Published: 2023-11-08 16:15:52 ET

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO___________

Commission File Number 001-39587

 

23ANDME HOLDING CO.

(Exact name of Registrant as specified in its Charter)

 

Delaware	87-1240344
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
349 Oyster Point Boulevard South San Francisco, California	94080
(Address of principal executive offices)	(Zip Code)

(650) 938-6300

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.0001 par value per share	ME	The Nasdaq Global Select Market

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 31, 2023, there were 311,613,095 shares of Class A common stock, $0.0001 par value per share, and 167,491,460 shares of Class B common stock, $0.0001 par value per share, issued and outstanding.

 

 

 

 

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23ANDME HOLDING CO.

TABLE OF CONTENTS

 

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations and Comprehensive Loss	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to the Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48
PART II
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
SIGNATURES		51

 

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”), including, without limitation, statements under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Generally, statements that are not historical facts, including statements concerning 23andMe Holding Co.’s (the “Company,” “23andMe,” “we,” “us,” or “our”) possible or assumed future actions, business strategies, events, or results of operations, are forward-looking statements. In some instances, these forward-looking statements can be identified by the use of forward-looking terminology, including, without limitation, words like “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations.

The forward-looking statements contained in this Form 10-Q are based on our current expectations and beliefs, which we believe to be reasonable, concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control), and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, without limitation, those factors described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on May 25, 2023, and our subsequent reports filed with the SEC. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Form 10-Q. In addition, even if our results of operations, financial condition, and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

23ANDME HOLDING CO.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

		September 30,				March 31,
		2023				2023
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	256,386			$	386,849
Restricted cash			1,399				1,399
Accounts receivable, net			1,501				1,897
Inventories			14,979				10,247
Deferred cost of revenue			5,782				5,376
Prepaid expenses and other current assets			17,948				19,224
Total current assets			297,995				424,992
Property and equipment, net			32,805				38,608
Operating lease right-of-use assets			52,549				56,078
Restricted cash, noncurrent			6,974				6,974
Internal-use software, net			18,971				15,661
Intangible assets, net			37,835				45,520
Goodwill			351,744				351,744
Other assets			2,357				3,021
Total assets		$	801,230			$	942,598
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable (includes related party amounts of nil and $3,186, respectively)		$	8,546			$	12,924
Accrued expenses and other current liabilities (includes related party amounts of $13,732 and $8,738, respectively)			44,686				66,430
Deferred revenue (includes related party amounts of nil and $11,753, respectively)			40,283				62,521
Operating lease liabilities			8,086				7,541
Total current liabilities			101,601				149,416
Operating lease liabilities, noncurrent			72,963				77,763
Other liabilities			1,415				1,480
Total liabilities			175,979				228,659
Commitments and contingencies (Note 11)
Stockholders’ equity
Preferred stock - par value $0.0001, 10,000,000 shares authorized as of September 30, 2023 and March 31, 2023; zero shares issued and outstanding as of September 30, 2023 and March 31, 2023			—				—
Common stock, par value $0.0001 - Class A shares, 1,140,000,000 shares authorized, 311,339,539 and 293,020,474 shares issued and outstanding as of September 30, 2023 and March 31, 2023, respectively; Class B shares, 350,000,000 shares authorized, 167,491,460 and 168,179,488 shares issued and outstanding as of September 30, 2023 and March 31, 2023, respectively			48				46
Additional paid-in capital			2,311,481				2,220,897
Accumulated other comprehensive loss			—				(620	)
Accumulated deficit			(1,686,278	)			(1,506,384	)
Total stockholders’ equity			625,251				713,939
Total liabilities and stockholders’ equity		$	801,230			$	942,598

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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23ANDME HOLDING CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share data)

(Unaudited)

 

