Fulgent Genetics, Inc. 10-Q

Item 1. Financial Statements. FULGENT GENETICS, INC. Condensed Consolidated Balance Sheets (in thousands, except par value data) (unaudited) September 30, December 31, 2021 2020 Assets Current assets Cash and cash equivalents $ 214,877 $ 87,426 Marketable securities 255,102 211,941 Trade accounts receivable, net of allowance for credit losses of $ 6,893 and $ 1,898 as of September 30, 2021 and December 31, 2020, respectively 120,822 183,857 Other current assets 32,035 40,392 Total current assets 622,836 523,616 Marketable securities, long-term 407,284 132,502 Redeemable preferred stock investment 20,000 — Fixed assets, net 60,166 40,199 Acquisition-related intangible assets, net 36,684 — Goodwill 48,749 — Other long-term assets 8,949 4,144 Total assets $ 1,204,668 $ 700,461 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 24,868 $ 26,488 Income tax payable 17,875 53,319 Contract liabilities 7,879 26,576 Customer deposit 41,510 185 Investment margin loan 15,107 15,019 Other current liabilities 39,919 8,528 Total current liabilities 147,158 130,115 Notes payable 5,947 — Unrecognized tax benefits 534 377 Other long-term liabilities 6,576 582 Total liabilities 160,215 131,074 Commitments and contingencies (Note 8) Stockholders’ equity Common stock, $ 0.0001 par value per share, 50,000 shares authorized, 29,829 and 28,178 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively 3 3 Preferred stock, $ 0.0001 par value per share, 1,000 shares authorized, no shares issued or outstanding at September 30, 2021 and December 31, 2020 — — Additional paid-in capital 483,731 418,065 Accumulated other comprehensive income (loss) ( 212 ) 438 Retained earnings 553,258 150,881 Total Fulgent stockholders' equity 1,036,780 569,387 Noncontrolling interest 7,673 — Total stockholders’ equity 1,044,453 569,387 Total liabilities and stockholders’ equity $ 1,204,668 $ 700,461 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 FULGENT GENETICS, INC. Condensed Consolidated Statements of Operations (in thousands, except per share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue $ 227,868 $ 101,716 $ 740,913 $ 126,734 Cost of revenue 43,466 26,261 153,399 38,035 Gross profit 184,402 75,455 587,514 88,699 Operating expenses: Research and development 6,021 3,177 16,755 7,004 Selling and marketing 6,012 5,014 16,239 9,871 General and administrative 12,299 3,741 28,630 7,575 Amortization of acquisition-related intangible assets 797 — 797 — Total operating expenses 25,129 11,932 62,421 24,450 Operating income 159,273 63,523 525,093 64,249 Interest and other income, net 496 421 1,382 937 Income before income taxes, gain (loss) on equity method investments and equity loss in investee 159,769 63,944 526,475 65,186 Provision for income taxes 37,545 14,526 127,647 13,961 Income before gain (loss) on equity method investments and equity loss in investee 122,224 49,418 398,828 51,225 Gain (loss) on equity-method investments — ( 2,591 ) 3,734 ( 2,591 ) Equity loss in investee — ( 189 ) — ( 631 ) Net income from consolidated operations 122,224 46,638 402,562 48,003 Net loss attributable to noncontrolling interests 298 — 463 — Net income attributable to Fulgent $ 122,522 $ 46,638 $ 403,025 $ 48,003 Net income per common share attributable to Fulgent: Basic $ 4.13 $ 2.11 $ 13.79 $ 2.20 Diluted $ 3.93 $ 1.98 $ 13.04 $ 2.07 Weighted-average common shares: Basic 29,673 22,062 29,221 21,793 Diluted 31,170 23,539 30,906 23,135 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 FULGENT GENETICS, INC. Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income from consolidated operations $ 122,224 $ 46,638 $ 402,562 $ 48,003 Other comprehensive income (loss): Foreign currency translation gain (loss) ( 114 ) 18 ( 78 ) 17 Net unrealized gain (loss) on marketable securities, net of tax 142 ( 460 ) ( 587 ) 444 Comprehensive income from consolidated operations 122,252 46,196 401,897 48,464 Net loss attributable to noncontrolling interest 298 — 463 — Foreign currency translation loss attributable to noncontrolling interest 25 — 15 — Comprehensive loss attributable to noncontrolling interest 323 — 478 — Comprehensive income attributable to Fulgent $ 122,575 $ 46,196 $ 402,375 $ 48,464 The accompanying notes are an integral part of these condensed consolidated financial statements . 3 FULGENT GENETICS, INC. Condensed Consolidated Statements of Stockholders’ Equity (in thousands) (unaudited) Fulgent Stockholders' Equity Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Fulgent Stockholders' Equity Noncontrolling Interest Total Equity Balance at December 31, 2020 28,178 $ 3 $ 418,065 $ 438 $ 150,881 $ 569,387 $ — $ 569,387 Equity-based compensation — — 2,962 — — 2,962 — 2,962 Exercise of common stock options 45 — 44 — — 44 — 44 Restricted stock awards 187 — — — — — — — Common stock withholding for employee tax obligations ( 4 ) — ( 513 ) — — ( 513 ) — ( 513 ) Issuance of common stock at an average of $ 52.00 per share, net 583 — 30,297 — — 30,297 — 30,297 Other comprehensive loss — — — ( 654 ) — ( 654 ) — ( 654 ) Cumulative effect of accounting change — — — — ( 887 ) ( 887 ) — ( 887 ) Cumulative tax effect of accounting change — — — — 239 239 — 239 Net income — — — — 200,691 200,691 — 200,691 Balance at March 31, 2021 28,989 3 450,855 ( 216 ) 350,924 801,566 — 801,566 Equity-based compensation — — 3,526 — — 3,526 — 3,526 Exercise of common stock options 4 — 24 — — 24 — 24 Restricted stock awards 143 — — — — — — — Common stock withholding for employee tax obligations ( 1 ) — ( 39 ) — — ( 39 ) — ( 39 ) Issuance of common stock at an average of $ 73.75 per share, net 378 — 27,889 — — 27,889 — 27,889 Noncontrolling interest assumed related to acquisitions — — — — — — 8,151 8,151 Other comprehensive gain (loss) — — — ( 49 ) ( 49 ) 10 ( 39 ) Net income (loss) — — — — 79,812 79,812 ( 165 ) 79,647 Balance at June 30, 2021 29,513 3 482,255 ( 265 ) 430,736 912,729 7,996 920,725 Equity-based compensation — — 4,374 — — 4,374 — 4,374 Exercise of common stock options 25 — 17 — — 17 — 17 Restricted stock awards 320 — — — — — — — Common stock withholding for employee tax obligations ( 29 ) — ( 2,915 ) — — ( 2,915 ) — ( 2,915 ) Other comprehensive gain (loss) — — — 53 — 53 ( 25 ) 28 Net income (loss) — — — — 122,522 122,522 ( 298 ) 122,224 Balance at September 30, 2021 29,829 $ 3 $ 483,731 $ ( 212 ) $ 553,258 $ 1,036,780 $ 7,673 $ 1,044,453 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 FULGENT GENETICS, INC. Condensed Consolidated Statements of Stockholders’ Equity (in thousands) (unaudited) Fulgent Stockholders' Equity Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Equity Balance at December 31, 2019 21,483 $ 2 $ 146,058 $ 146 $ ( 63,429 ) $ 82,777 Equity-based compensation — — 924 — — 924 Exercise of common stock options 33 — 12 — — 12 Restricted stock awards 159 — — — — — Common stock withholding for employee tax obligations ( 3 ) — ( 46 ) — — ( 46 ) Other comprehensive loss — — — ( 339 ) — ( 339 ) Net loss — — — — ( 1,956 ) ( 1,956 ) Balance at March 31, 2020 21,672 2 146,948 ( 193 ) ( 65,385 ) 81,372 Equity-based compensation — — 1,080 — — 1,080 Exercise of common stock options 11 — 28 — — 28 Restricted stock awards 127 — — — — — Other comprehensive gain — — — 1,242 — 1,242 Net income — — — — 3,321 3,321 Balance