GeneDx Holdings Corp.: Form 10-Q for the period ended Sep 30, 2023

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and our audited financial statements for the year ended December 31, 2022 and the related notes in our Annual Report on Form 10-K for the year ended December 31, 2022. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from the results described in or implied by the forward-looking statements. You should carefully read the section entitled “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from these forward-looking statements.

Overview

We are a leading genomics company—one that sits at the intersection of diagnostics and data science, pairing decades of genomic expertise with an ability to interpret clinical data at scale. We are focused on delivering personalized and actionable health insights to inform diagnosis, direct treatment and improve drug discovery. We believe we are well-positioned to accelerate the use of genomics and leverage large-scale clinical data to enable precision medicine as the standard of care. Our initial focus is in pediatric and rare diseases, two areas in which we believe we have competitive advantage and can deliver on our vision today.

Corporate History Overview

Mount Sinai Genomics, Inc. d/b/a as Sema4 (“Legacy Sema4”) was established out of the Mount Sinai Health System and commenced operations as a commercial entity on June 1, 2017. Legacy Sema4 derived the majority of its revenue from diagnostic testing services, which primarily related to reproductive and women’s health and somatic tumor testing. In addition, between May 2020 through March 31, 2022, Legacy Sema4 provided COVID-19 diagnostic testing services.

GeneDx, LLC (formerly, GeneDx, Inc.) (“Legacy GeneDx”), which derives its revenue primarily from diagnostic testing services, including revenue related to exome sequencing and whole genome sequencing, was acquired by the Company on April 29, 2022 (the “Acquisition”). The diagnostic testing services businesses of Legacy Sema4 were discontinued as of the end of the first quarter of 2023, and our continuing operations now include the combination of the Legacy GeneDx diagnostic testing services business with the data and information business of Legacy Sema4.

Additional information on Legacy GeneDx and Legacy Sema4 can be found in the audited financial statements in Note 1, “Organization and Description of Business” included within our Annual Report on Form 10-K for the year ended December 31, 2022, and our condensed consolidated financial statements in Note 1, “Organization and Description of Business” included within this Quarterly Report.

Factors Affecting Our Performance

We believe several important factors have impacted, and will continue to impact, our performance and results of operations. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must address. See the section titled “Item 1A. Risk Factors” in this Quarterly Report and in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, which is incorporated by reference in this Quarterly Report, for further information.

Number of resulted tests

A test is resulted once the appropriate workflow is completed and details are provided to the ordered patients or healthcare professional for reviews, which corresponds to the timing of our revenue recognition. We believe the number of resulted tests in any period is important and useful to our investors because it directly correlates with long-term patient relationships and the size of our genomic database.

Success obtaining and maintaining reimbursement

Our ability to increase the number of billable tests and our revenue therefrom will depend on our success in achieving reimbursement for our tests from third-party payors. Reimbursement by a payor may depend on several factors, including a payor’s determination that a test is appropriate, medically necessary, cost-effective, and has received prior authorization. Since each payor makes its own decision as to whether to establish a policy or enter into a contract to provide coverage for our tests, as well as the amount it will reimburse us for a test, seeking these approvals is a time-consuming and costly process.

In cases where we or our partners have established reimbursement rates with third-party payors, we face additional challenges in complying with their procedural requirements for reimbursement. These requirements often vary from payor to payor and are reassessed by third-party payors regularly. As a result, in the past we have needed additional time and resources to comply with the requirements.

Third-party payors may decide to deny payment or seek to recoup payments for tests performed by us that they contend were improperly billed, not medically necessary or against their coverage determinations, or for which they believe they have otherwise overpaid. As a result, we may be required to refund payments already received, and our revenues may be subject to retroactive adjustment as a result of these factors among others.

We expect to continue to focus our resources on increasing the adoption of, and expanding coverage and reimbursement for, our current and any future tests we may develop or acquire. If we fail to expand and maintain broad adoption of, and coverage and reimbursement for, our tests, our ability to generate revenue and our future business prospects may be adversely affected.

Ability to lower the costs associated with performing our tests

Reducing the costs associated with performing our diagnostic tests is both our focus and a strategic objective. We source, and will continue to source, components of our diagnostic testing workflows from third parties. We also rely upon third-party service providers for data storage and workflow management.

Increasing adoption of our services by existing and new customers

Our performance depends on our ability to retain and broaden the adoption of our services with existing customers as well as our ability to attract new customers. Our success in retaining and gaining new customers is dependent on the market’s confidence in our services and the willingness of customers to continue to seek more comprehensive and integrated genomic and clinical data insights.

Investment in platform innovation to support commercial growth

We are seeking to leverage and deploy our platforms to develop a pipeline of future disease-specific research and diagnostic and therapeutic products and services. We have limited experience in the development or commercialization of clinical or research products in connection with our database and platform.

