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(1)Customer C is a reseller.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2024 | | 2023 | | 2024 | | 2023 |
| Percentage of revenue: | | | | | | | |
Customer C(1) | | % | | | % | | | % | | | % |
| Customer B | | % | | | % | | | % | | * |
•less than 10%
(1)Customer C is a reseller.
million and $ million as of December 31, 2024 and March 31, 2024, respectively. The increase in restricted cash is related to a new letter of credit entered into by the Company in April 2024, and subsequently amended and increased in November 2024, as collateral related to the Company’s credit card processor.
million of the escrow amount was
million was released during the first quarter of fiscal 2025. Accordingly, the entire escrow amount has been released. billion, and unrestricted cash and cash equivalents of $ million. The Company will need additional liquidity to fund its necessary expenditures and financial commitments for 12 months after the date that the unaudited interim condensed consolidated financial statements included in this report are issued. The Company has determined that, as of the filing date of this report, there is substantial doubt about the Company’s ability to continue as a going concern.
To improve its financial condition and liquidity position, the Company is attempting to raise additional capital. In addition, the Company is working to implement cost-cutting measures, including further reducing operating expenses, negotiating terminations of the Company's long-term real estate leases, and attempting to reach a settlement covering all U.S. customers affected by the Cyber Incident (as defined below) as well as to resolve non-U.S. litigation and ongoing investigations from various governmental agencies arising from the Cyber Incident. See Note 11, "Commitments and Contingencies," for additional details. To reduce the Company's operating costs, during the three months ended December 31, 2024, the Company’s Board of Directors approved the November 2024 Reduction in Force, which represented a reduction of approximately % of the Company’s workforce and included the closing of substantially all operations in the Company's former Therapeutics operating segment, and the ceasing of additional investment in the Company’s two clinical trials beyond their respective current stages of development. See Note 9, “Restructuring,” for additional details. The Company’s ability to continue as a going concern, however, is contingent upon the Company’s ability to successfully implement steps such as those referenced above, and if the Company fails to do so and/or is unable to raise sufficient capital or consummate a strategic transaction, it would be forced to modify or cease operations, liquidate assets, or pursue bankruptcy proceedings. While the Company believes in the viability of its strategy, there are numerous risks and uncertainties that may prevent, and there can be no assurances regarding, the successful implementation of the Company’s operational and financial plans and/or the consummation of any transactions. See Note 1, “Organization and Description of Business,” for additional details.
The unaudited interim condensed consolidated financial statements do not reflect any adjustments pertaining to the recoverability and classification of assets or the amount and classification of liabilities or any other adjustments that would be necessary if the Company were unable to continue as a going concern.
Nasdaq Deficiency Minimum Bid Price
On November 10, 2023, the Company received a deficiency letter (the “First Nasdaq Letter”) from the Nasdaq Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”), notifying the Company that it was not in compliance with Nasdaq Listing Rule 5450(a)(1), which requires the Company to maintain a minimum bid price of at least $1.00 per share for continued listing on The Nasdaq Global Select Market (the “Minimum Bid Requirement”). The Company’s failure to comply with the Minimum Bid Requirement was based on its Class A common stock per share price being below the $1.00 threshold for a period of 30 consecutive trading days. Pursuant to the First Nasdaq Letter, the Company had an initial 180 calendar days from the date of the First Nasdaq Letter to regain compliance. The Company did not regain compliance during the initial compliance period.
On May 9, 2024, the Company received a notification letter from the Staff notifying the Company that it had been granted an additional 180 days, or until November 4, 2024, to regain compliance with the Minimum Bid Requirement, based on the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on The Nasdaq Capital Market with the exception of the bid price requirement, and the Company’s written notice of its intention to cure the deficiency during the second compliance period. In order to be
%) of the voting power of the outstanding shares of the Company’s Class A common stock and Class B common stock voting together as a single class, approved a proposal authorizing the Company’s Board of Directors, in its discretion, to effect a reverse stock split of the Company’s outstanding shares of Class A common stock and Class B common stock, respectively, by a ratio of not less than one-for-five and not more than one-for-thirty, with the exact ratio to be set within this range by the Company’s Board of Directors in its sole discretion. On October 7, 2024, the Company’s Board approved the Reverse Stock Split at a ratio of one-for-twenty. The Reverse Stock Split became effective as of 12:01 a.m. Eastern Time on October 16, 2024.
On October 30, 2024, the Company received written notice (the “Compliance Notice”) from the Staff informing the Company that it has regained compliance with the Minimum Bid Requirement. The Staff notified the Company in the Compliance Notice that, from October 16, 2024 to October 29, 2024, the closing bid price of the Company’s Class A common stock had been $1.00 per share or greater and, accordingly, the Company had regained compliance with the Minimum Bid Requirement and that the matter was now closed.
Nasdaq Deficiency Independent Directors
On September 18, 2024, the Company received a deficiency letter from the Staff, notifying the Company that the Company was not in compliance with Nasdaq Listing Rule 5605 (the “Second Nasdaq Letter”). Specifically, as a result of the Resignations, the Company was no longer in compliance with the following (collectively, the “Corporate Governance Requirements”):
•Nasdaq Listing Rule 5605(b), which requires, among other things, that a majority of the Company’s Board of Directors be comprised of Independent Directors (as defined in Nasdaq Listing Rule 5605(a)(2));
•Nasdaq Listing Rule 5605(c), which requires, among other things, that the Company have an Audit Committee that has at least three members, each of whom must (i) be an Independent Director, (ii) meet the criteria for independence set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended, (iii) not have participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years, and (iv) be able to read and understand fundamental financial statements;
•Nasdaq Listing Rule 5605(d), which requires, among other things, that the Company have a Compensation Committee that has at least two members, each of whom must be an Independent Director; and
•Nasdaq Listing Rule 5605(e), which requires, among other things, that the Company have Independent Director oversight of director nominations.
Pursuant to the Second Nasdaq Letter, the Company had until October 3, 2024 to submit a plan to regain compliance with the Corporate Governance Requirements (the “Plan”) for the Staff’s review. The Company submitted the Plan to the Staff on September 26, 2024.
independent directors to the Company’s Board of Directors, each of whom was appointed to the Audit Committee and Compensation Committee (the “Appointments”). On October 30, 2024, the Company received a letter from the Staff informing the Company that, as a result of the Appointments, the Company had regained compliance with the Corporate Governance Requirements.
3.
million and $ million for the three months ended December 31, 2024 and 2023, respectively, and $ million and $ million for the nine months ended December 31, 2024 and 2023, respectively.
The Company will not have any significant continuing involvement in the operations of the former Therapeutics operating segment after the disposal transaction.
| | $ | | |
| Total current assets of discontinued operations | $ | | | | $ | | |
| | | |
Property and equipment, net(1) | $ | | | | $ | | |
| Operating lease ROU assets | | | | | |
| Other assets | | | | | |
| Total assets noncurrent assets of discontinued operations | $ | | | | $ | | |
| | | |
Accounts payable (includes related party amounts of and $, respectively) | $ | | | | $ | | |
Accrued expenses and other current liabilities (includes related party amounts of $ and $, respectively) | | | | | |
Operating lease liabilities(2) | | | | | |
| Total current liabilities of discontinued operations | $ | | | | $ | | |
| | | |
Operating lease liabilities, noncurrent(2) | $ | | | | $ | | |
| Total noncurrent liabilities of discontinued operations | $ | | | | $ | | |
(1)In connection with the November 2024 Reduction Plan, the Company wrote off leasehold improvements and disposed of certain laboratory equipment and software. The loss on disposal of property and equipment was immaterial for the three and nine months ended December 31, 2024.
(2)The Company's operating lease for the South San Francisco Facility has a remaining contractual period of years. As of December 31, 2024, the future minimum lease payments included in the measurement of the Company’s operating lease liabilities were $ million for the remainder of fiscal 2025, $ million for fiscal 2026, and $ million for fiscal 2027, and the total imputed interest was $ million.
The following table summarizes the condensed operating results of the discontinued operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (in thousands) |
| Operating expenses: | | | | | | | |
Research and development (includes related party expenses of $ and $ for the three months ended December 31, 2024 and 2023, respectively, and $ and $ for the nine months ended December 31, 2024 and 2023, respectively)(1)(2) | $ | | | | $ | | | | $ | | | | $ | | |
Restructuring and other charges(2) | | | | | | | | | | | |
| Total operating expenses | | | | | | | | | | | |
Net loss from discontinued operations(3) | $ | () | | | $ | () | | | $ | () | | | $ | () | |
(1)For the three months ended December 31, 2024 and 2023, the Company recorded operating lease costs of $ million and $ million, respectively, and variable operating lease costs of $ million and $ million, respectively, associated with the South San Francisco Facility. For the nine months ended December 31, 2024 and 2023, the Company recorded operating lease costs of $ million and $ million, respectively, and variable operating lease costs of $ million and $ million, respectively, associated with the South San Francisco Facility.
provision for (benefit from) income tax related to discontinued operations for the three and nine months ended December 31, 2024 and 2023.
During the three and nine months ended December 31, 2024, the Company recorded restructuring charges of $ million and $ million, respectively, related to discontinued operations, of which $ million and $ million, respectively, were related to cash severance payments and benefits continuation, and $ million and $ million, respectively, were related to stock-based compensation related to equity modifications in connection with the reductions in force. In addition, in connection with the November 2024 Reduction Plan, the Company abandoned the South San Francisco Facility in December 2024. As a result, the Company determined to record a lease abandonment charge of $ million to accelerate all amortization of the remaining carrying value of the operating lease ROU asset for the South San Francisco Facility, and impairment losses of $ million related to leasehold improvements for this facility. The Company recorded the expenses associated with this facility exit in restructuring and other charges in the table above and within discontinued operations in the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended December 31, 2024.
During the three and nine months ended December 31, 2023, the Company recorded restructuring charges of $ million and $ million, respectively, within restructuring and other charges in the table above and net loss from discontinued operations within the condensed consolidated statements of operations, of which $ million and $ million, respectively, were related to cash severance payments and benefits continuation, and $ million and $ million, respectively, were related to stock-based compensation related to equity modifications in connection with the reductions in force. There were impairments to ROU assets and property and equipment for the three and nine months ended December 31, 2023.
| | Restructuring charges incurred during the period | | |
| Amounts paid during the period | () | |
| Accrued restructuring costs included in accrued expenses and other current liabilities as of December 31, 2024 | $ | | |
| | $ | | | | Stock-based compensation expense | $ | | | | $ | | |
|
| Impairment of long-lived assets | $ | | | | $ | | |
|
| Changes in operating assets and liabilities: | | | |
| Prepaid expenses and other current assets | $ | | | | $ | | |
| Operating lease ROU assets | $ | | | | $ | | |
| Other assets | $ | | | | $ | | |
Accounts payable (includes related party amounts of $() and $ for the nine months ended December 31, 2024 and 2023, respectively) | $ | () | | | $ | | |
Accrued expenses and other current liabilities (includes related party amounts of $() and $ for the nine months ended December 31, 2024 and 2023, respectively) | $ | () | | | $ | () | |
| Operating lease liabilities | $ | () | | | $ | () | |
| Cash flows from investing activities: | | | |
| Purchases of property and equipment | $ | () | | | $ | () | |
| Proceeds from sale of property and equipment | $ | | | | $ | | |
4.
| | | % | | $ | | | | | % | | $ | | | | | % | | $ | | | | | % | | Telehealth | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Consumer services | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Research services | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Total | $ | | | | | % | | $ | | | | | % | | $ | | | | | % | | $ | | | | | % |
| | | | | | | | | | | | | | | |
Over Time | | | | | | | | | | | | | | | |
| PGS | $ | | | | | % | | $ | | | | | % | | $ | | | | | % | | $ | | | | | % |
| Telehealth | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Consumer services | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Research services | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Total | $ | | | | | % | | $ | | | | | % | | $ | | | | | % | | $ | | | | | % |
| | | | | | | | | | | | | | | | |
| Revenue by Category | | | | | | | | | | | | | | | |
| PGS | $ | | | | | % | | $ | | | | | % | | $ | | | | | % | | $ | | | | | % |
| Telehealth | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Consumer services | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Research services | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Total | $ | | | | | % | | $ | | | | | % | | $ | | | | | % | | $ | | | | | % |
| | | % | | $ | | | | | % | | $ | | | | | % | | $ | | | | | % | | United Kingdom | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Canada | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Other regions | | | | | % | | | | | | % | | | | | | % | | | | | | % |
| Total | $ | | | | | % | | $ | | | | | % | | $ | | | | | % | | $ | | | | | % |
million and $ million for the three months ended December 31, 2024 and 2023, respectively, and $ million and $ million for the nine months ended December 31, 2024 and 2023, respectively.Contract Balances
Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts associated with contractual rights related to consideration for performance obligations in the Company's Research Services contracts and are included in prepaid expenses and other current assets on the condensed consolidated balance sheets. The amount of contract assets was as of December 31, 2024 and March 31, 2024.
