Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provide information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the Fiscal 2022 Form 10-K, including the audited consolidated financial statements of 23andMe Holding Co. as of March 31, 2022 and 2021 and Management's Discussion and Analysis of Financial Condition and Results of Operations included therein, as well as the accompanying unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q.
In addition to historical information, this discussion and analysis contains forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those discussed in the Fiscal 2022 Form 10-K and our subsequent reports filed with the SEC, that could cause actual results to differ materially from historical results or anticipated results. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to the “Company,” “we,” “us,” and “our” refer to 23andMe Holding Co., a Delaware corporation formerly known as VG Acquisition Corp. and its consolidated subsidiaries. References to VG Acquisition Corp. or “VGAC” refer to the Company prior to the consummation of the Business Combination.
Overview
23andMe Holding Co. is a mission-driven company dedicated to empowering customers to live healthier lives. Our mission is to help people access, understand, and benefit from the human genome.
We pioneered direct-to-customer genetic testing through our PGS products and services. Our PGS business provides customers with a full suite of genetic reports, including information on customers’ genetic ancestral origins, personal genetic health risks, and chances of passing on certain rare carrier conditions to their children, as well as reports on how genetics can affect responses to medications. We believe that by providing customers with direct access to their genetic information, we can empower them to make better decisions by arming them with information about their risks of developing certain diseases or conditions and by highlighting opportunities for prevention and mitigation of disease. We provide customers with an engaging experience, including access to frequent updates to their genetic health and ancestry reports and new product features, the ability to connect with genetic relatives, and a subscription option for extended health insights. Customers have the option to participate in our research programs and over 80% of our customers have done so. We analyze consenting customers’ genotypic data together with phenotypic data they provide to us concerning their physical characteristics, family origins, lifestyle, and other habits. We analyze this data using our proprietary machine learning and other analytic techniques in order to discover insights into whether and how particular genetic variants affect the likelihood of individuals developing specific diseases. These insights may highlight opportunities to develop a drug to treat or cure a specific disease.
We completed our acquisition of Lemonaid Health, Inc. (“Lemonaid Health”) on November 1, 2021 (the “Lemonaid Acquisition”). Lemonaid Health, an on-demand platform for accessing medical care and pharmacy services online, offers telemedicine, lab, and pharmacy services to patients in all 50 states, the District of Columbia, and the U.K. We believe that the addition of Lemonaid Health's telehealth services to our consumer business will enable us to bring better healthcare to individuals in an affordable and accessible way and offer personalized healthcare, based on a patient’s wellness, choices, and genetics.
Our Therapeutics business focuses on the use of genetic insights to validate and develop novel therapies to improve patients’ lives. We currently have research programs across several therapeutic areas, including oncology, respiratory, and cardiovascular diseases. In July 2018, we signed an exclusive agreement with an affiliate of GlaxoSmithKline plc (“GSK”) to leverage genetic insights to validate, develop, and commercialize promising drugs (the “GSK Agreement”). This multi-year collaboration is expected to identify and prioritize genetically validated drug targets, enable rapid progression of clinical programs, and bring useful new drugs to market. In addition to our collaboration with GSK, we have several proprietary programs, one of which is being pursued in collaboration with Almirall, S.A.
Our most advanced program is our joint immuno-oncology antibody collaboration program with GSK targeting CD96 (GSK6097608, a.k.a. GSK’608). We elected to take a royalty option on the program. GSK will be solely responsible for GSK’608’s subsequent development in later-stage clinical trials, including full development costs moving forward. Our second most advanced program, 23ME-00610, is an antibody that blocks the suppression of T-cells by tumors and reactivates their immune response. 23ME-00610 is wholly owned by us, and this program entered Phase 1 clinical trials in January 2022. Following the expiration of the GSK Agreement, we will have the opportunity to collaborate with, or out-license other wholly owned programs to third parties or to develop them independently.
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We operate in two reporting segments: Consumer and Research Services, and Therapeutics. The Consumer and Research Services segment consists of our PGS and telehealth business, as well as research services that we perform under agreements with third parties, including the GSK Agreement, relating to the use of our genotypic and phenotypic data to identify promising drug targets. The Therapeutics segment consists of revenues from the out-licensing of intellectual property associated with identified drug targets and expenses related to therapeutic product candidates under clinical development. For the three and six months ended September 30, 2022 and 2021, all our revenues were derived from our Consumer and Research Services segment. There was no Therapeutics revenue for all periods presented.
The table below reflects our revenue for the three and six months ended September 30, 2022 and 2021:
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Three Months Ended
September 30, |
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Six Months Ended
September 30, |
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2022 |
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2021 |
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$ Change |
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% Change |
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2022 |
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2021 |
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$ Change |
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% Change |
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(dollars in thousands) |
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|
(dollars in thousands) |
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Consumer and Research Services Revenue |
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$ |
75,659 |
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|
$ |
55,204 |
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|
$ |
20,455 |
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|
37 |
% |
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$ |
140,172 |
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|
$ |
114,443 |
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|
$ |
25,729 |
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22 |
% |
Total Revenue |
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$ |
75,659 |
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$ |
55,204 |
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$ |
20,455 |
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37 |
% |
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$ |
140,172 |
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$ |
114,443 |
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$ |
25,729 |
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22 |
% |
The table below reflects our two segments’ Adjusted EBITDA (as defined below) for the three and six months ended September 30, 2022 and 2021:
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Three Months Ended
September 30, |
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Six Months Ended
September 30, |
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2022 |
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2021 |
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$ Change |
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% Change |
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2022 |
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2021 |
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$ Change |
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% Change |
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(dollars in thousands) |
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(dollars in thousands) |
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Consumer and Research Services |
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Adjusted EBITDA (1) |
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$ |
2,324 |
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|
$ |
(760 |
) |
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$ |
3,084 |
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NM(2) |
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$ |
(14,673 |
) |
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$ |
(1,265 |
) |
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$ |
(13,408 |
) |
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NM(2) |
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Therapeutics |
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Adjusted EBITDA (1) |
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$ |
(18,663 |
) |
|
$ |
(18,828 |
) |
|
$ |
165 |
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|
|
(1 |
%) |
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$ |
(37,128 |
) |
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$ |
(37,131 |
) |
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$ |
3 |
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(0 |
%) |
(1)Adjusted EBITDA is the measure of segment profitability reported to our Chief Executive Officer (“CEO”), who is our chief operating decision-maker (“CODM”). We define Adjusted EBITDA as net income (loss) before net interest income (expense), net other income (expense), changes in fair value of warrant liabilities, income tax benefit, depreciation and amortization of fixed assets, amortization of internal use software, amortization of acquired intangible assets, non-cash stock-based compensation exp0nse, acquisition-related costs, and expenses related to restructuring and other charges, if applicable, for the period. See “—Adjusted EBITDA” below for a reconciliation of Adjusted EBITDA to net loss.
Key Factors Affecting Results of Operations
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those set forth in Part I, Item 1A., “Risk Factors,” of the Fiscal 2022 Form 10-K.
New Customer Acquisition
PGS. Our ability to attract new customers is a key factor for the future growth of our PGS business and our database. Our historical financial performance has largely been driven by the rate of sales of our PGS kits. Revenue from our PGS business, primarily composed of kit sales, represented approximately 60% and 81% of our total revenues for the three months ended September 30, 2022 and 2021, respectively, and approximately 63% and 81% of our total revenues for the six months ended September 30, 2022 and 2021, respectively. In addition, kit sales are a source of subscribers to our new subscription service, which represented approximately 5% and 3% of our total revenue for the three months ended September 30, 2022 and 2021, respectively, and approximately 5% and 2% of our total revenue for the six months ended September 30, 2022 and 2021, respectively. We expect PGS revenues to grow through a combination of kit sales, our new subscription service, and new product offerings that enhance or add new product features. This will be achieved by increasing awareness of our current and new offerings in existing markets and expanding into new markets.