at June 30, 2020 21,810 2 148,056 1,049 ( 62,064 ) 87,043 Equity-based compensation — — 3,150 — — 3,150 Exercise of common stock options 6 — 62 — — 62 Restricted stock awards 183 — — — — — 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 $ 39.24 per share, net 200 — 7,849 — — 7,849 Other comprehensive loss — — — ( 442 ) — ( 442 ) Net income — — — — 46,638 46,638 Balance at September 30, 2020 23,307 $ 2 $ 201,772 $ 607 $ ( 15,426 ) $ 186,955 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 FULGENT GENETICS, INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Nine Months Ended September 30, 2021 2020 Cash flow from operating activities: Net income from consolidated operations $ 402,562 $ 48,003 Adjustments to reconcile net income to net cash provided by operating activities: Equity-based compensation 10,862 5,154 Depreciation and amortization 7,513 1,840 Noncash lease expense 682 345 Loss on disposal of fixed asset 779 352 Amortization of premium of marketable securities 5,490 327 Provision for credit losses 4,107 441 Deferred taxes ( 6,574 ) ( 1,083 ) Unrecognized tax benefits 157 389 Net loss on marketable securities 595 — Equity loss in investee — 631 Gain (loss) on equity-method investments ( 3,734 ) 2,591 Other ( 22 ) ( 7 ) Changes in operating assets and liabilities: Trade accounts receivable 65,003 ( 84,557 ) Other current and long-term assets ( 2,086 ) ( 19,176 ) Accounts payable ( 9,002 ) 14,675 Accrued liabilities and other liabilities ( 953 ) 22,169 Income tax payable ( 35,444 ) 14,603 Contract liabilities ( 18,697 ) — Customer deposit 40,902 — Operating and finance lease liabilities ( 649 ) ( 325 ) Net cash provided by operating activities 461,491 6,372 Cash flow from investing activities: Purchases of fixed assets ( 17,829 ) ( 11,336 ) Proceeds from sale of fixed assets 22 8 Purchase of marketable securities ( 523,939 ) ( 13,563 ) Purchase of redeemable preferred stock ( 20,000 ) — Proceeds from sale of marketable securities 155,809 8,072 Maturities of marketable securities 61,516 13,119 Acquisition of businesses, net of cash acquired ( 61,868 ) — Investment in equity-method investees — ( 3,971 ) Net cash used in investing activities ( 406,289 ) ( 7,671 ) Cash flow from financing activities: Proceeds from public offerings of common stock, net of issuance costs 75,626 42,292 Proceeds from noncontrolling interest 10 — Proceeds from exercise of stock options 85 102 Principal paid for finance lease ( 3 ) — Common stock withholding for employee tax obligations ( 3,467 ) ( 46 ) Net cash provided by financing activities 72,251 42,348 Effect of exchange rate changes on cash and cash equivalents ( 2 ) 17 Net increase in cash and cash equivalents 127,451 41,066 Cash and cash equivalents at beginning of period 87,426 11,965 Cash and cash equivalents at end of period $ 214,877 $ 53,031 Supplemental disclosures of cash flow information: Income taxes paid $ 169,540 $ 28 Supplemental disclosures of non-cash investing and financing activities: Purchases of marketable securities in other current liabilities $ 20,092 $ — Contingent consideration for business acquisition included in other current liabilities $ 8,500 $ — Purchases of fixed assets in accounts payable $ 2,279 $ 2,822 Operating lease right-of-use assets obtained in exchange for lease liabilities $ 1,706 $ 393 Operating lease right-of-use assets reduced due to lease modification and termination $ 399 $ — Public offerings proceeds included in other current assets $ — $ 8,407 Public offerings costs included in accounts payable $ — $ 374 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 FULGENT GENETICS, INC. Notes to the Condensed Consolidated Financial Statements (unaudited) Note 1. Overview and Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. These financial statements include the assets, liabilities, revenues and expenses of all subsidiaries and entities in which the Company has a controlling financial interest or is deemed to be the primary beneficiary. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company uses the equity method to account for its investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. All significant intercompany accounts and transactions are eliminated from the accompanying condensed 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 United States, or 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 has 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. In August 2021, the Company acquired Cytometry Specialists, Inc., or CSI, to expand the Company’s presence and capabilities in somatic molecular diagnostics and cancer testing. 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. Unaudited Interim Financial Information The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s audited consolidated financial statements as of and for the fiscal year ended December 31, 2020, which are included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 8, 2021, or 2020 Annual Report, and, in the opinion of management, include all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the Company’s financial position and results of operations. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or any other period. The accompanying Condensed Consolidated Balance Sheet as of December 31, 2020 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the disclosures required by U.S. GAAP. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements included in the 2020 Annual Report, including the notes thereto. 7 Note 2. Summary of Significant Accounting Policies See the summary of the Company’s significant accounting policies set forth in the notes to its consolidated financial statements included in the 2020 Annual Report. Use of Estimates The preparation of condensed 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 condensed 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) trade accounts receivable and allowances for credit losses, (iii) the useful lives of fixed assets, (iv) estimates of tax liabilities, (v) the valuation of equity method investments, (vi) valuation of acquisition-related intangibles and goodwill, and (vii) useful lives of intangible assets and fixed assets. Foreign Currency Translation and Foreign Currency Transactions The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in accumulated other comprehensive income (loss) in the accompanying Condensed Consolidated Statements of Stockholders’ Equity. Losses from these translations were not significant in the three and nine months ended September 30, 2021, and gains from these translations were not significant for the three and nine months ended September 30, 2020. The Company and its subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and nonmonetary assets and liabilities at historical rates. Losses from these remeasurements were not significant in the three and nine months ended September 30, 2021 and 2020. Leases The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Operating and finance lease right-of-use, or ROU assets, short-term lease liabilities, and long-term lease liabilities were included in other long-term assets, other current liabilities, and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheets. Lease ROU 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. Lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, including options to extend the lease when it is reasonably certain that the Company will exercise that option. The Company uses its incremental borrowing rate based on the information available at the commencement date, including inquiries with its bank, in determining the present value of lease payments since its leases do not provide an implicit rate. Lease ROU assets consist of initial measurement of lease liabilities, any lease payments made to lessor on or before the lease commencement date, minus any lease incentive received, and any initial direct costs incurred by the Company. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term. For finance lease, ROU assets are amortized on a straight-line basis from the commencement date to the earlier of the end of useful life of the ROU assets or the end of the lease term. Amortization of ROU assets and interest on the lease liability for finance leases are included as charges to the accompanying Condensed Consolidated Statements of Operations. Lease ROU assets and liabilities arising from business combinations are recognized and measured at the acquisition dates as if an acquired lease were a new lease at the date of acquisition using the Company’s incremental borrowing rate unless the discount rate is implicit in the lease. The Company elects to not to recognize assets or liabilities as of the acquisition dates for leases that, on the acquisition dates, have a remaining lease term of 12 months or less. The Company also retains the acquirees’ classification of the leases if there are no modifications as part of the business combinations. 8 The Company leases and subleases out space in buildings it owns or leases to third-party tenants or subtenants under noncancelable operating leases . T he Company recognizes lease payments as income over the lease terms on a straight-line basis and recognizes variable lease payments as income in the period in which the changes in facts and circumstances on which the variable lease payments are based occur. The net rental income is included in the interest and other income, net, in the accompanying Condensed Consolidated Statement of Operations. Concentration of Customers In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue. After aggregating customers that are under common control or are affiliates, two customers contributed 31% and 11% of the Company’s revenue for the three months ended September 30, 2021, respectively, and one customer contributed 26 % of the Company’s revenue for the nine months ended September 30, 2021. One customer contributed 37 % and 35 % of the Company’s revenue for the three and nine months ended September 30, 2020, respectively. No customer comprised 10% or more of total accounts receivable as of September 30, 2021 and December 31, 2020. Revenue from the U.S. government was less than 10% of total revenue for the three and nine months ended September 30, 2021 and 2020. Revenue from Contracts with Customers 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 three and nine months ended September 30, 2021 and 2020 . Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Testing Services by payor Insurance $ 143,276 $ 66,111 $ 400,354 $ 66,936 Institutional 84,401 34,527 339,572 58,459 Patient 191 1,078 987 1,339 Total Revenue $ 227,868 $ 101,716 $ 740,913 $ 126,734 Contract Balances Receivables from contracts with customers —As of September 30, 2021 and December 31, 2020, receivables from contracts with customers were approximately $ 120.8 million and $ 183.9 million, respectively, and are included within trade accounts receivable on the Condensed Consolidated Balance Sheets. Contracts assets and liabilities —As of September 30, 2021 and December 31, 2020, contract assets from contracts with customers were $ 206,000 and $ 1.4 million, respectively, associated with contract execution and certain costs to fulfill a contract, and included in other current assets in the accompanying Condensed Consolidated Balance Sheets. Contract liabilities are recorded when the Company receives payment or bills prior to completing its obligation to transfer goods or services to a customer. The Company had $ 7.9 million and $ 26.6 million of contract liabilities as of September 30, 2021 and December 31, 2020, respectively. Revenues of $ 5.7 million and $ 252,000 for the three months and $ 26.4 million and $ 254,000 for the nine months were recognized for the periods ended September 30, 2021 and 2020, respectively, related to contract liabilities at the beginning of the respective periods. Transaction Price Allocated to Future Performance Obligations The Company does not have material future obligations associated with testing services that extend beyond one year. Reagents and Supplies The Company maintains reagents and other consumables primarily used in sample collections and testing which are valued at the lower of cost or net realizable value. Cost is determined using actual costs on a first-in, first-out basis. The reagents and supplies were 9 $ 22.0 million and $ 16.5 million as of September 30, 2021 and December 31, 2020, respectively, and was included in other current assets in the accompanying Condensed Consolidated Balance Sheets. Customer Deposit Customer deposit in the accompanying Condensed Consolidated Balance Sheets consists primarily of payments received from customers in excess of their outstanding trade accounts receivable balances, and the excess payments will be refunded to the customers or offset against future testing receivables. Trade Accounts Receivable and Allowance for Credit Losses Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains an allowance for credit losses for expected uncollectible trade accounts receivable, which is recorded as an offset to trade accounts receivable and changes in allowance for credit losses are classified as a general and administrative expense in the accompanying Condensed Consolidated Statements of Operations. The Company assesses collectability by reviewing trade accounts receivable on a collective basis where similar risk characteristics exist and on an individual basis when it identifies specific customers that have deterioration in credit quality such that they may no longer share similar risk characteristics with the other receivables. In determining the amount of the allowance for credit losses, the Company uses a probability-of-default and loss given default model, which allows the ability to define a point of default and measure credit losses for receivables that have reached the point of default for purposes of calculating the allowance for credit losses. Loss given default represents the likelihood that a receivable that has reached the point of default will not be collected in full. The Company will update its probability-of-default and loss given default factors annually to incorporate the most recent historical data and adjusts the quantitative portion of the reserve through its qualitative reserve overlay. The Company looks at qualitative factors such as general economic conditions in determining expected credit losses. During the three and nine months ended September 30, 2021, the Company recorded $ 848,000 and $ 4.1 million of provision for credit losses for trade accounts receivable, respectively. The