We operate in a rapidly evolving and highly competitive industry. Our business faces changing technologies, shifting provider and patient needs, and frequent introductions of rival products and services. To compete successfully, we must accurately anticipate technology developments and deliver innovative, relevant, and useful products, services, and technologies on time. As our business evolves, the competitive pressure to innovate will encompass a wider range of products and services. We must continue to invest significant resources in research and development, including investments through acquisitions and partnerships. These investments are critical to the enhancement of our current diagnostics and health information and data science technologies from which existing and new service offerings are derived.

We expect to incur significant expenses to advance these development efforts, but they may not be successful. New potential services may fail at any stage of development and, if we determine that any of our current or future services are unlikely to succeed, we may abandon them without any return on our investment. If we are unsuccessful in developing additional services, our growth potential may be impaired.

COVID-19 Impact

During 2023, our test volumes improved to what would, at this time, be considered normalized market conditions. A COVID-19 resurgence in the United States could however have a material impact on our results of operations, cash flows, and financial condition.

In March 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), was signed into law. The CARES Act was a stimulus bill that, among other things, provided assistance to qualifying businesses and individuals and included funding for the healthcare system. We received $5.4 million in 2020 as part of the stimulus, comprised of $2.6 million received under the Provider Relief Fund (the “PRF”), and $2.8 million received under the Employee Retention Credit (the “ERC”). In 2021, we received an additional $5.6 million under the PRF.

Funds provided under the PRF to healthcare providers are not loans and will not be required to be repaid; however, as a condition to receiving these payments, providers must agree to certain terms and conditions and submit sufficient documentation demonstrating that the funds are being used for healthcare-related expenses or lost revenue attributable to the COVID-19 pandemic. We have concluded it is probable that all terms and conditions associated with the funds received under the PRF distribution have been met. As a result, we recorded the funds received under the PRF in other expense (income), net in the statements of operations and comprehensive loss during the periods in which we received the funds.

Funds provided under the ERC are refundable tax credits for 50% of qualified wages paid to employees during the pandemic. A company is eligible for the ERC (1) its operations have been fully or partially suspended because of COVID-19 or (2) its gross receipts in a calendar quarter in 2020 declined by more than 50% from the same period in 2019. At the time of applying for the ERC, we concluded that it was reasonably possible the eligibility requirements would be met; however, due to a change in circumstances, we have re-evaluated our position and concluded that the funds received under the ERC needed to be repaid back. Therefore, in July 2023, we remitted $2.7 million of payment and reduced a liability initially recorded in other current liabilities on the condensed consolidated balance sheets.

Key Performance Indicators

We use the following key financial and operating metrics to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions. These key financial and operating metrics should be read in conjunction with the following discussion of our results of operations and financial condition together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report.

The principal focus of our commercial operations is to offer our diagnostic tests through both our direct sales force and laboratory distribution partners. Test volume correlates with genomic database size and long-term patient relationships. Thus, test volumes drive database diversity and enable potential identification of variants of unknown significance and population-specific insights. The number of tests resulted and the mix of test results, with a focus on driving whole exome and whole genome sequencing, are key indicators that we use to assess the operational efficiency of our business. Once the appropriate workflow is completed, the test is resulted and details are provided to ordered patients or healthcare professionals for reviews.

During the nine months ended September 30, 2023, we resulted 165,339 tests, of which all were processed by the Legacy GeneDx laboratory compared to the period ended September 30, 2022, in which we resulted approximately 276,171 tests in Legacy Sema4 and Legacy GeneDx laboratories. The volume decrease from 2022 to 2023 can be primarily attributed to the Company’s decision to terminate its Legacy Sema4 reproductive health and somatic oncology testing activities in 2022. This was partially compensated by the addition of volumes from Legacy GeneDx’s laboratory subsequent to the Acquisition’s closing, as elaborated below.

Key Components of Results of Operations

Revenue

Diagnostic Test Revenue

The majority of our revenue is derived from genetic and genomic diagnostic testing services for three groups of customers: healthcare professionals working with patients with third-party insurance coverage or without third-party insurance coverage, institutional clients such as hospitals, clinics, state governments and reference laboratories, and self-pay patients. The amount of revenue recognized for diagnostic testing services depends on a number of factors, such as contracted rates with our customers and third-party insurance providers, insurance reimbursement policies, payor mix, historical collection experience, price concessions and other business and economic conditions and trends. To date, the majority of our diagnostic test revenue has been earned from orders received for patients with third-party insurance coverage. The now discontinued Legacy Sema4 diagnostics business previously provided reproductive and women’s health testing and screening, as well as somatic tumor testing. Our ability to increase our diagnostic test revenue will depend on our ability to increase our market penetration, obtain contracted reimbursement coverage from third-party payors, enter into contracts with institutions, and increase our reimbursement rate for tests performed.