		Three Months Ended September 30,								Six Months Ended September 30,
		2023				2022				2023				2022
Revenue (includes related party revenue of $1,082 and $14,925 for the three months ended September 30, 2023 and 2022, respectively, and $11,753 and $23,190 for the six months ended September 30, 2023 and 2022, respectively)		$	49,999			$	75,659			$	110,863			$	140,172
Cost of revenue (includes related party cost of $20 and $(271) for the three months ended September 30, 2023 and 2022, respectively, and $295 and $(510) for the six months ended September 30, 2023 and 2022, respectively)			28,270				37,386				58,453				76,409
Gross profit			21,729				38,273				52,410				63,763
Operating expenses:
Research and development (includes related party expenses of $4,907 and $2,717 for the three months ended September 30, 2023 and 2022, respectively, and $8,208 and $6,266 for the six months ended September 30, 2023 and 2022, respectively)			54,588				52,598				116,917				104,607
Sales and marketing			18,328				24,835				40,986				58,269
General and administrative			25,290				28,881				76,030				58,524
Restructuring and other charges			2,654				—				6,871				—
Total operating expenses			100,860				106,314				240,804				221,400
Loss from operations			(79,131	)			(68,041	)			(188,394	)			(157,637	)
Other income (expense):
Interest income, net			3,752				1,392				8,059				1,637
Other income (expense), net			145				(687	)			477				(1,122	)
Loss before income taxes			(75,234	)			(67,336	)			(179,858	)			(157,122	)
Provision for (benefit from) income taxes			36				(1,271	)			36				(1,525	)
Net loss			(75,270	)			(66,065	)			(179,894	)			(155,597	)
Other comprehensive income, net of tax			954				829				620				1,453
Total comprehensive loss		$	(74,316	)		$	(65,236	)		$	(179,274	)		$	(154,144	)
Net loss per share of Class A and Class B common stock attributable to common stockholders:
Basic and diluted		$	(0.16	)		$	(0.15	)		$	(0.38	)		$	(0.35	)
Weighted-average shares used to compute net loss per share:
Basic and diluted			474,858,266				449,899,537				468,592,009				448,211,708

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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23ANDME HOLDING CO.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share and per share data)

(Unaudited)

 

		Common Stock								Additional Paid-In				Accumulated Other Comprehensive				Accumulated				Total Stockholders’ Equity
		Shares				Amount				Capital				Income (Loss)				Deficit				(Deficit)
Balance as of March 31, 2023			461,199,962			$	46			$	2,220,897			$	(620	)		$	(1,506,384	)		$	713,939
Issuance of common stock upon exercise of stock options			180,718				—				85				—				—				85
Issuance of common stock upon release of restricted stock units			1,812,802				—				—				—				—				—
Issuance of common stock upon release of restricted stock units under the 2022 Annual Incentive Plan			8,961,053				1				18,629				—				—				18,630
Net share settlements for stock-based minimum tax withholdings			(58,985	)			—				(121	)			—				—				(121	)
Stock-based compensation expense			—				—				47,915				—				—				47,915
Other comprehensive loss			—				—				—				(334	)			—				(334	)
Net loss			—				—				—				—				(104,624	)			(104,624	)
Balance as of June 30, 2023			472,095,550			$	47			$	2,287,405			$	(954	)		$	(1,611,008	)		$	675,490
Issuance of common stock upon exercise of stock options			828,561				—				388				—				—				388
Issuance of common stock upon release of restricted stock units			4,358,378				1				(1	)			—				—				—
Issuance of common stock upon release of restricted stock units under the 2022 Annual Incentive Plan			57,996				—				102				—				—				102
Net share settlements for stock-based minimum tax withholdings			(19,022	)			—				(22	)			—				—				(22	)
Issuance of common stock under employee stock purchase plan			1,509,536				—				1,411				—				—				1,411
Stock-based compensation expense			—				—				22,198				—				—				22,198
Other comprehensive income			—				—				—				954				—				954
Net loss			—				—				—				—				(75,270	)			(75,270	)
Balance as of September 30, 2023			478,830,999			$	48			$	2,311,481			$	—			$	(1,686,278	)		$	625,251

 

		Common Stock								Additional Paid-In				Accumulated Other Comprehensive				Accumulated				Total Stockholders’ Equity
		Shares				Amount				Capital				Income (Loss)				Deficit				(Deficit)
Balance as of March 31, 2022			448,812,321			$	45			$	2,110,160			$	179			$	(1,194,728	)		$	915,656
Issuance of common stock upon exercise of stock options			1,065,784				—				1,533				—				—				1,533
Issuance of common stock upon release of restricted stock units			1,461,448				—				—				—				—				—
Net share settlements for stock-based minimum tax withholdings			(14,036	)			—				—				—				—				—
Stock-based compensation expense			—				—				25,915				—				—				25,915
Other comprehensive income			—				—				—				624				—				624
Net loss			—				—				—				—				(89,532	)			(89,532	)
Balance as of June 30, 2022			451,325,517			$	45			$	2,137,608			$	803			$	(1,284,260	)		$	854,196
Issuance of common stock upon exercise of stock options			1,430,629				—				2,498				—				—				2,498
Issuance of common stock upon release of restricted stock units			1,580,591				—				—				—				—				—
Net share settlements for stock-based minimum tax withholdings			(14,038	)			—				(86	)			—				—				(86	)
Issuance of common stock under employee stock purchase plan			1,130,337				—				3,238				—				—				3,238
Stock-based compensation expense			—				—				24,710				—				—				24,710
Other comprehensive income			—				—				—				829				—				829
Net loss			—				—				—				—				(66,065	)			(66,065	)
Balance as of September 30, 2022			455,453,036			$	45			$	2,167,968			$	1,632			$	(1,350,325	)		$	819,320