provision was not significant for the three and nine months ended September 30, 2020. Marketable Securities All marketable debt securities, which consist of corporate debt securities, municipal bonds, U.S. government and 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 on marketable debt securities are included in interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations. The cost of any marketable debt securities sold is based on the specific-identification method. The amortized cost of marketable debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest on marketable debt securities is included in interest and other income, net. In accordance with the Company’s investment policy, management invests to diversify credit risk and only invests in securities with high credit quality, including U.S. government securities. The Company’s investments in marketable equity securities are measured at fair value with the related gains and losses, realized and unrealized, recognized in interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations. The cost of any marketable equity securities sold is based on the specific-identification method. For available-for-sale debt securities, in an unrealized loss, the Company determines whether a credit loss exists. The credit loss is estimated by considering available information relevant to the collectability of the security and information about past events, current conditions, and reasonable and supportable forecasts. Any credit loss is recorded as a charge to interest and other income, net, not to exceed the amount of the unrealized loss. If the Company has an intent to sell, or if it is more likely than not that the Company will be required to sell a debt security in an unrealized loss position before recovery of its amortized cost basis, the Company will write down the security to its fair value and record the corresponding charge as a component of interest and other income, net. Redeemable Preferred Stock Investment The redeemable preferred stock investment of $ 20.0 million as of September 30, 2021 consisted of redeemable preferred stock of Laboratory for Advanced Medicine, Inc., or Helio Health, that the Company purchased in July 2021. The investment is classified as available-for-sale debt securities. The fair value of available-for-sale debt security is included in the Condensed Consolidated Statement of Balance Sheets. Any unrealized holding gains and losses will be excluded from earnings and reported in other comprehensive income (loss) until realized. Since the Company intends on holding the preferred stock, and preferred stock is not redeemable until July 2027 , the investment is recorded as a long-term investment. 10 Business Combination The Company uses the acquisition method of accounting and allocates the fair value of purchase consideration to the assets acquired and liabilities assumed from an acquiree based on their respective fair values as of the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth and margins, future changes in technology, expected cost and time to develop in-process research and development, brand awareness and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability. Goodwill Goodwill is not amortized but is subject to impairment tests on an annual basis, or more frequently if indicators of potential impairment exist, and goodwill is written down when it is determined to be impaired. The Company will perform an annual impairment review in the fourth quarter of each fiscal year and compare the fair value of the reporting unit in which the goodwill resides to its carrying value. Recent Accounting Pronouncements The Company evaluates all Accounting Standards Updates, or ASUs, issued by the Financial Accounting Standards Board, or 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 condensed consolidated financial statements. Recently Adopted Accounting Pronouncements ASU 2016-13 In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. ASU 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 was 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 adopted ASU 2016-13 using the modified retrospective approach as of January 1, 2021. The cumulative effect upon adoption was $ 887,000 to the retained earnings in the accompanying Condensed Consolidated Statements of Stockholders’ Equity and trade accounts receivable, net, in the accompanying Condensed Consolidated Balance Sheets. The cumulative tax effect was $ 239,000 to retained earnings in the accompanying Condensed Consolidated Statements of Stockholders’ Equity and deferred tax assets included in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets. There was no impact related to available-for-sale debt securities. 11 ASU 2019-12 In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), or ASU 2019-12, 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 ASU simplifies the accounting for income taxes by removing some exceptions including the incremental approach for intraperiod tax allocation, the 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. For public business entities, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 with early adoption permitted. The Company adopted ASU 2019-12 in the first quarter of 2021, and the adoption had no material impact to the Company’s condensed consolidated financial statements. Note 3. Equity and Debt Securities The Company’s equity and debt securities consisted of the following: September 30, 2021 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Equity securities: Short-term Bond funds $ 129,343 $ — $ ( 356 ) $ 128,987 Exchange traded funds 35,098 — ( 8 ) 35,090 Total equity securities 164,441 — ( 364 ) 164,077 Available-for-sale debt securities Short-term Corporate debt securities 74,093 95 ( 26 ) 74,162 Money market accounts 50,425 — — 50,425 U.S. government debt securities 9,297 — ( 1 ) 9,296 Municipal bonds 3,955 — ( 4 ) 3,951 Yankee debt securities 3,620 — ( 2 ) 3,618 Less: Cash equivalents ( 50,425 ) — — ( 50,425 ) Total debt securities due within 1 year 90,965 95 ( 33 ) 91,027 After 1 year through 5 years Corporate debt securities 284,018 89 ( 507 ) 283,600 U.S. Government debt securities 54,854 4 ( 19 ) 54,839 U.S. agency debt securities 39,703 — ( 10 ) 39,693 Municipal bonds 12,283 14 ( 16 ) 12,281 Yankee debt securities 8,734 1 ( 23 ) 8,712 Total debt securities due after 1 year through 5 years 399,592 108 ( 575 ) 399,125 After 5 years through 10 years Municipal bonds 8,213 — ( 56 ) 8,157 Redeemable preferred stock investment 20,000 — — 20,000 Total debt securities due after 5 years through 10 years 28,213 — ( 56 ) 28,157 Total available-for-sale debt securities 518,770 203 ( 664 ) 518,309 Total equity and debt securities $ 683,211 $ 203 $ ( 1,028 ) $ 682,386 12 December 31, 2020 Amortized Cost Basis Unrealized Gains Unrealized Losses Aggregate Fair Value (in thousands) Equity securities: Short-term Bond funds $ 153,269 $ 67 $ ( 151 ) $ 153,185 Exchange traded funds 17,614 — ( 5 ) 17,609 Total equity securities 170,883 67 ( 156 ) 170,794 Available-for-sale debt securities Short-term Money market accounts 47,461 — — 47,461 Corporate debt securities 41,061 101 ( 15 ) 41,147 Less: Cash equivalents ( 47,461 ) — — ( 47,461 ) Total debt securities due within 1 year 41,061 101 ( 15 ) 41,147 After 1 year through 5 years Corporate debt securities 124,989 580 ( 117 ) 125,452 U.S. agency debt securities 1,000 2 — 1,002 Yankee debt securities 6,054 4 ( 10 ) 6,048 Total debt securities due after 1 year through 5 years 132,043 586 ( 127 ) 132,502 Total available-for-sale debt securities 173,104 687 ( 142 ) 173,649 Total equity and debt securities $ 343,987 $ 754 $ ( 298 ) $ 344,443 Gross unrealized losses on the Company’s marketable securities were $ 1.0 million as of September 30, 2021. Gross unrealized losses on the Company’s marketable securities were $ 298,000 as of December 31, 2020. During the three and nine months ended September 30, 2021, the Company did no t recognize credit losses. The Company’s securities of $ 421.2 million are used as collateral for an outstanding margin account borrowing. As of September 30, 2021, the Company had an outstanding borrowing of $ 15.1 million under its margin account. Margin account borrowings were used for the purchase of real property located in El Monte, California in 2020. 