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Purchasing patterns of our kits are largely influenced by product innovation, marketing spends, and varying levels of price discounting on our products. These promotional windows have typically aligned with gift-giving portions of the year, with an emphasis on the holiday period, other gift-giving and family-oriented holidays such as Mother’s Day and Father’s Day, and Amazon Prime Day, which may change from year to year. Historically, we have experienced higher revenue in the fourth quarter of the fiscal year compared to other quarters. Over time, we expect the seasonality of our business to continue, with pronounced increases in revenue recognized in the fourth fiscal quarter. We generally incur higher sales and marketing expenses during holiday promotional periods, which have included, among others, Mother’s Day, Father’s Day, and the November-December holidays.
Telehealth. Our ability to attract new patients and members is a key factor for the future growth of our telehealth business. Revenue from our telehealth business represented approximately 15% and 17% of our total revenues for the three and six months ended September 30, 2022, respectively. Telehealth awareness, acceptance, and usage have been positively impacted by the COVID-19 pandemic, leading to increased consumer acceptance of virtual care. While we anticipate continued growth, there are many participants in the telehealth market, including new entrants and traditional health care systems offering virtual care, and competition is intense.
Engagement of Research Participants
Our ability to conduct research and grow our database of genotypic and phenotypic information depends on our customers’ willingness to consent to participate in our research. Over 80% of our customers have consented to participate in research. These customers permit us to use their de-identified data in our research and many of them regularly respond to our research surveys, providing us with phenotypic data in addition to the genetic data in their DNA samples. We analyze this genotypic and phenotypic data and conduct genome-wide association studies and phenome-wide association studies, which enable us to determine whether particular genetic variants affect the likelihood of individuals developing certain diseases.
Our customers can withdraw their consent to participate in research at any time. If a significant number of our customers were to withdraw their consent, or if the percentage of consenting customers were to decline significantly in the future, our ability to conduct research successfully could be diminished, which could adversely affect our business.
Drug Target Productivity of Our Genetics Database
Our genetics database underpins our research programs and enables us to identify drug targets with novel genetic evidence. As of March 31, 2022, we have identified over 50 drug targets. We expect the current productivity of our genetics database to continue based on the increasing amounts of data that we expect to result from increased kit sales and customer engagement. Any significant decline in such productivity would have a negative impact on our ability to identify drug targets and ultimately to develop and commercialize new drugs.
Development of Therapeutic Product Candidates
Our ability to successfully identify and develop therapeutic product candidates will determine the success of our Therapeutics business over time. Developing therapeutic product candidates with novel genetic evidence requires a significant investment of resources over a prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area. We have over 50 programs in our pipeline in various stages of research and development that have been selected and are being pursued.
We have one therapeutic product candidate, GSK6097608, our joint immuno-oncology antibody program with GSK, in clinical development, for which we have elected to take a royalty option. Our wholly-owned immuno-oncology antibody, 23ME-00610, entered Phase 1 clinical trials in January 2022. Additional programs are in research or preclinical stages of development. We have incurred, and will continue to incur, significant research and development costs for preclinical studies and clinical trials. We expect that our research and development expenses will continue to constitute a significant portion of our expenses in future periods.
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Collaborations
Substantially all of our research services revenues are generated from the GSK Agreement. In January 2022, GSK elected to exercise its option to extend the exclusive target discovery period of the ongoing collaboration with us for an additional year to July 2023. In October 2022, we received a one-time payment of $50.0 million from GSK in consideration of the exercise of the option pursuant to the GSK Agreement. In addition, we elected to take a royalty option on our joint immuno-oncology antibody collaboration program with GSK targeting CD96 (GSK6097608, a.k.a. GSK’608). GSK will be solely responsible for GSK’608’s subsequent development in later-stage clinical trials, including full development costs moving forward.
Our ability to enter into new collaboration agreements upon the expiration of the GSK Agreement will affect our research services revenues. If we are unable to enter into additional collaboration agreements, our future research services revenue may decline.
Ability to Commercialize Our Therapeutics Products
Our ability to generate revenue from our therapeutic product candidates depends on our and our collaborators’ ability to successfully complete clinical trials for our therapeutic product candidates and receive regulatory approval, particularly in the United States, Europe, and other major markets.
We believe that our broad portfolio of therapeutic product candidates with novel genetic evidence and validated targets enhances the likelihood that our research and development efforts will yield successful therapeutic product candidates. Nonetheless, we cannot be certain if any of our therapeutic product candidates will receive regulatory approvals. Even if such approvals are granted, we will thereafter need to establish manufacturing and supply arrangements and engage in extensive marketing efforts and expenses prior to generating any revenue from such products. The ultimate commercial success of our products will depend on their acceptance by patients, the medical community, and third-party payors, their ability to compete effectively with other therapies in the market, and the appropriate pricing and reimbursement of the products by third-party payors.
The competitive environment is also an important factor with the commercial success of our therapeutic product candidates, and our ability to successfully commercialize a therapeutic product candidate will depend on whether there are competing therapeutic product candidates in development or already marketed by other companies.
Expansion into New Categories
We launched our 23andMe+ subscription service in October 2020, and through the Lemonaid Acquisition, we began providing access to telehealth services in November 2021. We expect to expand into new categories and innovative healthcare models with the goal of driving future growth. Those opportunities include product enhancements, such as our proprietary polygenic risk scores, new product offerings aimed at extending our personalized and customer-centric philosophy to primary healthcare, and potential additional acquisitions of other consumer-oriented healthcare businesses. Such expansion would allow us to increase the number of engaged customers who purchase or subscribe for additional products and services.
Success of our subscription service will depend upon our ability to acquire and retain subscribing customers over an extended period. Retention of customers will be based on the perceived value of the premium content and features they receive. If we are unable to provide sufficiently compelling new content and features, subscribers may not renew.
Similarly, the success of our telehealth business is dependent on our ability to attract and retain patients and members. Category expansion allows us to increase the number of patients to whom we can provide products and services. It also allows us to offer access to treatment of additional conditions that may already affect our current patients. Expanding into new categories will require financial investments in additional headcount, marketing and customer acquisition expenses, additional operational capabilities, and may require the purchase of new inventory. If we are unable to generate sufficient demand in new categories, we may not recover the financial investments we make into new categories and revenue may not increase in the future.
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Investments in Growth and Innovation
Our research platform is based on a continually growing database of genotypic and phenotypic information. Our database allows us to conduct analyses in a multi-directional fashion, by searching for genetic signatures of particular diseases or the likelihood of a particular genetic variant causing disease in a particular individual or group of individuals who share the same trait. Our platform enables us to rapidly and serially conduct studies across an almost unlimited number of conditions at unprecedented statistical power, yielding insights into the causes and potential treatments of a wide variety of diseases.
We believe that our research platform enables us to rapidly identify genetically validated drug targets with improved odds of clinical success. With our state-of- the-art bioinformatics capabilities, we analyze the trillions of data points in our database, optimizing the use of our resources, to genetically validate drug targets, inform patient selection for clinical trials, and increase the probability of success of our programs. We plan to advance new drugs through the rapid selection of those with compelling clinical promise.