Contract liabilities consist of deferred revenue. As of December 31, 2024 and March 31, 2024, deferred revenue for consumer services was $ million and $ million, respectively. Of the $ million of deferred revenue for consumer services as of March 31, 2024, the Company recognized $ million and $ million as revenue during the three and nine months ended December 31, 2024, respectively.
As of December 31, 2024 and March 31, 2024, deferred revenue for research services was $ million and $ million, respectively. As of December 31, 2024 and March 31, 2024, deferred revenue for research services included $ million and $ million, respectively, of related party deferred revenue. Of the $ million of deferred revenue for research services as of March 31, 2024, the Company recognized $ million and $ million as revenue during the three and nine months ended December 31, 2024, respectively, which included related party revenue of $ million and $ million for the three and nine months ended December 31, 2024, respectively.
Remaining Performance Obligations
The transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that are expected to be billed and recognized as revenue in future periods. The Company has utilized the practical expedient available under ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) to not disclose the value of unsatisfied performance obligations for PGS and telehealth as those contracts have an expected length of one year or less. As of December 31, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations for research services was $ million. The Company expects to recognize revenue of approximately % of this amount over the next months and the remainder thereafter. During the three and nine months ended December 31, 2024 and 2023, revenue recognized for performance obligations satisfied in prior periods were immaterial.
5.
exclusive drug discovery and development collaboration agreement, amended in 2019 and 2021, respectively (as amended, the “original GSK Agreement”), for collaboration on identification and development of therapeutic agents with a unilateral option for GSK to extend the term for an additional year. In January 2022, GSK elected to exercise the option to extend the exclusive target discovery term for an additional year to July 23, 2023, after which it expired under the original GSK Agreement. The Company has concluded that GSK is considered a customer. Therefore, the Company applied the guidance in ASC 606 to account for and present consideration received from GSK related to research services provided by the Company. The Company’s activities under the original GSK Agreement, which included reporting, drug target discovery, and joint steering committee participation, represented one combined performance obligation to deliver research services. The Company recognized research services revenue related to the original GSK Agreement as the respective performance obligations were satisfied using an input method to measure progress. In addition, the original GSK Agreement, provided GSK the right to include certain identified pre-existing Company programs in the collaboration at GSK’s election, each of which was considered distinct from the research services.
million data access fee, which the Company received during fiscal 2024. The license to the New Data will expire from the date GSK provides the Company with a notice that GSK was ready to use the New Data (the “Data Use Notice”); in September 2024, the Company and GSK agreed to extend the deadline for the Data Use Notice from September 30, 2024 to October 28, 2024. Revenue attributable to the New Data license was accounted for upon the satisfaction of performance obligations and was recognized upon the Company’s receipt of the Data Use Notice from GSK, which occurred on October 28, 2024. Revenue attributable to research services will be recognized as the performance obligation is satisfied using an input method to measure progress. The Company believes that actual hours incurred relative to contractually agreed upon hours is the most accurate measurement of progress for the input method. As of December 31, 2024, deferred revenue associated with the New Data access was $ million. The license to the New Data will expire on October 28, 2025. Pursuant to the 2023 GSK Amendment, the Company opted-out of cost-sharing and other research and development obligations with respect to programs initiated by GSK and the Company under the original GSK Agreement. The Company will retain rights to receive low to mid single digit royalties on net sales of products developed in these three programs.
The Company did recognize research services revenue related to the original GSK Agreement during the three months ended December 31, 2024 and 2023. The Company recognized research services revenue related to the original GSK Agreement of and $ million during the nine months ended December 31, 2024 and 2023, respectively. The Company recognized research services revenue related to the 2023 GSK Amendment of $ million during the three and nine months ended December 31, 2024. The Company did recognize research services revenue related to the 2023 GSK Amendment during the three and nine months ended December 31, 2023.
As of December 31, 2024 and March 31, 2024, the Company had deferred revenue of $ million and $ million, respectively, related to the 2023 GSK Amendment. Cost-sharing amounts incurred prior to the identification of targets included in cost of service revenue were during the three and nine months ended December 31, 2024, and were and for the three and nine months ended December 31, 2023, respectively.
Cost-sharing amounts incurred subsequent to the identification of targets were $ million and $ million during the three and nine months ended December 31, 2024, respectively, and $ million and $ million during the three and nine months ended December 31, 2023, respectively, included within net loss from discontinued operations within the condensed consolidated statement of operations. As of December 31, 2024 and March 31, 2024, the Company had $ million and $ million, respectively, related to balances of amounts payable to GSK for reimbursement of shared costs included within current liabilities from discontinued operations on the condensed consolidated balance sheets.
GSK’s affiliate, Glaxo Group Limited, is considered as a related party to the Company. See Note 18, “Related Party Transactions.”
6.
million and $ million for the three months ended December 31, 2024 and 2023, respectively, and $ million and $ million for the nine months ended December 31, 2024 and 2023, respectively. The Company maintains the ability to control the VIEs, is entitled to substantially all of the economic benefits from the VIEs, and is obligated to absorb all expected losses of the VIEs.7.
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | Total financial assets | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
The fair value of cash, restricted cash, accounts receivable, accounts payable, and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date as of December 31, 2024 and March 31, 2024.
Cash equivalents consist primarily of money market funds and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.
The Company had transfers between levels of the fair value hierarchy of its assets and liabilities measured at fair value during the nine months ended December 31, 2024 and the fiscal year ended March 31, 2024.
Nonrecurring Fair Value Measurements
Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date. Certain of the Company’s assets, including intangible assets and goodwill, are measured at fair value on a nonrecurring basis and are classified in Level 3 of the fair value hierarchy.
As a result of a sustained decline in market capitalization based on the Company’s publicly quoted share price, lower than expected financial performance and macroeconomic conditions that existed during the three months ended December 31, 2023, the Company performed an impairment assessment of goodwill acquired as part of the Lemonaid
million impairment charge to partially write down the value of its goodwill to its estimated fair value during the three and nine months ended December 31, 2023. No nonrecurring fair value measurements for continuing operations were required during the three and nine months ended December 31, 2024.8.
| | $ | | | | Insurance recovery receivable | | | | | |
| Other receivables | | | | | |
| Other current assets | | | | | |
| Prepaid expenses and other current assets | $ | | | | $ | | |
Property and Equipment, Net
| | $ | | | | Laboratory equipment and software | | | | | |
| Furniture and office equipment | | | | | |
| Leasehold improvements | | | | | |
| Capitalized asset retirement obligations | | | | | |
| Property and equipment, gross | | | | | |
| Less: accumulated depreciation and amortization | () | | | () | |
| Property and equipment, net | $ | | | | $ | | |
Depreciation and amortization expense was $ million and $ million for the three months ended December 31, 2024 and 2023, respectively, and $ million and $ million for the nine months ended December 31, 2024 and 2023, respectively.
Operating Lease ROU Assets, Net
| | $ | | | | Less: accumulated amortization | () | | | () | |
| Operating lease ROU assets, net | $ | | | | $ | | |
There were impairments to ROU assets for continuing operations during the three and nine months ended December 31, 2024 and 2023.
| | $ | | | | Less: accumulated amortization | () | | | () | |
| Internal-use software, net | $ | | | | $ | | |
The Company capitalized $ million and $ million in internal-use software during the three months ended December 31, 2024 and 2023, respectively, and $ million and $ million in internal-use software during the nine months ended December 31, 2024 and 2023, respectively. In addition, the Company wrote off $ million of internal-use software during the three months ended December 31, 2023 related to the disposition of Lemonaid Health Limited, refer to Note 17, “Disposition of Subsidiary,” for additional information.
Amortization of internal-use software was $ million and $ million for the three months ended December 31, 2024 and 2023, respectively, and $ million and $ million for the nine months ended December 31, 2024 and 2023, respectively. Impairment to internal-use software was and $ million for the three and nine months ended December 31, 2024, respectively, and $ million for both the three and nine months ended December 31, 2023, respectively.
Intangible Assets, Net
| $ | | | | $ | () | | | $ | | | | Partnerships | | | | | | () | | | | |
| Trademark | | | | | | () | | | | |
| Developed technology | | | | | | () | | | | |
| Non-compete agreements | | | | | | () | | | | |
| Patents | | | | | | () | | | | |
| Total intangible assets | | | $ | | | | $ | () | | | $ | | |
| $ | | | | $ | () | | | $ | | | | Partnerships | | | | | | () | | | | |
| Trademark | | | | | | () | | | | |
| Developed technology | | | | | | () | | | | |
| Non-compete agreements | | | | | | () | | | | |
| Patents | | | | | | () | | | | |
| Total intangible assets | | | $ | | | | $ | () | | | $ | | |
Amortization expense for intangible assets was $ million and $ million for the three months ended December 31, 2024 and 2023, respectively, and $ million and $ million for nine months ended December 31, 2024 and 2023, respectively. There was impairment to intangible assets during the three and nine months ended December 31, 2024 and 2023.
| | 2026 | | |
| 2027 | | |
| 2028 | | |
| 2029 | | |
| Thereafter | | |
| Total estimated future amortization expense | $ | | |
Accrued Expense and Other Current Liabilities
| | $ | | | | Accrued settlement and legal expenses | | | | | |
| Accrued compensation and benefits | | | | | |
| Accrued vacation | | | | | |
| Accrued bonus | | | | | |
|
|
|
%
|
| |
|
| |
There were potential shares of Class B common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented.
15.
% of the first % or % of the first $ (subject to annual compensation and contribution limits) of employee contributions. The Company recognized matching contributions cost of $ million and $ million for the three months ended December 31, 2024 and 2023, respectively, and $ million and $ million for the nine months ended December 31, 2024 and 2023, respectively.16.
tax provision recognized and an immaterial tax benefit was recognized for the three and nine months ended December 31, 2024, respectively, and an immaterial tax provision was recognized for the three and nine months ended December 31, 2023. The provision tax expense or benefit from income taxes is reflected on the condensed consolidated statements of operations and comprehensive loss for the periods. The Company continues to maintain a full valuation allowance on the remaining net deferred tax assets of the U.S. entities as it is more likely than not that the Company will not realize the deferred tax assets. Utilization of net operating loss carryforwards may be subject to future annual limitations provided by Section 382 of the Code and similar state provisions.The Company files income tax returns in the U.S. federal jurisdiction and various states. As of the date of this filing, the Company is not currently under examination by income tax authorities in federal, state, or other jurisdictions. All tax returns will remain open for examination by the federal and state authorities for three and four years, respectively, from the date of utilization of any net operating loss or credits.
17.
million of loss on the disposition of Lemonaid Health Limited and transaction-related costs within general and administrative expenses. There were charges incurred during the three and nine months ended December 31, 2024.
18.
% and % voting interest in the Company as of December 31, 2024 and March 31, 2024, respectively. The Anne Wojcicki Foundation, which subscribed for shares of the Company’s Class A common stock in the PIPE investment in connection with the Merger, is affiliated with the Company’s CEO and therefore a related party.