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. 13 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: September 30, 2021 Total Level 1 Level 2 Level 3 (in thousands) Equity securities, debt securities and cash equivalents: Bond funds $ 128,987 $ 128,987 $ — $ — Exchange traded funds 35,090 35,090 — — Corporate debt securities 357,762 — 357,762 — U.S. government debt securities 64,135 — 64,135 — U.S. agency debt securities 39,693 — 39,693 — Municipal bonds 24,389 — 24,389 — Yankee debt securities 12,330 — 12,330 — Redeemable preferred stock investment 20,000 — — 20,000 Money market accounts 50,425 50,425 — — Total equity securities, debt securities and cash equivalents $ 732,811 $ 214,502 $ 498,309 $ 20,000 December 31, 2020 Total Level 1 Level 2 Level 3 (in thousands) Equity securities, debt securities and cash equivalents: Bond funds $ 153,185 $ 153,185 $ — $ — Exchange traded funds 17,609 17,609 — — Corporate debt securities 166,599 — 166,599 — Yankee debt securities 6,048 — 6,048 — U.S. agency debt securities 1,002 — 1,002 — Money market accounts 47,461 47,461 — — Total equity securities, debt securities and cash equivalents $ 391,904 $ 218,255 $ 173,649 $ — The Company’s Level 1 assets include bond funds, exchange traded funds, and money market instruments and are valued based upon observable market prices. Level 2 assets consist of U.S. government and U.S. agency debt securities, municipal bonds, corporate debt securities and Yankee debt securities. Level 2 securities are valued based upon observable inputs that include reported trades, broker/dealer quotes, bids and offers. As of September 30, 2021, the Company had $ 20.0 million of redeemable preferred stock of Helio Health that was measured using unobservable (Level 3) inputs. The quantitative unobservable inputs for the redeemable preferred stock investment are not developed by the Company. The fair value is based on the most recent transaction price in July 2021, and there has not been any significant activity at Helio Health since July 2021, including any new funding rounds, that would result in a material change in the value. There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2021. 14 Note 5. Fixed Assets Major classes of fixed assets consisted of the following: September 30, December 31, Useful Lives 2021 2020 (in thousands) Medical lab equipment 2 to 12 Years $ 33,956 $ 20,849 Building 39 Years 6,731 6,731 Aircraft 7 Years 6,503 6,503 Computer hardware 1 - 5 Years 5,187 3,699 Leasehold improvements Shorter of lease term or estimated useful life 3,987 1,580 Computer software 1 to 5 Years 1,501 541 Furniture and fixtures 2 to 10 Years 1,074 454 Automobile 2 to 7 Years 803 53 Building improvements 6 months to 5 Years 707 707 Land improvements 5 to 15 Years 403 403 General equipment 3 to 5 Years 44 44 Land 7,500 7,500 Assets not yet placed in service 8,912 2,055 Total 77,308 51,119 Less: Accumulated depreciation ( 17,142 ) ( 10,920 ) Fixed assets, net $ 60,166 $ 40,199 Depreciation expense on fixed assets totaled $ 2.5 million and $ 722,000 for the three months and $ 6.7 million and $ 1.8 million for the nine months ended September 30, 2021 and 2020, respectively. Note 6. Other Significant Balance Sheet Accounts Other current assets consisted of the following: September 30, December 31, 2021 2020 (in thousands) Reagents and supplies $ 21,950 $ 16,491 Prepaid expenses 5,348 3,682 Marketable securities interest receivable 2,724 1,016 Other receivable 1,807 17,810 Contract assets 206 1,379 Prepaid income taxes — 14 Total $ 32,035 $ 40,392 Reagents and supplies include reagents and consumables used for COVID-19 testing and genetics testing and collection kits for COVID-19 testing. Other receivable as of December 31, 2020 primarily consists of proceeds to be received from public offerings of the Company’s common stock, which were all collected during the nine months ended September 30, 2021. 15 Other current liabilities consisted of the following: September 30, December 31, 2021 2020 (in thousands) Payable to a broker $ 20,092 $ — Contingent consideration 8,500 — Payroll liabilities 8,380 5,314 Operating lease liabilities, short term 1,830 267 Due to related parties 634 409 Sales tax payable and other 467 2,538 Finance lease liabilities, short term 16 — Total $ 39,919 $ 8,528 The payable to a broker of $ 20.1 million was for marketable securities purchased before the period-end that did not settle until after period-end, and contingent consideration of $ 8.5 million was related to the acquisition of CSI (see Note 14). Note 7. Reporting Segment and Geographic Information The Company views its operations and manages its business in one reporting segment. Long-lived assets were primarily located in the United States as of September 30, 2021 and December 31, 2020 with an insignificant amount located in China and Canada. Revenue by region during the three and nine months ended September 30, 2021 and 2020 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Revenue: United States $ 223,685 $ 100,223 $ 731,084 $ 122,000 Foreign 4,183 1,493 9,829 4,734 Total $ 227,868 $ 101,716 $ 740,913 $ 126,734 Note 8. Debt, Commitments and Contingencies Debt As of September 30, 2021, the Company had an outstanding borrowing of $ 15.1 million under its margin account with the custodian of the Company’s marketable debt security investment account, Pershing Advisor Solutions, LLC, a BNY Mellon Company. Margin account borrowings were used for the purchase of real property located in El Monte, California in 2020. The securities in the brokerage account were used as collateral for the margin loan. The custodian can issue a margin call at any time. The interest rate on the margin loan was the effective federal funds rate, or EFFR, plus a spread, and the EFFR and/or the spread can be changed by BNY Mellon at any time. The interest was 1 % at the time of withdrawal of $ 15.0 million from the margin account, and the interest rate at September 30, 2021 was less than 1.0 %. The Company did not make any other withdrawals from the margin account, and the outstanding balance of $ 15.1 million is included in the accompanying Condensed Consolidated Balance Sheets. The related interest expenses for the three and nine months ended September 30, 2021 were $ 30,000 and $ 88,000 , respectively. There were no related interest expenses for the three and nine months ended September 30, 2020. Notes payable as of September 30, 2021 consisted of $ 5.9 million of notes payable to Xilong Scientific Co., Ltd., or Xilong Scientific, by Fujian Fujun Gene Biotech Co., Ltd., or FF Gene Biotech, as defined in Note 14, Business Combination. The loan is payable on December 31, 2022 and interest rate on the loan is 4.97 %. The related interest expenses for the three and nine months ended September 30, 2021 were $ 74,000 . Operating Leases See Note 9, Leases, for further information. 