We expect to continue investing in our business to capitalize on market opportunities and the long-term growth of our company. We intend to make significant investments in therapeutics research and development efforts and in marketing to acquire new customers and drive brand awareness, and also expect to incur software development costs as we work to enhance our existing products, expand the depth of our subscription service, and design new offerings, including additional primary care offerings. In addition, we expect to incur additional expenses as a result of operating as a public company. The expenses we incur may vary significantly by quarter depending, for example, on when significant hiring takes place, and as we focus on building out different aspects of our business.
COVID-19 Impact
We are continuing to closely monitor the impact of the COVID-19 pandemic in all aspects of our business. We rely entirely on third-party vendors in our PGS and telehealth supply chain, including our PGS kit and array manufacturers, order fulfillment vendor, our DNA-processing lab vendor, and drug suppliers for our pharmacy business. These vendors have independent responses to managing the effect of the COVID-19 pandemic. We have been amplifying monitoring of our inventory levels and supply chain and have not experienced any significant disruptions in our ability to fulfill and process PGS or telehealth orders to date. If we experience delays or other challenges in obtaining supplies necessary for the production, fulfillment, or distribution of the products or services we offer, it could negatively affect our ability to satisfy our obligations to customers and maintain our operations in a cost-efficient manner and have a material adverse effect on our business.
With respect to our telehealth services, the COVID-19 pandemic has increased awareness, acceptance, and usage of virtual medical care and pharmacy services, resulting in greater consumer trial and use of telehealth. While we believe that these trends present significant opportunities for our telehealth services, it is uncertain whether the increase in demand caused by COVID-19 will continue.
In our Therapeutics segment, the advancement of our programs requires our scientists to have physical access to our laboratory facilities on a continuing basis, and we have implemented health and safety protocols and procedures to keep our laboratory facilities operating during the COVID-19 pandemic. In an effort to provide a safe work environment for our employees, we have, among other things, increased the cadence of sanitization and air filtration in our office and lab facilities. We continue to monitor the impact and effects of the COVID-19 pandemic and our response to it, and we expect to continue to take actions as may be required or recommended by government authorities or as we determine are in the best interests of our employees and other business partners in light of the pandemic.
Despite the introduction and continued administration of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including the Omicron, Delta, and other variants and other areas that may affect our business operations. Despite our mitigation efforts, we may experience delays or an inability to execute on our clinical and preclinical development plans, reduced revenues or other adverse impacts to our business, which are described in more detail in Part I, Item 1A., “Risk Factors,” of the Fiscal 2022 Form 10-K. The duration of the COVID-19 pandemic and the impact of the efforts being made to contain it or to flatten the spread of the disease cannot be predicted with any accuracy, and this uncertainty could have a material impact on our financial results for the foreseeable future.
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Basis of Presentation
The condensed consolidated financial statements and accompanying notes of the Company included elsewhere in this Form 10-Q include the accounts of 23andMe Holding Co. and its consolidated subsidiaries and variable interest entities and were prepared in accordance with GAAP. As 23andMe, Inc. is considered the Company’s accounting predecessor, certain historical financial information presented in the unaudited condensed consolidated financial statements represents the accounts of 23andMe, Inc. and its wholly owned subsidiary.
As discussed above, we operate in two reporting segments: Consumer and Research Services, and Therapeutics. The Consumer and Research Services segment consists of our PGS and telehealth business, as well as research services that we perform under agreements with third parties, including the GSK Agreement, relating to the use of our genotypic and phenotypic data to identify promising drug targets. The Therapeutics segment consists of revenues from the out-licensing of intellectual property associated with identified drug targets and expenses related to therapeutic product candidates under clinical development. Substantially all our revenues are derived from our Consumer and Research Services segment.
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify trends, formulate business plans, and make strategic decisions. We believe the following metrics are useful in evaluating our business:
•PGS Customers. When we refer to our “Customers,” this means individuals who have registered a PGS kit and provided their DNA sample. We view Customers as an important metric to assess our financial performance because each Customer has registered a kit and has engaged with us by providing us with their DNA sample. These Customers may be interested in purchasing additional PGS products and services or in becoming subscribers to our new 23andMe+ subscription service, especially if they consent to participate in our research. We had approximately 13.4 million and 11.9 million Customers as of September 30, 2022 and 2021, respectively.
•Consenting Customers. “Consenting Customers” are Customers who have affirmatively opted in to participate in our research program. Consenting Customers are critical to our research programs and to the continuing growth of our database, which we use to identify drug targets and to generate new and interesting additional ancestry and health reports. Moreover, Consenting Customers respond to our research surveys, providing useful phenotypic data about their traits, habits, and lifestyles, which we analyze using de-identified data to determine whether a genetic variant makes an individual more or less likely to develop certain diseases. A Consenting Customer is likely to be more engaged with our brand, which may lead to the purchase of our 23andMe+ subscription service and to participation in further research studies, helping us to advance our research. Over 80% of our Customers are Consenting Customers.
•Subscribers. This metric represents the number of subscribers who have signed up for our 23andMe+ subscription service, which was launched in October 2020. We believe that 23andMe+ will position us for future growth, as the annual membership model represents a previously untapped source of recurring revenue. We are continually investing in new reports and features to provide to subscribers as part of the 23andMe+ membership, which we believe will enhance customer lifetime value as customers can make new discoveries about themselves. We believe that this, in turn, will help to scale our customer acquisition costs and create expanding network effects. As of the fiscal years ended March 31, 2022 and 2021, our 23andMe+ membership base had approximately 425,000 and 125,000 subscribers, respectively.
•Adjusted EBITDA. Adjusted EBITDA is the measure of segment profitability reported to our CEO, the CODM. See “—Adjusted EBITDA” below for a reconciliation of Adjusted EBITDA to net loss.
Components of Results of Operations
Revenue
We recognize revenue in accordance with Topic 606 when we transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
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Our consolidated revenue is composed primarily of sales of PGS kits to customers and telehealth services which include online medical visits, pharmacy services, and memberships, as well as revenues from target discovery activities as part of our research collaborations through our Consumer and Research Services segment. Additionally, revenue is generated through our collaboration agreements in our Therapeutics segment primarily as a result of the out-licensing of intellectual property to collaboration partners.
See Note 2, “Summary of Significant Accounting Policies,” to our accompanying unaudited condensed consolidated financial statements for a more detailed discussion of our revenue recognition policies.
Cost of Revenue, Gross Profit, and Gross Margin
Cost of revenue for PGS primarily consists of cost of raw materials, lab processing fees, personnel-related expenses, including salaries, benefits, and stock-based compensation, shipping and handling, and allocated overhead. Cost of revenue for telehealth primarily consists of personnel-related expenses that we incur for medical services, prescription drug costs, packaging and shipping, and amortization of intangible assets. Cost of revenue for research services primarily consists of personnel-related expenses, including salaries, benefits, and stock-based compensation, and allocated overhead. We expect cost of revenue to increase in the foreseeable future in absolute dollars but gradually decrease as a percentage of revenue over the long term.
Our gross profit represents total revenue less our total cost of revenue, and our gross margin is our gross profit expressed as a percentage of our total revenue. Our gross profit and gross margin have been and will continue to be affected by a number of factors, including the volume of PGS kit sales recognized, the prices we charge for our PGS products and research services, the prices we charge for telehealth services (medical visits, pharmacy services, and memberships), the fees we incur for lab processing PGS kits, the costs we incur for medical services and prescription drug costs, the revenues from our collaboration agreements and the personnel costs to fulfill them. We expect our Consumer and Research Services gross margin to increase over the long term as subscription revenues become a higher percentage of revenue mix, although our gross margin may fluctuate from period to period. Substantially all our research services revenue is currently derived from the GSK Agreement. If we are unable to add new research services agreements, our research services revenue may decline substantially following the expiration of the GSK Agreement in July 2023.