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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23ANDME HOLDING CO.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

		Six Months Ended September 30,
		2023				2022
Cash flows from operating activities:
Net loss		$	(179,894	)		$	(155,597	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			13,714				16,747
Amortization and impairment of internal-use software			2,514				2,078
Stock-based compensation expense			74,840				59,430
Loss (gain) on disposal of property and equipment			(5	)			4
Loss on disposition of Lemonaid Health Limited			2,026				—
Other operating activities			(504	)			—
Changes in operating assets and liabilities:
Accounts receivable, net (includes related party amounts of $19 and $(50,001) for the six months ended September 30, 2023 and 2022, respectively)			396				(49,502	)
Inventories			(4,733	)			(3,017	)
Deferred cost of revenue			(406	)			914
Prepaid expenses and other current assets			(2,433	)			4,899
Operating lease right-of-use assets			3,529				3,689
Other assets			664				(834	)
Accounts payable (includes related party amounts of $(3,186) and $(8,915) for the six months ended September 30, 2023 and 2022, respectively)			(3,951	)			(26,968	)
Accrued expenses and other current liabilities (includes related party amounts of $4,993 and $(3,009) for the six months ended September 30, 2023 and 2022, respectively)			(5,674	)			(10,367	)
Deferred revenue (includes related party amounts of $(11,753) and $26,812 for the six months ended September 30, 2023 and 2022, respectively)			(22,237	)			18,984
Operating lease liabilities			(4,255	)			(4,426	)
Other liabilities			(65	)			(2,008	)
Net cash used in operating activities			(126,474	)			(145,974	)
Cash flows from investing activities:
Purchases of property and equipment			(715	)			(1,945	)
Proceeds from sale of property and equipment			5				2
Capitalized internal-use software costs			(4,758	)			(3,008	)
Net cash used in investing activities			(5,468	)			(4,951	)
Cash flows from financing activities:
Proceeds from exercise of stock options			473				3,944
Proceeds from issuance of common stock under employee stock purchase plan			1,411				3,238
Payments of deferred offering costs			(263	)			—
Payments for taxes related to net share settlement of equity awards			(142	)			—
Net cash provided by financing activities			1,479				7,182
Effect of exchange rates on cash and cash equivalents			—				1,452
Net decrease in cash, cash equivalents and restricted cash			(130,463	)			(142,291	)
Cash, cash equivalents and restricted cash—beginning of period			395,222				561,755
Cash, cash equivalents and restricted cash—end of period		$	264,759			$	419,464
Supplemental disclosures of non-cash investing and financing activities:
Purchases of property and equipment included in accounts payable and accrued expenses		$	26			$	762
Stock-based compensation capitalized for internal-use software costs		$	2,089			$	1,320
Reconciliation of cash, cash equivalents, and restricted cash within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows above:
Cash and cash equivalents		$	256,386			$	410,891
Restricted cash, current			1,399				1,599
Restricted cash, noncurrent			6,974				6,974
Total cash, cash equivalents and restricted cash		$	264,759			$	419,464

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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23ANDME HOLDING CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provide information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended March 31, 2023 (“Fiscal 2023 Form 10-K”), including the audited consolidated financial statements of 23andMe Holding Co. as of March 31, 2023 and 2022 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included therein, as well as the accompanying unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q.

In addition to historical information, this discussion and analysis contains forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those discussed in the Fiscal 2023 Form 10-K and our subsequent reports filed with the SEC, that could cause actual results to differ materially from historical results or anticipated results. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to the “Company,” “23andMe,” “we,” “us,” and “our” refer to 23andMe Holding Co., a Delaware corporation formerly known as VG Acquisition Corp. and its consolidated subsidiaries.

Overview

Our mission is to help people access, understand, and benefit from the human genome. To achieve this, we are building the leading direct-to-consumer precision medicine platform that powers our genetics driven therapeutics and research business.

We are dedicated to empowering customers to live healthier lives by providing consumers direct access to their genetic information, and digital access to affordable personalized healthcare through our Lemonaid Health (as defined below) telehealth platform.

We pioneered direct-to-consumer genetic testing, giving consumers unique, personalized information about their genetic health risks, ancestry, and traits. We were the first company to obtain Food and Drug Administration (“FDA”) authorization for a direct-to-consumer genetic test, and we are the only company to have FDA authorization, clearance, or an exemption from premarket notification for all of the carrier status, genetic health risk, cancer predisposition, and pharmacogenetics reports that we offer to customers. As of September 30, 2023, we had over 65 health and carrier status reports that were available to customers in the U.S.

