabilities and stockholders’ equity $ 700,461 $ 88,756 The accompanying notes are an integral part of these consolidated financial statements. F-3 FULGENT GENETICS, INC. Consolidated Statements of Operations (in thousands, except per share data) Year Ended December 31, 2020 2019 Revenue $ 421,712 $ 32,528 Cost of revenue 89,807 14,107 Gross profit 331,905 18,421 Operating expenses: Research and development 11,580 6,537 Selling and marketing 14,952 5,898 General and administrative 15,215 6,414 Total operating expenses 41,747 18,849 Operating income (loss) 290,158 (428 ) Interest and other income, net 1,526 837 Income before income taxes, equity loss in investee and impairment loss 291,684 409 Provision for income taxes 72,532 43 Income before equity loss in investee and impairment loss 219,152 366 Equity loss in investee (488 ) (777 ) Impairment loss in equity-method investments (4,354 ) — Net income (loss) $ 214,310 $ (411 ) Net income (loss) per common share: Basic $ 9.44 $ (0.02 ) Diluted $ 8.91 $ (0.02 ) Weighted-average common shares: Basic 22,694 18,709 Diluted 24,056 18,709 The accompanying notes are an integral part of these consolidated financial statements. F-4 FULGENT GENETICS, INC. Consolidated Statements of Comprehensive Income (Loss) (in thousands) Year Ended December 31, 2020 2019 Net income (loss) $ 214,310 $ (411 ) Other comprehensive income (loss) Foreign currency translation gain (loss) 20 (17 ) Net unrealized gain on marketable debt securities, net of tax 272 198 Comprehensive income (loss) $ 214,602 $ (230 ) The accompanying notes are an integral part of these consolidated financial statements. F-5 FULGENT GENETICS, INC. Consolidated Statements of Stockholders’ Equity (in thousands) Stockholders' Equity Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Accumulated Deficit) Total Equity Balance at December 31, 2018 18,172 $ 2 $ 114,203 $ (35 ) $ (63,018 ) $ 51,152 Equity-based compensation — — 3,209 — — 3,209 Exercise of common stock options 100 — 38 — — 38 Restricted stock awards 434 — — — — — Issuance of common stock at an average of $9.37 per share, net 104 — 979 — — 979 Issuance of common stock at an average of $10.34 per share, net 2,674 — 27,650 — — 27,650 Repurchases of capital stock (1 ) — (21 ) — — (21 ) Other comprehensive gain, net — — — 181 — 181 Net loss — — — — (411 ) (411 ) Balance at December 31, 2019 21,483 2 146,058 146 (63,429 ) 82,777 Equity-based compensation — — 8,157 — — 8,157 Exercise of common stock options 56 — 104 — — 104 Restricted stock awards 655 — — — — — Issuance of common stock at an average of $38.50 per share, net 1,108 — 42,655 — — 42,655 Issuance of common stock at an average of $42.90 per share, net 2,846 1 122,102 — — 122,103 Issuance of common stock at an average of $48.70 per share, net 2,034 — 99,051 — — 99,051 Repurchases of capital stock (4 ) — (62 ) — — (62 ) Other comprehensive gain, net — — — 292 — 292 Net income — — — — 214,310 214,310 Balance at December 31, 2020 28,178 $ 3 $ 418,065 $ 438 $ 150,881 $ 569,387 The accompanying notes are an integral part of these consolidated financial statements. F-6 FULGENT GENETICS, INC. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2020 2019 Cash flow from operating activities: Net income (loss) $ 214,310 $ (411 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity-based compensation 8,157 3,209 Depreciation 2,962 2,107 Noncash lease expense 409 413 Loss on disposal of fixed asset 672 11 Amortization of premium of marketable securities 857 106 Provision for bad debt 1,170 189 Deferred taxes (1,775 ) (21 ) Unrecognized tax benefits 377 — Holding loss on equity securities 90 — Equity loss in investee 488 777 Impairment loss in equity method investments 4,354 — Other 8 52 Changes in operating assets and liabilities: Accounts receivable (178,480 ) (839 ) Other current and long-term assets (21,149 ) 374 Accounts payable 22,617 (329 ) Accrued liabilities and other liabilities 32,655 264 Income tax payable 53,295 24 Operating lease liabilities (389 ) (409 ) Net cash provided by operations 140,628 5,517 Cash flow from investing activities: Purchases of fixed assets (35,130 ) (1,182 ) Proceeds from sale of fixed assets 8 — Purchase of marketable securities (324,359 ) (52,077 ) Maturities of marketable securities 19,919 24,350 Purchase of equipment contributed to equity-method investee (1,380 ) (137 ) Proceeds from sale of marketable securities 17,095 — Investment in equity method investee (2,591 ) — Net cash used in investing activities (326,438 ) (29,046 ) Cash flow from financing activities: Proceeds from public offerings of common stock, net of issuance costs 246,190 28,758 Proceeds from exercise of stock options 104 38 Repurchases of capital stock (62 ) (21 ) Borrowing under margin account 15,019 — Net cash provided by financing activities 261,251 28,775 Effect of exchange rate changes on cash and cash equivalents 20 (17 ) Net increase in cash and cash equivalents 75,461 5,229 Cash and cash equivalents at beginning of period 11,965 6,736 Cash and cash equivalents at end of period $ 87,426 $ 11,965 Supplemental disclosures of cash flow information: Income taxes paid $ 20,612 $ 20 Supplemental disclosures of non-cash investing and financing activities: Purchases of fixed assets in accounts payable $ 3,402 $ 557 Operating lease right-of-use assets obtained in exchange for lease liabilities $ 402 $ 110 Operating lease liabilities removed due to purchasing of underlying assets $ 1,853 $ — Public offerings proceeds in other receivable included in other current assets $ 17,799 $ — Public offerings costs included in accounts payable $ 359 $ 129 The accompanying notes are an integral part of these consolidated financial statements. F-7 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 wholly-owned 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 significant intercompany accounts and transactions are eliminated from the accompanying consolidated financial statements. Nature of the Business Fulgent Genetics, Inc., together with its subsidiaries, collectively referred to as the Company, unless otherwise noted or the context otherwise requires, is a technology company offering comprehensive genetic testing providing physicians with clinically actionable diagnostic information they can use to improve the quality of patient care. The Company has developed a proprietary technology platform that allows it to offer a broad and flexible test menu and continually expand and improve its proprietary genetic reference library, while maintaining accessible pricing, high accuracy and competitive turnaround times. Combining next generation sequencing, or NGS, with its technology platform, the Company performs full-gene sequencing with deletion/duplication analysis in single-gene tests; pre-established, multi-gene, disease-specific panels; and customized panels that can be tailored to meet specific customer needs. In 2019, the Company launched its first patient-initiated product, Picture Genetics, a new line of at-home screening tests that combines the Company’s advanced NGS solutions with actionable results and genetic counseling options for individuals. Since March 2020, the Company has commercially launched several tests for the detection of SARS-CoV-2, the virus that causes the novel coronavirus, or COVID-19, including NGS and reverse transcription polymerase chain reaction – based, or RT-PCR-based, tests. The Company has received an Emergency Use Authorization, or EUA, from the U.S. Food and Drug Administration, or the FDA, for the RT-PCR-based tests for the detection of SARS-CoV-2 using upper respiratory specimens (nasal, nasopharyngeal, and oropharyngeal swabs) and for the at-home testing service through Picture Genetics. The Company’s at-home testing service for COVID-19 and RT-PCR-based test have been granted an EUA by the FDA only for the detection of nucleic acid from SARS-CoV-2, not for any other viruses or pathogens. The Company believes its test menu offers more genes for testing than its competitors in today’s market, which enables it to provide expansive options for test customization and clinically actionable results. A cornerstone of the Company’s business is its ability to provide expansive options and flexibility for all clients’ unique testing needs. Note 2. Summary of Significant Accounting Policies Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, judgments and assumptions are based on historical data and experience available at the date of the accompanying consolidated financial statements, as well as various other factors management believes to be reasonable under the circumstances, including but not limited to the potential impacts arising from the recent global pandemic related to COVID-19. As the extent and duration of the impacts from COVID-19 remain unclear, 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 doubtful accounts, (iii) the useful lives of fixed assets, (iv) estimates of tax liabilities and (v) valuation of equity method investments. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. F-8 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. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are stated at the amount the Company expects to collect. The Company performs credit evaluations of its customers and generally does not require collateral. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information that assists in management’s evaluation. The Company writes off accounts receivable following a review by management and a determination that the receivable is uncollectible. A roll-forward of the activity in the Company’s allowance for doubtful accounts is as follows: December 31, 2020 2019 (in thousands) Allowance for doubtful accounts at beginning of year $ 751 $ 590 Bad debt expense 1,170 189 Write-offs (23 ) (28 ) Allowance for doubtful accounts at end of year $ 1,898 $ 751 Marketable Securities All marketable debt securities, which consist of corporate debt securities, U.S. government agency debt securities, 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. Unrealized gains and losses, net of any related tax effects, are excluded from earnings and are included in other comprehensive income (loss) and reported as a separate component of stockholders’ equity until realized. Realized gains and losses and declines in value judged to be other than temporary, if any, 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, and the maximum final maturity from the date of purchase is three years. 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. The Company regularly evaluates whether declines in the fair value of its investments below their cost are other than temporary. The evaluation includes consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether the Company has the intent to sell the securities, and whether it is more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. If the Company determines that the decline in fair value of an investment is below its accounting basis and this decline is other than temporary, the Company would reduce the carrying value of the security it holds and record a loss for the amount of such decline. The Company has not recorded any realized losses or declines in value judged to be other than temporary on its investments. Fair Value of Financial Instruments The Company's financial instruments consist principally of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and investment margin loan. The carrying amounts of certain of these financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and investment margin loan, approximate fair value due to their short maturities. Fair value of marketable securities is disclosed in Note 4, Fair Value Measurements, to the accompanying consolidated financial statements. F-9 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, accounts receivable and marketable securities, which consist of debt securities and equity securities. As of December 31, 2020, substantially all of the Company’s cash and cash equivalents were deposited in accounts at financial institutions, and amounts may exceed federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial strength of the depository institutions in which its cash and cash equivalents are held. In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue. Aggregating customers that are under common control or are affiliates, two customers comprised 28% and 10% of total revenue in the year ended December 31, 2020, and one customer comprised 28% of total revenue in the year ended December 31, 2019. No customer comprised at least 10% of total accounts receivable as of December 31, 2020 and 2019. Revenue from the U.S. government was less than 10% of total revenue in each of the years ended December 31, 2020 and 2019. The Company relies on a limited number of suppliers for its test collection kits and certain laboratory substances used in the chemical reactions incorporated into its processes, referred to as reagents, as well as for the sequencers and various other equipment and materials it uses in its laboratory operations. In particular, the Company relies on a sole supplier for the next generation sequencers and associated reagents it uses to perform its genetic tests and as the sole provider of maintenance and repair services for these sequencers. The Company’s laboratory operations would be interrupted if it encountered delays or difficulties securing these test collection kits, reagents, sequencers, other equipment or materials or maintenance and repair services, which could occur for a variety of reasons, including if the Company needs a replacement or temporary substitute for any of its limited or sole suppliers and is not able to locate and make arrangements with an acceptable replacement or temporary substitute. The Company believes there are currently only a few other manufacturers that are capable of supplying and servicing some of the equipment and other materials necessary for its laboratory operations, including collection kits, sequencers and various associated reagents. Equity Method Investments The Company uses the equity method to account for investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. The Company's proportionate share of the net income or loss of these companies is included in consolidated net earnings. Judgments regarding the level of influence over each equity method investment include consideration of key factors such as the Company's ownership interest, representation on the board of directors or other management body and participation in policy-making decisions. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that a decline in value has occurred that is other than temporary. Evidence considered in this evaluation includes, but would not necessarily be limited to, the financial condition and near-term prospects of the investee, recent operating trends and forecasted performance of the investee, market conditions in the geographic area or industry in which the investee operates and the Company’s strategic plans for holding the investment in relation to the period of time expected for an anticipated recovery of its carrying value. If the investments is determined to have a decline in value deemed to be other than temporary it is written down to estimated fair value. Leases The Company determines if an arrangement is a lease at inception. Operating leases are included as operating lease right-of-use, or ROU, assets, operating lease liabilities, short-term, and operating lease liabilities, long-term, on the Company’s Consolidated Balance Sheets. ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating ROU lease 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 in determining the present value of lease payments since its leases do not provide an implicit rate. The ROU lease asset includes any base rent payments made and excludes lease incentives and variable operating expenses. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company leases out space in buildings it owns in El Monte, California, to third-party tenants under noncancelable operating leases and has leased out such space since the Company purchased such buildings. The Company determines whether a lease exists at inception. 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 payment are based F-10 occur. The net rental income is included in the interest and other income, net, in the accompany ing Consolidated Statement of Operations. 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, which is generally between three and thirty-nine years. 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. 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 three 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. 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. To date, there have been no such impairment losses. Reporting Segment and Geographic Information Reporting segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company views its operations and manages its business in one reporting segment. Revenue Recognition The Company generates revenue from sales of its COVID-19 and genetic tests. The Company currently receives payments from primarily three different customer types: insurance customers, institutional customers, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, and patients who pay directly . The Company’s test results are primarily delivered electronically. The Company bills certain customers for shipping and handling fees incurred by the Company associated with COVID-19 tests, and s hipping and handlings fees billed to customers are included in revenue, and shipping and handling fees incurred are included in cost of revenue in the accompanying Consolidated Statements of Operations . Performance Obligations COVID-19 and Genetic Testing Services Institutional and Patient Direct Pay The Company’s institutional contracts for COVID-19 and genetic testing services typically have a single performance obligation to deliver COVID-19 or genetic testing services to the ordering facility or patient. Some arrangements involve the delivery of genetic testing services to research