Other Revenue

We also generate revenue from collaboration service agreements with biopharma companies and other third parties pursuant to which we provide health information and patient identification support services. Certain of these contracts provide non-refundable payments, which we record as contract liabilities, and variable payments based upon the achievement of certain milestones during the contract term.

With respect to existing collaboration and service agreements, our revenue may fluctuate period to period due to the pattern in which we may deliver our services, our ability to achieve milestones, the timing of costs incurred, changes in estimates of total anticipated costs that we expect to incur during the contract period, and other events that may not be within our control. Our ability to increase our revenue will depend on our ability to enter into contracts with third-party partners.

Cost of Services

The cost of services reflect the aggregate costs incurred in performing services, which include expenses for reagents and laboratory supplies, personnel-related expenses (comprising salaries and benefits) and stock-based compensation for employees directly involved in revenue generating activities, shipping and handling fees, costs of third-party reference lab testing and phlebotomy services, if any, and allocated genetic counseling, facility and IT costs associated with delivery services. Allocated costs include depreciation of laboratory equipment, facility occupancy, and information technology costs. The cost of services are recorded as the services are performed.

We expect the cost of services to generally increase in line with the anticipated growth in diagnostic testing volume and services we provide under our collaboration service agreements. However, we expect the cost per test to decrease over the long term due to the efficiencies we may gain from improved utilization of our laboratory capacity, automation, and other value engineering initiatives. These expected reductions may be offset by new tests which often have a higher cost per test during the introductory phases before we can gain efficiencies. The cost per test may fluctuate from period to period.

Research and Development Expenses

Research and development expenses represent costs incurred to develop our technology and future test offerings. These costs are principally associated with our efforts to develop the software we use to analyze data and process customer orders. These costs primarily consist of personnel-related expenses (comprising salaries and benefits), stock-based compensation for employees performing research and development, innovation and product development activities, costs of reagents and laboratory supplies, costs of consultants and third-party services, equipment and related depreciation expenses, non-capitalizable software development costs, research funding to our research partners as part of research and development agreements and allocated facility and information technology costs associated with genomics medical research. Research and development costs are generally expensed as incurred and certain non-refundable advanced payments provided to our research partners are expensed as the related activities are performed.

We generally expect our research and development expenses to continue to increase as we innovate and expand the application of our platforms. However, we expect research and development expenses to decrease as a percentage of revenue in the long term, although the percentage may fluctuate from period to period due to the timing and extent of our development and commercialization efforts and fluctuations in our compensation-related charges.

Selling and Marketing Expenses

Selling and marketing expenses primarily consist of personnel-related expenses (comprising salaries and benefits) and stock-based compensation for employees performing commercial sales, account management, marketing, and allocation of genetic counseling services for GeneDx. Allocated genetic counseling service cost for Legacy Sema4 is recorded as general and administrative expenses as the activities are not expected to support selling and marketing expenses of Legacy Sema4. Selling and marketing costs are expensed as incurred.

We generally expect our selling and marketing expenses will continue to increase in absolute dollars as we expand our commercial sales and marketing and counseling teams and increase marketing activities. However, we expect selling and marketing expenses to decrease as a percentage of revenue in the long term, subject to fluctuations from period to period due to the timing and magnitude of these expenses.

General and Administrative Expenses

General and administrative expenses primarily consist of personnel-related expenses (comprising salaries and benefits) and stock-based compensation for employees in executive leadership, legal, finance and accounting, human resources, information technology, and other administrative functions. In addition, these expenses include office occupancy and information technology costs. General and administrative costs are expensed as incurred.

We generally expect our general and administrative expenses to continue to increase in absolute dollars as we increase headcount and incur costs associated with operating as a public company, including expenses related to legal, accounting, and regulatory matters, maintaining compliance with requirements of Nasdaq and of the SEC, director and officer insurance premiums. We expect these expenses to decrease as a percentage of revenue in the long term as revenue increases, although the percentage may fluctuate from period to period due to fluctuations in our compensation-related charges.

Comparison of the three months ended September 30, 2023 and 2022

The following table sets forth our results of operations for the periods presented:

(in thousands)

NM - Not Meaningful

Revenue

Total revenue decreased by $29.9 million, or 36%, to $53.3 million for the three months ended September 30, 2023, from $83.2 million for the three months ended September 30, 2022.

Diagnostic test revenue decreased by $29.5 million, or 36%, to $52.0 million for the three months ended September 30, 2023, from $81.5 million for the three months ended September 30, 2022. The decrease primarily reflected $36.1 million in lower revenues from the now discontinued Legacy Sema4 business. This decrease was partially offset by an increase from Legacy GeneDx diagnostic testing revenues of $3.6 million driven by a $10.0 million, or 42%, increase in whole exome and genome sequencing revenues resulting from a 71% increase in test volumes partially offset by lower average reimbursement rates from exome tests and declines in other non-exome test revenues.