Through our Lemonaid Health telehealth platform, we connect patients to licensed healthcare professionals to provide affordable and direct online access to medical care, from consultation through treatment, for a number of common conditions, using evidence-based guidelines and up-to-date clinical protocols. When medications are prescribed by Lemonaid Health’s affiliated healthcare professionals, patients can use Lemonaid Health’s online pharmacy for fulfillment. Patients also can access telehealth consultations for certain 23andMe genetic reports through Lemonaid Health.

We believe that we can revolutionize research through our premier database of genetic and phenotypic information crowdsourced from our millions of engaged customers. We have built the world’s largest crowdsourced platform for genetic research, with over 80% of our customers electing to participate in our research program as of September 30, 2023. We believe that this platform allows us to accelerate research at an unprecedented scale, enabling us to discover insights into the origins of diseases and to speed the discovery and development of novel therapies.

We are developing a broad portfolio of genetically validated therapeutic candidates for a variety of diseases across different therapeutic areas with high unmet medical need. We have a diversified and differentiated portfolio, including one product candidate in clinical development, as well as multiple discovery stage programs. Each of our programs has been validated through our human genetics drug discovery platform. We believe that the combination of a genetically validated discovery platform, to increase the probability of technical success, and a maturing therapeutic portfolio will position us for long-term success in our goal to advance next-generation, targeted medicines for people living with serious and life-threatening diseases.

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Our Therapeutics business focuses on the use of genetic insights to validate and develop novel therapies to improve patients’ lives. We currently have research programs across several therapeutic areas, including oncology, respiratory, and cardiovascular diseases. In July 2018, we signed an exclusive agreement with an affiliate of GlaxoSmithKline plc (“GSK”) to leverage genetic insights to validate, rapidly progress development, and commercialize useful new drugs to market (the “GSK Agreement”). While the exclusive target discovery term of the GSK Agreement, the majority of which was included in the Consumer and Research Services segment, ended on July 23, 2023, the collaboration portion for our jointly-developed programs continues, which is included in the Therapeutics segment. As the exclusive target discovery term of the GSK Agreement concluded in July 2023, we are able to pursue new target discovery collaborations with other parties that leverage our extensive database, maturing capabilities and successful drug discovery track record through our work with GSK. We will continue to collaborate with GSK on a number of ongoing programs per the GSK Agreement. In October 2023, we entered into an amendment to the GSK Agreement (the “2023 GSK Amendment”) to provide GSK with a non-exclusive license to certain new, de-identified, aggregated data of the Company’s database (the “New Data”), as well as access to certain of our research services with respect to such New Data. See Note 18 — “Subsequent Events” to our condensed consolidated financial statements for details. In addition to our collaboration with GSK, we have several proprietary programs.

Our first joint immuno-oncology antibody collaboration program with GSK targeting CD96 (GSK6097608, or GSK’608) entered clinical trials in 2020. We elected to take a royalty option on the program per the terms of the GSK Agreement. GSK will be solely responsible for GSK’608’s subsequent development in later-stage clinical trials, including full development costs moving forward, except as previously agreed with GSK.

In addition to our collaboration with GSK, we have several proprietary programs. Our most advanced program, 23ME-00610, is an antibody that blocks CD200R1 to inhibit the suppression of T-cells by tumors to reactivate their immune response. 23ME-00610 is wholly owned by us, and this program entered Phase 1 clinical trials in January 2022 and has started the Phase 2a portion of the study. For any other wholly-owned programs or any programs as to which GSK has exercised its option to opt out and elected to take a royalty option, we have the opportunity to collaborate with, or out-license such programs to, third parties or to develop them independently.

We operate in two reporting segments: (1) Consumer and Research Services and (2) Therapeutics. The Consumer and Research Services segment consists of our PGS and telehealth business, as well as research services that we perform under agreements with third parties, including the GSK Agreement, relating to the use of our genotypic and phenotypic data to identify promising drug targets. The Therapeutics segment consists of revenues from the out-licensing of intellectual property associated with identified drug targets and expenses related to therapeutic product candidates under clinical development, including the continuation of any jointly-developed collaboration programs that were identified during the exclusive target discovery term of the GSK Agreement. During the three and six months ended September 30, 2023 and 2022, all our revenues were derived from our Consumer and Research Services segment. See “Adjusted EBITDA” section below.

Key Factors Affecting Results of Operations

We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those set forth in Part I, Item 1A., “Risk Factors,” of the Fiscal 2023 Form 10-K.