institutions, which the Company refers to as “sequencing as a service.” In arrangements with institutions, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, and patients who pay directly, the transaction price is stated within the contract and is therefore fixed consideration. For most of the Company’s testing volume, the Company identified the institutions, including hospitals, medical institutions, other laboratories, governmental bodies, municipalities and large corporations, and patients as the customer in Step 1 of the model 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 of the model. Control over COVID-19 or genetic testing services is transferred to the F-11 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 COVID-19 and genetic testing services typically have a single performance obligation to deliver COVID-19 or genetic testing services to the ordering facility or patient. For most of the Company’s insurance volume, the Company identified the patient as the customer in Step 1 of the model and have determined a contract exists with the patient in Step 1. In arrangements with insurance patients, the transaction price is typically stated within the contract, however, the Company may accept payments from third-party payors that are less than the contractually stated price and is therefore variable consideration. In developing the estimate of variable consideration, the Company utilizes the expected value method under a portfolio approach. The Company’s estimate requires significant judgment and is developed using known reimbursement rates and historical reimbursement data from payors and patients. As these contracts typically have a single performance obligation, no allocation of the transaction price is required in Step 4 of the model. Control over COVID-19 and genetic testing services is transferred to the Company’s ordering physicians 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. Historically contract costs have not been significant to the financial statements. Significant Judgments and Contract Estimates COVID-19 and Genetic Testing Services 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 payors, estimation of the transaction price represents variable consideration. In order to estimate variable consideration, the Company utilizes a portfolio approach in which payors with similar reimbursement experience are grouped into portfolios. The Company’s estimates of variable consideration are based primarily on historical reimbursement data. Certain assumptions will also be adjusted based on known and anticipated factors not reflected in the historical reimbursement data. The Company monitors these accrual estimates at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required. Both the initial accrual estimate and any subsequent revision to the estimate contain uncertainty and require the use of judgment in the estimation of the transaction price and application of the constraint for variable consideration. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect revenue and earnings in the period such variances become known. 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. Overhead Expenses The Company allocates overhead expenses, such as rent and utilities, to cost of revenue and operating expense categories based on headcount. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category. Cost of Revenue Cost of revenue reflects the aggregate costs incurred in delivering test results and consists of: personnel costs, including salaries, employee benefit costs, bonuses and equity-based compensation expenses; costs of laboratory supplies; depreciation of laboratory equipment; amortization of leasehold and building improvements and allocated overhead. Costs associated with performing tests are recorded as tests are processed. Research and Development Expenses Research and development expenses represent costs incurred to develop the Company’s technology and future tests. These costs consist of: personnel costs, including salaries, employee benefit costs, bonuses and equity-based compensation expenses; laboratory supplies; consulting costs and allocated overhead. The Company expenses all research and development costs in the periods in which they are incurred. F-12 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. 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, or RSU, awards that generally vest over a specified period of time upon the satisfaction of service-based conditions. The Company measures compensation expense for equity-based awards granted to employees based on the fair value of the award on the grant date of the award. Compensation expense for employee RSU awards with a service-based vesting condition is recognized ratably over the vesting period of the award. Foreign Currency Translation and Foreign Currency Transactions The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Expenses for these subsidiaries are translated using average rates in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in other comprehensive income (loss) as a component in the accompanying Consolidated Statements of Stockholders’ Equity. The Company’s 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 resulting from the remeasurements are included in interest and other income, net in the accompanying Consolidated Statements of Operations. Gains and losses from these remeasurements were not significant in the year ended December 31, 2020. Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gain or loss on marketable debt securities and foreign currency translation adjustments from its subsidiaries not using the U.S. dollar as their functional currency. The Company did not have reclassifications from other comprehensive income (loss) to net loss during the year ended December 31, 2020. The tax effects related to unrealized holding gains on marketable debt securities were $147,000 in 2020. The tax effects related to unrealized gain was insignificant in 2019 due to valuation allowance. F-13 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 loss attributable to common stockholders by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. Emerging Growth Company Pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, a company constituting an “emerging growth company” is, among other things, entitled to rely upon certain reduced reporting requirements. The Company is an emerging growth company, but has irrevocably elected not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. As a result, the Company will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. Disaggregation of Revenue The Company classifies its customers into three payor types: (i) Insurance, (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, 2020 and 2019. Year Ended December 31, 2020 2019 (in thousands) Testing Services by payor Insurance $ 257,587 $ 705 Institutional 163,083 31,284 Patient 1,042 539 Total Revenue $ 421,712 $ 32,528 There was no material variable consideration recognized in the current period that relates to performance obligations that were completed in the prior period. Contract Balances Receivables from contracts with customers - As of December 31, 2020 and 2019, receivables from contracts with customers were approximately $183.9 million and $6.6 million, respectively, and are included within Trade accounts receivable on the Consolidated Balance Sheets. Contracts assets and liabilities - As of December 31, 2020 and 2019, contract assets from contracts with customers were $1.4 million and $150,000, respectively, associated with contract execution and certain costs to fulfill a contract, which is 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. The Company had $26.6 million and $365,000 of contract liabilities as of December 31, 2020 and 2019, respectively. Revenues of $257,000 and $59,000 for the years ended December 31, 2020 and 2019, respectively, related to contract liabilities at the beginning of the respective periods were recognized. Transaction Price Allocated to Future Performance Obligations The Accounting Standards Codification, or ASC, 606, Revenue from Contracts with Customers, issued by the Financial Accounting Standards Board, or FASB, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as December 31, 2020. 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 not 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 F-14 less. The Company does not have material future obligations associated with COVID 19 or g enetic t esting S ervices that extend beyond one year. Recent Accounting Pronouncements The Company evaluates all Accounting Standards Updates, or 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. ASU No. 2016-13 In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments . ASU No. 