In January 2024, the Company entered into a research services agreement (the “TWF Agreement”) and related statement of work (the “initial SOW”) with the Troper Wojcicki Foundation (“TWF”) with the goal of expanding scientific knowledge in the field of lung cancer using the Company’s phenotype and genotype data to build large scale research cohorts. At the time, Susan Wojcicki was a director and officer of TWF, and a sibling of the Company’s CEO, Anne Wojcicki, and therefore the Company determined that TWF is a related party. The TWF Agreement has a term of through December 21, 2028. The fees under the initial SOW are $ million, payable in installments over the term of the TWF Agreement, with certain payments being subject to the achievement of specified milestones. The Company recognized revenue from the TWF Agreement of $ million and during the three months ended December 31, 2024 and 2023, respectively, and $ million and during the nine months ended December 31, 2024 and 2023, respectively. As of December 31, 2024 and March 31, 2024, the Company had deferred revenue of $ million and $ million, respectively, associated with the TWF Agreement.
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. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended March 31, 2024 (“Fiscal 2024 Form 10-K”), including the audited consolidated financial statements of 23andMe Holding Co. as of March 31, 2024 and 2023 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, without limitation, those discussed in the Fiscal 2024 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,” “23andMe,” “we,” “us,” and “our” refer to 23andMe Holding Co., a Delaware corporation formerly known as VG Acquisition Corp. and its consolidated subsidiaries.
Overview
Our mission is to help people access, understand, and benefit from the human genome. To achieve this, we pioneered direct-to-consumer genetic testing and built the world’s largest crowdsourced platform for genetic research. Our data engine powers our leading direct-to-consumer precision health platform and our genetics driven Research business.
We are dedicated to empowering customers to optimize their health by providing direct access to their genetic information, personalized reports, actionable insights and digital access to affordable healthcare professionals through our telehealth platform, Lemonaid Health, Inc. (“Lemonaid Health”).
Through direct-to-consumer genetic testing, we give consumers unique, personalized information about their genetic health risks, ancestry, and traits. We were the first company to obtain Food and Drug Administration (“FDA”) authorization for a direct-to-consumer genetic test, and we are the only company to have FDA authorization, clearance, or an exemption from premarket notification for all of the carrier status, genetic health risk, cancer predisposition, and pharmacogenetics reports that we offer to customers. As of December 31, 2024, we had over 65 health and carrier status reports that were available to customers in the U.S.
Through our Lemonaid Health telehealth platform, our ultimate goal is to provide customers access to personalized care based on their unique genetic profile and lifestyle. We currently connect patients to licensed healthcare professionals to provide affordable and direct online access to medical care, from consultation through treatment, for a number of common conditions, using evidence-based guidelines and up-to-date clinical protocols. When medications are prescribed by Lemonaid Health’s affiliated healthcare professionals, patients can use Lemonaid Health’s online pharmacy for fulfillment. Patients also can access telehealth consultations for certain 23andMe genetic reports through Lemonaid Health.
In November 2023, we launched 23andMe+ Total Health (“Total Health”), our most comprehensive membership providing access to third-party independent clinicians practicing genetics informed care with a focus on early risk detection preventative actions. Our Total Health service combines membership and telehealth offerings with the addition of next generation sequencing covering 200x more hereditary disease-causing variants than our personal genome service (“PGS”) reports (50,000+ hereditary disease-causing variants in Total Health exome sequencing compared to 250 health-related variants in our genotyping Carrier Status and Genetic Health Risk reports). Total Health also includes blood testing and access to genetics-based clinical care.
We have built the world’s largest crowdsourced platform for genetic research. The aim of our Research business is to revolutionize research and become the market’s preferred genetic-based research partner by monetizing access to our growing data engine of genetic and phenotypic information provided by our millions of engaged customers. We believe that this platform allows us to accelerate research at an unprecedented scale, enabling us to discover insights into the origins of diseases and to speed the discovery and development of novel therapies.
We previously operated our business through two reporting segments: (1) Consumer and Research Services; and (2) Therapeutics. As previously disclosed, on November 8, 2024, our Board of Directors approved a reduction in force related to both our former Consumer and Research Services and Therapeutics segments (the “November 2024 Reduction in
Force”), which also included the closure of substantially all operations in our Therapeutics operating segment (together with the November 2024 Reduction in Force, the “November 2024 Reduction Plan”). With the discontinuation of the Therapeutics operating segment, we now operate our business as one segment as of December 31, 2024. Prior comparative periods have been revised to conform with the current period segment presentation. Unless otherwise noted, management’s discussion and analysis of our results of operations relate to our continuing operations. See Note 2, “Summary of Significant Accounting Policies,” and Note 3, “Discontinued Operations,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.
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 known and unknown risks and challenges, including, without limitation, those set forth in Part I, Item 1A., “Risk Factors,” of the Fiscal 2024 Form 10-K, as amended and supplemented in our subsequent reports and filings with the SEC.
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 55% and 78% of our total revenues for the three months ended December 31, 2024 and 2023, respectively, and approximately 71% and 72% of our total revenues for the nine months ended December 31, 2024 and 2023, respectively. In addition, kit sales are a source of members to our PGS membership service, which represented approximately 16% and 12% of our total revenue during the three months ended December 31, 2024 and 2023, respectively, and approximately 19% and 9% of our total revenue during the nine months ended December 31, 2024 and 2023, respectively. We expect PGS revenues to fluctuate in the near-term and to grow in the long-term, as we continue to evolve our product offerings across kit sales and our membership service, and introduce new products or features that enhance or add value for customers and members. This will be achieved by increasing awareness of our current and new offerings in existing markets and expanding into new markets.
Purchasing patterns of our kits are largely influenced by product innovation, marketing spend, and varying levels of price discounting on our products. Sales and marketing expenses are typically higher during promotional windows that align with gift-giving portions of the year, with an emphasis on the holiday period, as well as other gift-giving and family-oriented holidays such as Mother’s Day and Father’s Day, and major Amazon sales events such as Prime Day, which may change from year to year. We expect the seasonality of our business to continue, with pronounced increases in revenue recognized in the fourth fiscal quarter, relating to our holiday promotions. For the three months ended December 31, 2024, PGS kit sales were lower than the prior year quarter. This decrease could have a negative impact on revenue and financial results in fiscal 2025.
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 11% and 18% of our total revenue during the three months ended December 31, 2024 and 2023, respectively, approximately 14% and 17% of our total revenue during the nine months ended December 31, 2024 and 2023, respectively. As there are many participants in the telehealth market, including new entrants and traditional health care systems offering virtual care, competition with respect to our telehealth business continues to intensify.
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. As of December 31, 2024, 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, our ability to conduct research successfully could be diminished, which could adversely affect our business.
Collaborations
Substantially all of our research services revenues were generated from the original GSK Agreement.
The exclusive target discovery term under the original GSK Agreement expired in July 2023. In October 2023, we entered into an amendment to the original GSK Agreement (the “2023 GSK Amendment”) to provide GSK with a non-exclusive license to certain new, de-identified, aggregated data included in our database (the “New Data”), as well as access to certain research services with respect to such New Data in return for a $20.0 million data access fee, which we received during fiscal 2024. The license to the New Data will expire one year from the date GSK provides the Company with a notice that GSK was ready to use the New Data (the “Data Use Notice”), which occurred on October 28, 2024. Accordingly, the license to the New Data will expire on October 28, 2025. See Note 5, “Collaborations,” to our condensed consolidated financial statements for more information regarding the 2023 GSK Amendment. Our ability to enter into new collaboration agreements will affect our research services revenues. If we are unable to enter into additional collaboration agreements, our future research services revenue will decline.
Expansion into New Categories and Customer Retention
We launched our 23andMe+ Premium membership service in October 2020, and through our acquisition of Lemonaid Health, we began providing access to telehealth services in November 2021. In November 2023, we launched Total Health, our comprehensive ongoing early detection health membership.
We expect to expand into new categories and innovative healthcare models with the goal of driving future growth. Such 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 additional products and services.
The success of our membership services will depend upon our ability to acquire and retain members 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, members may not renew.
Similarly, the success of our telehealth business is dependent on our ability to attract and retain patients and members, as well as continuing to expand our offering in related products and services categories. 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 in new categories and revenue may not increase in the future.
Our Total Health product combines select features and services of our membership and telehealth offerings. As such, the success of the Total Health product will depend on factors similar to those described above.
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 broad-based 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. We believe that 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 the rapid identification of 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.
We expect to continue investing in our business to capitalize on market opportunities and long-term growth. We plan to continue to invest in our 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 membership services, and design new offerings, including additional primary care offerings. In addition, we expect to continue to incur expenses associated with operating as a public company. The expenses we incur may vary significantly by quarter as we focus on building out different aspects of our business. We regularly evaluate our capital allocation approach to make sure that our capital is being used for the highest value-creating activities and in the most efficient manner. This may require changes to investment levels, how we operate, or are structured to ensure alignment to business priorities.
Recent Developments
Special Committee of the Company’s Board of Directors
As previously disclosed, the Company formed a special committee composed of independent members of the Board of Directors (the “Special Committee”) on March 28, 2024. The role of the Special Committee is to review strategic alternatives that may be available to the Company to maximize stockholder value. See Note 1, “Organization and Description of Business,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for details.
Nasdaq Minimum Bid Requirement
On November 10, 2023, the Company received a deficiency letter from the Nasdaq Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”), notifying the Company that it was not in compliance with Nasdaq Listing Rule 5450(a)(1), which requires the Company to maintain a minimum bid price of at least $1.00 per share for continued listing on The Nasdaq Global Select Market (the “Minimum Bid Requirement”). Following the effectiveness of the Reverse Stock Split (as defined below), on October 30, 2024, the Company received written notice from the Staff informing the Company that it has regained compliance with the Minimum Bid Requirement. See Note 2, “Summary of Significant Accounting Policies,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.
Nasdaq Listing Rule 5605 Corporate Governance Requirements
On September 18, 2024, the Company received a deficiency letter from the Staff, notifying the Company that the Company was not in compliance with Nasdaq Listing Rule 5605 (the “Corporate Governance Requirements”). On October 29, 2024, the Company announced the appointment of three independent directors to the Company’s Board of Directors, each of whom was appointed to the Audit Committee and Compensation Committee. On October 30, 2024, the Company received written notice from the Staff informing the Company that it has regained compliance with the Corporate Governance Requirements. See Note 2, “Summary of Significant Accounting Policies,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.
Reverse Stock Split
On October 11, 2024, the Company filed the Certificate of Amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse stock split at the ratio of one-for-twenty, which became effective on October 16, 2024 (the “Reverse Stock Split”). See Note 2, “Summary of Significant Accounting Policies,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.
Settlement Related to the Cyber Incident
On October 10, 2023, the Company reported that certain information was accessed from individual 23andMe.com accounts without the account users’ authorization (the “Cyber Incident”).
On July 15, 2024, we reached an agreement in principle to settle the putative class action lawsuits currently pending in the U.S. District Court for the Northern District of California (the “Court”). The parties executed a confidential settlement term sheet on July 29, 2024. We subsequently reached agreement with the plaintiffs on all material terms, including payment of $30.0 million (the “Settlement Agreement”). On September 12, 2024, plaintiffs filed a motion asking the Court for preliminary approval of the Settlement Agreement, and the motion was considered at a court hearing on October 29, 2024. On October 29, 2024, the Court deferred the motion for preliminary approval and asked the parties to provide additional information by November 12, 2024.
On December 4, 2024, the Court granted preliminary conditional approval of the Settlement Agreement under which the Company would agree to pay $30.0 million and implement certain remedial measures to resolve all claims by
U.S. customers (who do not opt out) arising out of the Cyber Incident disclosed in October 2023. The Court’s order granting preliminary approval of the settlement was conditioned on the parties’ acceptance of certain modifications to the Settlement Agreement, including the exclusion from the settlement class of customers who have chosen to exercise their right to arbitrate, whether by making a demand for arbitration or by filing a formal complaint with the arbitral forum. Following the December 4, 2024 order, the parties have engaged in discussions regarding a potential settlement that would resolve all claims by U.S. customers, including those who choose to exercise arbitration rights. As of the filing date of this report, such discussions have not resulted in a revised settlement. See Note 11, “Commitments and Contingencies — Cyber Incident,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.
GSK New Data Notification
In September 2024, the Company and GSK agreed to extend the deadline for the Data Use Notice from September 30, 2024 to October 28, 2024. Revenue attributable to the New Data license was accounted for upon the satisfaction of performance obligations and was recognized upon the Company’s receipt of the Data Use Notice from GSK, which occurred on October 28, 2024. See Note 5, “Collaboration,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.