New Customer Acquisition

PGS. Our ability to attract new customers is a key factor for the future growth of our PGS business and our database. Our historical financial performance has largely been driven by the rate of sales of our PGS kits. Revenue from our PGS business, primarily composed of kit sales, represented approximately 79% and 60% of our total revenues for the three months ended September 30, 2023 and 2022, respectively, and approximately 69% and 63% of our total revenues for the six months ended September 30, 2023 and 2022, respectively. In addition, kit sales are a source of subscribers to our subscription service, which represented approximately 9% and 5% of our total revenue during the three months ended September 30, 2023 and 2022, respectively, and approximately 8% and 5% of our total revenues for the six months ended September 30, 2023 and 2022, respectively. We expect PGS revenues to fluctuate in the near-term and to grow long-term, as we continue to evolve our product offerings across kit sales and our subscription service, and introduce new products or features that enhance or add value for customers and members. This will be achieved by increasing awareness of our current and new offerings in existing markets and expanding into new markets.

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Purchasing patterns of our kits are largely influenced by product innovation, marketing spend, and varying levels of price discounting on our products. Sales and marketing expenses are typically higher during promotional windows that align with gift-giving portions of the year, with an emphasis on the holiday period, other gift-giving and family-oriented holidays such as Mother’s Day and Father’s Day, and major Amazon sales events such as Prime Day, which may change from year to year. Over time, we expect the seasonality of our business to continue, with pronounced increases in revenue recognized in the fourth fiscal quarter, following our holiday promotions.

Telehealth. Our ability to attract new patients and members is a key factor for the future growth of our telehealth business. Revenue from our telehealth business represented approximately 18% and 15% of our total revenue during the three months ended September 30, 2023 and 2022, respectively, and approximately 18% and 17% of our total revenues for the six months ended September 30, 2023 and 2022, respectively. There are many participants in the telehealth market, including new entrants and traditional health care systems offering virtual care, and competition continues to intensify.

Engagement of Research Participants

Our ability to conduct research and grow our database of genotypic and phenotypic information depends on our customers’ willingness to consent to participate in our research. As of September 30, 2023, over 80% of our customers have consented to participate in research. These customers permit us to use their de-identified data in our research and many of them regularly respond to our research surveys, providing us with phenotypic data in addition to the genetic data in their DNA samples. We analyze this genotypic and phenotypic data and conduct genome-wide association studies and phenome-wide association studies, which enable us to determine whether particular genetic variants affect the likelihood of individuals developing certain diseases.

Our customers can withdraw their consent to participate in research at any time. If a significant number of our customers were to withdraw their consent, or if the percentage of consenting customers were to decline significantly in the future, our ability to conduct research successfully could be diminished, which could adversely affect our business.

Drug Target Productivity of Our Genetics Database

Our genetics database underpins our research programs and enables us to identify drug targets with novel genetic evidence. As of March 31, 2023, we had identified over 50 drug targets. We expect the current productivity of our genetics database to continue based on the increasing amounts of data that we expect to result from increased kit sales and customer engagement. Any significant decline in such productivity would have a negative impact on our ability to identify drug targets and ultimately to develop and commercialize new drugs.

Development of Therapeutic Product Candidates

Our ability to successfully identify and develop therapeutic product candidates will determine the success of our Therapeutics business over time. Developing therapeutic product candidates with novel genetic evidence requires a significant investment of resources over a prolonged period of time, and a core part of our strategy is to continue making sustained investments in this area. As of March 31, 2023, we had over 50 programs in our pipeline in various stages of research and development that have been selected and are being pursued by us or by GSK through our collaboration.

For the therapeutic product candidate GSK6097608, our first joint immuno-oncology antibody program with GSK, we have elected to take a royalty option, and GSK is solely responsible for continued clinical development. Our wholly-owned immuno-oncology antibody, 23ME-00610, entered Phase 1 clinical trials in January 2022 and has started the Phase 2a portion of the Phase 1/2a study. Additional programs are in research or preclinical stages of development. We have incurred, and will continue to incur, significant research and development costs for preclinical studies and clinical trials. We expect that our research and development expenses will continue to constitute a significant portion of our expenses in future periods.

Collaborations

Substantially all of our research services revenues were generated from the GSK Agreement. In January 2022, GSK elected to exercise its option to extend the exclusive target discovery term of the ongoing collaboration with us for an additional year to July 2023. In October 2022, we received a one-time payment of $50.0 million from GSK in consideration of the exercise of the option pursuant to the GSK Agreement. In addition, we elected to take a royalty option on our joint immuno-oncology antibody collaboration program with GSK targeting CD96 (GSK6097608, or GSK’608). GSK will be solely responsible for GSK’608’s subsequent development in later-stage clinical trials, including full development costs moving forward.