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those reporting periods for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application of the amendments is permitted. The Company does not expect the adoption of the new guidance under the standard to materially affect its financial position or results of operations and plans to adopt during fiscal year 2021. ASU No. 2018-15 In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which provides new guidance on the accounting for implementation, set-up, and other upfront costs incurred in a hosted cloud computing arrangement. Under the new guidance, entities will apply the same criteria for capitalizing implementation costs as they would for an internal-use software license arrangement. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This ASU can be adopted prospectively to eligible costs incurred on or after the date of adoption or retrospectively. The adoption of this update did not have a material impact on the Company’s consolidated financial statements or disclosures. ASU No. 2019-12 In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) , which is intended to reduce the complexity of accounting standards while maintaining or enhancing the helpfulness of information provided to financial statement users. The amendment in this update simplifies the accounting for income taxes by removing some exceptions including the incremental approach for intraperiod tax allocation, t he requirement to recognize a deferred tax liability for equity method investments, the ability not to recognize a deferred tax liability for a foreign subsidiary, and the general methodology for calculating income taxes in an interim period. Other changes include requiring entities to recognize franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, evaluate tax basis step-up in goodwill obtained in a transaction that is not a business combination, and reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date, making minor codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method, and specifying that an entity is not required to allocate the consolidated current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. This amendment is effective for public business entities beginning after December 15, 2020 with early adoption permitted. The Company does not expect the adoption of the new guidance under the standard to materially affect its financial position or results of operations and plans to adopt during fiscal year 2021. F-15 Note 3. Marketable Securities The Company’s marketable securities consisted of the following: December 31, 2020 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Marketable securities: Short-term Equity securities Bond fund $ 153,269 $ 67 $ (151 ) $ 153,185 Exchange traded funds 17,614 — (5 ) 17,609 Available-for-sale debt securities Money market accounts 47,461 — — 47,461 Corporate debt securities 41,061 101 (15 ) 41,147 Less: Cash equivalents (47,461 ) — — (47,461 ) Total short-term marketable securities 211,944 168 (171 ) 211,941 Long-term Corporate debt securities 124,989 580 (117 ) 125,452 U.S. government agency debt securities 1,000 2 — 1,002 Yankee debt securities 6,054 4 (10 ) 6,048 Total long-term marketable securities 132,043 586 (127 ) 132,502 Total marketable securities $ 343,987 $ 754 $ (298 ) $ 344,443 December 31, 2019 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Marketable securities: Short-term Money market accounts $ 4,700 $ — $ — $ 4,700 Corporate debt securities 17,962 43 (2 ) 18,003 Less: Cash equivalents (6,399 ) — — (6,399 ) Total short-term marketable securities 16,263 43 (2 ) 16,304 Long-term Corporate debt securities 41,861 116 (30 ) 41,947 Total long-term marketable securities 41,861 116 (30 ) 41,947 Total marketable securities $ 58,124 $ 159 $ (32 ) $ 58,251 Management determined that the gross unrealized losses of $298,000 on the Company’s marketable securities as of December 31, 2020 were temporary in nature. Gross unrealized losses on the Company’s marketable securities were $32,000 as of December 31, 2019. The Company currently does not intend to sell the debt securities prior to maturity and does not consider these investments to be other-than-temporarily impaired as of December 31, 2020. The proceeds and gross realized gains from sale of available-for-sale securities for the year ended December 31, 2020 were $8.1 million and $131,000, respectively. The proceeds and gross realized gains from sale of equity securities for the year ended December 31, 2020 were $9.0 million and $24,000, respectively. The Company did not sell any marketable securities in 2019. The net unrealized loss related to equity securities still held at December 31, 2020 was $89,000. The Company did not hold any equity securities in 2019. The Company’s available-for-sale debt securities of $221.1 million are used as collateral for an outstanding margin account borrowing. As of December 31, 2020, the Company had an outstanding borrowing of $15.0 million under its margin account. Margin account borrowings were used for the purchase of real property located in El Monte, California. F-16 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 inputs for the asset or liability. The following tables present information about the Company’s financial assets measured at fair value on a recurring basis, based on the three-tier fair value hierarchy: December 31, 2020 Total Level 1 Level 2 Level 3 (in thousands) Marketable securities and cash equivalents: Bond Fund $ 153,185 $ 153,185 $ — $ — Exchange traded funds 17,609 17,609 — — Corporate debt securities 166,599 — 166,599 — U.S. government agency debt securities 1,002 — 1,002 — Yankee debt securities 6,048 — 6,048 — Money market accounts 47,461 47,461 — — Total marketable securities and cash equivalents $ 391,904 $ 218,255 $ 173,649 $ — December 31, 2019 Total Level 1 Level 2 Level 3 (in thousands) Marketable securities and cash equivalents: Corporate debt securities $ 59,950 $ — $ 59,950 $ — Money market accounts 4,700 4,700 — — Total marketable securities and cash equivalents $ 64,650 $ 4,700 $ 59,950 $ — The Company’s Level 1 assets include marketable equity securities and money market instruments and are valued based upon observable market prices. Level 2 assets consist of U.S. government agency debt securities, 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, 2020 and 2019, the Company had no investments that were measured using unobservable (Level 3) inputs. There were no transfers between fair value measurement levels during the years ended December 31, 2020 and 2019. There were no g ross unrealized losses for cash equivalents as of December 31, 2020, and gross unrealized losses for marketable securities as of December 31, 2020 were not material. There were no unrealized losses for securities in an unrealized loss position for more than 12 months. During the years ended December 31, 2020 and 2019, the Company did not recognize other-than-temporary impairment losses related to its marketable securities. F-17 Note 5. Fixed Assets Major classes of fixed assets consisted of the following: December 31, Useful Lives 2020 2019 (in thousands) Medical lab equipment 5 Years $ 20,849 $ 10,493 Building 39 Years 6,731 — Aircraft 7 Years 6,503 — Computer hardware 3 Years 3,699 1,705 Leasehold improvements Shorter of lease term or estimated useful life 1,580 876 Building improvements 6 months to 5 Years 707 — Computer software 3 Years 541 541 Furniture and fixtures 5 Years 454 235 Land improvements 5 to 15 Years 403 — Automobile 5 Years 53 — General equipment 5 Years 44 — Land 7,500 — Assets not yet placed in service 2,055 114 Total 51,119 13,964 Less: Accumulated depreciation (10,920 ) (7,990 ) Property and equipment, net $ 40,199 $ 5,974 Depreciation expense on fixed assets totaled $3.0 million and $2.1 million for the years ended December 31, 2020 and 2019, respectively. Note 6. Other Current Assets Other current assets consisted of the following: December 31, 2020 2019 (in thousands) Other receivable $ 17,810 $ 16 Reagents and supplies 16,491 277 Prepaid expenses 3,682 1,288 Contract assets 1,379 150 Marketable securities interest receivable 1,016 478 Prepaid income taxes 14 46 Total $ 40,392 $ 2,255 Reagents and supplies include reagents and consumables used for DNA sequencing applications in the Company’s DNA sequencing equipment and collection kits for COVID-19 tests. Other receivable primarily consists of proceeds to be received from public offerings of the Company’s common stock. F-18 Note 7. Reporting Segment and Geographic Information The Company views its operations and manages its business in one reporting segment. All long-lived assets were located in the United States as of December 31, 2020 and 2019 with an insignificant amount located in Canada. Revenue by region for the years ended December 31, 2020 and 2019 were as follows: Year Ended December 31, 2020 2019 (in thousands) Revenue: United States $ 415,334 $ 25,014 Foreign: Canada 1,725 2,245 Other Countries 4,653 5,269 Total $ 421,712 $ 32,528 Note 8. Debt, Commitments and Contingencies Debt In 2020, the Company purchased a real property located at 4399 - 4401 Santa Anita Avenue, El Monte, California, or the Property, from 4401 Santa Anita Corporation, a California corporation, or the Seller. The Company paid an aggregate of $15.4 million