GeneDx Holdings Corp.: Form 10-Q for the period ended Sep 30, 2024

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 consolidated financial statements and the related notes in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”). 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 focus is in pediatric and rare diseases today, two areas in which we believe we have competitive advantage and can deliver on our vision.

See Note 1, “Organization and Description of Business” included in this Quarterly Report for more information on the Company’s history.

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 2023 Form 10-K, 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. The commercial success of our current and future products, if approved, will depend on the extent to which our customers receive coverage and adequate reimbursement from third-party payors. 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.

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, 2024, we resulted 171,955 tests, compared to the nine months ended September 30, 2023, in which we resulted approximately 165,339 tests.

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. 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 information technology 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 certain genetic counseling services. 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, billing 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, and 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, 2024 and 2023

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

NM – Not Meaningful

Revenue

Total revenue increased by $23.6 million, or 44%, to $76.9 million for the three months ended September 30, 2024, from $53.3 million for the three months ended September 30, 2023.

Diagnostic test revenue increased by $25.5 million, or 49%, to $77.4 million for the three months ended September 30, 2024, from $52.0 million for the three months ended September 30, 2023. The increase of $26.0 million, or 77%, primarily reflected an increase in whole exome and genome sequencing revenues resulting from a 46% increase in test volumes, partially coupled with higher whole exome and genome average reimbursement rates.

Other revenue decreased by $1.9 million, or 140%, to $(0.5) million for the three months ended September 30, 2024, from $1.3 million for the three months ended September 30, 2023. The decrease reflected a negative adjustment in partnership revenues from our data business.

Gross Profit

Gross profit increased by $22.6 million, or 89%, to $47.8 million for the three months ended September 30, 2024, from $25.3 million for the three months ended September 30, 2023, driven by a combination of a favorable shift in volume mix to higher margin whole exome and genome tests, an improvement in exome average reimbursement rates and continued cost per test leverage.

Research and Development

Research and development expense decreased by $2.6 million, or 18%, to $11.7 million for the three months ended September 30, 2024, from $14.3 million for the three months ended September 30, 2023. The decrease was primarily attributable to lower current period compensation costs of $1.0 million as a result of headcount reduction actions and a $1.7 million decrease in information technology, lab-related and sponsored research expenses related to the discontinued Legacy Sema4 business.

Selling and Marketing

Selling and marketing expense increased by $0.3 million, or 2%, to $17.0 million for the three months ended September 30, 2024, from $16.8 million for the three months ended September 30, 2023. The increase reflected our investment to support growth in our commercial team.

General and Administrative

General and administrative expense increased by a nominal amount, or 0.2%, to $26.1 million for the three months ended September 30, 2024, from $26.1 million for the three months ended September 30, 2023. Lower depreciation expense as a result of the discontinued Legacy Sema4 business was offset by increased compensation and personnel-related costs.

Impairment Loss

The non-cash charge of $8.3 million for the three months ended September 30, 2023 reflected the impairment of certain capital and right-of-use asset leases. See Note 5, “Property and Equipment, net” to our condensed consolidated financial statements for further information.

Other Operating Expenses, Net

Other operating expenses, net were $0.8 million for the three months ended September 30, 2024 as compared with $2.8 million for the three months ended September 30, 2023. This decrease reflected a non-cash charge of $1.0 million in the prior period to reserve for obsolete Legacy Sema4 inventory and decreased services costs of $1.0 million following the expiration of the transition services agreement with OPKO in October 2023.

Non-Operating Income (Expense), Net

Non-operating income (expense), net decreased by $1.1 million, due to the significant increase in fair value of our warrant liabilities, an increase in interest expense as a result of the Perceptive term loan facility entered in the last quarter of 2023. This was offset by a reduction in legal reserves, net of insurance, of approximately $1.3 million. In addition, the prior period included contract termination costs of $1.0 million associated with the discontinued Legacy Sema4 business.

See Note 4, “Fair Value Measurements” to our condensed consolidated financial statements for further information on the changes in fair value of our warrant and earn-out contingent liabilities. Also see Note 9, “Purchase Commitments and Contingencies” to our condensed consolidated financial statements for further information.