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The exclusive target discovery term under the GSK Agreement expired in July 2023. Accordingly, our ability to enter into new collaboration agreements will affect our research services revenues. If we are unable to enter into additional collaboration agreements, our future research services revenue may decline.

As discussed above, in October 2023, we entered into the 2023 GSK Amendment. See Note 18 — “Subsequent Events” to our condensed consolidated financial statements for details.

Ability to Commercialize Our Therapeutics Products

Our ability to generate revenue from our therapeutic product candidates depends on our and our collaborators’ ability to successfully complete clinical trials for our therapeutic product candidates and receive regulatory approval, particularly in the United States, Europe, and other major markets.

We believe that our broad portfolio of therapeutic product candidates with novel genetic evidence and validated targets enhances the likelihood that our research and development efforts will yield successful therapeutic product candidates. Nonetheless, we cannot be certain if any of our therapeutic product candidates will receive regulatory approvals. Even if such approvals are granted, we will thereafter need to establish manufacturing and supply arrangements and engage in extensive marketing efforts and expenses prior to generating any revenue from such products. The ultimate commercial success of our products will depend on their acceptance by patients, the medical community, and third-party payors, their ability to compete effectively with other therapies in the market, and the appropriate pricing and reimbursement of the products by third-party payors.

The competitive environment is also an important factor with the commercial success of our therapeutic product candidates, and our ability to successfully commercialize a therapeutic product candidate will depend on whether there are competing therapeutic product candidates in development or already marketed by other companies.

Expansion into New Categories

We launched our 23andMe+ subscription service in October 2020, and through our acquisition of Lemonaid Health, Inc. (“Lemonaid Health”) in November 2021 (the “Lemonaid Acquisition”), we began providing access to telehealth services in November 2021. We expect to expand into new categories and innovative healthcare models with the goal of driving future growth. Those opportunities include product enhancements, such as our proprietary polygenic risk scores, new product offerings aimed at extending our personalized and customer-centric philosophy to primary healthcare, and potential additional acquisitions of other consumer-oriented healthcare businesses. Such expansion would allow us to increase the number of engaged customers who purchase or subscribe for additional products and services.

The success of our subscription service will depend upon our ability to acquire and retain subscribing customers over an extended period. Retention of customers will be based on the perceived value of the premium content and features they receive. If we are unable to provide sufficiently compelling new content and features, subscribers may not renew.

Similarly, the success of our telehealth business is dependent on our ability to attract and retain patients and members. Category expansion allows us to increase the number of patients to whom we can provide products and services. It also allows us to offer access to treatment of additional conditions that may already affect our current patients. Expanding into new categories will require financial investments in additional headcount, marketing and customer acquisition expenses, additional operational capabilities, and may require the purchase of new inventory. If we are unable to generate sufficient demand in new categories, we may not recover the financial investments we make into new categories and revenue may not increase in the future.

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Investments in Growth and Innovation

Our research platform is based on a continually growing database of genotypic and phenotypic information. Our database allows us to conduct analyses in a broad-based fashion, by searching for genetic signatures of particular diseases or the likelihood of a particular genetic variant causing disease in a particular individual or group of individuals who share the same trait. Our platform enables us to rapidly and serially conduct studies across an almost unlimited number of conditions at unprecedented statistical power, yielding insights into the causes and potential treatments of a wide variety of diseases.

We believe that our research platform enables us to rapidly identify genetically validated drug targets with improved odds of clinical success. With our state-of-the-art bioinformatics capabilities, we analyze the trillions of data points in our database, optimizing the use of our resources, to genetically validate drug targets, inform patient selection for clinical trials, and increase the probability of success of our programs. We plan to advance, partner or out-license new potential drug candidates through the rapid selection of those with compelling clinical promise.

We expect to continue investing in our business to capitalize on market opportunities and the long-term growth of our Company. We intend to make significant investments in therapeutics research and development efforts and in marketing to acquire new customers and drive brand awareness, and also expect to incur software development costs as we work to enhance our existing products, expand the depth of our subscription service, and design new offerings, including additional primary care offerings. In addition, we expect to incur increased expenses associated with operating as a public company. The expenses we incur may vary significantly by quarter depending, for example, on when significant hiring takes place, and as we focus on building out different aspects of our business. We regularly evaluate our capital allocation approach to make sure our capital is being used for the highest value-creating activities and in the most efficient manner. This may require changes to investment levels, how we operate, or are structured to ensure alignment to business priorities.

Recent Developments

In June 2023, as previously reported, we undertook a reduction in force intended to restructure and strategically align our workforce with our strategy and to reduce operating costs. The reduction in force involved approximately 9% of the then-current workforce. The restructuring charges were primarily related to the Consumer and Research Services segment.