Operating Expenses
Our operating expenses primarily consist of research and development, sales and marketing, and general and administrative expenses. Personnel-related expenses, which include salaries, benefits, and stock-based compensation, is the most significant component of research and development and general and administrative expenses. Advertising and brand-related spend and personnel-related expenses represent the primary components of sales and marketing expenses. Operating expenses also include allocated overhead costs. Overhead costs that are not substantially dedicated for use by a specific functional group are allocated based on headcount. Allocated overhead costs include shared costs associated with facilities (including rent and utilities) and related personnel, information technology and related personnel, and depreciation of property and equipment.
Research and Development Expenses
Our research and development expenses support our efforts to add new services and add new features to our existing services, and to ensure the reliability and scalability of our services across our Consumer and Research Services segment. Research and development expenses also include our efforts to discover and genetically validate new therapeutic product candidates and continue to develop our portfolio of existing therapeutic product candidates, either our own proprietary programs or those in collaboration with partners across our Therapeutics segment. Research and development expenses primarily consist of personnel-related expenses, including salaries, benefits, and stock-based compensation associated with our research and development personnel, collaboration expenses, preclinical and clinical trial costs, laboratory services and supplies costs, third-party data services, and allocated overhead.
We plan to continue to invest in personnel to support our research and development efforts. We intend to make significant investments in therapeutics research and development efforts as we ramp up our clinical trials and continue the GSK collaboration. This multi-year collaboration with GSK is expected to validate drug targets with novel genetic evidence, enable rapid progression of clinical programs, and bring useful new drugs to market. We expect that research and development expenses will increase on an absolute dollar basis in the foreseeable future as we continue to invest in our products, pipeline, and infrastructure for long-term growth. In addition, our research and development expenses may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.
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Sales and Marketing Expenses
Sales and marketing expenses consist primarily of advertising costs, personnel-related expenses, including salaries, benefits, and stock-based compensation associated with our sales and marketing personnel, amortization of intangible assets, and outside services.
Advertising and brand costs consist primarily of direct expenses related to television and radio advertising, including production and branding, paid search, online display advertising, direct mail, affiliate programs, marketing collateral, market research and public relations. Advertising production costs are expensed the first time the advertising takes place, and all other advertising costs are expensed as incurred. Deferred advertising costs primarily consist of vendor payments made in advance to secure media spots across varying media channels, as well as production costs incurred before the first time the advertising takes place. Deferred advertising costs are expensed on the first date the advertisements occur. In addition, advertising costs include platform fees due to brokers related to our third-party retailers.
We expect our sales and marketing expenses to gradually decrease as a percentage of revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of revenue from period to period due to promotional strategies that drive the timing and amount of these expenses.
General and Administrative Expenses
General and administrative expenses primarily consist of personnel-related expenses, including salaries, benefits, and stock-based compensation associated with corporate management, including our CEO office, finance, legal, compliance, regulatory, corporate communications and other administrative personnel. In addition, general and administrative expenses include professional fees for external legal, accounting, and other consulting services, as well as credit card processing fees related to PGS kit sales and telehealth services.
We expect general and administrative expenses to increase for the foreseeable future as we increase headcount with the growth of our business. We also expect general and administrative expenses to increase in the near term as a result of operating as a public company, including expenses associated with compliance with SEC rules and regulations, and related increases in legal, audit, insurance, investor relations, professional services, and other administrative expenses. However, we anticipate general and administrative expenses to gradually decrease as a percentage of revenue over the long term, although it may fluctuate as a percentage of total revenue from period to period due to the timing and amount of these expenses.
Other Income (Expense)
Other income (expense) includes interest income, net, and other income (expense), net. Interest income, net primarily consists of interest income earned on our cash deposits and cash equivalents. Other income (expense), net primarily consists of change in fair value of warrants liabilities, effects of changes in foreign currency exchange rates, and other non-operating income and expenditures.
Benefit from Income Taxes
The income tax benefit primarily consists of an adjustment to the Lemonaid Health deferred tax liability recorded in fiscal year 2022. Deferred tax assets are reduced by a valuation allowance to the extent management believes it is not more likely than not to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management makes estimates and judgments about future taxable income based on assumptions that are consistent with our plans and estimates.
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Results of Operations
Comparisons for Three and Six Months ended September 30, 2022 and 2021
The following table sets forth our unaudited condensed consolidated statements of operations for the three and six months ended September 30, 2022 and 2021, and the dollar and percentage change between the two periods:
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Three Months Ended
September 30, |
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Six Months Ended
September 30, |
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2022 |
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|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
(dollars in thousands) |
|
Revenue |
|
$ |
75,659 |
|
|
$ |
55,204 |
|
|
$ |
20,455 |
|
|
|
37 |
% |
|
$ |
140,172 |
|
|
$ |
114,443 |
|
|
$ |
25,729 |
|
|
|
22 |
% |
Cost of revenue(2) |
|
|
37,386 |
|
|
|
27,276 |
|
|
|
10,110 |
|
|
|
37 |
% |
|
|
76,409 |
|
|
|
55,818 |
|
|
|
20,591 |
|
|
|
37 |
% |
Gross profit |
|
|
38,273 |
|
|
|
27,928 |
|
|
|
10,345 |
|
|
|
37 |
% |
|
|
63,763 |
|
|
|
58,625 |
|
|
|
5,138 |
|
|
|
9 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(2) |
|
|
52,598 |
|
|
|
44,523 |
|
|
|
8,075 |
|
|
|
18 |
% |
|
|
104,607 |
|
|
|
88,755 |
|
|
|
15,852 |
|
|
|
18 |
% |
Sales and marketing(2) |
|
|
24,835 |
|
|
|
13,588 |
|
|
|
11,247 |
|
|
|
83 |
% |
|
|
58,269 |
|
|
|
29,007 |
|
|
|
29,262 |
|
|
|
101 |
% |
General and administrative(2) |
|
|
28,881 |
|
|
|
16,264 |
|
|
|
12,617 |
|
|
|
78 |
% |
|
|
58,524 |
|
|
|
28,860 |
|
|
|
29,664 |
|
|
|
103 |
% |