Costs Associated with Exit or Disposal Activities and Cease of Operations of Therapeutics
In August 2024, the Board of Directors of the Company determined that it was in the best interests of the Company and its stockholders to cease operations of the Therapeutics Discovery portion of the Company’s Therapeutics business, effective August 9, 2024. As a result, the Company terminated 30 employees. Therapeutics Discovery operated within the Company’s former Therapeutics segment.
In November 2024, the Board of Directors of the Company approved the November 2024 Reduction in Force, which, as previously disclosed, involved 223 employees, representing approximately 40% of our then-workforce, and also included the closure of substantially all operations in our former Therapeutics segment. The November 2024 Reduction Plan was intended to restructure and strategically align our workforce and organization with our current strategy and to reduce our operating costs. The November 2024 Reduction in Force is expected to reduce annualized payroll and benefit expenses by more than $35.0 million. In connection with the November 2024 Reduction Plan, we (i) ceased additional investment in our two clinical trials (23ME-00610 and 23ME-01473) beyond their respective current stages of development in November 2024, and (ii) abandoned our South San Francisco, California lab facility (the “South San Francisco Facility”) in December 2024. We completed the November 2024 Reduction Plan substantially during the three months ended December 31, 2024, with certain affected employees retained through a transition period expected to end no later than the end of fiscal 2025. See Note 9, “Restructuring,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.
Discontinued Operations of the Therapeutics Segment
In accordance with Accounting Standards Codification (“ASC”) 205, Presentation of Financial Statements (“ASC 205”), we determined that the closure of substantially all operations in our Therapeutics operating segment in November 2024 represented a strategic shift that will have a major effect on our operations and financial results, thus meeting the criteria to be reported as discontinued operations as of December 31, 2024. Discontinued operations include research and development costs, including lab-related research services, clinical development, and collaboration costs, as well as personnel-related, lease, equipment and depreciation costs associated with the Therapeutics segment. Also included are restructuring costs including cash severance payments, benefits continuation, stock-based compensation, and the South San Francisco Facility exit costs in connection with the November 2024 Reduction Plan.
We will not have any significant continuing involvement in the operations of the Therapeutics operating segment after the disposal transaction. See Note 3, “Discontinued Operations,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.
Basis of Presentation
The unaudited 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 generally accepted accounting principles in the United States (“GAAP”).
As discussed above, we determined that the closure of substantially all operations in the Therapeutics operating segment met the criteria for presentation as a discontinued operation. Certain prior period amounts related to discontinued operations, as a result of the closure of substantially all operations in our Therapeutics operating segment, have been reclassified to conform with the current period presentation. As a result, we have retrospectively recast our consolidated balance sheet at March 31, 2024 and consolidated statements of operations and comprehensive loss for the three and nine months ended December 31, 2023 to reflect the assets and liabilities and operating results, respectively, related to the disposed business in discontinued operations. We have chosen not to segregate the cash flows of the disposed business in the condensed consolidated statements of cash flows. Supplemental disclosures related to discontinued operations for the statements of cash flows have been provided in Note 3, “Discontinued Operations,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q. Unless otherwise noted, management’s discussion and analysis of our results of operations relate to our continuing operations.
General corporate overhead costs historically allocated to the former Therapeutics operating segment that do not meet the requirements to be presented in discontinued operations have been allocated to the continuing operations in accordance with ASC 205-20 for the periods presented herein, as the costs were not directly attributable to the discontinued operations of the Therapeutics operating segment. Such allocations include general corporate overhead costs for shared services.
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 that the following metrics are useful in evaluating our business:
•PGS Customers. “Customers” 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 members of our 23andMe+ Premium membership service, especially if they consent to participate in our research. We had approximately 15.5 million and 15.1 million Customers as of December 31, 2024 and March 31, 2024, 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+ Premium membership service and to participation in further research studies, helping us to advance our research. As of December 31, 2024, over 80% of our Customers were Consenting Customers.
•Members. This metric represents the number of customers who have signed up for our 23andMe+ Premium membership service, which was launched in October 2020. We believe that 23andMe+ Premium, and any other future membership offerings, will position us for future growth, as the membership model, which is annual for 23andMe+ Premium, represents a previously untapped source of recurring revenue. We are continually investing in new reports and features to provide to members as part of the 23andMe+ Premium 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 March 31, 2024 and 2023, our 23andMe+ Premium membership base had approximately 562,000 and 640,000 members, respectively.
•Adjusted EBITDA. Adjusted EBITDA from continuing operations, a non-GAAP financial measure, is the measure of profitability reported to our Chief Executive Officer (“CEO”), the chief operating decision-maker (“CODM”). See “—Adjusted EBITDA” below for further details and a reconciliation of Adjusted EBITDA to net loss.
Components of Results of Operations
Revenue
We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 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.
Our service revenue is composed primarily of sales of PGS kits to customers, 23andMe+ Premium membership and telehealth services, which include online medical visits and memberships, as well as revenues from our research collaborations. Our product revenue is composed primarily of telehealth pharmaceutical sales, as well as a portion of our telehealth membership revenue.
See Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements included in our Fiscal 2024 Form 10-K for a more detailed discussion of our revenue recognition policies.
Cost of Revenue, Gross Profit, and Gross Margin
Cost of service 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 service revenue for telehealth primarily consists of personnel-related expenses as described above that we incur for medical services, and amortization of intangible assets. Cost of product revenue consists of personnel-related expenses, telehealth prescription drug costs, packaging and shipping, and allocated overhead. Cost of revenue for research services primarily consists of personnel-related expenses as described above, and allocated overhead. We expect cost of revenue to fluctuate from period to period 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 and renewal rates of members within our membership 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 gross margin to increase over the long term as membership revenues become a higher percentage of revenue mix, although our gross margin may fluctuate from period to period. Substantially all our research services revenue in the periods prior to July 2023 was derived from the original GSK Agreement. In October 2023, we entered into the 2023 GSK Amendment to provide GSK with a non-exclusive license to certain new, de-identified, aggregated New Data, as well as access to certain of our research services with respect to such New Data. See Note 5, “Collaborations,” to our condensed consolidated financial statements for additional information regarding the 2023 GSK Amendment. If we are unable to add new research services agreements, our research services revenue may decline substantially.
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, are 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. We regularly evaluate our capital allocation approach to make sure our capital is being used for the highest value-creating activities and in the most efficient manner. This may require changes to investment levels, how we operate, or are structured to ensure alignment to business priorities.
Research and Development Expenses
Our research and development expenses support our efforts to add new services and features to our existing services, and to ensure the reliability and scalability of our services. Prior to closure of the remaining portion of our Therapeutics business in November 2024 (following the previous closure of the Therapeutics Discovery portion of the
business in August 2024), research and development expenses included efforts to develop our portfolio of existing therapeutic product candidates in our former Therapeutics segment. Prior to ceasing operations of the Therapeutics Discovery portion of our Therapeutics business in August 2024, research and development expenses included our efforts to discover and genetically-validate new therapeutic product candidates. 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 our research and development efforts. 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.
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 and impairment of intangible assets, outside services, and allocated overhead.
Advertising and brand costs consist primarily of direct expenses related to television, online 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 that 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 that 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, corporate development, 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, and allocated overhead.
We currently experience substantial general and administrative expenses in connection with operating as a public company, including expenses associated with compliance with SEC rules and regulations, and related legal, audit, insurance, investor relations, professional services, and other administrative expenses. We anticipate general and administrative expenses will stabilize over the long term and gradually decrease as a percentage of revenue, although it may fluctuate as a percentage of total revenue from period to period due to the timing and amount of these expenses.
Restructuring and Other Charges
Restructuring and other charges consists of costs directly associated with employee-related and disposal activities, and other restructuring activities. Such costs include employee severance and termination benefits associated with a reduction in force, including non-cash stock-based compensation, if applicable, for the period.
Goodwill Impairment Charge
Goodwill impairment charge included the impairment loss recognized on goodwill. Goodwill was assessed for impairment on an annual basis and whenever events and circumstances indicated that the asset might be impaired at the former Consumer and Research Services reporting segment. We compared the fair value of our former Consumer and Research Services reporting unit to its carrying value. If the carrying value exceeded our former Consumer and Research Services reporting segment’s fair value, we recognized an impairment loss for the amount by which the carrying amount exceeded the former Consumer and Research Services reporting segment’s fair value. See Note 7, “Fair Value Measurements — Nonrecurring Fair Value Measurements,” to our condensed consolidated financial statements for details.
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 effects of changes in foreign currency exchange rates, and other non-operating income and expenditures.
Provision for (Benefit from) Income Taxes
Provision for income tax primarily consists of separate state tax expense generated by one of the variable interest entities. 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.
Net Loss from Discontinued Operations
Net loss from discontinued operations includes the results of our research and development activities related to the former Therapeutics operating segment and restructuring and other charges, including lease abandonment charges, in connection with the discontinuation of the Therapeutics operating segment. It does not include any allocation of general corporate overhead costs historically allocated to the former Therapeutics operating segment that do not meet the requirements to be presented in discontinued operations.
Results of Operations
Comparisons for the Three and Nine Months Ended December 31, 2024 and 2023
The following table sets forth our unaudited condensed consolidated statements of operations for the three and nine months ended December 31, 2024 and 2023, respectively, and the dollar and percentage change between the two periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2024 | | 2023 | | $ Change | | % Change | | 2024 | | 2023 | | $ Change | | % Change |
| | | | | | | | | | | | | | | |
| (in thousands, except percentages) |
| Revenue: | | | | | | | | | | | | | | | |
| Service | $ | 54,767 | | | $ | 38,071 | | | $ | 16,696 | | | 44 | % | | $ | 127,960 | | | $ | 134,097 | | | $ | (6,137) | | | (5 | %) |
| Product | 5,495 | | | 6,676 | | | (1,181) | | | (18 | %) | | 16,787 | | | 21,513 | | | (4,726) | | | (22 | %) |
| Total revenue | 60,262 | | | 44,747 | | | 15,515 | | | 35 | % | | 144,747 | | | 155,610 | | | (10,863) | | | (7 | %) |
| Cost of revenue: | | | | | | | | | | | | | | | |
Service (1) (2) | 17,872 | | | 22,134 | | | (4,262) | | | (19 | %) | | 54,069 | | | 74,991 | | | (20,922) | | | (28 | %) |
Product (1) (2) | 2,564 | | | 2,928 | | | (364) | | | (12 | %) | | 8,186 | | | 9,470 | | | (1,284) | | | (14 | %) |
| Total cost of revenue | 20,436 | | | 25,062 | | | (4,626) | | | (18 | %) | | 62,255 | | | 84,461 | | | (22,206) | | | (26 | %) |
| Gross profit | 39,826 | | | 19,685 | | | 20,141 | | | 102 | % | | 82,492 | | | 71,149 | | | 11,343 | | | 16 | % |
| Operating expenses: | | | | | | | | | | | | | | | |
Research and development (1) (2) | 20,216 | | | 23,897 | | | (3,681) | | | (15 | %) | | 80,050 | | | 77,524 | | | 2,526 | | | 3 | % |
Sales and marketing (1) (2) | 17,950 | | | 27,925 | | | (9,975) | | | (36 | %) | | 50,609 | | | 69,541 | | | (18,932) | | | (27 | %) |
General and administrative (1) (2) | 26,891 | | | 31,780 | | | (4,889) | | | (15 | %) | | 83,034 | | | 108,742 | | | (25,708) | | | (24 | %) |
Restructuring and other charges (1) (2) | 10,642 | | | 217 | | | 10,425 | | | NM | | 10,866 | | | 4,642 | | | 6,224 | | | 134 | % |
| Goodwill impairment | — | | | 198,800 | | | (198,800) | | | (100 | %) | | — | | | 198,800 | | | (198,800) | | | (100 | %) |
| Total operating expenses | 75,699 | | | 282,619 | | | (206,920) | | | (73 | %) | | 224,559 | | | 459,249 | | | (234,690) | | | (51 | %) |
| Loss from operations | (35,873) | | | (262,934) | | | 227,061 | | | (86 | %) | | (142,067) | | | (388,100) | | | 246,033 | | | (63 | %) |
| Other income (expense): | | | | | | | | | | | | | | | |
| Interest income, net | 1,282 | | | 3,230 | | | (1,948) | | | (60 | %) | | 5,865 | | | 11,289 | | | (5,424) | | | (48 | %) |
| Other income (expense), net | 316 | | | 23 | | | 293 | | | NM | | 312 | | | 501 | | | (189) | | | (38 | %) |
| Loss before income taxes | (34,275) | | | (259,681) | | | 225,406 | | | (87 | %) | | (135,890) | | | (376,310) | | | 240,420 | | | (64 | %) |
| Provision for (benefit from) income taxes | — | | | 19 | | | (19) | | | (100 | %) | | (41) | | | 55 | | | (96) | | | (175 | %) |
| Net loss from continuing operations | $ | (34,275) | | | $ | (259,700) | | | $ | 225,425 | | | (87 | %) | | $ | (135,849) | | | $ | (376,365) | | | $ | 240,516 | | | (64 | %) |
Net loss from discontinued operations (3) | (18,760) | | | (18,276) | | | (484) | | | 3 | % | | (45,689) | | | (81,505) | | | 35,816 | | | (44 | %) |
| Net loss | $ | (53,035) | | | $ | (277,976) | | | $ | 224,941 | | | (81 | %) | | $ | (181,538) | | | $ | (457,870) | | | $ | 276,332 | | | (60 | %) |
NM = not meaningful
(1)General corporate overhead costs for shared services historically allocated to the former Therapeutics operating segment that do not meet the requirements to be presented in discontinued operations have been allocated to the continuing operations for the periods presented herein, as the costs were not directly attributable to the discontinued operations of the former Therapeutics operating segment. These costs were $0.5 million and $1.6 million for the three months ended December 31, 2024 and 2023, respectively, and $2.4 million and $6.3 million for the nine months ended December 31, 2024 and 2023, respectively.