In August 2023, as previously reported, we undertook a reduction in force primarily intended to restructure and strategically align the Therapeutics workforce. The reduction in force involved approximately 11% of the Company’s then-current workforce and 47% of the then-current Therapeutics segment.

On October 10, 2023, we reported that certain profile information, which a customer creates and chooses to share with their genetic relatives in the DNA Relatives feature, was accessed from individual 23andMe.com accounts without the account users’ authorization (the “incident”). While the Company’s investigation is ongoing, it appears an unauthorized third party downloaded a file that included the data points of various users’ DNA Relatives profiles, and then created posts on other websites with links containing such information where other third parties could download this information. As of the filing date of this Quarterly Report on Form 10-Q, it is unclear who and how many third parties may download this information from such posts. Based on our investigation as of the filing date of this Quarterly Report on Form 10-Q, we do not have any indication at this time that there has been a data security incident within our systems, or that we were the source of the account credentials used in these attacks. As of the filing date of this Quarterly Report on Form 10-Q, we believe that the threat actor was able to access certain accounts in instances usernames and passwords that were used on 23andMe.com were the same as those used on other websites that had been previously compromised or otherwise available. Our investigation into this matter is ongoing, and it is still discerning the implications of the incident. As of the filing of this Quarterly Report on Form 10-Q, as a result of this incident, multiple class action claims have been filed against the Company in federal and state court in California, as well as in British Columbia, which the Company is defending. These cases are at an early stage, and the Company cannot predict the outcome. The Company is also assessing its response to notices filed by consumers under the California Consumer Privacy Act and to inquiries from various governmental officials and agencies. The full scope of the costs and related impacts of this incident and related litigation, including, without limitation, the availability of insurance to offset some of these costs, cannot be estimated at this time. See Note 18, “Subsequent Events - Cyber Security Incident.”

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Basis of Presentation

The unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this Form 10-Q include the accounts of 23andMe Holding Co. and its consolidated subsidiaries and variable interest entities and were prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). As 23andMe, Inc. is considered our accounting predecessor, certain historical financial information presented in the condensed consolidated financial statements represents the accounts of 23andMe, Inc. and its wholly owned subsidiary.

As discussed above, we operate in two reporting segments: (1) Consumer and Research Services and (2) Therapeutics. The Consumer and Research Services segment consists of our PGS and telehealth business, as well as research services that we perform under agreements with third parties, including the GSK Agreement, relating to the use of our genotypic and phenotypic data to identify promising drug targets. The Therapeutics segment consists of revenues from the out-licensing of intellectual property associated with identified drug targets and expenses related to therapeutic product candidates under clinical development. Substantially all our revenues are derived from our Consumer and Research Services segment.

Key Business Metrics

We monitor the following key metrics to help us evaluate our business, identify trends, formulate business plans, and make strategic decisions. We believe that the following metrics are useful in evaluating our business:

Components of Results of Operations

Revenue

We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), when we transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

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Our consolidated revenue is composed primarily of sales of PGS kits to customers and telehealth services, which include online medical visits, pharmacy services, and memberships, as well as revenues from target discovery activities as part of our research collaborations through our Consumer and Research Services segment. Additionally, revenue is generated through our collaboration agreements in our Therapeutics segment primarily as a result of the out-licensing of intellectual property to collaboration partners.

See Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in our Fiscal 2023 Form 10-K for a more detailed discussion of our revenue recognition policies.

Cost of Revenue, Gross Profit, and Gross Margin

Cost of revenue for PGS primarily consists of cost of raw materials, lab processing fees, personnel-related expenses, including salaries, benefits, and stock-based compensation, shipping and handling, and allocated overhead. Cost of revenue for telehealth primarily consists of personnel-related expenses as described above that we incur for medical services, prescription drug costs, packaging and shipping, and amortization of intangible assets. Cost of revenue for research services primarily consists of personnel-related expenses as described above, and allocated overhead. We expect cost of revenue to fluctuate from period to period in the foreseeable future in absolute dollars but gradually decrease as a percentage of revenue over the long term.

Our gross profit represents total revenue less our total cost of revenue, and our gross margin is our gross profit expressed as a percentage of our total revenue. Our gross profit and gross margin have been and will continue to be affected by a number of factors, including the volume of PGS kit sales recognized, the prices we charge for our PGS products and research services, the prices we charge for telehealth services (medical visits, pharmacy services, and memberships), the fees we incur for lab processing PGS kits, the costs we incur for medical services and prescription drug costs, the revenues from our collaboration agreements, and the personnel costs to fulfill them. We expect our Consumer and Research Services gross margin to increase over the long term as subscription revenues become a higher percentage of revenue mix, although our gross margin may fluctuate from period to period. Substantially all our research services revenue in the periods presented was derived from the GSK Agreement, the exclusive target discovery term of which expired in July 2023. In October 2023, we entered into an amendment to the GSK Agreement (the “2023 GSK Amendment” to provide GSK with a non-exclusive license to certain new, de-identified, aggregated data of the Company’s database (the “New Data”), as well as access to certain of our research services with respect to such New Data. See Note 18 — “Subsequent Events” to our condensed consolidated financial statements for details. If we are unable to add new research services agreements, our research services revenue may decline substantially.