Comparison of the nine months ended September 30, 2024 and 2023

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

NM – Not Meaningful

Revenue

Total revenue increased by $64.7 million, or 45%, to $209.8 million for the nine months ended September 30, 2024, from $145.1 million for the nine months ended September 30, 2023.

Diagnostic test revenue increased by $67.5 million, or 48%, to $208.0 million for the nine months ended September 30, 2024, from $140.4 million for the nine months ended September 30, 2023. The increase of $69.6 million, or 82%, primarily reflected an increase in whole exome and genome sequencing revenues resulting from a 59% increase in test volumes coupled with improved whole exome and genome average reimbursement, partially offset by lower revenues from the now discontinued Legacy Sema4 business.

Other revenue decreased by $2.9 million, or 61%, to $1.8 million for the nine months ended September 30, 2024, from $4.7 million for the nine months ended September 30, 2023. The decrease reflected a negative adjustment in partnership revenues from our data business.

Gross Profit

Gross profit increased by $68.9 million for the nine months ended September 30, 2024, 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 decreased by $11.9 million, or 26%, to $34.1 million for the nine months ended September 30, 2024, from $46.0 million for the nine months ended September 30, 2023. The decrease was primarily attributable to lower current period compensation costs as a result of headcount reduction actions and a decrease in depreciation expense of $5.2 million related to the discontinued Legacy Sema4 business.

Selling and Marketing

Selling and marketing expense increased by $4.3 million, or 9%, to $49.7 million for the nine months ended September 30, 2024, from $45.4 million for the nine months ended September 30, 2023. The increase reflected our investment to support growth in our commercial team.

General and Administrative

General and administrative expense decreased by $33.4 million, or 31%, to $73.8 million for the nine months ended September 30, 2024, from $107.1 million for the nine months ended September 30, 2023. The decrease was attributable to lower current period expenses related to professional services, software and information technology related costs, insurance costs, fixed asset depreciation and personnel-related costs as a result of the restructuring to discontinue the Legacy Sema4 business.

Impairment Loss

The non-cash charge of $10.4 million for the nine months ended September 30, 2023 reflected the impairment of certain capital and right-of-use asset leases. See Note 5, “Property and Equipment, net” to our condensed consolidated financial statements for further information.

Other Operating Expenses, Net

Other operating expenses, net were $2.6 million for the nine months ended September 30, 2024 as compared with $5.3 million for the nine months ended September 30, 2023. The decrease in expense reflected decreased services costs following the expiration of the transition services agreement with OPKO in October 2023. This was partially offset by the impact of a gain recognized on the sale of certain assets sold as a result of an auction held during the nine months ended September 30, 2023, which did not recur in the nine months ended September 30, 2024.

Non-Operating Income (Expense), Net

Non-operating income (expense), net, decreased by $30.5 million, to $26.0 million of expense for the nine months ended September 30, 2024, from $4.4 million of income for the nine months ended September 30, 2023. The current period results primarily included legal reserves, net of insurance, of approximately $12.1 million, net interest expense of $2.3 million, and non-cash charges of $10.1 million associated with the exercise of the Perceptive warrant and $1.3 million driven by the increase in fair value of our public and private warrant liabilities driven primarily by the increase in our stock price as of September 30, 2024. See Note 4, “Fair Value Measurements” to our condensed consolidated financial statements for further information on the changes in fair value of our warrant and earn-out contingent liabilities. Also see Note 9, “Purchase Commitments and Contingencies” to our condensed consolidated financial statements for further information.

The prior year results included net interest income of $2.1 million driven by higher cash balances as a result of the 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 our loan from the Connecticut Department of Economic and Community Development (“DECD”). See Note 8, “Long-Term Debt” and Note 14, “Supplemental Financial Information” to our condensed consolidated financial statements for further information.