16 Purchase Obligations As of September 30, 2021, the Company had non-cancelable purchase obligations of $ 13.8 million, of which, $ 10.4 million for reagents and other supplies, $ 3.0 million for medical lab equipment, and $ 373,000 for medical lab furniture are payable within twelve months. Contingencies From time to time, the Company may be subject to legal proceedings and claims arising in the ordinary course of business. In the opinion of management, the outcome of these matters would not have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows. Note 9. Leases Lessee The Company is party as a lessee to various non-cancelable operating leases with varying terms through March 2028 primarily for laboratory and office space and equipment. The Company has options to renew some of these leases after their expirations. On a lease-by-lease basis, the Company considers such options, which may be elected at the Company’s sole discretion, in determining the lease term. The Company also has a finance lease acquired in the acquisition of CSI for lab equipment through July 2024, and the Company retains CSI’s classification of its leases. The Company does not have any leases with variable lease payments. The Company’s operating lease agreements do not contain any residual value guarantees, material restrictive covenants, bargain purchase options or asset retirement obligations. The Company’s headquarters are located in Temple City, California, which is comprised of various corporate offices and a laboratory certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, accredited by the College of American Pathologists, or CAP, and licensed by the State of California Department of Public Health. Other CLIA-certified laboratories are located in Houston, Texas and Alpharetta, Georgia. Additional offices are located in Atlanta, Georgia and are used for certain report generation functions. In February 2021, the Company extended the lease for its headquarters located in Temple City, California, to January 31, 2023 . In March 2021, the Company entered into a new lease for its 12,000 square foot CLIA-certified laboratory in Houston, Texas, and the lease will expire in November 2023 . The operating and finance lease right-of-use asset, short-term lease liabilities, and long-term lease liabilities as of September 30, 2021 and December 31, 2020 were as follows: September 30, December 31, 2021 2020 (in thousands) Operating lease ROU asset, net $ 7,502 $ 828 Operating lease liabilities, short term $ 1,830 $ 267 Operating lease liabilities, long term $ 5,713 $ 568 Finance lease ROU asset, net $ 47 $ — Finance lease liabilities, short term $ 16 $ — Finance lease liabilities, long term $ 31 $ — The following was operating and finance lease expense: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 (in thousands) Operating lease cost $ 429 $ 167 $ 730 $ 468 Finance lease cost: Amortization of ROU assets 3 — 3 — Interest on lease liabilities — — — — Short-term lease cost 53 56 245 59 Total lease cost $ 485 $ 223 $ 978 $ 527 17 Supplemental information related to operating leases and finance lease was the following: September 30, 2021 Weighted average remaining lease term - operating leases 5.13 years Weighted average discount rate - operating leases 3.15 % Weighted average remaining lease term -finance lease 2.83 years Weighted average discount rate - finance lease 3.12 % The following is a maturity analysis of operating and finance lease liabilities using undiscounted cash flows on an annual basis with renewal periods included: Operating Leases Finance Lease (in thousands) Year Ending December 31, 2021 (remaining 3 months) $ 523 $ 5 2022 2,001 17 2023 1,541 17 2024 1,120 10 2025 1,044 — 2026 883 — Thereafter 1,080 — Total lease payments 8,192 49 Less imputed interest ( 649 ) ( 2 ) Total $ 7,543 $ 47 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 also subleases out some space in a lease acquired as part of the acquisition of CSI. As of September 30, 2021, the remaining lease terms left range from 14 months to 47 months 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 $ 79,000 and $ 321,000 for the three and nine months ended September 30, 2021, respectively, which was included in interest and other income, net, in the accompanying Condensed Consolidated Statements of Operations. Total lease income was as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 (in thousands) Lease income $ 78 $ — $ 315 $ — Variable lease income 1 — 6 — Total lease income $ 79 $ — $ 321 $ — 18 Future fixed lease payments from tenants for all noncancelable operating leases as of September 30, 2021 are as follows: Lease Payments from Tenants (in thousands) Year Ending December 31, 2021 (remaining 3 months) $ 87 2022 356 2023 266 2024 238 2025 120 Total $ 1,067 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 Condensed Consolidated Statements of Operations as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Cost of revenue $ 962 $ 428 $ 2,328 $ 929 Research and development 1,757 887 4,461 1,563 Selling and marketing 693 1,184 1,739 1,577 General and administrative 962 651 2,334 1,085 Total $ 4,374 $ 3,150 $ 10,862 $ 5,154 Note 11. Provision for Income Taxes The effective tax rate used for interim periods is the estimated annual effective consolidated tax rate, based on the current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur. The annual effective tax rate is based upon several significant estimates and judgments, including the estimated annual pre-tax income of the Company in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year. In addition, the Company’s tax expense can be impacted by changes in tax rates or laws and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions. The Company recorded consolidated provision for income taxes of $ 37.5 million and $ 127.6 million for the three and nine months ended September 30, 2021, respectively, compared with $ 14.5 million and $ 14.0 million for the three and nine months ended September 30, 2020, respectively. The Company’s effective tax rates were 23 % and 24 % for the three and nine months ended September 30, 2021, respectively, compared with 23 % and 21 % for the three and nine months ended September 30, 2020, respectively. The change in the effective tax rate for the nine-month period of 2021, relative to 2020, was primarily attributable to a significant increase in the Company’s pre-tax income in 2021, partially offset by increased windfall tax deductions related to stock-based compensation. The Company is not currently under examination by any major income tax jurisdiction. During 2021, the statutes of limitations will lapse on the Company's 2017 federal tax year and certain 2016 and 2017 state tax years. The Company does not believe the federal or state statute lapses or any other event will significantly impact the balance of unrecognized tax benefits in the next twelve months. The net balance of unrecognized tax benefits was not material to the interim financial statements for the three and nine months ended September 30, 2021 and 2020. 