Other revenue decreased by $0.4 million, or 23%, to $1.3 million for the three months ended September 30, 2023, from $1.7 million for the three months ended September 30, 2022 due the lower revenues from the now discontinued Legacy Sema4 business.

Gross Profit

Gross profit increased by $11.7 million or 86%, to $25.3 million for the three months ended September 30, 2023, from $13.5 million for the three months ended September 30, 2022. The increase was driven by a combination of lower cost of services from the now discontinued Legacy Sema4 business and improved margins from Legacy GeneDx. The gross profit performance from Legacy GeneDx reflected favorable volume mix shift to higher margin whole exome and genome tests, partially offset by lower average cost per test associated with these tests.

Research and Development

Research and development expense increased by $0.9 million, or 7%, to $14.3 million for the three months ended September 30, 2023, from $13.4 million for the three months ended September 30, 2022. The increase was primarily attributable to costs associated with a Guardian newborn screening study which commenced in the fourth quarter of 2022. In addition, the prior period included a $7.6 million reversal of stock compensation expense resulting from forfeitures of unvested equity awards by employees terminated from the now discontinued Legacy Sema4 business.

Selling and Marketing

Selling and marketing expense decreased by $17.6 million, or 51%, to $16.8 million for the three months ended September 30, 2023, from $34.4 million for the three months ended September 30, 2022. The decrease was primarily attributable to lower costs from the now discontinued Legacy Sema4 business, partially offset by an increase in Legacy GeneDx costs which were in line with the increase in revenue for the business.

General and Administrative

General and administrative expense decreased by $28.8 million, or 52%, to $26.1 million for the three months ended September 30, 2023, from $54.9 million for the three months ended September 30, 2022. The decrease was primarily attributable to lower current period costs from the now discontinued Legacy Sema4 business and a $4.9 million reversal of stock compensation expense in the current period resulting from forfeitures of unvested equity awards by employees terminated in connection with recent headcount reduction actions. The decrease was partially offset by $3.3 million of accelerated depreciation recorded in the current period to write down the remaining assets at the two closed Legacy Sema4 labs.

Impairment Loss

The non-cash charge of $8.3 million reflected the impairment of certain capital and right-of-use asset leases. See Note 6, “Property and Equipment, net” to our unaudited condensed consolidated financial statements for further information.

Other Operating Expenses, Net

Other operating expenses, net were $2.8 million for the three months ended September 30, 2023 as compared with $1.7 million for the three months ended September 30, 2022. The increase reflected a non-cash charge of $1.0 million in the current period to reserve for obsolete Legacy Sema4 inventory.

Non-Operating Income, Net

Non-operating income, net decreased by $12.7 million, due to the significant decline in fair value of our warrant and earn-out contingent liabilities taken in the prior period and $1.0 million contract termination costs in the current period associated with the now discontinued Legacy Sema4 business, partially offset by interest income in the current period due to higher interest rates associated with money market funds established with proceeds from our public offering of Class A common stock in the first quarter of 2023.

See Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements for further information on the changes in fair value of our warrant and earn-out contingent liabilities.

Comparison of the nine months ended September 30, 2023 and 2022

The following table sets forth our results of operations for the periods presented:

(in thousands)

NM - Not Meaningful

Revenue

Total revenue decreased by $28.2 million, or 16%, to $145.1 million for the nine months ended September 30, 2023, from $173.3 million for the nine months ended September 30, 2022.

Diagnostic test revenue decreased by $27.5 million, or 16%, to $140.4 million for the nine months ended September 30, 2023, from $168.0 million for the nine months ended September 30, 2022. The decrease was attributable in lower revenues from the now discontinued Legacy Sema4 business, partially offset by an increase in diagnostic test revenue increase from Legacy GeneDx driven by an increase in whole exome and genome sequencing revenues resulting from higher test volumes partially offset by lower average reimbursement rates from exome tests and declines in other non-exome test revenues. In addition, the prior period only reflected Legacy GeneDx’s revenue following the closing of the Acquisition in April 2022.

Other revenue decreased by $0.6 million, or 12%, to $4.7 million for the nine months ended September 30, 2023, from $5 million for the nine months ended September 30, 2022 due the lower revenues from the now discontinued Legacy Sema4 business.

Gross Profit

Gross profit increased by $69.7 million for the nine months ended September 30, 2023, driven by a combination of lower cost of services from the now discontinued Legacy Sema4 business and improved margins from Legacy GeneDx. The gross profit performance from Legacy GeneDx reflected favorable volume mix shift to higher margin whole exome and genome tests, partially offset by lower average cost per test associated with these tests. In addition, the prior year only reflected GeneDx’s results following the closing of the Acquisition in April 2022.