in exchange for the Property, or the Property Purchase Agreement, which consists of approximately 61,612 total square feet of building situated on 2.6 acres of land. In connection with the signing of the Property Purchase Agreement, the Company provided a refundable $350,000 deposit to the Seller. In connection with the closing of escrow, the Company paid the remaining amount owed pursuant to the Property Purchase Agreement of approximately $15.0 million to the Seller. The $15.0 million paid in connection with the close of escrow was financed using a margin loan with the custodian of the Company’s marketable debt security investment account. The marketable securities in the brokerage account were used as collateral for the margin loan. The custodian can issue a margin call at any time. The interest rate on the margin loan was the effective federal funds rate, or EFFR, plus a spread, and the EFFR and/or the spread can be changed by Bank of New York at any time. The interest was 1% at the time of withdrawal of $15.0 million from the margin account, and the interest rate at December 31, 2020 was 0.78%. The Company did not make any other withdrawals from the margin account, and the outstanding balance of $15.0 million is included in the accompanying Consolidated Balance Sheets. The related interest expenses for the year ended December 31, 2020 was $20,000. Operating Leases See Note 9, Leases, for further information. Gene Biotech See Note 15, Equity Method Investments, for a description of the Company’s commitments related to its joint venture, FF Gene Biotech, as defined in Note 15. Purchase Obligations As of December 31, 2020, the Company had non-cancelable purchase obligations of $27.6 million, of which, $23.6 million for reagents and other supplies and $3.3 million for medical lab equipment are payable within twelve months , and $700,000 for medical lab equipment is payable within the next twenty-four months. Contingencies From time to time, the Company may be subject to legal proceedings and claims arising in the ordinary course of business. Management does not believe that the outcome of any of these matters will have a material effect on the Company’s consolidated financial position, results of operations or cash flows. F-19 Note 9. Leases Lessee The Company has various non-cancelable operating leases with varying terms through October 2025 primarily for office space and equipment. The Company has options to renew some of these leases for three years after their expiration. The Company considers these options, which may be elected at the Company’s sole discretion, in determining the lease term on a lease-by-lease basis. The Company does not have any finance leases or leases with variable lease payments. The determination of whether an arrangement contains a lease is made 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. The Company’s headquarters is located in Temple City, California, which is comprised of various corporate offices and a laboratory certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, accredited by the College of American Pathologists and licensed by the State of California Department of Public Health. Additional offices are located in El Monte, California, and in 2020, the Company purchased the real property from the landlord. The Company paid an aggregate of $15.4 million in exchange for the real property which consists of approximately 61,612 total square feet of building situated on 2.6 acres of land. Additional offices are located in Atlanta, Georgia and are used for certain report generation functions. During the year ended December 31, 2020, the Company opened another CLIA-certified laboratory in Houston, Texas to expand its capacity. The Company adopted new accounting standard ASC 842, Leases , on January 1, 2019, including the practical expedient on not separating lease components from nonlease components for all operating leases. Upon adoption, the Company recorded ROU assets of $3.0 million and short-term and long-term lease liabilities of $384,000 and $2.6 million, respectively. The difference between the ROU asset and liability is due to the existing balance of deferred rent at the date of adoption. There was no impact to retained earnings upon adoption. The Company entered into three operating leases with an existing landlord during the year. Upon entering into the leases, the Company recorded ROU assets of $393,000 and short-term and long-term lease liabilities of $58,000 and $335,000, respectively. These three leases along with other leases for the office spaces in El Monte were terminated due to the Company’s purchase of the buildings from the landlord. The difference between the carrying amount of ROU assets and lease liabilities immediately before the purchase was recorded as an adjustment to the carrying amount of the buildings. The Company entered an operating lease for a copier during the year. Upon entering into the lease, the Company recorded ROU assets of $9,000 and short-term and long-term lease liabilities of $1,000 and $8,000, respectively. The Company also entered into fifteen short-term leases during the year ended December 31, 2020 and elected short-term lease recognition exemption for such leases. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the commencement date in determining the discount rate used to calculate present value lease payment. The Company determined its incremental borrowing rate based on inquiries with its bank. The Company’s lease agreements do not contain any residual value guarantees, material restrictive covenants, bargain purchase options or asset retirement obligations. Lease expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. The Company’s leases do not contain variable lease payments. The following was operating lease expense: Year Ended December 31, 2020 2019 (in thousands) Operating lease cost $ 566 $ 587 Short-term lease cost 142 — Total lease cost $ 708 $ 587 Supplemental cash flow information related to leases was the following: Year Ended December 31, 2020 2019 (in thousands) Cash paid for amounts included in the measurement of lease liabilities $ 801 $ 535 Noncash lease expense $ 409 $ 413 Right-of-assets obtained in exchange for new operating lease liabilities $ 402 $ 110 F-20 Supplemental information related to leases was the following: December 31, 2020 Weighted average remaining lease term - operating leases 3.0 years Weighted average discount rate - operating leases 6.22 % The following is a maturity analysis of operating lease liabilities using undiscounted cash flows on an annual basis with renewal periods included: Operating Leases (in thousands) Year Ending December 31, 2021 $ 311 2022 309 2023 270 2024 24 2025 2 Thereafter 1 Total lease payments 917 Less imputed interest (82 ) Total $ 835 Lessor The Company leases out space in buildings it owns to third-party tenants under noncancelable operating leases and has leased out such space since the Company purchased such buildings in October 2020. The Company determines whether a lease exists at inception. The remaining terms left after purchasing the buildings are from 2 months to 4 years including renewal options and may include rent escalation clauses. Lease income primarily represents fixed lease payments from tenants recognized on a straight-line basis over the application lease term. Variable lease income represents tenant payments for real estate taxes, insurance and maintenance. The lease income was $145,000 for 2020, which was included in interest and other income, net, in the accompanying Consolidated Statements of Operations. There was no lease income in 2019. Total lease income for 2020 was as follows: Year Ended December 31, 2020 (in thousands) Lease income $ 144 Variable lease income 1 Total lease income $ 145 Future fixed lease payments from tenants for all noncancelable operating leases as of December 31, 2020 are as follows: Lease Payments from Tenants (in thousands) Year Ending December 31, 2021 $ 335 2022 190 2023 95 2024 61 Total $ 681 F-21 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, 2020 2019 (in thousands) Cost of revenue $ 1,452 $ 676 Research and development 2,693 1,024 Selling and marketing 2,092 845 General and administrative 1,920 664 Total $ 8,157 $ 3,209 Award Activity Option Awards The following table summarizes activity for options to acquire shares of the Company’s common stock in the years ended December 31, 2020 and 2019: 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, 2018 417 $ 0.64 7.1 $ 1,116 Granted 30 $ 6.98 $ 4.58 Exercised (100 ) $ 0.38 $ 5.36 Canceled (6 ) $ 0.38 $ 7.10 Balance at December 31, 2019 341 $ 1.27 6.4 $ 3,960 Granted 10 $ 15.82 $ 11.45 Exercised (56 ) $ 1.86 $ 5.04 Canceled (8 ) $ 4.18 $ 4.68 Balance at December 31, 2020 287 $ 1.59 5.5 $ 14,484 Exercisable as of December 31, 2020 258 $ 0.65 5.1 $ 13,274 (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, 2020 and 2019 was $223,000 and $549,000, respectively. As of December 31, 2020, the remaining unrecognized compensation expense related to all