Fulgent Genetics Inc

REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM

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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Fulgent Genetics, Inc., and subsidiaries (the“Company”) as of December 31, 2023, and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill—Laboratory Services and Therapeutic Development Reporting Units—Refer to Notes 2 and 17 to the financial statements

Critical Audit Matter Description

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company used the discounted cash flow model to estimate fair value, which requires management to make significant estimates and assumptions related to discount rates and forecasts of future revenues and EBITDA (defined as earnings before interest, income taxes, depreciation and amortization) margin, as well as timing of commercial success for the Therapeutic Development Reporting Unit. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The goodwill balance was $142.3 million as of December 31, 2023, of which $120.2 million was allocated to the Laboratory Services Reporting Unit and $22.1 million was allocated to the Therapeutic Development Reporting Unit. The carrying value of the Laboratory Services Reporting Unit exceeded its fair value as of the measurement date, resulting in a full impairment of goodwill as of December 31, 2023. The fair value of the Therapeutic Development Reporting Unit exceeded its carrying value by 15% as of the measurement date and, therefore, no impairment was recognized as of December 31, 2023.

We identified goodwill as a critical audit matter because of the significant judgments made by management to estimate the fair value of each reporting unit and the difference between its fair value and carrying value. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve professionals in our firm having fair value expertise when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rate and forecasts of future revenue and EBITDA margin for the Laboratory Services Reporting Unit and assumptions related to selection of the discount rate and forecasts of future revenue and timing of commercial success for the Therapeutic Development Reporting Unit.

How the Critical Audit Matter Was Addressed in the Audit

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

•

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

•

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

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

o

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

o

Internal communications to management and the Board of Directors.

o

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

o

Relevant regulatory approvals supporting timing of commercial success.

•

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

o

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

o

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

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

Critical Audit Matter Description

The Company has in-process research & development (“IPR&D”) that are indefinite-lived intangible assets. As of December 31, 2023, the carrying value of the IPR&D is $64.6 million. Management estimates the fair value of IPR&D annually on its elected assessment date of December 31, 2023, using a multi-period excess earnings method, which is a specific discounted cash flow method. The determination of the fair value requires management to make significant estimates and assumptions related to forecasts of future revenues, timing of commercial success and discount rates to estimate the net present value of revenues. Changes in these assumptions could have a significant impact on the fair value of IPR&D and a significant change in fair value could cause a significant impairment. The fair value of the IPR&D exceeded its carrying value by 11% as of the measurement date and therefore, no impairment was recognized.

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

How the Critical Audit Matter Was Addressed in the Audit

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

•

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

•

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

o

Comparing management’s forecasts with:

o

Internal communications to management and the Board of Directors.

o

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

o

Relevant regulatory approvals.

•

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

o

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

o

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

/s/DELOITTE & TOUCHE LLP

Los Angeles, California

February 28, 2024

CONSOLIDATED FINANCIAL STATEMENTS