Total operating expenses |
|
|
106,314 |
|
|
|
74,375 |
|
|
|
31,939 |
|
|
|
43 |
% |
|
|
221,400 |
|
|
|
146,622 |
|
|
|
74,778 |
|
|
|
51 |
% |
Loss from operations |
|
|
(68,041 |
) |
|
|
(46,447 |
) |
|
|
(21,594 |
) |
|
|
46 |
% |
|
|
(157,637 |
) |
|
|
(87,997 |
) |
|
|
(69,640 |
) |
|
|
79 |
% |
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
1,392 |
|
|
|
92 |
|
|
|
1,300 |
|
|
NM (1) |
|
|
|
1,637 |
|
|
|
136 |
|
|
|
1,501 |
|
|
NM (1) |
|
Change in fair value of warrant liabilities |
|
|
— |
|
|
|
29,828 |
|
|
|
(29,828 |
) |
|
|
(100 |
%) |
|
|
— |
|
|
|
29,294 |
|
|
|
(29,294 |
) |
|
|
(100 |
%) |
Other income (expense), net |
|
|
(687 |
) |
|
|
3 |
|
|
|
(690 |
) |
|
NM (1) |
|
|
|
(1,122 |
) |
|
|
17 |
|
|
|
(1,139 |
) |
|
NM (1) |
|
Loss before income taxes |
|
|
(67,336 |
) |
|
|
(16,524 |
) |
|
|
(50,812 |
) |
|
|
308 |
% |
|
|
(157,122 |
) |
|
|
(58,550 |
) |
|
|
(98,572 |
) |
|
|
168 |
% |
Benefit from income taxes |
|
|
1,271 |
|
|
|
— |
|
|
|
1,271 |
|
|
|
100 |
% |
|
|
1,525 |
|
|
|
— |
|
|
|
1,525 |
|
|
|
100 |
% |
Net loss |
|
$ |
(66,065 |
) |
|
$ |
(16,524 |
) |
|
$ |
(49,541 |
) |
|
|
300 |
% |
|
$ |
(155,597 |
) |
|
$ |
(58,550 |
) |
|
$ |
(97,047 |
) |
|
|
166 |
% |
(2)Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
Six Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Cost of revenue |
|
$ |
2,413 |
|
|
$ |
945 |
|
|
$ |
5,740 |
|
|
$ |
1,743 |
|
Research and development |
|
|
12,003 |
|
|
|
5,450 |
|
|
|
24,079 |
|
|
|
11,057 |
|
Sales and marketing |
|
|
2,003 |
|
|
|
860 |
|
|
|
4,892 |
|
|
|
1,763 |
|
General and administrative |
|
|
12,548 |
|
|
|
3,172 |
|
|
|
24,719 |
|
|
|
5,501 |
|
Total stock-based compensation expense |
|
$ |
28,967 |
|
|
$ |
10,427 |
|
|
$ |
59,430 |
|
|
$ |
20,064 |
|
36
Table of Contents
The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
Six Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(as a percentage of total revenue) |
|
|
(as a percentage of total revenue) |
|
Revenue |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenue |
|
|
49 |
% |
|
|
49 |
% |
|
|
55 |
% |
|
|
49 |
% |
Gross margin |
|
|
51 |
% |
|
|
51 |
% |
|
|
45 |
% |
|
|
51 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
70 |
% |
|
|
81 |
% |
|
|
74 |
% |
|
|
78 |
% |
Sales and marketing |
|
|
33 |
% |
|
|
25 |
% |
|
|
41 |
% |
|
|
25 |
% |
General and administrative |
|
|
38 |
% |
|
|
29 |
% |
|
|
42 |
% |
|
|
25 |
% |
Total operating expenses |
|
|
141 |
% |
|
|
135 |
% |
|
|
157 |
% |
|
|
128 |
% |
Loss from operations |
|
|
(90 |
%) |
|
|
(84 |
%) |
|
|
(112 |
%) |
|
|
(77 |
%) |
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
2 |
% |
|
|
0 |
% |
|
|
1 |
% |
|
|
0 |
% |
Change in fair value of warrant liabilities |
|
|
0 |
% |
|
|
54 |
% |
|
|
0 |
% |
|
|
26 |
% |
Other income (expense), net |
|
|
(1 |
%) |
|
|
0 |
% |
|
|
(1 |
%) |
|
|
0 |
% |
Loss before income taxes |
|
|
(89 |
%) |
|
|
(30 |
%) |
|
|
(112 |
%) |
|
|
(51 |
%) |
Benefit from income taxes |
|
|
2 |
% |
|
|
0 |
% |
|
|
1 |
% |
|
|
0 |
% |
Net loss |
|
|
(87 |
%) |
|
|
(30 |
%) |
|
|
(111 |
%) |
|
|
(51 |
%) |
Revenue
Total revenue increased by $20.5 million, or 37%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was due primarily to an increase in consumer services revenue of $11.7 million attributable to three months of telehealth services revenue from the Lemonaid Acquisition and a $1.9 million increase in subscription services revenue, partially offset by a $1.5 million decrease in PGS revenue driven mainly by lower PGS kit sales volume. Research services revenue increased by $8.4 million due primarily to a $4.9 million increase in GSK collaboration revenue related to the GSK Agreement and a $3.5 million increase in revenue under research contracts with third parties in connection with the achievement of certain non-recurring milestones.
Total revenue increased by $25.7 million, or 22%, for the six months ended September 30, 2022, compared to the six months ended September 30, 2021. The increase was due primarily to an increase in consumer services revenue of $23.6 million attributable to six months of telehealth services revenue from the Lemonaid Acquisition and a $3.6 million increase in subscription services revenue, partially offset by a $7.0 million decrease in PGS revenue driven mainly by lower PGS kit sales volume. Research services revenue increased by $5.5 million due primarily to a $3.5 million increase in revenue under research contracts with third parties in connection with the achievement of certain non-recurring milestones, and an increase of $2.0 million in GSK collaboration revenue related to the GSK Agreement.
Cost of Revenue, Gross Profit and Gross Margin
Total cost of revenue increased by $10.1 million, or 37%, for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021. Cost of revenue for consumer services increased by $12.8 million, driven mainly by a $12.6 million increase in telehealth services cost of revenue, primarily from $5.9 million in personnel-related expenses, $3.2 million in allocated overhead costs, $1.4 million in shipping and supplies and $0.9 million in amortization expense for developed technology. Cost of revenue for research services decreased by $2.7 million primarily due to lower project hours pursuant to the GSK Agreement.
37
Table of Contents
Total cost of revenue increased by $20.6 million, or 37%, for the six months ended September 30, 2022, as compared to the six months ended September 30, 2021. Cost of revenue for consumer services increased by $24.2 million, driven mainly by a $24.5 million increase in telehealth services cost of revenue, primarily from $11.8 million in personnel-related expenses, $6.2 million in allocated overhead costs, $2.6 million in shipping and supplies, and $1.7 million in amortization expense for developed technology, partially offset by a $0.3 million decrease primarily related to lower PGS kit sales volume. Cost of revenue for research services decreased by $3.6 million primarily due to lower project hours pursuant to the GSK Agreement.
Our gross profit increased by $10.3 million, or 37%, to $38.3 million for the three months ended September 30, 2022 from $27.9 million for the three months ended September 30, 2021. The increase in gross profit was primarily due to the increases in consumer services revenue and research services revenue as discussed above.
Our gross profit increased by $5.1 million, or 9%, to $63.8 million for the six months ended September 30, 2022, from $58.6 million for the six months ended September 30, 2021. The increase in gross profit was primarily due to the increases in consumer services revenue and research services revenue as discussed above.
Our gross margin remained the same year over year at 51% for both the three months ended September 30, 2021 and 2022. While we experienced increased research service revenue related to milestone achievements that required minimal costs due to their one-time nature, increased GSK collaboration revenue, and growth in subscription services, which generated a higher gross margin than our PGS kit sales, during the three months ended September 30, 2022, these gross margin increases were offset by the integration of the telehealth business, which generated a lower gross margin than our PGS kit sales and research services, and its share of overhead allocations, as well as increased PGS shipping and distribution expenses.
Our gross margin declined year over year, from 51% for the six months ended September 30, 2021, to 45% for the six months ended September 30, 2022, due to the integration of the telehealth business, which generated a lower gross margin than our PGS kit sales and research services, and its share of overhead allocations, as well as increased PGS shipping and distributions expenses.