outstanding option awards was $178,000 and is expected to be recognized over a weighted-average period of 3.0 year. RSU Awards RSUs are awards that entitle the holder to receive shares of the Company’s common stock upon satisfaction of vesting conditions. Each RSU represents the contingent right to receive one share of the Company’s common stock upon vesting and settlement. F-22 The following table summarizes activity for RSUs relating to shares of the Company’s common stock in the years ended December 31, 2020 and 2019 : Number of Shares (in thousands) Weighted-Average Grant Date Fair Value Balance at December 31, 2018 1,086 $ 5.94 Granted 982 $ 7.00 Vested and settled (434 ) $ 6.39 Forfeited (123 ) $ 5.38 Balance at December 31, 2019 1,511 $ 6.54 Granted 1,389 $ 24.86 Vested and settled (655 ) $ 7.97 Forfeited (160 ) $ 11.17 Balance at December 31, 2020 2,085 $ 17.93 The RSU awards granted in the years ended December 31, 2020 and 2019 will result in aggregate equity-based compensation expense of $34.5 million and $6.9 million, respectively, to be recognized over the vesting periods from the grant date of each award granted in the period. As of December 31, 2020, the remaining unrecognized compensation expense related to all outstanding RSU awards was $33.5 million and is expected to be recognized over a weighted-average period of 3.4 years. As of December 31, 2019, the remaining unrecognized compensation expense related to all outstanding RSU awards was $8.7 million and was expected to be recognized over a weighted-average period of 2.9 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 year ended December 31, 2020 and 2019. Year Ended December 31, 2020 2019 Expected term (in years) 6.1 6.1 Risk-free interest rates 0.4 % 1.8 % Dividend yield — — Expected volatility 87.5 % 73.6 % F-23 Determination of Fair Value on Grant Dates The fair value of the shares of the Company’s common stock underlying option and RSU awards is determined by the Company’s board of directors or the compensation committee thereof based on the closing sales price of the Company’s common stock on the date of grant as reported by the Nasdaq Global Market. Note 11. Income Taxes Provision for income taxes consists of U.S. federal and state income taxes. A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences, operating losses and tax credit carryforwards. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The following table summarizes income (loss) before income taxes, equity loss in investee and impairment loss in equity-method investments: Year Ended December 31, 2020 2019 (in thousands) U.S. income before income taxes, equity loss in investee and impairment loss $ 291,739 $ 679 Foreign loss before income taxes and equity loss in investee (55 ) (270 ) Income before income taxes, equity loss in investee and impairment loss $ 291,684 $ 409 Income tax expense (benefit) consisted of the following: Year Ended December 31, 2020 2019 (in thousands) Current: Federal $ 53,794 $ 5 State 20,513 38 Total Current 74,307 43 Deferred: Federal (248 ) (249 ) State (14 ) (280 ) Change in valuation allowance (1,513 ) 529 Total Deferred (1,775 ) — Total income tax expense $ 72,532 $ 43 Reconciliation of the difference between the federal statutory income tax rate and the effective income tax rate is as follows: Year Ended December 31, 2020 2019 Tax provision at federal statutory rate 21.00 % 21.00 % State taxes 5.68 % -46.76 % Foreign tax rate differential 0.00 % 13.83 % Uncertain Tax Positions 0.13 % 0.00 % Stock based compensation -0.92 % -53.53 % Return to provision -0.11 % -57.11 % Other permanent differences 0.02 % 3.87 % Other -0.41 % 0.01 % Change in valuation allowance -0.52 % 129.22 % Tax provision 24.87 % 10.53 % F-24 The following table summarizes the elements of the deferred tax assets (liabilities): Year Ended December 31, 2020 2019 (in thousands) Deferred tax assets Accrued vacation and other accrued expenses $ 166 $ 97 Provision for bad debts 513 180 Net operating losses 206 445 Stock based compensation 1,424 609 State income taxes 4,306 8 Foreign 1,220 545 Credits — 680 Lease liability 226 643 Equity loss in investment 700 — Other 89 — Gross deferred tax assets 8,850 3,207 Less: Valuation allowance (2,021 ) (2,125 ) Net deferred tax assets 6,829 1,082 Deferred tax liabilities Depreciation 4,830 419 Right of use asset 224 633 Other 147 30 Total deferred tax liabilities 5,201 1,082 Net deferred tax assets $ 1,628 $ — As of December 31, 2020, the Company has no estimated federal net operating loss, or NOL, carryforwards and estimated state NOL carryforwards of $1.9 million. The Company’s state NOLs are scheduled to expire from 2022 through 2042. The Company also has foreign NOL carryforwards of $405,000 which are scheduled to expire from 2021 through 2025. FASB ASC 740 requires that deferred income tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred income tax assets will not be realized. The Company has evaluated the realizability of its deferred tax assets and has concluded that it is more likely than not that the Company may not realize the benefit of certain deferred tax assets. These deferred tax assets consist primarily of equity losses in joint ventures and foreign net operating loss carryforwards; accordingly, a valuation allowance of $2.0 million has been recorded on these deferred tax assets as of December 31, 2020. At December 31, 2019, the Company concluded that it was more likely than not that the Company may not realize the benefit of its deferred tax assets, primarily as a result of operating losses in recent years and, accordingly, provided a full valuation allowance of $2.1 million. The decrease in the valuation allowance of $104,000 for the year ended December 31, 2020 was primarily due to current and expected future operating profits. During 2020 and 2019 the Company recorded deferred tax assets related to its equity method investment in FF Gene Biotech. When realized, the asset will generate a capital loss which may only be used to offset capital gain income. The Company does not currently have any capital gain income and has therefore recorded a full valuation allowance against this asset. During 2020, the Company recorded a deferred tax asset related to the impairment of its investment in BostonMolecules, Inc. When realized, the asset will generate a capital loss which may only be used to offset capital gain income; therefore, the Company has recorded a full valuation allowance against this asset. The net deferred assets are included in other long-term assets in the accompanying Consolidated Balance Sheets. Uncertain Tax Positions The Company is subject to income taxation by the United States government and certain states in which the Company's activities give rise to an income tax filing requirement. The Company does not have any significant income tax filing requirements in any foreign jurisdiction. As of December 31, 2020, there were no pending tax audits in any jurisdiction. The tax returns are subject to statutes of limitations that vary by jurisdiction. At December 31, 2020, the Company remains subject to income tax examinations in the U.S. and various states for tax years 2017 through 2020. 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. F-25 A reconciliation of the Company’s gross unrecognized tax benefits is as follows : Year Ended December 31, 2020 2019 (in thousands) Balance at beginning of year $ — $ — Increases to prior positions 141 — Increases for current year positions 236 — Balance at end of year $ 377 $ — As of December 31, 2020, the Company has $377,000 of gross unrecognized tax benefits, related to research and experimental tax credits. The Company has $377,000 of unrecognized tax benefits as of December 31, 2020, which, if recognized, would affect the annual effective tax rate. The Company has no accrual for interest or penalties at December 31, 2020 or 2019, and has not recognized interest or penalties during the years ended December 31, 2020 and 2019. Although it is possible that the amount of unrecognized benefits with respect to our uncertain tax positions will increase or decrease in the next twelve months, the Company does not expect material changes. While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could differ from the Company's accrued positions. Accordingly, additional provisions on federal, state and foreign tax-related matters could be recorded in future periods as revised estimates are settled or otherwise resolved. Note 12. Income (Loss) per Share The following is a reconciliation of the basic and diluted income (loss) per share computations: Year Ended December 31, 2020 2019 (in thousands, except per share data) Net income (loss) $ 214,310 $ (411 ) Weighted-average common shares - outstanding, basic 22,694 18,709 Weighted-average common shares - outstanding, diluted 24,056 18,709 Net income (loss) per common share, basic $ 9.44 $ (0.02 ) Net income (loss) per common share, diluted $ 8.91 $ (0.02 ) The following securities have been excluded from the calculation of diluted loss per share