19 Note 12. Income per Share The following table presents the calculation of basic and diluted income per share for the three and nine months ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands, except per share data) Net income attributable to Fulgent $ 122,522 $ 46,638 $ 403,025 $ 48,003 Weighted-average common shares—outstanding, basic 29,673 22,062 29,221 21,793 Weighted-average common shares—outstanding, diluted 31,170 23,539 30,906 23,135 Net income per common share, basic $ 4.13 $ 2.11 $ 13.79 $ 2.20 Net income per common share, diluted $ 3.93 $ 1.98 $ 13.04 $ 2.07 The following securities have been excluded from the calculation of diluted income per share because their effect would have been anti-dilutive: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Options 5 — 5 10 Restricted Stock Units 241 5 129 167 The anti-dilutive shares described above were calculated using the treasury stock method. Note 13. Related Parties 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 $ 762,000 and $ 2.6 million in revenue in the three and nine months ended September 30, 2021, respectively. The Company recognized $ 1.3 million in revenue in the three and nine months ended September 30, 2020. As of September 30, 2021 and December 31, 2020, $ 724,000 and $ 1.8 million was owed to the Company by AHMC, which is included in trade accounts receivable, net, in the accompanying Condensed Consolidated Balance Sheets, in connection with this relationship. The Company and Fulgent Pharma LLC, the Company’s former subsidiary, are party to shared services arrangements where research and development, administrative services and office space and equipment are provided between the companies, on an arms-length basis. Ming Hsieh is the Manager and a member of Fulgent Pharma LLC. During the three and nine months ended September 30, 2021, the cost of research development services rendered by Fulgent Pharma LLC for the Company was $ 74,000 and $ 279,000 , respectively. The cost of research development services rendered by Fulgent Pharma LLC for the Company was no t significant during the three and nine months ended September 30, 2020. Amounts for services performed by the Company for Fulgent Pharma LLC were no t significant during the three and nine months ended September 30, 2021 and 2020. As of September 30, 2021, and December 31, 2020, $ 634,000 and $ 409,000 , respectively, were owed to Fulgent Pharma LLC by the Company, which are included in due to related parties as a component in other current liabilities in the accompanying Condensed Consolidated Balance Sheets, in connection with these relationships. 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. During the three and nine months ended September 30, 2021, the company incurred $ 65,000 and $ 142,000 , respectively, in expenses for flights between California and Texas to transport employees and supplies. As of September 30, 2021, nothing was owed to PTJ by the Company. As of December 31, 2020, $ 94,000 was owed to PTJ by the Company, which is included in accounts payable in the accompanying Condensed Consolidated Balance Sheets. Note 14. Business Combinations The Company believes that the acquisitions of businesses enhance its existing businesses by either expanding its geographic range and customer base or expanding its existing product lines. The Company incurred $ 2.2 million and $ 2.8 million acquisition related costs for the three and nine months ended September 30, 2021, respectively, which was included in general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. 20 FF Gene Biotech In April 2017, the Company acquired a 30 % equity interest in FF Gene Biotech , a newly formed a joint venture with Xilong Scientific, and Fuzhou Jinqiang Investment Partnership (LP), or FJIP. The joint venture was formed under the laws of China to offer genetic testing services to customers in China. In May 2021, the Company entered into a restructuring agreement with Xilong Scientific and FJIP, resulting in the Company indirectly acquiring a 72 % controlling financial interest in FF Gene Biotech. As a result of the acquisition of FF Gene Biotech, or the FF Gene Biotech Acquisition , the Company seeks to be more strategically aligned with its geographic expansion strategy. It also expects to reduce costs through economies of scale. The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on estimated fair values. As additional information becomes available, such as the finalization of the estimated fair value of tax-related items, the Company may further update the preliminary purchase price allocation during the remainder of the measurement period (up to one year from the FF Gene Biotech Acquisition date). The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the FF Gene Biotech Acquisition date, as well as the fair value of the noncontrolling interest at the FF Gene Biotech Acquisition date. Amounts (in thousands) Considerations Cash $ 18,974 Fair value of the Company’s 30% equity interest held before the business combination 3,734 $ 22,708 Recognized amounts of identifiable assets acquired and liabilities assumed Financial assets $ 3,181 Reagents and supplies 1,288 Fixed assets 3,874 Other tangible assets 944 Identifiable intangible assets 6,958 Other current liabilities ( 2,585 ) Notes payable ( 5,893 ) Recognized amounts of identifiable assets acquired and liabilities assumed, net 7,767 Noncontrolling interest ( 8,141 ) Goodwill 23,082 Total $ 22,708 The fair value of the noncontrolling interest, or NCI, in FF Gene Biotech, a private entity, $ 8.1 million, was estimated by applying the income approach and market approach. The fair value measurement was based on significant inputs that are not observable in the market and thus represents a fair value categorized within Level 3 of the three-tier fair value hierarchy . The NCI represents a minority interest of 28 % in the post-restructuring FF Gene Biotech. Since the NCI is the result of the restructuring, the implied value was utilized to value the NCI based on the 42 % effective investment. After determining the implied value, a discount for lack of marketability was applied to the 28 % interest representing lack of marketability related to the holding period to monetize the NCI in a future initial public offering, or IPO, or sale, and marketability related to market participant acquisition premiums implied in the value of the $ 19.0 million purchase price for a 42 % interest. The resultant total discount applied was 35 %, which is supported both by the put option analyses related to the potential holding period, and a 10 % discount owed to a market participant acquisition premium. The Company recognized a gain of $ 3.7 million as a result of remeasuring to fair value its 30 % equity interest held before the FF Gene Biotech Acquisition . The fair value of the preexisting equity interest was determined based on the characteristics before consummating the FF Gene Biotech Acquisition and estimated by applying income approach and utilized the discounted cash flow method. The Company did not apply the market approach based on its characteristics before consummating the restructuring. The gain on the equity method investment is included in the Company’s Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021. The goodwill of $ 23.1 million arising from the FF Gene Biotech Acquisition is attributed to the expected synergies and other benefits that will be potentially generated from the combination of the Company and FF Gene Biotech. The goodwill recognized is not deductible for tax purposes . 