(2)Includes stock-based compensation expense from continuing operations as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2024 | | 2023 | | $ Change | | % Change | | 2024 | | 2023 | | $ Change | | % Change |
| | | | | | | | | | | | | | | |
| (in thousands, except percentages) |
| Cost of service revenue | $ | 365 | | | $ | 788 | | | $ | (423) | | | (54 | %) | | $ | 2,242 | | | $ | 4,066 | | | $ | (1,824) | | | (45 | %) |
| Cost of product revenue | 216 | | | 287 | | | (71) | | | (25 | %) | | 1,074 | | | 1,228 | | | (154) | | | (13 | %) |
| Research and development | 2,362 | | | 4,805 | | | (2,443) | | | (51 | %) | | 19,490 | | | 19,172 | | | 318 | | | 2 | % |
| Sales and marketing | 561 | | | 1,145 | | | (584) | | | (51 | %) | | 5,240 | | | 5,048 | | | 192 | | | 4 | % |
General and administrative (a) | 3,663 | | | 17,075 | | | (13,412) | | | (79 | %) | | 17,566 | | | 61,191 | | | (43,625) | | | (71 | %) |
Restructuring and other charges (b) | 2,077 | | | — | | | 2,077 | | | 100 | % | | 2,113 | | | 630 | | | 1,483 | | | 235 | % |
Total stock-based compensation expense (c) | $ | 9,244 | | | $ | 24,100 | | | $ | (14,856) | | | (62 | %) | | $ | 47,725 | | | $ | 91,335 | | | $ | (43,610) | | | (48 | %) |
(a)Includes $10.8 million and $32.8 million of stock-based compensation charges related to the termination of two former Lemonaid officers during the three and nine months ended December 31, 2023, respectively.
(b)In connection with the November 2024 Reduction in Force, there were modifications of equity awards, which included the acceleration of certain non-vested awards. We recorded $2.1 million of stock-based compensation modification expense related to the November 2024 Reduction in Force during the three and nine months ended December 31, 2024.
(3)Total stock-based compensation expense from discontinued operations was $0.2 million and $2.3 million for the three months ended December 31, 2024 and 2023, respectively, and $2.7 million and $9.9 million for the nine months ended December 31, 2024 and 2023, respectively.
The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue for the three and nine months ended December 31, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2024 | | 2023 | | 2024 | | 2023 |
| Revenue: | | | | | | | |
| Service | 91 | % | | 85 | % | | 88 | % | | 86 | % |
| Product | 9 | % | | 15 | % | | 12 | % | | 14 | % |
| Total revenue | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| Cost of revenue: | | | | | | | |
| Service | 30 | % | | 49 | % | | 37 | % | | 48 | % |
| Product | 4 | % | | 6 | % | | 6 | % | | 6 | % |
| Total cost of revenue | 34 | % | | 55 | % | | 43 | % | | 54 | % |
| Gross profit | 66 | % | | 45 | % | | 57 | % | | 46 | % |
| Operating expenses: | | | | | | | |
| Research and development | 33 | % | | 53 | % | | 55 | % | | 50 | % |
| Sales and marketing | 30 | % | | 63 | % | | 35 | % | | 45 | % |
| General and administrative | 45 | % | | 71 | % | | 57 | % | | 70 | % |
| Restructuring and other charges | 18 | % | | 1 | % | | 8 | % | | 3 | % |
Goodwill impairment | — | % | | 444 | % | | — | % | | 128 | % |
| Total operating expenses | 126 | % | | 632 | % | | 155 | % | | 296 | % |
| Loss from operations | (60 | %) | | (587 | %) | | (98 | %) | | (250 | %) |
| Other income (expense): | | | | | | | |
| Interest income, net | 2 | % | | 7 | % | | 4 | % | | 8 | % |
| Other income (expense), net | 1 | % | | — | % | | — | % | | — | % |
| Loss before income taxes | (57 | %) | | (580 | %) | | (94 | %) | | (242 | %) |
| Provision for (benefit from) income taxes | — | % | | — | % | | — | % | | — | % |
| Net loss from continuing operations | (57 | %) | | (580 | %) | | (94 | %) | | (242 | %) |
| Net loss from discontinued operations | (31 | %) | | (41 | %) | | (31 | %) | | (52 | %) |
| Net loss | (88 | %) | | (621 | %) | | (125 | %) | | (294 | %) |
Revenue
Total revenue increased by $15.5 million, or 35%, for the three months ended December 31, 2024 as compared to the three months ended December 31, 2023. The increase in total revenue was driven by an $18.8 million increase in research services revenue due to the recognition of $19.3 million of non-recurring revenue upon receipt of the Data Use Notice from GSK, representing substantially all remaining revenue associated with the 2023 GSK Amendment (the “Non-Recurring Revenue Recognition”). The increase in research services revenue was partially offset by a $3.3 million decrease in consumer services revenue. Consumer revenue decreased due to a $6.4 million decrease in PGS kit revenue driven mainly by lower PGS kit sales volume, as well as a lower average selling price due to greater promotions and discounts versus the prior year quarter. Consumer revenue also decreased due to a $0.3 million decrease in telehealth services revenue and a $1.2 million decrease in telehealth tangible product revenue, primarily driven by lower medical visits and pharmacy sales compared to the prior year quarter. These decreases in consumer revenue were partially offset by a $4.6 million increase in consumer PGS membership services revenue.
Total revenue decreased by $10.9 million, or 7%, for the nine months ended December 31, 2024 as compared to the nine months ended December 31, 2023. The decrease in total revenue was driven by a $16.7 million decrease in consumer services revenue, which included a $21.2 million decrease in PGS kit revenue driven mainly by lower PGS kit sales volume, as well as a lower average selling price due to greater promotions and discounts versus the prior year period. The decrease in consumer services revenue also included a $3.2 million decrease in telehealth services revenue and a $4.7 million decrease in telehealth tangible product revenue, primarily driven by lower medical visits and pharmacy sales, and partially related to the disposition of Lemonaid Health Limited, compared to the prior year period. These decreases in
consumer revenue were partially offset by a $12.3 million increase in consumer PGS membership services revenue. In addition, there was a $5.9 million increase in research services revenue due primarily to the Non-Recurring Revenue Recognition, partially offset by decreases in research services revenue related to the conclusion of the exclusive target discovery term of the original GSK Agreement in July 2023.
Cost of Revenue, Gross Profit and Gross Margin
Total cost of revenue decreased by $4.6 million, or 18%, for the three months ended December 31, 2024 as compared to the three months ended December 31, 2023. The cost of revenue for consumer services decreased by $4.2 million, driven by a $2.5 million decrease in the cost of revenue for consumer PGS primarily due to lower lab processing and kit costs due to lower PGS kit sales volume, as well as lower overhead allocations. In addition, there was a $1.3 million decrease in consumer telehealth services cost of revenue primarily from lower personnel-related expenses and related overhead allocations due to reductions in force. There was also a $0.4 million decrease in consumer telehealth tangible product cost of revenue primarily from reduced shipping costs due to lower pharmacy sales volume. The cost of revenue for research services also decreased by $0.4 million primarily due to the conclusion of the exclusive target discovery term of the original GSK Agreement in July 2023.
Total cost of revenue decreased by $22.2 million, or 26%, for the nine months ended December 31, 2024 as compared to the nine months ended December 31, 2023. The cost of revenue for consumer services decreased by $20.3 million, driven by a $9.9 million decrease in the cost of revenue for consumer PGS primarily due to lower lab processing, shipping and fulfillment, and kit costs due to lower PGS kit sales volume. In addition, there was a $9.1 million decrease in consumer telehealth services cost of revenue primarily from lower personnel-related expenses and related overhead allocations due to reductions in force and the disposition of Lemonaid Health Limited during the second quarter of the fiscal 2024. There was also a $1.3 million decrease in consumer telehealth tangible product cost of revenue primarily from reduced shipping costs due to lower pharmacy sales volume. The cost of revenue for research services decreased by $2.0 million primarily due to the conclusion of the exclusive target discovery term of the original GSK Agreement in July 2023.
Our overall gross profit increased by $20.1 million, or 102%, to $39.8 million for the three months ended December 31, 2024 from $19.7 million for the three months ended December 31, 2023. The increase in gross profit was primarily driven by an increase of $19.2 million in research services gross profit due to the Non-Recurring Revenue Recognition. Our gross margin improved from 45% for the three months ended December 31, 2023 to 66% for the three months ended December 31, 2024. The increase in gross margin was due primarily to the aforementioned 2023 GSK Amendment revenue.
Our overall gross profit increased by $11.3 million, or 16%, from $71.1 million for the nine months ended December 31, 2023 to $82.5 million for the nine months ended December 31, 2024. The increase in gross profit was primarily driven by an increase of $7.8 million in research services gross profit due to the Non-Recurring Revenue Recognition. There was also an increase in consumer gross profit of $3.5 million, which was primarily driven by an increase in telehealth service and PGS gross profit, partially offset by a decrease in telehealth product gross profit. Our gross margin improved from 46% for the nine months ended December 31, 2023 to 57% for the nine months ended December 31, 2024. The increase in gross margin was primarily due to an increase in research services gross margin due primarily to the aforementioned 2023 GSK Amendment revenue.
Gross margin has historically been higher for activities associated with research services than for consumer services.
Research and Development Expenses
The following table sets forth our research and development expenses for the three and nine months ended December 31, 2024 and 2023, and the dollar and percentage change between the two periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2024 | | 2023 | | $ Change | | % Change | | 2024 | | 2023 | | $ Change | | % Change |
| | | | | | | | | | | | | | | |
| (in thousands, except percentages) |
| Personnel-related expenses | $ | 13,126 | | | $ | 15,541 | | | $ | (2,415) | | | (16 | %) | | $ | 55,588 | | | $ | 53,475 | | | $ | 2,113 | | | 4 | % |
| Lab-related research services | 574 | | | 614 | | | (40) | | | (7 | %) | | 1,594 | | | 1,599 | | | (5) | | | — | % |
| Depreciation, amortization, equipment, and supplies, net of capitalized internal-use software | 552 | | | 361 | | | 191 | | | 53 | % | | 1,511 | | | (1,021) | | | 2,532 | | | (248 | %) |
| Facilities, overhead allocations and other | 5,964 | | | 7,381 | | | (1,417) | | | (19 | %) | | 21,357 | | | 23,471 | | | (2,114) | | | (9 | %) |
| Total research and development expenses | $ | 20,216 | | | $ | 23,897 | | | $ | (3,681) | | | (15 | %) | | $ | 80,050 | | | $ | 77,524 | | | $ | 2,526 | | | 3 | % |
Research and development expenses for the three months ended December 31, 2024 decreased to $20.2 million as compared to $23.9 million for the three months ended December 31, 2023. The $3.7 million, or 15%, decrease was primarily attributable to a $2.4 million decrease in personnel-related expenses, including a decrease in non-cash stock-based compensation expense, primarily due to reductions in force. In addition, there was a $1.4 million decrease in facilities, overhead allocations and other expenses, primarily due to a reduction in overhead allocations resulting from the aforementioned reductions in force.