for all periods presented because their effect would have been anti-dilutive: Year Ended December 31, 2020 2019 (in thousands) Options 10 36 RSUs 347 161 The anti-dilutive shares described above were calculated using the treasury stock method. During the year ended December 31, 2019, the Company had outstanding options and RSUs that were excluded from the weighted-average share calculation for continuing operations due to the Company’s net loss positions. F-26 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 $422,000 and $237,000 in the years ended December 31, 2020 and 2019, 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 $3.1 million in revenue in the year ended December 31, 2020. As of December 31, 2020, $1.8 million 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. The Spouse of the Company’s founder, Chief Executive Officer and Chairman of the Company’s board of directors, Ming Hsieh, is the owner of JEM Enterprise, or JEM. In the year ended December 31, 2020 , the Company purchased $200,000 of office furniture and supplies from JEM. The Company believed $200,000 was a fair market price for the furniture purchased. As of December 31, 2020 , zero was owed to JEM by the Company in connection with this relationship. The Chief Executive Officer and Chairman of the Company’s board of directors, 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 year ended December 31, 2020, the Company incurred $343,000 in expenses for flights between California and Texas to transport employees and supplies. As of December 31, 2020, $94,000 was owed to PTJ by the Company, which is included in accounts payable in the accompanying Consolidated Balance Sheets, in connection with this relationship. As more fully described in Note 15, Equity Method Investments, in April 2017, the Company, through an affiliated company formed for the purpose of the relationship, entered into a cooperation agreement, or JV Agreement, with Xilong Scientific Co., Ltd., or Xilong Scientific, and Fuzhou Jinqiang Investment Partnership (LP), or FJIP, to form a joint venture under the laws of the People’s Republic of China, or China, called Fujian Fujun Gene Biotech Co., Ltd., or FF Gene Biotech. Xilong Scientific is an affiliate of Xi Long USA, Inc., a company which at one point owned greater than 10% of the Company’s common stock. XiLong USA, Inc. has since reported beneficial ownership of 4.92% of the Company’s common stock in a Schedule 13G filed with the SEC on June 12, 2020. FJIP is owned by key management of FF Gene Biotech, including Dr. Han Lin Gao, the Chief Scientific Officer and a large stockholder of the Company and the owner of approximately 25% of FJIP. The Company and Fulgent Pharma LLC, the Company’s former subsidiary, are party to shared services arrangements where research and development and administrative services and office space and equipment are provided between the companies, on an arms-length basis . Ming Hsieh is the Manager and a member of Fulgent Pharma LLC. During the year ended December 31, 2020, the research development service rendered by Fulgent Pharma LLC was $427,000 and costs allocated to Fulgent Pharma, LLC were $52,000. Costs allocated to Fulgent Pharma LLC were not significant during the year ended December 31, 2019. As of December 31, 2020, $409,000 was owed to Fulgent Pharma LLC by the Company, which is included in accrued liabilities in the accompanying Consolidated Balance Sheets, and as of December 31, 2019, $26,000 was owed to the Company by Fulgent Pharma, which is recorded in other receivable in other current assets in the accompanying Consolidated Balance Sheet, in connection with these relationships. Note 15. Equity Method Investments In April 2017, the Company, through an affiliated company formed for the purpose of the relationship, entered into the JV Agreement with Xilong Scientific and FJIP to form FF Gene Biotech, a joint venture formed under the laws of China to offer genetic testing services to customers in China. Pursuant to the terms of the JV Agreement, the Company has agreed to contribute to FF Gene Biotech genetic sequencing and other equipment with a total cost of 60.0 million renminbi, or RMB, over a five-year period for a 30% ownership interest in FF Gene Biotech, previously three-year per original agreement and amended in April 2019. Xilong Scientific has agreed to contribute to FF Gene Biotech 102.0 million RMB over a five-year period for a 51% ownership interest in the FF Gene Biotech, previously three-year per original agreement and amended in April 2019. FJIP has agreed to contribute to FF Gene Biotech 19.0 million RMB over a ten-year period for a 19% ownership interest in FF Gene Biotech, previously five-year per original agreement and amended in April 2019. The Company’s maximum exposure to fund losses of FF Gene Biotech as a result of its minority ownership of this entity is equal to its contribution obligation under the JV Agreement as described above. As of December 31, 2020, 29.7 million RMB (or approximately $4.5 million U.S. dollars) remained to be contributed to FF Gene Biotech by the F-27 Company under the terms of the JV Agreement, and the Company has purchased and contributed equipment with an aggregate fair value of $ 4.5 million pursuant to its contribution commitment under the JV Agreement, of which, $ 1.4 million and $ 137 ,000 were contributed in the year ended December 31, 2020 and 2019 , respectively. The Company accounted for this contribution in accordance with ASC 845, Nonmonetary Transactions, and recorded an investment based on the fair value of the contributed equipment, which is the same as carryover basis. In the year ended December 31, 2020, the Company recorded an impairment loss of $ 1.8 million from the investment on FF Gene Biotech as the decline in the fair value of the investment compared to the pro forma carrying value is more than the current carrying value, and the Company believes the decline is other-than-temporary. 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 does not have the power to direct the most significant activities of FF Gene Biotech and therefore is not the primary beneficiary of the entity. 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. The Company accounts for its 30% interest in FF Gene Biotech using the equity method of accounting. The Company recorded its proportionate share of the losses of FF Gene Biotech for the year ended December 31, 2020 and 2019 in the accompanying Consolidated Statements of Operations, and recorded its contribution during the period, net of its proportionate share in the accumulated losses and impairment loss of FF Gene Biotech, in the accompanying Consolidated Balance Sheet as of December 31, 2020 and 2019. FF Gene Biotech provided curation services, on an arms-length basis, for the Company, the cost of such services was insignificant for the year ended December 31, 2020 and 2019. Summary Financial Information In the year ended December 31, 2020, FF Gene did not constitute 10 percent or more of the Company’s consolidated assets, equity or income from continuing operation, thus the results of operations of FF Gene were not significant to the Company. Summarized financial information for FF Gene Biotech for 2019 is as follows. December 31, 2019 Consolidated Balance Sheet Data: (in thousands) Current assets $ 3,007 Non-current assets $ 4,457 Current liabilities $ 3,748 Non-current liabilities $ 889 Minority interest $ (426 ) Stockholders' equity $ 3,253 Year Ended December 31, 2019 Consolidated Statement of Operations Data: (in thousands) Net sales $ 4,055 Gross profit $ 1,354 Net loss $ (3,009 ) Share of loss from investments accounted for using the equity method $ (777 ) BostonMolecules, Inc. In September 2020, the Company entered into a Series A Preferred Stock Purchase Agreement, or the Series A Purchase Agreement, with BostonMolecules, Inc., or BostonMolecules, a Delaware corporation, pursuant to which the Company purchased 333 shares of Series A Preferred Stock of BostonMolecules, $0.0001 par value per share, or the BostonMolecules Shares, at a purchase price of $7,500 per share and an aggregate purchase price of $2.5 million. The BostonMolecules Shares represent an approximate 25% ownership interest in BostonMolecules. In connection with its purchase of the BostonMolecules Shares, the Company was granted the right to designate a member of BostonMolecules board of directors and the Company has designated Ming Hsieh to hold this position. F-28 The Company concluded that it has the ability to exercise significant influence over the operating and financial policies of BostonMolecules and therefore concluded the purchase is an equity-method investment. Judgment regarding the level of influence over BostonMolecules includes consideration of key factors such as the Company's ownership interest and representation on the board of directors. The Company initially accounted for its 25% interest in BostonMolecules using the equity method of accounting. The primary purpose of the investment was to gain