Research and Development

Research and development expense decreased by $15.8 million, or 26%, to $46.0 million for the nine months ended September 30, 2023, from $61.8 million for the nine months ended September 30, 2022. The decrease was primarily attributable to lower current year costs from the now discontinued Legacy Sema4 business, which included a $3.3 million reversal of stock compensation expense resulting from forfeitures of unvested equity awards by terminated employees. In addition, the prior year only reflected GeneDx’s research and development costs following the closing of the Acquisition in April 2022. The decrease was partially offset by costs associated with a Guardian newborn screening study which commenced in the fourth quarter of 2022.

Selling and Marketing

Selling and marketing expense decreased by $47.4 million, or 51%, to $45.4 million for the nine months ended September 30, 2023, from $92.8 million for the nine months ended September 30, 2022. The decrease was primarily attributable to lower current year costs of $77.0 million from the now discontinued Legacy Sema4 business. In addition, the prior year only reflected Legacy GeneDx’s selling and marketing costs following the closing of the Acquisition in April 2022. This decrease was partially offset by higher Legacy GeneDx costs, in line with the increase in post-Acquisition revenue.

General and Administrative

General and administrative expense decreased by $65.8 million, or 38%, to $107.1 million for the nine months ended September 30, 2023, from $173.0 million for the nine months ended September 30, 2022. The decrease was primarily attributable to lower current year cost of $85.0 from the now discontinued Legacy Sema4 business and a $25.2 million reversal of stock compensation expense in the current period resulting from forfeitures of unvested equity awards by employees terminated in connection with fiscal 2023 headcount reduction actions. In addition, the prior year only reflected Legacy GeneDx’s general and administrative costs following the closing of the Acquisition in April 2022. The decrease was partially offset by $3.3 million of accelerated depreciation recorded in the current year to write-down the remaining assets at the two closed Legacy Sema4 labs.

Impairment Loss

The non-cash charge of $10.4 million reflected the impairment of certain capital and right-of-use asset leases. See Note 6, “Property and Equipment, net” to our condensed consolidated financial statements for further information.

Other Operating Expenses, Net

Other operating expenses, net were $5.3 million for the nine months ended September 30, 2023 and included related party expenses of $4.6 million and non-cash charges of $3.6 million to reserve for obsolete Legacy Sema4 inventory, partially offset by a current year gain of $3.0 million recognized on the sale of certain assets sold as a result of an auction. Other operating expenses, net were $4.7 million for the nine months ended September 30, 2022 primarily reflected related party expenses.

Non-Operating income, Net

Non-operating income, net, decreased by $49.0 million, due to the significant decline in fair value of our warrant and earn-out contingent liabilities taken in the prior year and $1.0 million of contract termination costs in the current year associated with the now discontinued Legacy Sema4 business. This decrease was partially offset by interest income in the current year due to higher interest rates associated with money market funds established with proceeds from our public offering of Class A common stock in the first quarter of 2023 and the principal loan forgiveness of $2.8 million under the amendment to the DECD loan. See Note 8, “Long-Term Debt” to our condensed consolidated financial statements for further information.

Reconciliation of Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.

Non-GAAP financial measures have limitations as analytical tools and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. We may in the future incur expenses similar to the adjustments in the presentation of non-GAAP financial measures. Other limitations include that non-GAAP financial measures do not reflect:

• all expenditures or future requirements for capital expenditures or contractual commitments;
• changes in our working capital needs;
• the costs of replacing the assets being depreciated, which will often have to be replaced in the future;
• the non-cash component of employee compensation expense; and
• the impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis, of our ongoing operations.

Adjusted Gross Profit and Adjusted Gross Margin

Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of services, excluding depreciation and amortization expense, stock-based compensation expense and restructuring costs. We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We believe these non-GAAP financial measures are useful in evaluating our operating performance compared to that of other companies in our industry, as these metrics generally eliminate the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance.

The following is a reconciliation of gross profit to our Adjusted Gross Profit and of our gross margin to Adjusted Gross Margin for the three and nine months ended September 30, 2023 and 2022:

(in thousands)

(in thousands)

(1) Represent costs incurred for restructuring activities, which include severance costs to impacted employees and third party consulting costs incurred during the periods presented.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we define as net loss adjusted for interest expense (income), net, income tax benefit, depreciation and amortization, stock-based compensation expenses, transaction costs, other (income) expense, net, impairment loss, restructuring and business exit related charges, acquisition costs and change in fair market value of warrant and earn-out contingent liabilities. We believe Adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain factors that may vary from company to company for reasons unrelated to overall operating performance.