Research and development expenses for the nine months ended December 31, 2024 increased to $80.1 million as compared to $77.5 million for the nine months ended December 31, 2023. The $2.5 million, or 3%, increase was primarily attributable to a $2.1 million increase in personnel-related expenses, including non-cash stock-based compensation expense, primarily due to an increase in headcount prior to the November 2024 Reduction in Force. In addition, there was a $2.5 million increase in depreciation, amortization, equipment and supplies, net of capitalized internal use software, primarily related to fewer internal use software project hours in development during the nine months ended December 31, 2024. These increases were offset by a $2.1 million decrease in facilities, overhead allocations and other expenses, primarily due to a reduction in overhead allocations resulting from the aforementioned reductions in force.
Sales and Marketing Expenses
The following table sets forth our sales and marketing expenses for the three and nine months ended December 31, 2024 and 2023, and the dollar and percentage change between the two periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2024 | | 2023 | | $ Change | | % Change | | 2024 | | 2023 | | $ Change | | % Change |
| | | | | | | | | | | | | | | |
| (in thousands, except percentages) |
| Advertising and brand | $ | 9,817 | | | $ | 18,881 | | | $ | (9,064) | | | (48 | %) | | $ | 22,358 | | | $ | 38,570 | | | $ | (16,212) | | | (42 | %) |
| Personnel-related expenses | 3,788 | | | 4,123 | | | (335) | | | (8 | %) | | 14,837 | | | 13,481 | | | 1,356 | | | 10 | % |
| Intangibles amortization and impairment, depreciation, equipment, and supplies | 1,489 | | | 1,946 | | | (457) | | | (23 | %) | | 4,064 | | | 8,271 | | | (4,207) | | | (51 | %) |
| Facilities, overhead allocations and other | 2,856 | | | 2,975 | | | (119) | | | (4 | %) | | 9,350 | | | 9,219 | | | 131 | | | 1 | % |
| Total sales and marketing expenses | $ | 17,950 | | | $ | 27,925 | | | $ | (9,975) | | | (36 | %) | | $ | 50,609 | | | $ | 69,541 | | | $ | (18,932) | | | (27 | %) |
Sales and marketing expenses for the three months ended December 31, 2024 decreased to $18.0 million as compared to $27.9 million for the three months ended December 31, 2023. The decrease of $10.0 million, or 36%, was primarily driven by a $9.1 million decrease in advertising and brand-related expenses due to a reduction in marketing campaigns and spending.
Sales and marketing expenses for the nine months ended December 31, 2024 decreased to $50.6 million as compared to $69.5 million for the nine months ended December 31, 2023. The decrease of $18.9 million, or 27%, was primarily driven by a $16.2 million decrease in advertising and brand-related expenses due to a reduction in marketing
campaigns and spending. There was also a decrease of $4.2 million in intangible asset amortization and impairment, depreciation, equipment, and supplies primarily due to customer relationships being fully amortized within intangible assets in the second quarter of fiscal 2024. These decreases were partially offset by a $1.4 million increase in personnel-related expenses, including an increase in non-cash stock-based compensation expense, related to headcount growth prior to the November 2024 Reduction in Force.
General and Administrative Expenses
Total general and administrative expenses for the three months ended December 31, 2024 decreased by $4.9 million, or 15%, to $26.9 million as compared to $31.8 million for the three months ended December 31, 2023. The decrease was primarily due to a $14.4 million reduction in personnel-related expenses, primarily driven by a decrease in non-cash stock-based compensation, of which $10.8 million was related to a charge taken during the three months ended December 31, 2023 due to the departure of a former Lemonaid officer, and the remainder of the decrease was related to reductions in force. In addition, there was a decrease of $1.4 million in other expenses, including overhead allocations due to reductions in force. These decreases were partially offset by a $10.9 million increase in outside services expenses primarily due to the accrual of an additional loss contingency and legal fees associated with the Cyber Incident, net of probable insurance recoveries, compensation and recruiting fees related to the recruitment and appointment of three independent directors to our Board of Directors in order to regain compliance with the Nasdaq listing rules, as well as legal and finance expenses to support the Special Committee.
Total general and administrative expenses for the nine months ended December 31, 2024 decreased by $25.7 million, or 24%, to $83.0 million as compared to $108.7 million for the nine months ended December 31, 2023. The decrease was primarily due to a $45.8 million reduction in personnel-related expenses, mostly related to non-cash stock-based compensation, of which $32.8 million was related to charges taken during the nine months ended December 31, 2023 due to the departure of two former Lemonaid officers and the remainder of the decrease was related to reductions in force. See Note 13, “Equity Incentive Plans and Stock-Based Compensation,” to our condensed consolidated financial statements for details. In addition, there was a decrease of $4.7 million in overhead allocations due to reductions in force, business insurance and other expenses. These decreases were partially offset by a $24.9 million increase in outside services expenses primarily due to the accrual of an additional loss contingency and legal fees associated with the Cyber Incident, net of probable insurance recoveries, compensation and recruiting fees related to the recruitment and appointment of three independent directors to our Board of Directors in order to regain compliance with the Nasdaq listing rules, and legal and finance expenses to support the Special Committee.
Restructuring and Other Charges
Restructuring and other charges for the three months ended December 31, 2024 increased by $10.4 million, to $10.6 million as compared to $0.2 million for the three months ended December 31, 2023. The charges for the three months ended December 31, 2024 consisted of $10.6 million of employee severance and termination benefits related to the November 2024 Reduction in Force, of which $2.1 million was non-cash stock-based compensation expense.
Restructuring and other charges for the nine months ended December 31, 2024 increased by $6.2 million, or 134%, to $10.9 million as compared to $4.6 million for the nine months ended December 31, 2023. The charges for the nine months ended December 31, 2024 consisted of $10.9 million of employee severance and termination benefits related to the November 2024 Reduction in Force, of which $2.1 million was non-cash stock-based compensation expense. For the nine months ended December 31, 2023, the charges consisted of $4.6 million of employee severance and termination benefits related to the prior year reductions in force, of which $0.6 million was non-cash stock-based compensation expense. See Note 9, “Restructuring,” to our condensed consolidated financial statements for details.
Goodwill Impairment
During the three months ended December 31, 2023, as a result of a decline in market capitalization based on the Company's publicly quoted share price, lower than expected financial performance and macroeconomic conditions, we performed an impairment assessment of goodwill. Based on our quantitative assessment, we determined that the carrying value of our former Consumer and Research Services reporting segment exceeded its fair value as of December 31, 2023, and as a result, we recorded a goodwill impairment charge of $198.8 million during the three and nine months ended December 31, 2023. See Note 7, “Fair Value Measurements — Nonrecurring Fair Value Measurements,” to our condensed consolidated financial statements for details. There were no goodwill impairment charges during the three and nine months ended December 31, 2024.
Interest Income, net
Interest income, net decreased by $1.9 million to $1.3 million for the three months ended December 31, 2024 from $3.2 million for the three months ended December 31, 2023 primarily due to a decrease in the cash equivalents balance held in money market funds.
Interest income, net decreased by $5.4 million to $5.9 million for the nine months ended December 31, 2024 from $11.3 million for the nine months ended December 31, 2023 primarily due to a decrease in the cash equivalents balance held in money market funds.
Net Loss from Discontinued Operations
Net loss from discontinued operations was primarily attributable to the discontinuation of the former Therapeutics operating segment in connection with the November 2024 Reduction Plan. The following table summarizes the condensed operating results of the discontinued operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2024 | | 2023 | | $ Change | | % Change | | 2024 | | 2023 | | $ Change | | % Change |
| (in thousands, except percentages) |
| Operating expenses: | | | | | | | | | | | | | | | |
| Research and development | 6,700 | | | 16,996 | | | (10,296) | | | (61) | % | | 31,611 | | | 77,779 | | | (46,168) | | | (59) | % |
| Restructuring and other charges | 12,060 | | | 1,280 | | | 10,780 | | | 842 | % | | 14,078 | | | 3,726 | | | 10,352 | | | 278 | % |
| Total operating expenses | 18,760 | | | 18,276 | | | 484 | | | 3 | % | | 45,689 | | | 81,505 | | | (35,816) | | | (44) | % |
| Net loss from discontinued operations | (18,760) | | | (18,276) | | | (484) | | | 3 | % | | (45,689) | | | (81,505) | | | 35,816 | | | (44) | % |
Net loss from discontinued operations for the three months ended December 31, 2024 increased by $0.5 million, or 3%, to $18.8 million as compared to $18.3 million for the three months ended December 31, 2023. The increase was primarily due to a $10.8 million increase in restructuring and other charges, which relates primarily to a $10.0 million charge taken to write off the right-of-use (“ROU”) assets and leasehold improvements associated with the abandonment of the South San Francisco Facility and $0.8 million increase in employee severance and termination benefits, and non-cash stock-based compensation, related to reductions in force. This increase was mostly offset by a $10.3 million decrease in research and development expenses due to a $5.5 million decrease in personnel-expenses, including non-cash stock-based compensation, associated with reduced headcount from reductions in force, a $3.5 million decrease in lab-related research services related to our former proprietary and collaboration therapeutics programs, and a $1.3 million decrease in other expenses, including consulting.
Net loss from discontinued operations for the nine months ended December 31, 2024 decreased by $35.8 million, or 44%, to $45.7 million as compared to $81.5 million for the nine months ended December 31, 2023. The decrease was due to a $46.2 million decrease in research and development expenses due to a $20.6 million decrease in personnel-expenses, including non-cash stock-based compensation, associated with reduced headcount from reductions in force, and a $24.9 million decrease in lab-related research services related to our former proprietary and collaboration therapeutics programs. This decrease was partially offset by an $10.4 million increase in restructuring and other charges, which relates primarily to a $10.0 million charge taken to write off the ROU assets and leasehold improvements associated with the abandonment of the South San Francisco Facility.
Adjusted EBITDA from Continuing Operations
We evaluate the performance of our business based on Adjusted EBITDA, which is a non-GAAP financial measure that we define as net income (loss) from continuing operations before net interest income (expense), net other income (expense), income tax expenses (benefit), depreciation and amortization, impairment charges, stock-based compensation expense, and other items that are considered unusual or not representative of underlying trends of our business, including but not limited to: litigation settlements, gains or losses on dispositions of subsidiaries and transaction-related costs, and Cyber Incident expenses, net of probable insurance recoveries, if applicable for the periods presented. 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.