access to certain technologies and products BostonMolecules was developing, however, after the investment was made, similar products became available in the market, and the development of BostonMolecules’ products was delayed. Since the current expected performance of BostonMolecules is significantly worse than anticipated when the investment was initially made and recoverability of the Company's investment is not expected, the Company determined its investment has been fully impaired. Total investment and direct costs associated with the investment were $2.6 million for the year ended December 31, 2020 . The Company recorded the impairment loss using the equity method in the accompanying Consolidated Statements of Operations. The Company also entered into a distribution agreement with BostonMolecules in June 2020, or the Distribution Agreement, and upon the closing of the aforementioned investment, the Distribution Agreement was amended and restated, as amended and restated, the Amended Distribution Agreement. P ursuant to the Amended Distribution Agreement, the Company will purchase, use and distribute COVID-19 test kits from BostonMolecules and offer a testing service using these test kits for its customers within the United States and Canada. Pursuant to the Amended Distribution Agreement, the Company may purchase the COVID-19 test kits from BostonMolecules at a price that is no less favorable than the lowest price charged by BostonMolecules to any third party in the United States and Canada for these test kits or their substantial equivalent during the same calendar year. The Company did not purchase any test kits from BostonMolecules in the year ended December 31, 2020 . Equity method investments as of December 31, 2020 and 2019 consisted of the following: December 31, 2020 2019 Carrying Value Ownership Percentage Carrying Value Ownership Percentage (in thousands) (in thousands) FF Gene Biotech $ — 30 % $ 872 30 % BostonMolecules — 25 % — 0 % Total equity method investments $ — $ 872 Note 16. Equity Distribution Agreements In August 2019, the Company entered into an Equity Distribution Agreement, or the 2019 Equity Distribution Agreement, with Piper Jaffray & Co., or Piper, as sales agent, which was amended on August 4, 2020. During the year ended December 31, 2019, the Company sold an aggregate of 104,000 shares of its common stock pursuant to the 2019 Equity Distribution Agreement at a weighted-average net selling price of $9.37 per share, which resulted in $979,000 of net proceeds to the Company. During the year ended December 31, 2020, the Company sold an aggregate of 1.1 million shares of its common stock pursuant to the 2019 Equity Distribution Agreement at a weighted-average net selling price of $38.50 per share, which resulted in $42.7 million of net proceeds to the Company. Shares sold under the 2019 Equity Distribution Agreement were offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-233227) filed with the SEC on August 12, 2019 and declared effective on August 23, 2019, and prospectus supplements and accompanying base prospectus filed with the SEC on August 30, 2019, May 6, 2020 and August 5, 2020. In September 2020, the Company entered into an Equity Distribution Agreement, or the September 2020 Equity Distribution Agreement, with Piper as sales agent, pursuant to which the Company sold an aggregate of 2.8 million shares of its common stock at a weighted-average net selling price of $42.90 per share, which resulted in $122.1 million of net proceeds to the Company. Shares sold under the September 2020 Equity Distribution Agreement were offered and sold pursuant to the Company’s registration statement on Form S-3 (File No. 333-239964) filed with the SEC on July 21, 2020, as amended on August 5, 2020, and declared effective on August 12, 2020, and a prospectus supplement and accompanying base prospectus filed with the SEC on September 25, 2020. In November 2020, the Company entered into an Equity Distribution Agreement, or the November 2020 Equity Distribution Agreement, with Piper, Oppenheimer & Co. Inc., and BTIG LLC, as sales agents, pursuant to which the Company may offer and sell, from time to time through Piper, shares of its common stock having an aggregate offering price of up to $175.0 million. Piper may receive a commission of up to 3% of the gross proceeds received by the Company for sales pursuant to the November 2020 Equity Distribution Agreement. During the year ended December 31, 2020, the Company sold an aggregate of 2.0 million shares of its F-29 common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $ 48.70 per share, which resulted in $ 99.1 million of net proceeds to the Company. Shares sold under the November 2020 Equity Distribution Agreement were offered and sold pursuant to the Company’s registration statement on Form S-3 (File No. 333-239964) filed with the SEC on July 21, 2020, as amended on August 5, 2020, and declared effective on August 12, 2020, and a prospectus supplement and accompanying base prospectus filed with the S EC on November 20, 2020 . Note 17. Underwriting Agreement On November 13, 2019, the Company entered into a purchase agreement with Piper as representative of the several underwriters, pursuant to which the Company sold 2,673,750 shares of its common stock at a price of $10.51875 per share, with a public offering price of $11.25 per share. The Company received net proceeds of approximately $27.6 million, after deducting underwriting discounts and commissions and offering expenses paid or payable by us of approximately $2.4 million. The shares issued and sold in the underwritten offering were sold pursuant to a shelf registration statement registered under the Securities Act on a registration statement on Form S-3 (File No. 333-233227), as amended, and a prospectus supplement and accompanying base prospectus filed with the SEC on November 13, 2019. Note 18. Subsequent Event Subsequent to December 31, 2020, the Company sold an aggregate of 582,650 shares of its common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average selling price of $53.15 per share, which resulted in approximately $31.0 million of gross proceeds to the Company. Shares sold under the November 2020 Equity Distribution Agreement were offered and sold pursuant to the Company’s registration statement on Form S-3 (File No. 333-239964) filed with the SEC on July 21, 2020, as amended on August 5, 2020, and declared effective on August 12, 2020, and a prospectus supplement and accompanying base prospectus filed with the SEC on November 20, 2020. F-30 Note 1 9 . Selected Quarterly Financial Data (Unaudited) The tables below set forth the Company’s quarterly Consolidated Statements of Operations data for the eight quarters ended December 31, 2020. In the opinion of management, this quarterly data has been prepared on the same basis as the accompanying consolidated financial statements and includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations for the periods presented. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the report in which these consolidated financial statements are included for descriptions of the effects of any extraordinary, unusual or infrequently occurring items recognized in any of the periods covered by this data. The results for any one quarter are not indicative of the results to be expected in the current period or any future period . Three Months Ended Dec. 31, 2020 Sept. 30, 2020 June 30, 2020 Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31, 2019 (dollars in thousands, except per share data) Statement of Operations Data: Revenue $ 294,978 $ 101,716 $ 17,265 $ 7,753 $ 8,387 $ 10,347 $ 8,424 $ 5,370 Cost of revenue 51,772 26,261 7,717 4,057 3,634 3,885 3,620 2,968 Gross profit 243,206 75,455 9,548 3,696 4,753 6,462 4,804 2,402 Operating expenses: Research and development 4,576 3,177 1,849 1,978 1,795 1,744 1,574 1,424 Selling and marketing 5,081 5,014 3,260 1,597 1,635 1,687 1,304 1,272 General and administrative 7,640 3,741 1,799 2,035 1,732 1,522 1,631 1,529 Total operating expenses 17,297 11,932 6,908 5,610 5,162 4,953 4,509 4,225 Operating income (loss) 225,909 63,523 2,640 (1,914 ) (409 ) 1,509 295 (1,823 ) Interest and other income, net 589 421 275 241 249 189 192 207 Income (loss) before income taxes, equity earnings (loss) in investee and impairment loss 226,498 63,944 2,915 (1,673 ) (160 ) 1,698 487 (1,616 ) Provision for (benefit from) income taxes 58,571 14,526 (599 ) 34 (38 ) 61 7 13 Income (loss) before equity earnings (loss) in investee and impairment loss 167,927 49,418 3,514 (1,707 ) (122 ) 1,637 480 (1,629 ) Equity earnings (loss) in investee 143 (189 ) (193 ) (249 ) (174 ) (175 ) (149 ) (279 ) Impairment loss in equity-method investment (1,763 ) (2,591 ) — — — — — — Net income (loss) $ 166,307 $ 46,638 $ 3,321 $ (1,956 ) $ (296 ) $ 1,462 $ 331 $ (1,908 ) Net income (loss) per common share: Basic $ 6.55 $ 2.11 $ 0.15 $ (0.09 ) $ (0.01 ) $ 0.08 $ 0.02 $ (0.10 ) Diluted $ 6.16 $ 1.98 $ 0.14 $ (0.09 ) $ (0.01 ) $ 0.08 $ 0.02 $ (0.10 ) F-31