The following is a reconciliation of our net loss to Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022:

(in thousands)

(in thousands)

(1) Represents interest income from interest-bearing and money market deposit accounts and the total of interest expense related to our finance leases and interest-bearing loans and interest income earned on money market funds. This also includes the unused line fee and amortization of deferred transaction costs related to the loan and security agreement entered into with SVB.

(2) Represents the impairment of certain capital and right-of-use asset leases.

(3) 2022 amounts represent professional service costs incurred in connection with the Legacy GeneDx Acquisition, which include due diligence and legal costs.

(4) Represent costs incurred for restructuring activities, which include severance packages offered to impacted employees and third party consulting costs incurred during the periods presented.

(5) Represents the change in fair market value of the liabilities associated with our public warrants, private placement warrants and the earn-out shares that were issuable under the terms of the merger agreement for our business combination.

(6) Represents a current year gain recognized on the sale of certain assets sold as a result of an auction.

Liquidity and Capital Resources

On April 29, 2022, upon the closing of the Acquisition, we received gross proceeds of $200 million from the issuance of 1.5 million shares of our Class A common stock pursuant to subscription agreements with certain institutional investors, (the “Acquisition PIPE Investment”). The gross proceeds were partially used to pay for the cash consideration of the Acquisition and transaction costs incurred in connection with the Acquisition.

On January 31, 2023, we announced the closing of an underwritten public offering of 9,956,710 shares of our Class A common stock and a concurrent registered direct offering of 2,353,436 shares of our Class A common stock. On April 17, 2023, we issued the remaining 676,868 shares of our Class A common stock in the registered direct offering. The total gross proceeds were approximately $150 million.

Subsequent to September 30, 2023, in addition, on October 27, 2023, we entered into a new, five-year senior secured credit facility with an affiliate of Perceptive Advisors and received an initial tranche of $50 million under the facility. See Note 8, “Long-Term Debt” to our condensed consolidated financial statements for further information.

Management believes that our cash and cash equivalents, including the proceeds from the initial tranche under the credit facility, and available-for-sale marketable securities provide us with sufficient liquidity for at least twelve months from the filing date of this Quarterly Report.

Accordingly, our condensed consolidated financial statements included in this Quarterly Report have been prepared on a basis that assumes we will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. Nevertheless, we may also seek additional funding in the future through the sale of common or preferred equity or convertible debt securities, the entry into other credit facilities or another form of third-party funding or by seeking other debt financing. For example, we have an effective shelf registration statement that we filed with the SEC in August of 2022, registering $300 million shares of our Class A common stock and other securities. Following the underwritten and registered direct offerings described above, approximately $150 million of securities remained available under this registration statement.

Material Cash Requirements for Known Contractual Obligations and Commitments

We anticipate fulfilling our contractual obligations and commitments with existing cash and cash equivalents and available-for-sale marketable securities, which amounted to $114.3 million at September 30, 2023, through additional capital raised to finance our operations; see “Liquidity and Capital Resources” or through an additional tranche of $25 million under the Perceptive credit facility, which is subject to certain conditions.

We entered into a settlement agreement related to the Legacy Sema4 business with one of our third-party payors in 2022, in order to settle the claims related to coverage and billing matters allegedly resulting in overpayments by the payor to the Legacy Sema4 business including those related to multi-gene tests, such as carrier screening services. Under the settlement agreement, the total settlement amount is $42 million, to be paid by us to the payor in a series of installments over the next four years with the final installment payment scheduled to be on or before June 30, 2026. The first installment payment of $15 million was made on December 30, 2022 and the next installment of $5.0 million is due in December 2023. In consideration for the payments, the payor has agreed to provide releases of the disputed claims, which releases became effective on or about March 31, 2023. For further information regarding this matter, see Note 4, “Revenue Recognition” included within our Annual Report on Form 10-K for the year ended December 31, 2022, and our condensed consolidated financial statements in Note 4, “Revenue Recognition,” included within this Quarterly Report, respectively.

Cash Flows

(in thousands)

Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2023 was $150.3 million, which reflected the cash expenditures associated with the net loss for the current period and unfavorable working capital associated with the wind down of the Legacy Sema4 accounts payable, primarily during the third quarter of 2023.

Net cash used in operating activities during the nine months ended September 30, 2022 was $254.5 million, which reflected the cash expenditures associated with the net loss for the prior year period and favorable working capital, primarily for accounts payable and accrued expenses to support combined Legacy GeneDx and Legacy Sema4 businesses.

Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2023 was $38.9 million, which primarily includes net purchases of marketable securities of $27.3 million, $12.1 million in consideration on escrow paid for the Legacy GeneDx Acquisition and $2.9 million in purchases of property and equipment, which was offset partially by $3.9 million in proceeds from the sale of assets.