The following tables reconcile net loss from continuing operations to Adjusted EBITDA for the three and nine months ended December 31, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended December 31, |
| | 2024 | | 2023 | | $ Change | | % Change | | 2024 | | 2023 | | $ Change | | % Change |
| | (in thousands, except percentages) |
| Reconciliation of net loss from continuing operations to Adjusted EBITDA from continuing operations: | | | | | | | | | | | | | | | |
| Net loss from continuing operations | $ | (34,275) | | | $ | (259,700) | | | $ | 225,425 | | | (87 | %) | | $ | (135,849) | | | $ | (376,365) | | | $ | 240,516 | | | (64 | %) |
| Adjustments: | | | | | | | | | | | | | | | |
| Interest income, net | (1,282) | | | (3,230) | | | 1,948 | | | (60 | %) | | (5,865) | | | (11,289) | | | 5,424 | | | (48 | %) |
| Other (income) expense, net | (316) | | | (23) | | | (293) | | | NM | | (312) | | | (501) | | | 189 | | | (38 | %) |
| Provision for (benefit from) income taxes | — | | | 19 | | | (19) | | | (100 | %) | | (41) | | | 55 | | | (96) | | | (175 | %) |
| Depreciation, amortization and impairment | 2,970 | | | 4,153 | | | (1,183) | | | (28 | %) | | 10,562 | | | 11,482 | | | (920) | | | (8 | %) |
| Amortization of acquired intangible assets | 1,776 | | | 2,397 | | | (621) | | | (26 | %) | | 5,327 | | | 9,673 | | | (4,346) | | | (45 | %) |
| Stock-based compensation expense | 9,244 | | | 24,100 | | | (14,856) | | | (62 | %) | | 47,725 | | | 91,335 | | | (43,610) | | | (48 | %) |
Loss on disposition of Lemonaid Health and transaction-related costs (1) | — | | | — | | | — | | | — | % | | — | | | 2,375 | | | (2,375) | | | (100 | %) |
Goodwill impairment (2) | — | | | 198,800 | | | (198,800) | | | (100 | %) | | — | | | 198,800 | | | (198,800) | | | (100 | %) |
| Litigation settlement cost | — | | | — | | | — | | | — | % | | — | | | 98 | | | (98) | | | (100 | %) |
Cyber Incident expenses, net of probable insurance recoveries (3) | 8,884 | | | 1,000 | | | 7,884 | | | 788 | % | | 19,837 | | | 1,000 | | | 18,837 | | | NM |
| Total Adjusted EBITDA from continuing operations | $ | (12,999) | | | $ | (32,484) | | | $ | 19,485 | | | (60 | %) | | $ | (58,616) | | | $ | (73,337) | | | $ | 14,721 | | | (20 | %) |
NM = not meaningful
(1)Refer to Note 17, “Disposition of Subsidiary” for additional information.
(2)Refer to Note 7, “Fair Value Measurements — Nonrecurring Fair Value Measurements” for additional information.
(3)Refer to Note 11, “Commitments and Contingencies — Cyber Incident” for additional information.
Three Months Ended December 31, 2024
Adjusted EBITDA from continuing operations increased by $19.5 million, or 60%, for the three months ended December 31, 2024 as compared to the three months ended December 31, 2023, due to an increase in revenue of $15.5
million, or 35%, which was primarily driven by the Non-Recurring Revenue Recognition, and a decrease in expenses of $4.0 million, or 5%.
See “Results of Operations - Revenue” above for continuing operations revenue variance explanations for the three months ended December 31, 2024.
Expenses decreased primarily due to a $8.8 million decrease in advertising and brand-related expenses due to a reduction in marketing campaigns and spending, a $2.0 million decrease in lab processing and kit costs due to lower PGS kit sales volume, a $1.2 million decrease in facilities expenses due to property tax refunds, and a $0.4 million decrease in other expenses, including insurance premiums. These decreases were partially offset by a $3.3 million increase in outside services primarily due to compensation and recruiting fees related to the recruitment and appointment of three independent directors to our Board of Directors in order to regain compliance with the Nasdaq listing rules, as well as legal and finance expenses to support the Special Committee. In addition, there was a $3.0 million increase in personnel-related expenses due to severance charges associated with the November 2024 Reduction in Force, and $2.1 million increase in other expenses, including equipment and supplies.
Nine Months Ended December 31, 2024
Adjusted EBITDA from continuing operations increased by $14.7 million, or 20%, for the nine months ended December 31, 2024 as compared to the nine months ended December 31, 2023, primarily due to a decrease in expenses of $25.6 million, or 11%, partially offset by a decrease in revenue of $10.9 million, or 7%.
See “Results of Operations - Revenue” above for continuing operations revenue variance explanations for the nine months ended December 31, 2024.
Expenses decreased primarily due to a $16.1 million decrease in advertising and brand-related expenses due to a reduction in marketing campaigns and spending, a $5.6 million decrease in personnel-related expenses due to reductions in force, an $8.6 million decrease in shipping and fulfillment, lab supplies and processing, and kit costs due to lower PGS kit sales volume, a $1.3 million decrease in facilities expenses due to property tax refunds, a $1.4 million decrease in operations expenses, including a decrease in business insurance premiums, and a $0.5 million decrease in other expenses. These decreases were partially offset by a $6.0 million increase in outside services primarily due to compensation and recruiting fees related to the recruitment and appointment of three independent directors to our Board of Directors in order to regain compliance with the Nasdaq listing rules, legal and finance costs incurred to support the Special Committee, and an increase in consulting fees, as well as a $1.9 million increase in expenses due to a decrease in internal use software project hours in development.
Liquidity, Capital Resources and Going Concern
We have financed our operations primarily through sales of equity securities and sales of PGS, telehealth, and research services. During fiscal 2022, we received gross proceeds of $309.7 million from the Merger and $250.0 million from the PIPE investment consummated in connection with the Merger. Our primary requirements for liquidity and capital are to fund operating needs and finance working capital, capital expenditures, and general corporate purposes.
As of December 31, 2024, our principal source of liquidity was our unrestricted cash and cash equivalents balance of $79.4 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 $2.4 billion as of December 31, 2024.
We will need additional liquidity to fund our necessary expenditures and financial commitments for 12 months after the date that the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q are issued. We have determined that, as of the filing date of this report, there is substantial doubt about our ability to continue as a going concern.
To improve our financial condition and liquidity position, we are attempting to raise additional capital. In addition, we are working to implement cost-cutting measures, including further reducing operating expenses, negotiating terminations of our long-term real estate leases, and attempting to reach a settlement covering all U.S. customers affected by the Cyber Incident as well as to resolve non-U.S. litigation and ongoing investigations from various governmental agencies arising from the Cyber Incident. See Note 11, "Commitments and Contingencies," to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details. To reduce our operating costs, in November 2024, our Board of Directors approved the November 2024 Reduction in Force, which represented a reduction
of approximately 40% of our workforce and included the closing of substantially all operations in our former Therapeutics operating segment, and the ceasing of additional investment in our two clinical trials (23ME-00610 and 23ME-01473) beyond their respective current stages of development. See Note 9, “Restructuring,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details. Our ability to continue as a going concern, however, is contingent upon our ability to successfully implement steps such as those referenced above and if we fail to do so and/or are unable to raise sufficient capital or consummate a strategic transaction, we would be forced to modify or cease operations, liquidate assets, or pursue bankruptcy proceedings. While we believe in the viability of our strategy, there are numerous risks and uncertainties that may prevent, and there can be no assurances regarding, the successful implementation of our operational and financial plans and/or the consummation of any transactions. See Note 1, “Organization and Description of Business,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.
The unaudited interim condensed consolidated financial statements have been prepared assuming that we will continue as a going concern.
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 activities, and research and development efforts. We may not be able to obtain additional financing on terms acceptable to us or at all. Our ability to obtain additional financing depends on a number of factors, including, but not limited to, the market price of our Class A common stock, the availability and cost of additional equity capital, our ability to retain the listing of our Class A common stock on The Nasdaq Stock Market, and the general economic and industry conditions affecting the availability and cost of capital. 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. See Note 2, “Summary of Significant Accounting Policies - Liquidity and Going Concern,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.
Cash from operations could also be affected by our customers and other risks, including, without limitation, those risks set forth in Part I, Item 1A, “Risk Factors,” of our Fiscal 2024 Form 10-K, as amended and supplemented in our subsequent reports and filings with the SEC. We will require additional financing to execute our ongoing and future operations and expect to continue to maintain financing flexibility in the current market conditions.
On February 6, 2023, we entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (the “Agent”), pursuant to which we may sell, from time to time, at our option, up to $150.0 million in aggregate principal amount of an indeterminate amount of shares of our Class A common stock, $0.0001 par value per share (the “ATM Shares”), through the Agent, as our sales agent (the “ATM program”). Subject to the terms of the Sales Agreement, the Agent will use reasonable efforts to sell the ATM Shares from time to time, based upon our instructions (including any price, time, or size limits or other customary parameters or conditions that we may impose), by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended, and pursuant to the Shelf Registration Statement on Form S-3 that we filed with the SEC on February 6, 2023. We will pay the Agent a commission of 3.0% of the gross proceeds from the sales of the ATM Shares, if any. We have also agreed to provide the Agent with customary indemnification and contribution rights. The offering of the ATM Shares will terminate upon the earliest of (a) the sale of the maximum number or amount of the ATM Shares permitted to be sold under the Sales Agreement and (b) the termination of the Sales Agreement by the parties thereto. While we cannot provide any assurances that we will sell any ATM Shares pursuant to the Sales Agreement, we expect to use the net proceeds from the sale of securities under the Sales Agreement, if any, for general corporate purposes, including working capital requirements and operating expenses; we, however, have not allocated the net proceeds for specific purposes. As of the date of this Form 10-Q, we have not made any sales under the Sales Agreement.
For the nine months ended December 31, 2024, there were no material changes outside of the ordinary course of business in our commitments and contractual obligations disclosed in the Fiscal 2024 Form 10-K, except for the net loss contingencies related to the Cyber Incident. As of December 31, 2024, we had $41.3 million of accrued expenses related to estimated loss contingencies and legal fees included in current liabilities, offset by $21.3 million of insurance recoveries included in prepaid and other current assets, in the condensed consolidated balance sheets. See Note 11, “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 from continuing and discontinued operations for the periods presented:
| | | | | | | | | | | |
| Nine Months Ended December 31, |
| 2024 | | 2023 |
| (in thousands) |
| Net cash used in operating activities | $ | (128,854) | | | $ | (138,535) | |
| Net cash used in investing activities | $ | (2,969) | | | $ | (7,480) | |
| Net cash provided by financing activities | $ | 250 | | | $ | 1,584 | |
Cash Flows from Operating Activities
Net cash used in operating activities of $128.9 million for the nine months ended December 31, 2024 was primarily related to a net loss of $181.5 million, partially offset by non-cash charges for stock-based compensation of $50.5 million, depreciation and amortization of $11.4 million, impairment of long-lived assets of $10.0 million, and amortization and impairment of internal-use software of $6.3 million. The net changes in operating assets and liabilities of $25.6 million were primarily related to a decrease in deferred revenue of $11.9 million as a result of a decrease in research services deferred revenue related to GSK collaboration, an increase in inventories of $8.9 million primarily driven by an increase in kit inventory in preparation for October’s Amazon Prime Day and the holiday season, a decrease in operating lease liabilities of $7.0 million primarily due to lease payments, an increase in accounts receivable of $6.7 million primarily due to timing of customer billing, an increase in deferred cost of revenue of $5.1 million primarily due to PGS kits sales during the holiday season, a decrease in accounts payable of $2.8 million primarily due to the timing of vendor payments, and an increase in prepaid expenses and other current assets of $1.0 million primarily due to an increase in prepaid insurance. These were partially offset by an increase in accrued and other current liabilities of $11.5 million primarily driven by an increase in loss contingencies and legal fees associated with the Cyber Incident, as well as the timing of vendor invoices receipts, and a decrease in operating ROU assets of $5.6 million primarily due to ROU assets amortization.
Net cash used in operating activities of $138.5 million for the nine months ended December 31, 2023 was primarily related to a net loss of $457.9 million, partially offset by non-cash charges for goodwill impairment of $198.8 million, stock-based compensation of $101.2 million, depreciation and amortization of $19.2 million, amortization and impairment of internal-use software of $4.4 million, and loss on the disposition of Lemonaid Health Limited of $2.0 million. The net changes in operating assets and liabilities of $5.7 million were primarily related to an increase in accounts receivable of $16.3 million primarily due to timing of customer billing, an increase in inventories of $5.4 million primarily due to increased purchases of arrays for the processing of Kits sold during the holiday season, an increase in deferred cost of revenue of $6.8 million primarily due to PGS Kits sales during the holiday season, a decrease in operating lease liabilities of $6.5 million primarily due to lease payments, a decrease in accrued and other current liabilities of $5.9 million primarily due to timing of vendor invoice receipts, and an increase in prepaid expenses and other current assets of $4.5 million primarily due to an increase in prepaid insurance. These were partially offset by an increase in deferred revenue of $32.9 million as a result of an increase in research services deferred revenue related to the GSK collaboration and increases in PGS deferred revenue primarily due to more Kit sales from holiday sales than revenue recognized during the period, and a decrease in operating ROU assets of $5.3 million primarily due to ROU assets amortization.