Research and Development Expenses
The following table sets forth our research and development expenses for the three and six months ended September 30, 2022 and 2021, and the dollar and percentage change between the two periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
Six Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
(dollars in thousands) |
|
Personnel-related expenses |
|
$ |
30,422 |
|
|
$ |
20,217 |
|
|
$ |
10,205 |
|
|
|
50 |
% |
|
$ |
61,162 |
|
|
$ |
40,003 |
|
|
$ |
21,159 |
|
|
|
53 |
% |
Lab-related research services |
|
|
7,941 |
|
|
|
10,353 |
|
|
|
(2,412 |
) |
|
|
(23 |
%) |
|
|
15,511 |
|
|
|
21,498 |
|
|
|
(5,987 |
) |
|
|
(28 |
%) |
Depreciation, equipment and supplies |
|
|
2,474 |
|
|
|
2,457 |
|
|
|
17 |
|
|
|
1 |
% |
|
|
4,588 |
|
|
|
4,664 |
|
|
|
(76 |
) |
|
|
(2 |
%) |
Facilities, other overhead allocation, and other |
|
|
11,761 |
|
|
|
11,496 |
|
|
|
265 |
|
|
|
2 |
% |
|
|
23,346 |
|
|
|
22,590 |
|
|
|
756 |
|
|
|
3 |
% |
Total research and development expenses |
|
$ |
52,598 |
|
|
$ |
44,523 |
|
|
$ |
8,075 |
|
|
|
18 |
% |
|
$ |
104,607 |
|
|
$ |
88,755 |
|
|
$ |
15,852 |
|
|
|
18 |
% |
Research and development expenses for the three months ended September 30, 2022 was $52.6 million, compared to $44.5 million for three months ended September 30, 2021. This increase of $8.1 million, or 18%, was primarily attributable to the increase in personnel-related expenses of $10.2 million, due to increased salaries and related taxes as a result of inflation, growth in headcount, and stock-based compensation in connection with new equity awards granted under the 2021 Plan, as well as accrued compensation under the 2022 AIP adopted on June 9, 2022. This increase was partially offset by a $2.4 million decrease in lab-related research services primarily due to decreased spending on the GSK6097608 program following our election to adopt the royalty option instead of continuing to share in development costs.
38
Table of Contents
Research and development expenses for the six months ended September 30, 2022, was $104.6 million, compared to $88.8 million for the six months ended September 30, 2021. This increase of $15.9 million, or 18%, was primarily attributable to the increase in personnel-related expenses of $21.2 million, due to increased salaries and related taxes as a result of inflation, growth in headcount, and stock-based compensation in connection with new equity awards granted under the 2021 Plan, as well as accrued compensation under the 2022 AIP. This increase was partially offset by a $6.0 million decrease in lab-related research services primarily due to the exercise of our rights under the GSK Agreement to opt out of cost sharing with respect to further research on therapeutic product candidate GSK6097608.
For both the three and six months ended September 30, 2022 and 2021, 54% and 52% of total research and development expenses were attributable to the Consumer and Research Services business, respectively, and 46% and 48% were attributable to our Therapeutics business, respectively.
Sales and Marketing Expenses
The following table sets forth our sales and marketing expenses for the three and six months ended September 30, 2022 and 2021, and the dollar and percentage change between the two periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
Six Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
(dollars in thousands) |
|
Advertising & brand |
|
$ |
12,380 |
|
|
$ |
7,134 |
|
|
$ |
5,246 |
|
|
|
74 |
% |
|
$ |
32,915 |
|
|
$ |
16,187 |
|
|
$ |
16,728 |
|
|
|
103 |
% |
Personnel-related expenses |
|
|
5,297 |
|
|
|
3,157 |
|
|
|
2,140 |
|
|
|
68 |
% |
|
|
11,417 |
|
|
|
6,314 |
|
|
|
5,103 |
|
|
|
81 |
% |
Outside services, equipment and supplies |
|
|
1,773 |
|
|
|
1,426 |
|
|
|
347 |
|
|
|
24 |
% |
|
|
3,196 |
|
|
|
2,773 |
|
|
|
423 |
|
|
|
15 |
% |
Depreciation & amortization |
|
|
3,266 |
|
|
|
— |
|
|
|
3,266 |
|
|
|
100 |
% |
|
|
6,581 |
|
|
|
— |
|
|
|
6,581 |
|
|
|
100 |
% |
Facilities and other overhead allocation |
|
|
2,119 |
|
|
|
1,871 |
|
|
|
248 |
|
|
|
13 |
% |
|
|
4,160 |
|
|
|
3,733 |
|
|
|
427 |
|
|
|
11 |
% |
Total sales and marketing expenses |
|
$ |
24,835 |
|
|
$ |
13,588 |
|
|
$ |
11,247 |
|
|
|
83 |
% |
|
$ |
58,269 |
|
|
$ |
29,007 |
|
|
$ |
29,262 |
|
|
|
101 |
% |
Sales and marketing expenses for the three months ended September 30, 2022 amounted to $24.8 million, as compared to $13.6 million for the three months ended September 30, 2021, representing an increase of $11.2 million, or 83%. This increase was primarily driven by the $5.2 million increase in advertising and brand-related spend in our marketing programs to grow our telehealth business. Depreciation and amortization increased $3.3 million due to amortization of acquired intangible assets, including customer relationships, trademarks, and partnerships from the Lemonaid Acquisition. Additionally, personnel-related expenses increased by $2.1 million due to increased salaries and related taxes as a result of inflation, growth in headcount, and stock-based compensation in connection with new equity awards granted under the 2021 Plan, as well as accrued compensation under the 2022 AIP.
Sales and marketing expenses for the six months ended September 30, 2022, amounted to $58.3 million, as compared to $29.0 million for the six months ended September 30, 2021, representing an increase of $29.3 million, or 101%. This increase was primarily driven by the $16.7 million increase in advertising and brand-related spend in our marketing programs mainly to grow our telehealth business. Depreciation and amortization increased $6.6 million due to amortization of acquired intangible assets, including customer relationships, trademarks, and partnerships from the Lemonaid Acquisition. Additionally, personnel-related expenses increased by $5.1 million due to increased salaries and related taxes as a result of inflation, growth in headcount, and stock-based compensation in connection with new equity awards granted under the 2021 Plan, as well as accrued compensation under the 2022 AIP.
39
Table of Contents
General and Administrative Expenses
Total general and administrative expenses increased by $12.6 million, or 78%, from $16.3 million for the three months ended September 30, 2021 to $28.9 million for the three months ended September 30, 2022. The increase in general and administrative expenses was primarily due to the increase in personnel-related expenses of $11.3 million, which was a result of increased salaries and related taxes as a result of inflation, growth in headcount, and stock-based compensation expense in connection with new equity awards granted under the 2021 Plan, as well as accrued compensation under the 2022 AIP. Facilities and overhead allocation increased by $1.0 million, primarily due to higher allocated overhead costs driven by increased headcount, as well as increased personnel-related expenses for shared-cost departments during the three months ended September 30, 2022. Other operating expenses increased by $0.3 million due to various other administrative expenses.
Total general and administrative expenses increased by $29.7 million, or 103%, from $28.9 million for the six months ended September 30, 2021, to $58.5 million for the six months ended September 30, 2022. The increase in general and administrative expenses was primarily due to the increase in personnel-related expenses of $23.1 million, which was a result of increased salaries and related taxes as a result of inflation, growth in headcount, and stock-based compensation expense in connection with new equity awards granted under the 2021 Plan, as well as accrued compensation under the 2022 AIP. Other operating expenses increased by $3.0 million, primarily due to an increase in director and officer insurance as a result of operating as a public company. Facilities and overhead allocation increased by $2.0 million, primarily due to higher allocated overhead costs driven by increased headcount, as well as increased personnel-related expenses for shared-cost departments during the six months ended September 30, 2022. Outside services increased by $1.5 million, primarily due to increased advisory, legal, and consulting services related to the Lemonaid Acquisition, and the associated integration fees.