Reconciliation of Non-GAAP Financial Measures

In addition to our results determined in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “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, 2024 and 2023:

(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 Net Income (Loss)

Adjusted net income (loss) is a non-GAAP financial measure that we define as net loss adjusted for depreciation and amortization, stock-based compensation expenses, impairment loss, restructuring costs, change in fair value of financial liabilities, gain on sale of assets, provision for excess and obsolete inventory associated with Legacy Sema4, gain on debt forgiveness and other (income) expense, net. We believe adjusted net income (loss) 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 net income (loss) for the three and nine months ended September 30, 2024 and 2023:

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

(2) Represent costs incurred for restructuring activities, which include severance, and in the prior periods, third-party consulting costs.

(3) Represents the change in fair value of the liabilities associated with our public warrants, private placement warrants, Perceptive warrant and the earn-out shares.

(4) Represents principal loan forgiveness under the amendment to the DECD loan.

(5) For the three and nine months ended September 30, 2024, represents reserves net of insurance for a certain litigation matter. See Note 9 “Purchase Commitments and Contingencies” to our condensed consolidated financial statements for further information. For the three and nine months ended September 30, 2023, represents contract termination costs associated with the discontinued Legacy Sema4 business.

Liquidity and Capital Resources

Management believes that our cash and cash equivalents and available-for-sale marketable securities provide us with sufficient liquidity for at least 12 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, drawing on the additional $25 million tranche of the term loan under the Perceptive term loan facility, the entry into other credit facilities or another form of third-party funding, by seeking other debt financing or by disposing assets or businesses. See Note 8, “Long-Term Debt” to our condensed consolidated financial statements for further information regarding the Perceptive term loan facility.

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. As of September 30, 2024, $150 million of securities remained available under this registration statement.

In addition, we have entered into a sales agreement (the “Sales Agreement”) with TD Securities (USA) LLC (“TD Cowen”) pursuant to which we may, but are not obligated to, offer and sell, from time to time, shares of our Class A common stock with an aggregate offering price up to $75.0 million through TD Cowen, as sales agent, subject to the terms and conditions described in the Sales Agreement and SEC rules and regulations (our “ATM offering”). During the third quarter of 2024, we issued 418,653 shares of our Class A common stock in connection with the ATM offering at an average price of $35.83 per share. Proceeds received, net of agent fees and other offering expenses, were $14.6 million.

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 $116.5 million at September 30, 2024, through additional capital raised to finance our operations, including pursuant to our ATM offering, or through an additional tranche of $25 million under the Perceptive credit facility, which is subject to certain conditions. See “Liquidity and Capital Resources” for further information.

As discussed in the notes to our condensed consolidated financial statements, in 2022, we entered into an agreement with one of our third-party payors to settle for $42.0 million claims related to coverage and billing matters allegedly resulting in overpayments by the payor to Legacy Sema4. As of September 30, 2024, remaining payments due to the payor were $22.0 million.

For more information regarding this matter, see Note 4, “Revenue Recognition” to our consolidated financial statements included in our 2023 Form 10-K and Note 3, “Revenue Recognition,” to our condensed consolidated financial statements included within this Quarterly Report, respectively.

Cash Flows

Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2024 was $25.3 million, driven by lower cash expenditures associated with the current period net loss as compared with the prior period, which reflected improved gross margin profitability, as well as the realization of cost savings from exiting the Legacy Sema4 business and other previously announced cost reduction initiatives.

Net cash used in operating activities during the nine months ended September 30, 2023 was $150.3 million, driven by higher cash expenditures associated with the prior period net loss, which reflected the costs associated with the exiting of the Legacy Sema4 business.

Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2024 was $29.6 million, which included purchases of marketable securities of $52.7 million and $2.4 million of capital expenditures, partially offset by $25.6 million in proceeds from the sales and maturities of marketable securities.

Net cash used in investing activities during the nine months ended September 30, 2023 was $38.9 million, which primarily included purchases of marketable securities of $43.9 million, $12.1 million in consideration in escrow paid for the Legacy GeneDx acquisition and $2.9 million in purchases of property and equipment, which was offset partially by $16.7 million in proceeds from the maturities of marketable securities and $3.9 million in proceeds from the sale of assets.

Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2024 was $13.1 million, primarily driven by the $14.6 million net proceeds from our ATM offering, net of issuance costs, which was offset partially by $1.5 million of finance lease payments and $0.2 million of principal payments on the DECD loan.

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 our January 2023 underwritten public offering and concurrent registered direct offering, net of issuance costs, which was offset partially by a payment of $2.0 million on the DECD loan and $2.1 million of finance lease payments.

See Note 8, “Long-Term Debt” and Note 14, “Supplemental Financial Information” to our condensed consolidated financial statements for further information.

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 judgments, 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.

Our critical accounting policies and estimates are described in Note 2, “Summary of Significant Accounting Policies” to the consolidated financial statements included in the 2023 Form 10-K. There have been no material changes to our critical accounting policies and estimates in the current period. For further information, see Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements.

Filer Status

Loss of Smaller Reporting Company Status

Because the market value of our shares of Class A common stock held by non-affiliates was between $250 million and $700 million as of June 30, 2024 and our revenue for the year ended December 31, 2023 was more than $100 million, we will continue to be deemed an accelerated filer under the Exchange Act as of December 31, 2024. However, we are no longer a “smaller reporting company” and will no longer be eligible to rely on the scaled disclosure exemptions available to smaller reporting companies starting with our first Quarterly Report on Form 10-Q in 2025.

JOBS Act Accounting Election

We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (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. We have elected to use this extended transition period and, as a result, our financial statements may not be comparable to companies that comply with public company effective dates. We also intend to rely on other exemptions provided by the JOBS Act, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

We will remain an emerging growth company until the earliest of (1) September 1, 2025, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (3) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Class A common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Recent Accounting Pronouncements

Additional information on recent accounting pronouncements can be found in Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included within our 2023 Form 10-K, 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 $117.4 million at September 30, 2024 and $131.1 million at December 31, 2023, 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.

We are also exposed to interest rate risk on our variable rate debt associated with the Perceptive term loan facility. 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 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 as of September 30, 2024. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2024 because of the material weakness in internal control over financial reporting at December 31, 2023 that we previously identified in Item 9A. “Controls and Procedures” of our 2023 Form 10-K had not been fully remediated at September 30, 2024.

Notwithstanding the material weakness 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 Weakness

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 2023 Form 10-K, the material weakness identified related to the fact that our accounting and operating systems lacked controls over access, and program change management that are needed to ensure access to financial data is adequately restricted to appropriate personnel, including consideration of the appropriate segregation of duties. As a result, it is possible that our business process controls that depend on the accuracy and completeness of data or financial reports generated by our information technology system could be adversely affected due to the lack of operating effectiveness of the information technology general controls (“ITGCs”).

Remediation Plan

Our management is actively engaged and committed to taking the steps necessary to remediate the material weakness over user access and program change management in order to establish a strong internal control environment. Remediation actions undertaken during 2023 and planned are described in more detail in Item 9A. “Controls and Procedures” of our 2023 Form 10-K.

While significant progress has been made to strengthen the design and operating effectiveness of our ITGCs, management has concluded that as of September 30, 2024, there was not a sufficient period of time available to sufficiently test nor conclude that enhanced internal controls were fully implemented and operating effectively. We will continue to monitor the effectiveness of ITGC remediation actions in connection with future assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures. Assessment results will be used to validate the efficacy of our ITGC remediation efforts and identify any additional actions necessary to ensure ongoing design and operating effectiveness.

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, 2024 covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We are continuing to take steps to remediate the material weakness 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.

Except for as set forth below, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A “Risk Factors” of our 2023 Form 10-K and in Part II, Item 1A “Risk Factors” of each of our Quarterly Reports for the quarterly periods ended March 31, 2024, filed with the SEC on April 29, 2024, and June 30, 2024, filed with the SEC on July 30, 2024, which sections are incorporated by reference herein.

Changes in FDA enforcement discretion for laboratory developed tests (“LDTs”) could subject our operations to much more significant regulatory requirements.