Cash Flows from Investing Activities
Net cash used in investing activities was $3.0 million for the nine months ended December 31, 2024, which consisted of capitalization of internal-use software costs of $4.7 million and purchases of property and equipment of $0.7 million, offset by proceeds from sale of property and equipment of $2.5 million.
Net cash used in investing activities was $7.5 million for the nine months ended December 31, 2023, which consisted of capitalization of internal-use software costs of $6.6 million and purchases of property and equipment of $0.9 million.
Cash Flows from Financing Activities
Net cash provided by financing activities was $0.3 million for the nine months ended December 31, 2024.
Net cash provided by financing activities was $1.6 million for the nine months ended December 31, 2023, which consisted of $0.7 million in proceeds from the exercise of stock options and $1.4 million in proceeds from the issuance of Class A common stock under the ESPP, partially offset by $0.2 million in payments for taxes related to net share settlement of equity award and $0.4 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 ranging from 1 to 6.6 years. Refer to Note 10, “Leases,” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for a summary of our future minimum lease obligations.
In the normal course of business, we enter into non-cancelable purchase commitments with various parties for purchases. Refer to Note 11, “Commitments and Contingencies,” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for a summary of our commitments as of December 31, 2024.
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. We believe that the following are the critical accounting policies used in the preparation of our condensed consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included in this Form 10-Q.
Our significant accounting policies are described in Note 2 to our consolidated financial statements included in our Fiscal 2024 Form 10-K. These are the policies that we believe are the most critical to aid in fully understanding and evaluating our condensed consolidated financial condition and results of operations.
Revenue Recognition
We generate revenue from our PGS, telehealth, and research services. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that we expect to receive in exchange for these goods or services.
We sell through multiple channels, including direct-to-consumer via our website and through online retailers. If the customer does not return the kit, services cannot be completed by us, potentially resulting in unexercised rights (“breakage”) revenue. To estimate breakage, we apply the practical expedient available under ASC 606 to assess our customer contracts on a portfolio basis as opposed to individual customer contracts, due to the similarity of customer characteristics, at the sales channel level. We recognize the breakage amounts as revenue, proportionate to the pattern of revenue recognition of the returning kits in these respective sales channel portfolios. We estimate breakage for the portion of kits not expected to be returned using an analysis of historical data and consider other factors that could influence customer kit return behavior. We update our breakage rate estimate periodically and, if necessary, adjust the deferred revenue balance accordingly. If actual return patterns vary from the estimate, actual breakage revenue may differ from the amounts recorded.
We recognized breakage revenue from unreturned kits of $4.4 million and $4.4 million for the three months ended December 31, 2024 and 2023, respectively, and $13.8 million and $13.4 million for the nine months ended December 31, 2024 and 2023, respectively. A hypothetical ten percent change in our breakage rate estimate would not have had a material impact on total revenue recognized during the three and nine months ended December 31, 2024.
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 2024 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have operations primarily within the United States and we are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. We do not believe that inflation has had a material effect on our business, results of operations or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations or financial conditions.
Interest Rate Risk
As of December 31, 2024, we had $79.4 million in cash and cash equivalents. Our cash equivalents are comprised primarily of money market accounts. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income and cash flows. A hypothetical 10% change in interest rates during the three and nine months ended December 31, 2024 and 2023 would not have had a material impact on our historical condensed consolidated financial statements.
Foreign Currency Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Currently, substantially all our revenue and expenses are denominated in U.S. dollars. Revenue and expenses are remeasured each day at the exchange rate in effect on the day the transaction occurred. Our results of operations and cash flows in the future may be adversely affected due to an expansion of non-U.S. dollar denominated contracts and changes in foreign exchange rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our historical condensed consolidated financial statements for the three and nine months ended December 31, 2024 and 2023. To date, we have not engaged in any hedging strategies. If our international activities grow, we will continue to reassess our approach to manage the risk relating to fluctuations in currency rates.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As of December 31, 2024, as required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness in internal control over financial reporting as described below, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of December 31, 2024.
As a result of the resignations of seven non-employee directors from the Company’s Board of Directors on September 17, 2024, the Company did not have a majority independent Board of Directors with an independent Audit Committee as of September 30, 2024. Accordingly, material weaknesses in the control environment and monitoring of the internal control over financial reporting were identified as a result of the lack of oversight by an independent Audit Committee to assess the development and performance of internal control, maintain reporting lines and responsibilities, and
demonstrate a commitment to integrity and ethical values that support a functioning system of internal control, all of which impacted the Company’s ability to monitor and evaluate whether the components of internal control were present and functioning and properly evaluate deficiencies.
Remediation Efforts to Address Deficiencies in Internal Control Over Financial Reporting
On October 29, 2024, the Company announced the appointment of three independent board members (the “New Directors”), each of whom was appointed to the Audit Committee of the Board of Directors. Each of the New Directors (i) qualifies as an Independent Director (as defined in Nasdaq Listing Rule 5605(a)(2)), (ii) meets the criteria for independence set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended, (iii) has not participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years, and (iv) is able to read and understand fundamental financial statements. Additionally, at least one of the New Directors qualifies and was designated as the “audit committee financial expert.” The Company is working to remediate the material weakness upon demonstration of effective oversight of external financial reporting and internal controls over financial reporting within fiscal 2025.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended December 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 11, “Commitments and Contingencies,” of the Condensed Consolidated Financial Statements of this Form 10-Q is incorporated herein by reference.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes to the risk factors set forth in Part I, Item 1A., “Risk Factors,” of the Fiscal 2024 Form 10-K.
Our strategic restructuring and the associated headcount reduction have significantly changed our business, resulted in significant expense, may not result in anticipated savings, and has and will continue to disrupt our business.
As previously disclosed, on November 8, 2024, the Board of Directors of the Company approved a reduction in force (the “November 2024 Reduction in Force”), which also included the closure of substantially all operations in our former Therapeutics operating segment (together with the November 2024 Reduction in Force, the “November 2024 Reduction Plan”). The November 2024 Reduction Plan is intended to restructure and strategically align our workforce and organization with our current strategy and to reduce our operating costs. See Note 9, “Restructuring,” for additional details. We may not realize, in full or in part, the anticipated benefits, savings, and improvements in our cost structure from our restructuring efforts, and if we are unable to realize the expected operational efficiencies and cost savings from the restructuring, our operating results and financial condition would be adversely affected.
Our restructuring efforts could and have resulted in significant write-offs and other charges; for example, we recorded $10.0 million related to the South San Francisco Facility abandonment related to the November 2024 Reduction Plan during the three months ended December 31, 2024. Additionally, our restructuring efforts may divert management’s attention from our core business operations, have an adverse effect on existing relationships with our third-party business partners, and impact our ability to retain qualified personnel, which may negatively affect our infrastructure and operations or result in a loss of employees and reduced productivity among remaining employees. Further, the November 2024 Reduction Plan may yield unintended consequences, such as attrition beyond our intended workforce reduction, reduced employee morale, loss of customers or partners, and other adverse effects on our business.
If our management is unable to successfully manage the restructuring, or if we are required to take additional actions in order to support our business objectives, our expenses may be more than expected and may vary significantly from period to period and we may be unable to implement our business strategy. As a result, our future financial performance, operations, and prospects would be negatively affected.
There is substantial doubt regarding our ability to continue as a going concern.
We incurred significant operating losses as reflected in our accumulated deficit and negative cash flows from operations. As of December 31, 2024, we had an accumulated deficit of $2.4 billion, and unrestricted cash and cash equivalents of $79.4 million. We will need additional liquidity to fund our necessary expenditures and financial commitments for 12 months after the date that the unaudited condensed consolidated financial statements included in this Form 10-Q are issued. We have determined that, as of the filing date of this report, there is substantial doubt about our ability to continue as a going concern.
To improve our financial condition and liquidity position, we are attempting to raise additional capital. In addition, we are working to implement cost-cutting measures, including further reducing operating expenses, negotiating terminations of our long-term real estate leases, and attempting to reach a settlement covering all U.S. customers affected by the Cyber Incident that was reported by us in October 2023 as well as to resolve non-U.S. litigation and ongoing investigations from various governmental agencies arising from the Cyber Incident. Our ability to continue as a going concern, however, is contingent upon our ability to successfully implement steps such as those referenced above, and if we fail to do so and/or are unable to raise sufficient capital or consummate a strategic transaction, we would be forced to modify or cease operations, liquidate assets or pursue bankruptcy proceedings. While we believe in the viability of our strategy there are numerous risks and uncertainties may prevent, and there can be no assurances regarding, the successful implementation of our operational and financial plans and/or the consummation of any transactions.
Furthermore, the reaction of investors to our potential inability to continue as a going concern could also have a material and adverse impact on the price of our Class A common stock, which could negatively impact our ability to obtain
stock-based financing or enter into strategic transactions. Additionally, the perception that we may not be able to continue as a going concern may cause prospective partners or collaborators to choose not to conduct business with us due to concerns about our ability to meet our contractual obligations and continue operating our business without interruption.
The ultimate effect of the Reverse Stock Split on the market price of our Class A common stock cannot be predicted with any certainty and may decrease the liquidity of our Class A common stock and magnify any decrease in our overall market capitalization.
Effective October 16, 2024, we effected a one-for-twenty reverse stock split of all of our issued and outstanding shares of Class A common stock and Class B common stock, pursuant to which every twenty shares of our Class A common stock and Class B common stock were automatically combined into one issued and outstanding share of our respective Class A common stock and Class B common stock.
The ultimate effect of the Reverse Stock Split on the market price of our Class A common stock cannot be predicted with any certainty, and we cannot assure you that the Reverse Stock Split will result in any or all of the expected benefits, including enabling us to maintain compliance with the Nasdaq listing standards for any meaningful period of time. While the reduction in the number of outstanding shares of our Class A common stock increased the market price of our Class A common stock such that we were able to regain compliance with Nasdaq’s Minimum Bid Requirement, we cannot assure you that the Reverse Stock Split will result in any permanent or sustained increase in the market price of our Class A common stock. The market price of our Class A common stock depends on multiple factors, many of which are unrelated to the number of shares outstanding, including our business and financial performance, general market conditions, and prospects for future success, any of which could have a counteracting effect to the Reverse Stock Split on the per share price.
In addition, the Reverse Stock Split also reduced the total number of outstanding shares of our Class A common stock, which may lead to reduced trading for our Class A common stock. As a result of a lower number of shares outstanding, the market for our Class A common stock may also become more volatile. The Reverse Stock Split also increased the number of stockholders who own “odd lots” of less than 100 shares of Class A common stock. A purchase or sale of less than 100 shares of Class A common stock (an “odd lot” transaction) may result in incrementally higher trading costs through certain brokers, particularly “full service” brokers. Therefore, those stockholders who own fewer than 100 shares of Class A common stock following the Reverse Stock Split may be required to pay higher transaction costs if they sell their Class A common stock.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Rule 10b5-1 Trading Arrangements and Non-Rule 10b5-1 Trading Arrangements
None of the Company’s directors or officers , modified, or a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company’s fiscal quarter ended December 31, 2024.
Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q (unless otherwise indicated, the file number with respect to each filed document is 001-39587):
Exhibit Index
| | | | | | | | |
3.1* | |
| |
| 10.1 | |
| |
| 10.2 | |
| |
| 31.1* | |
| |
| 31.2* | |
| |
| 32.1** | |
| |
| 32.2** | |
| |
| 101.INS | Inline XBRL Instance Document |
| |
| 101.SCH | Inline XBRL Taxonomy Extension Schema |
| |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase |
| |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase |
| |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase |
| |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase |
| |
| 104 | Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit) |
| |
| * | Filed herewith |
| | |
| ** | Furnished herewith |
| | |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | 23ANDME HOLDING CO. |
| | | |
| Date: | February 6, 2025 | By: | /s/ Anne Wojcicki |
| | | Name: Anne Wojcicki |
| | | Chief Executive Officer and President |
| | | (Principal Executive Officer) |
| | | |
| Date: | February 6, 2025 | By: | /s/ Joseph Selsavage |
| | | Name: Joseph Selsavage |
| | | Chief Financial and Accounting Officer |
| | | (Principal Financial and Accounting Officer) |
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