Change in Fair Value of Warrant Liabilities
Benefit from change in fair value of warrant liabilities was $29.8 million and $29.3 million, respectively, for the three and six months ended September 30, 2021, due to a reduction in the fair value of the warrants that were assumed in connection with the Merger, which was primarily driven by movements in our stock price and volatility measurements.
As of March 31, 2022, all warrants were exercised or redeemed. Accordingly, there are no warrant liabilities outstanding in fiscal year 2023.
Adjusted EBITDA
We evaluate the performance of each segment based on Adjusted EBITDA, which is a non-GAAP financial measure that we define as net income (loss) before net interest income (loss), net other income (expense), changes in fair value of warrant liabilities, income tax benefit, depreciation and amortization of fixed assets, amortization of internal use software, amortization of acquired intangible assets, non-cash stock-based compensation expense, acquisition-related costs, and expenses related to restructuring and other charges, if applicable for the period. Adjusted EBITDA is a key measure used by our management and our Board of Directors to understand and evaluate our operating performance and trends, to prepare and approve our annual budget, and to develop short- and long-term operating plans. In particular, we believe that the exclusion of the items eliminated in calculating Adjusted EBITDA provides useful measures for period-to-period comparisons of our business. Accordingly, we believe that Adjusted EBITDA provides useful information in understanding and evaluating our operating results in the same manner as our management and our Board of Directors. Adjusted EBITDA should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. Other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of Adjusted EBITDA as a tool for comparison. There are a number of limitations related to the use of these non-GAAP financial measures rather than net loss, which is the most directly comparable financial measure calculated in accordance with GAAP.
Some of the limitations of Adjusted EBITDA include (i) Adjusted EBITDA does not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.
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Table of Contents
The following tables reconcile net loss to Adjusted EBITDA for the three and six months ended September 30, 2022 and 2021 on a company-wide basis and for each of our segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
Six Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Segment Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and Research Services |
|
$ |
75,659 |
|
|
$ |
55,204 |
|
|
$ |
140,172 |
|
|
$ |
114,443 |
|
Total revenue (1) |
|
$ |
75,659 |
|
|
$ |
55,204 |
|
|
$ |
140,172 |
|
|
$ |
114,443 |
|
Segment Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and Research Services Adjusted EBITDA |
|
$ |
2,324 |
|
|
$ |
(760 |
) |
|
$ |
(14,673 |
) |
|
$ |
(1,265 |
) |
Therapeutics Adjusted EBITDA |
|
|
(18,663 |
) |
|
|
(18,828 |
) |
|
|
(37,128 |
) |
|
|
(37,131 |
) |
Unallocated Corporate (2) |
|
|
(13,316 |
) |
|
|
(10,095 |
) |
|
|
(27,568 |
) |
|
|
(18,563 |
) |
Total Adjusted EBITDA |
|
$ |
(29,655 |
) |
|
$ |
(29,683 |
) |
|
$ |
(79,369 |
) |
|
$ |
(56,959 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net loss to Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(66,065 |
) |
|
$ |
(16,524 |
) |
|
$ |
(155,597 |
) |
|
$ |
(58,550 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
- |
|
Interest (income) expense, net |
|
|
(1,392 |
) |
|
|
(92 |
) |
|
|
(1,637 |
) |
|
|
(136 |
) |
Other (income) expense, net |
|
|
687 |
|
|
|
(3 |
) |
|
|
1,122 |
|
|
|
(17 |
) |
Change in fair value of warrant liabilities |
|
|
|
|
|
(29,828 |
) |
|
|
— |
|
|
|
(29,294 |
) |
Income tax benefit |
|
|
(1,271 |
) |
|
|
— |
|
|
|
(1,525 |
) |
|
|
- |
|
Depreciation and amortization |
|
|
5,152 |
|
|
|
4,871 |
|
|
|
10,256 |
|
|
|
9,508 |
|
Amortization of acquired intangible assets |
|
|
4,267 |
|
|
|
— |
|
|
|
8,582 |
|
|
|
- |
|
Stock-based compensation expense |
|
|
28,967 |
|
|
|
10,427 |
|
|
|
59,430 |
|
|
|
20,064 |
|
Acquisition-related costs (3) |
|
|
— |
|
|
|
1,466 |
|
|
|
— |
|
|
|
1,466 |
|
Total Adjusted EBITDA |
|
$ |
(29,655 |
) |
|
$ |
(29,683 |
) |
|
$ |
(79,369 |
) |
|
$ |
(56,959 |
) |
(1)There was no Therapeutics revenue for the three and six months ended September 30, 2022 and 2021.
(2)Certain department expenses such as Finance, Legal, Regulatory and Supplier Quality, Corporate Communications, and CEO Office are not reported as part of the reporting segments as reviewed by the CODM. These amounts are included in Unallocated Corporate.
(3)For the three and six months ended September 30, 2022 and 2021, acquisition-related costs primarily consisted of advisory, legal and consulting fees related to the Lemonaid Acquisition.
Consumer and Research Services
Consumer and Research Services Adjusted EBITDA improved for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021, primarily due to (i) an increase in consumer services revenue of $11.7 million attributable to three months of telehealth services revenue from the Lemonaid Acquisition and (ii) $1.9 million growth in subscription services revenue, partially offset by a $1.5 million decrease, driven mainly by lower PGS kit sales volume. Research services revenue increased by $8.4 million due primarily to a $4.9 million increase in GSK revenue related to the GSK Agreement and a $3.5 million increase in revenue under research contracts with third parties in connection with the achievement of certain non-recurring milestones.
The foregoing increases in revenue were partially offset by a $10.2 million increase in personnel-related expenses driven by increased salaries and related taxes as a result of inflation and growth in headcount, a $5.2 million increase in advertising and brand-related spend in marketing programs, and a $2.0 million increase in cost of revenue-related shipping, supplies, and consultant spend, all of which were primarily attributable to the inclusion to telehealth services.
Consumer and Research Services Adjusted EBITDA declined for the six months ended September 30, 2022, as compared to the six months ended September 30, 2021, primarily due to (i) a $20.0 million increase in personnel-related expenses driven by increased salaries and related taxes as a result of inflation and growth in headcount, (ii) a $16.7 million increase in advertising and brand-related spend in marketing programs, and (iii) a $3.7 million increase in cost of revenue-related shipping, supplies and consultant spend, all of which were primarily attributable to the inclusion of telehealth services.
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Table of Contents
The foregoing increases in expenses were partially offset by an increase in consumer services revenue of $23.6 million attributable to six months of telehealth services from the Lemonaid Acquisition and $3.6 million growth in subscription services revenue, partially offset by a $7.0 million decrease, driven mainly by lower PGS kit sales volume. Research services revenue increased by $5.5 million due primarily to a $3.5 million increase in revenue under research contracts with third parties in connection with the achievement of certain non-recurring milestones and an increase of $2.0 million in GSK revenue related to the GSK Agreement.
Therapeutics
Therapeutics' Adjusted EBITDA did not change significantly from the three and six months ended September 30, 2022, as compared to the three and six months ended September 30, 2021.