Net cash used in investing activities during the nine months ended September 30, 2022 was $138.5 million, which was attributable to $127.0 million cash consideration for the Acquisition of Legacy GeneDx, $5.0 million in purchases of property and equipment and $6.5 million of costs related to development of internal-use software assets.

Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2023 was $139.1 million, which was primarily driven by the $143.0 million net proceeds from the underwritten public offering and concurrent registered direct offering, net of issuance costs, which was offset partially by the DECD loan payment of $2.0 million and $2.1 million of finance lease payments.

Net cash provided by financing activities during the nine months ended September 30, 2022 was $197.3 million, which was driven by the $197.7 million proceeds from the Acquisition PIPE Investment, net of issuance costs of $2.3 million, and the exercise of stock options of $2.2 million which was offset by $2.6 million of finance lease principal payments.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about items that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our audited consolidated financial statements and notes thereto included within our Annual Report on Form 10-K for the year ended December 31, 2022, other than the Company’s policy for accounting for available-for-sale marketable securities. For further information, see Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements.

JOBS Act Accounting Election

We are an “emerging growth company” within the meaning of the JOBS Act. The JOBS Act allows an emerging growth company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. See Note 1 to our condensed consolidated financial statements for further.

Recent Accounting Pronouncements

Additional information on recent accounting pronouncements can be found in the audited financial statements in Note 2, “Summary of Significant Accounting Policies” included within our Annual Report on Form 10-K for the year ended December 31, 2022, and Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements.

We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates. Our cash, cash equivalents, available-for-sale marketable securities and restricted cash consists of bank deposits and money market funds, which totaled $115.2 million at September 30, 2023 and $138.3 million at December 31, 2022, respectively. Such interest-bearing instruments carry a degree of risk. However, because our investments are primarily high-quality credit instruments with short-term durations with high-quality institutions, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A 100 basis point change in interest rates would not have a material effect on the fair market value of our cash, cash equivalents and restricted cash. The majority of our cash, cash equivalents and restricted cash are uninsured with account balances in excess of the Federal Deposit Insurance Company limits. On March 14, 2023, we announced full access to our capital with nearly 100% of our cash and cash equivalents held in an institution designated as systematically important financial institutions.

The revolving credit facility under our loan and security agreement (the “SVB Agreement”) with Silicon Valley Bank (“SVB”) in place at September 30, 2023, included variable interest rate terms for the outstanding principal amount of any advance. At September 30, 2023, no amounts had been drawn under the SVB Agreement. The SVB Agreement was terminated effective as of October 27, 2023, and SVB’s security interest in our assets and property was released. Our credit agreement with Perceptive Credit Holdings IV, LP includes variable interest rate terms for the outstanding principal amount of $50 million at October 27, 2023. Therefore, changes in interest rates can impact future interest payments we are obligated to pay.

See Note 8, “Long-Term Debt” to our condensed consolidated financial statements for further information.

Evaluation of 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.

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 at September 30, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at September 30, 2023 because of the material weaknesses in internal control over financial reporting at December 31, 2022 that we previously identified in Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2022 has not been fully remediated at September 30, 2023.

Notwithstanding the identified material weaknesses in internal control over financial reporting, our management has concluded that our condensed consolidated financial statements included in the Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Previously Reported Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As described in more detail in Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2022, the material weaknesses identified related to the fact that we did not design and maintain accounting policies, procedures and controls to ensure complete, accurate and timely financial reporting in accordance with U.S. GAAP.

Remediation Plan

Our management is actively engaged and committed to taking the steps necessary to remediate the control deficiencies that constituted the material weaknesses. The Company has continued to improve its organizational capabilities and continues to implement processes and controls to remediate the material weaknesses. Remediation actions undertaken during 2022 and planned are described in more detail in Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2022.

We continue to enhance corporate oversight over process-level controls and structures to ensure that there is appropriate assignment of authority, responsibility, and accountability to enable remediation of our material weaknesses. We believe that our remediation plan will be sufficient to remediate the identified material weaknesses and strengthen our controls. As we continue to evaluate, and work to improve our controls, management may determine that additional measures to address control deficiencies or modifications to the remediation plan are necessary.

While we have performed certain remediation activities to strengthen our controls to address the identified material weaknesses, control weaknesses are not considered remediated until new internal controls have been operational for a period of time, are tested, and management concludes that these controls are operating effectively. We will continue to monitor the effectiveness of our remediation measures in connection with our future assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures, and we will make any changes to the design of our plan and take such other actions that we deem appropriate given the circumstances.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the nine months ended September 30, 2023 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except that on January 1, 2023 a majority of the services provided by OPKO under the OPKO Transition Services Agreement that had been in place since the date of Acquisition related to certain accounting processes and financial systems expired. We are continuing to take steps to remediate the material weaknesses in our internal control over financial reporting, as discussed above.