21 The identified intangible assets acquired in the FF Gene Biotech Acquisition consisted of a $ 5.7 million royalty-free technology with an estimated amortization life of 10 years and $ 1.2 million customer relationships with an estimated amortization life of 5 years . The value of these assets was based upon the preliminary fair values as of the closing date of the FF Gene Biotech Acquisition . The Company concluded FF Gene Biotech is a variable interest entity as FF Gene Biotech lacks sufficient capital to operate independently. The Company concluded that it alone has the power to direct the most significant activities of FF Gene Biotech and therefore is the primary beneficiary of the entity post the FF Gene Biotech Acquisition. Judgment regarding the level of influence over FF Gene Biotech includes consideration of key factors such as the Company's ownership interest, representation on the board of directors or other management body and participation in policy-making decisions. Post the FF Gene Biotech Acquisition , the financial results for FF Gene Biotech are included in the Company’s condensed financial statements. Prior to the FF Gene Biotech Acquisition , the financial results for FF Gene Biotech were not significant for pro forma financial information. CSI Acquisition In August 2021 the Company acquired 100 % of the outstanding equity of CSI, a multi-site reference laboratory business in the United States. This acquisition of CSI, or the CSI Acquisition, expands the Company’s national reference laboratory presence in the United States. The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on estimated fair values. As additional information becomes available, the Company may further update the preliminary purchase price allocation during the remainder of the measurement period (up to one year from the CSI Acquisition date). The following tables summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the CSI Acquisition date: Amounts (in thousands) Considerations Cash $ 43,359 Contingent consideration 8,500 $ 51,859 Recognized amounts of identifiable assets acquired and liabilities assumed Debt-free net working capital $ 4,270 Fixed assets 6,855 ROU assets - operating 4,988 ROU assets - finance 49 Other assets 160 Identifiable intangible assets 30,540 Deferred tax liability ( 9,629 ) Operating lease liabilities ( 4,988 ) Finance lease liabilities ( 49 ) Other liabilities ( 6,069 ) Recognized amounts of identifiable assets acquired and liabilities assumed, net 26,127 Goodwill 25,732 Total $ 51,859 The CSI Acquisition includes a contingent consideration arrangement that requires additional consideration to be paid by the Company based on CSI’s achievement of a minimum level of earnings, for the year ending December 31, 2021, as described in the acquisition agreement. The range of undiscounted amounts the Company may be required to pay under the contingent consideration agreement is between zero and $ 10.0 million. The fair value of the contingent consideration recognized on the CSI Acquisition date of $ 8.5 million was estimated by applying the income approach using discounted cash flows. Given the short-term nature of the contingent consideration the most significant assumption is the probability weighted cash flow. The goodwill of $ 25.7 million arising from the CSI Acquisition is attributed to the expected synergies, assembled workforce, other benefits that will be potentially generated from the combination and deferred tax. The goodwill recognized is not deductible for tax purposes. The identified intangible assets acquired in the CSI Acquisition consisted of $ 27.6 million customer relationships with an estimated amortization life of 12 years, $ 1.9 million laboratory information system platform with an estimated amortization life of 5 years, and $ 1.1 million trade name with an estimated amortization life of 10 years. 22 Revenue and operating income or loss from both acquisitions since the respective 2021 acquisition dates are included in the accompanying Condensed Consolidated Statements of Operations as follows, in thousands: Net Sales Operating Income (loss) FF Gene Biotech $ 4,556 $ ( 1,612 ) CSI 7,101 659 Total $ 11,657 $ ( 953 ) Note 15. Equity Distribution Agreement In November 2020, the Company entered into an Equity Distribution Agreement, or the November 2020 Equity Distribution Agreement, with Piper Sandler & Co. (f/k/a Piper Jaffray & Co.), or 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. The Company did no t sell any shares of its common stock during the three months ended September 30, 2021 pursuant to the November 2020 Equity Distribution Agreement. During the nine months ended September 30, 2021, the Company sold approximately 961,000 shares of its common stock pursuant to the November 2020 Equity Distribution Agreement at a weighted-average net selling price of $ 60.56 . Note 16. Goodwill and Acquisition-Related Intangibles Summaries of goodwill and acquisitions-related intangibles balances as of September 30, 2021 and December 30, 2020 were as follows: September 30, December 31, Weighted-Average Amortization Period 2021 2020 (in thousands) Goodwill $ 48,749 $ — Royalty-free technology 10 Years $ 5,706 $ — Less: accumulated amortization ( 238 ) — Royalty-free technology, net 5,468 — Customer relationships 12 Years 28,824 — Less: accumulated amortization ( 480 ) — Customer relationships, net 28,344 — Trade name 10 Years 1,090 — Less: accumulated amortization ( 19 ) — Trade name, net 1,071 — Laboratory information system platform 5 Years 1,860 — Less: accumulated amortization ( 59 ) — Laboratory information system platform, net 1,801 — Total acquisition-related intangibles, net $ 36,684 $ — 23 During the nine months ended September 30, 2021, the Company recorded $ 23.1 million of goodwill and $ 7.0 million of intangibles attributable to the FF Gene Biotech Acquisition. See Note 14, Business Combinations, to the Company's condensed consolidated financial statements. During the three months ended September 30, 2021, the Company recorded $ 25.7 million of goodwill and $ 30.5 million of intangibles attributable to the CSI Acquisition. See Note 14, Business Combinations, to the Company's condensed consolidated financial statements. Based on the carrying value of acquisition-related intangibles recorded as of September 30, 2021, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for acquisition-related intangibles is expected to be as follows: Amounts (in thousands) 2021 (remaining 3 months) $ 910 2022 3,597 2023 3,597 2024 3,597 2025 3,597 2026 3,278 Thereafter 18,108 Total $ 36,684 24