Liquidity and Capital Resources
We have financed our operations primarily through sales of equity securities and revenue from sales of PGS, telehealth, and research services. During the fiscal year ended March 31, 2022, we received gross proceeds of $309.7 million from the Merger and $250.0 million from the PIPE investment. Our primary requirements for liquidity and capital are to fund operating needs and finance working capital, capital expenditures, and general corporate purposes.
As of September 30, 2022, our principal source of liquidity was our cash and cash equivalents balance of $410.9 million, which is held for working capital purposes. We have incurred significant operating losses as reflected in our accumulated deficit and negative cash flows from operations. We had an accumulated deficit of $1,350.3 million as of September 30, 2022. As of the date of this Form 10-Q, we believe our existing cash resources are sufficient to continue operating activities for the next 12 months.
We expect to continue to incur operating losses and negative cash flows from operations for the foreseeable future due to the investments we intend to continue to make in research and development, additional general and administrative expenses we expect to incur in connection with operating as a public company, and additional sales and marketing expenses we expect to incur as a result of the Lemonaid Acquisition. Cash from operations could also be affected from our customers and other risks set forth in Part I, Item 1A., “Risk Factors,” of the Fiscal 2022 10-K. We expect to continue to maintain financing flexibility in the current market conditions. As a result, we may require additional capital resources to execute strategic initiatives to grow our business.
Our future capital requirements will depend on many factors including our revenue growth rate, the timing and extent of spending to support further sales and marketing, and research and development efforts. We may continue to enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may, as a result of those arrangements or the general expansion of our business, be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be materially and adversely affected.
For the six months ended September 30, 2022, there were no material changes outside of the ordinary course of business in our commitments and contractual obligations disclosed in the Fiscal 2022 Form 10-K. See Note 8, “Commitments and Contingencies,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.
Cash Flows
The following table summarizes our cash flows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Net cash used in operating activities |
|
$ |
(145,974 |
) |
|
$ |
(107,025 |
) |
Net cash used in investing activities |
|
$ |
(4,951 |
) |
|
$ |
(9,116 |
) |
Net cash provided by financing activities |
|
$ |
7,182 |
|
|
$ |
534,702 |
|
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Table of Contents
Cash Flows from Operating Activities
Net cash used in operating activities of $146.0 million for the six months ended September 30, 2022 was primarily related to a net loss of $155.6 million, partially offset by non-cash charges for stock-based compensation of $59.4 million, depreciation and amortization of $16.7 million and amortization and impairment of internal-use software of $2.1 million. The net changes in operating assets and liabilities of $68.6 million were primarily related to an increase in accounts receivable of $49.5 million mainly attributable to the $50.0 million receivable related to the GSK Agreement, a decrease in accounts payable of $27.0 million primarily due to timing of vendor payments, a decrease in accrued and other current liabilities of $10.4 million due to timing of vendor invoice receipts, a decrease in operating lease liabilities of $4.4 million primarily due to lease payments, and an increase in inventories of $3.0 million due to increased purchases in preparation for holiday season sales. These were partially offset by an increase in deferred revenue of $19.0 million as a result of increased deferred revenue related to GSK collaboration which is partially offset by decreases in PGS deferred revenue, a decrease in prepaid expenses and other current assets of $4.9 million primarily due to the receipt of insurance claim payments, and a decrease in operating right-of-use assets of $3.7 million primarily due to right-of-use assets amortization.
Net cash used in operating activities of $107.0 million for the six months ended September 30, 2021 was primarily related to a net loss of $58.6 million and changes in fair value of warrant liabilities of $29.3 million, partially offset by non-cash charges for stock-based compensation of $20.1 million, depreciation and amortization of $8.4 million, and amortization of internal-use software of $1.1 million. The net changes in operating assets and liabilities of $48.8 million were primarily related to an increase in accounts receivable of $24.2 million primarily attributable to an accounts receivable balance related to the GSK Agreement, an increase in inventories of $11.5 million due to increased purchases in preparation for holiday season sales, an increase in prepaid expenses and other current assets of $5.4 million primarily due to increase in prepaid insurance, a decrease in operating lease liabilities of $3.7 million primarily due to lease payments, and a decrease in deferred revenue of $3.6 million primarily due to less PGS kit sales than revenue recognized during the period. These were partially offset by increased deferred revenue balance related to GSK collaboration, a decrease in accrued expenses and other current liabilities of $2.3 million primarily due to timing of vendor invoice receipts, a decrease in accounts payable of $1.0 million due to timing of vendor payments, and an increase in other assets of $0.7 million primarily due to an increase in prepaid insurance, which were offset by a decrease in operating lease right-of-use assets of $3.5 million primarily due to right-of-use assets amortization.
Cash Flows from Investing Activities
Cash flows from investing activities primarily relate to purchase of property and equipment, prepayments for intangible assets, as well as capitalization of internal-use software costs.
Net cash used in investing activities was $5.0 million for the six months ended September 30, 2022, which consisted of capitalization of internal-use software costs of $3.0 million and purchases of property and equipment of $1.9 million.
Net cash used in investing activities was $9.1 million for the six months ended September 30, 2021, which consisted of prepayments for intangible assets of $5.5 million related to a patent rights purchase completed in October 2021, purchases of property and equipment of $1.8 million and capitalization of internal-use software costs of $1.8 million.
Cash Flows from Financing Activities
Net cash provided by financing activities was $7.2 million for the six months ended September 30, 2022, which consisted of $3.9 million in proceeds from the exercise of stock options and $3.2 million in proceeds from the issuance of common stock under the ESPP.
Net cash provided by financing activities was $534.7 million for the six months ended September 30, 2021, which consisted of $309.7 million in proceeds from the Business Combination, $250.0 million of proceeds from the PIPE Investment, and $5.6 million in proceeds from the exercise of stock options, which were partially offset by $30.6 million in payments of deferred offering costs.
Contractual Obligations and Commitments
Our lease portfolio includes leased offices, dedicated lab facility and storage space, and dedicated data center facility space, with remaining contractual periods from 0.4 years to 8.8 years. Refer to Note 7, “Leases,” of our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for a summary of our future minimum lease obligations.
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In the normal course of business, we enter into non-cancelable purchase commitments with various parties for purchases. Refer to Note 8, “Commitments and Contingencies,” of our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for a summary of our commitments as of September 30, 2022.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets. We test goodwill each fiscal year on January 1st for impairment at the Consumer and Research Services reporting unit level. Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Performance of the qualitative impairment assessment requires judgment in identifying and considering the significance of relevant events and circumstances, including external factors such as macroeconomic and industry conditions and the legal and regulatory environment, as well as entity-specific factors, such as actual and planned financial performance, that could impact the fair value of our Consumer and Research Services reporting unit. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, we will proceed to perform the quantitative impairment test in which the fair value of the reporting unit is compared with its carrying amount, and an impairment charge will be recorded for the amount by which the carrying amount exceeds the reporting unit's fair value, if any.
Our annual assessment for goodwill impairment was performed as of January 1, 2022. The assessment indicated that is it more likely than not that the fair value of the Consumer and Research Services reporting unit exceeds its carrying amount. We are not experiencing constraints on access to capital, poor financial performance, nor do we intend to scale down our business. We have not experienced any conditions that would require a write-down of our other assets, including long-lived assets. Therefore, no goodwill impairment charges were recorded as a result of our 2022 impairment analysis. Furthermore, in considering potential indicators of impairment, the Company has considered recent events and circumstances and concluded there is no evidence that changes our most recent conclusions.
Except as set forth above, there have been no material changes to our critical accounting policies and estimates as compared to those described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Fiscal 2022 Form 10-K.