Inherent Limitation on the Effectiveness of Internal Control

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.

You should carefully review and consider the following risk factors and the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q as well as in our other filings with the SEC before deciding whether to invest in our securities. We cannot assure you that any of the events discussed below will not occur. These events could have a material and adverse impact on our business, financial condition, results of operations and prospects. Unless otherwise indicated, references to our business being harmed in these risk factors will include harm to our business, reputation, financial condition, results of operations, net revenue and future prospects. In such event, the trading price of our securities could decline, and you could lose all or part of your investment. This discussion does not address all of the risks that we face, and we may face additional risks and uncertainties that are not presently known to us, or that we currently deem immaterial, which may also impair our business or financial condition. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included herein.

Our business is subject to various risks, including those described in Part II, Item 1A “Risk Factors” (the “Risk Factor Section”) beginning on page 62 of our Quarterly Report for the quarterly period ended June 30, 2023, filed with the SEC on August 8, 2023, which Risk Factor Section is incorporated by reference herein.

Except for as set forth below, there have been no material changes in the risk factors included in the Risk Factor Section.

Our credit agreement contains operating and financial restrictions that may limit our business and financing activities.

Our credit agreement with Perceptive Credit Holdings IV, LP contains operating and financial restrictions that may limit our business and financing activities. In particular, our credit agreement includes customary affirmative and negative covenants and events of default, including negative covenants that restrict, among other things, our ability to incur indebtedness and liens, dispose of property and make investments. In addition, the credit agreement requires us to maintain aggregate unrestricted cash of not less than $5.0 million and minimum levels of quarterly core revenue through the third quarter of 2028. The operating and financial restrictions in the credit agreement, as well as any other financing arrangements that we may enter into, may limit our ability to finance our operations, or engage in, expand, or otherwise pursue our business activities and strategies. Our ability to comply with these or other covenants may be affected by events beyond our control, and future breaches of these or other covenants could result in a default under the credit agreement or any other financing arrangement. If not waived, future defaults could cause all of the outstanding indebtedness under our credit agreement or other financing arrangement to become immediately due and payable and terminate all commitments to extend further credit, if any. Furthermore, if we were unable to repay our credit agreement or other indebtedness then due and payable, secured lenders could proceed against the assets, if any, securing such indebtedness. A default would also likely significantly diminish the market price of our securities.

If we do not have or are unable to generate sufficient cash to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our ability to operate and continue our business as a going concern.

If we do not meet the expectations of investors, stockholders or financial analysts, the market price of our securities may decline.

If we do not meet the expectations of investors or securities analysts, the market price of our securities may decline. In addition, fluctuations in the price of our securities could contribute to the loss of all or part of your investment. If an active market for our securities does not continue, the trading price of our securities could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.

Factors affecting the trading price of our securities may include:

• actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
• changes in the market’s expectations about our operating results;
• the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
• speculation in the press or investment community;
• announcements of technological innovation, new products, acquisitions, strategic alliances, significant agreements by us or competitors;
• success of competitors;
• our operating results falling below our financial guidance or other projections or failing to meet the expectation of securities analysts or investors in a particular period;
• changes in financial estimates and recommendations by securities analysts concerning us or the market in general;
• operating and stock price performance of other companies that investors deem comparable to us;
• our ability to market new and enhanced products on a timely basis;
• changes in laws and regulations affecting our business;
• commencement of, or involvement in, litigation involving us;
• changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
• the volume of shares of our Class A common stock available for public sale;
• any major change in our Board or management;
• sales of substantial amounts of Class A common stock by our directors, officers or significant stockholders or the perception that such sales could occur;
• the expiration of the market stand-off or contractual lock-up agreements;
• the realization of any of the risk factors described herein;
• additions or departures of key personnel;
• failure to comply with the requirements of the Nasdaq;
• failure to comply with the Sarbanes-Oxley Act or other laws or regulations;
• actual, potential or perceived control, accounting or reporting problems;
• changes in accounting principles, policies and guidelines; and
• general economic and political conditions such as recessions, rising inflation and interest rates, uncertainty with respect to the U.S. federal budget, global conflicts such as the war in Ukraine and the war in Israel, fuel prices, international currency fluctuations and acts of war or terrorism.

Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for the stocks of other companies which investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future. Further, the price of our Class A common stock may be subject to additional volatility as a result of our Reverse Stock Split. It is not uncommon for the market price of a company’s common stock to decline in the period following a reverse stock split.

In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. In particular, on September 7, 2022, a shareholder class action lawsuit was filed in the United States District Court for the District of Connecticut against the Company and certain of the Company’s current and former officers. For further information, see “Item 1. Legal Proceedings.” This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.