We currently offer an LDT version of certain tests. Historically, the FDA has exercised a policy of enforcement discretion with respect to most LDTs, whereby the FDA did not actively enforce its medical device regulatory requirements for such tests. However, at various points in recent years, FDA has indicated that it intends to end enforcement discretion for many tests offered as LDTs, and to require such tests to comply with certain FDA regulatory requirements. The FDA Commissioner and the Director of the Center for Devices and Radiological Health (“CDRH”) have expressed significant concerns regarding performance disparities between some LDTs and in vitro diagnostics that have been reviewed, cleared, authorized or approved by the FDA.

Most recently, on April 29, 2024, the FDA published a final rule on LDTs, in which FDA outlines its plans to end enforcement discretion for many LDTs in five stages over a four-year period. In Phase 1 (effective May 6, 2025), clinical laboratories would be required to comply with medical device (adverse event) reporting, correction/removal reporting, and certain quality systems complaint handling requirements. In Phase 2 (effective May 6, 2026), clinical laboratories would be required to comply with all other device requirements (e.g., registration/listing, labeling, investigational use), except for remaining quality systems requirements and premarket review. In Phase 3 (effective May 6, 2027), clinical laboratories would be required to comply with all remaining applicable quality systems requirements. In Phase 4 (effective November 6, 2027), clinical laboratories would be required to comply with premarket submission requirements for high-risk tests (i.e., tests subject to premarket approval (PMA) requirement). Finally, in Phase 5 (effective May 6, 2028), clinical laboratories would be required comply with premarket submission requirements for moderate- and low-risk tests (i.e., tests subject to de novo or 510(k) requirement). The final rule potentially extends enforcement discretion for certain tests – e.g., LDTs approved by the New York State Department of Health, and LDTs first marketed prior to May 6, 2024 which are not modified or are modified in certain limited ways – from certain FDA regulatory requirements, provided certain important limitations have been met. We are actively reviewing the final rule to evaluate its applicability to our operations, and the extent to which we may be required to modify our operations to comply with its requirements.

Multiple lawsuits have been filed challenging the FDA’s authority to regulate LDTs as medical devices under the Federal Food, Drug, and Cosmetic Act. The outcome of these lawsuits is uncertain at this time.

If the FDA were to determine that certain tests offered by us as LDTs are no longer eligible for enforcement discretion for any reason, including new rules, policies or guidance, or due to changes in statute, our tests may become subject to extensive FDA requirements or our business may otherwise be adversely affected. If the FDA were to actively regulate our LDTs, we could experience reduced revenue or increased costs, which could adversely affect our business, prospects, results of operations and financial condition. If required, the regulatory marketing authorization process required to bring our current or future LDTs into compliance may involve, among other things, successfully completing additional clinical validations and submitting to and obtaining clearance from the FDA for a premarket clearance (510(k)) submission or authorization for a de novo submission or approval of a premarket approval application. Furthermore, pending legislative proposals, if enacted, such as the VALID Act, could create new or different regulatory and compliance burdens on us and could have a negative effect on our ability to keep products on the market or develop new products, which could have a material effect on our business. In the event that the FDA requires marketing authorization of our LDTs in the future, the FDA may not ultimately grant any clearance, authorization or approval requested by us in a timely manner, may limit our indication in a way that is not commercially desirable, or refuse to provide such authorization at all. In addition, if the FDA inspects our laboratory in relation to the marketing of any FDA-authorized test, any enforcement action the FDA takes might not be limited to the FDA-authorized test carried by us and could encompass our other testing services.

Complying with numerous statutes and regulations pertaining to our business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.

In addition to the risks set out under this heading in our 2023 Form 10-K, the U.S. Supreme Court recently reversed its longstanding approach under the Chevron doctrine, which provided for judicial deference to regulatory agencies. As a result of this decision, we cannot be sure whether there will be increased challenges to existing agency regulations or how lower courts will apply the decision in the context of other regulatory schemes without more specific guidance from the U.S. Supreme Court. For example, the U.S. Supreme Court's decision could significantly impact healthcare, privacy, artificial intelligence and anti-corruption practices and other regulatory regimes with which we are required to comply. Any such regulatory developments could result in uncertainty about and changes in the ways such regulations apply to us, and may require additional resources to ensure our continued compliance.