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Operating Expenses

Our operating expenses primarily consist of research and development, sales and marketing, and general and administrative expenses. Personnel-related expenses, which include salaries, benefits, and stock-based compensation, is the most significant component of research and development and general and administrative expenses. Advertising and brand-related spend and personnel-related expenses represent the primary components of sales and marketing expenses. Operating expenses also include allocated overhead costs. Overhead costs that are not substantially dedicated for use by a specific functional group are allocated based on headcount. Allocated overhead costs include shared costs associated with facilities (including rent and utilities) and related personnel, information technology and related personnel, and depreciation of property and equipment. We regularly evaluate our capital allocation approach to make sure our capital is being used for the highest value-creating activities and in the most efficient manner. This may require changes to investment levels, how we operate, or are structured to ensure alignment to business priorities.

Research and Development Expenses

Our research and development expenses support our efforts to add new services and add new features to our existing services, and to ensure the reliability and scalability of our services across our Consumer and Research Services segment. Research and development expenses also include our efforts to discover and genetically validate new therapeutic product candidates and continue to develop our portfolio of existing therapeutic product candidates, either our own proprietary programs or those in collaboration with partners across our Therapeutics segment. Research and development expenses primarily consist of personnel-related expenses, including salaries, benefits, and stock-based compensation associated with our research and development personnel, collaboration expenses, preclinical and clinical trial costs, laboratory services and supplies costs, third-party data services, and allocated overhead.

We plan to continue to invest in personnel to support our research and development efforts. We intend to make significant investments in therapeutics research and development efforts as we ramp up clinical trials for either our own proprietary or collaboration programs, such as the GSK collaboration. We expect that research and development expenses will increase on an absolute dollar basis in the foreseeable future as we continue to invest in our products, pipeline, and infrastructure for long-term growth. In addition, our research and development expenses may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of advertising costs, personnel-related expenses, including salaries, benefits, and stock-based compensation associated with our sales and marketing personnel, amortization and impairment of intangible assets, and outside services.

Advertising and brand costs consist primarily of direct expenses related to television, online and radio advertising, including production and branding, paid search, online display advertising, direct mail, affiliate programs, marketing collateral, market research and public relations. Advertising production costs are expensed the first time the advertising takes place, and all other advertising costs are expensed as incurred. Deferred advertising costs primarily consist of vendor payments made in advance to secure media spots across varying media channels, as well as production costs incurred before the first time the advertising takes place. Deferred advertising costs are expensed on the first date the advertisements occur. In addition, advertising costs include platform fees due to brokers related to our third-party retailers.

We expect our sales and marketing expenses to gradually decrease as a percentage of revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of revenue from period to period due to promotional strategies that drive the timing and amount of these expenses.

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General and Administrative Expenses

General and administrative expenses primarily consist of personnel-related expenses, including salaries, benefits, and stock-based compensation associated with corporate management, including our CEO office, finance, legal, compliance, regulatory, corporate communications, corporate development, and other administrative personnel. In addition, general and administrative expenses include professional fees for external legal, accounting, and other consulting services, as well as credit card processing fees related to PGS kit sales and telehealth services.

We expect general and administrative expenses to increase in the near term as a result of operating as a public company, including expenses associated with compliance with SEC rules and regulations, and related increases in legal, audit, insurance, investor relations, professional services, and other administrative expenses. However, we anticipate general and administrative expenses to stabilize over the long term and gradually decrease as a percentage of revenue, although it may fluctuate as a percentage of total revenue from period to period due to the timing and amount of these expenses.

Restructuring and Other Charges

Restructuring and other charges consists of costs directly associated with employee-related exit or disposal activities. Such costs include employee severance and termination benefits associated with a reduction in force, if applicable for the period.

Other Income (Expense)

Other income (expense) includes interest income, net, and other income (expense), net. Interest income, net primarily consists of interest income earned on our cash deposits and cash equivalents. Other income (expense), net primarily consists of effects of changes in foreign currency exchange rates, and other non-operating income and expenditures.

Provision for Income Taxes

Income tax provision primarily consisted of separate state tax expense generated by one of the variable interest entities. Deferred tax assets are reduced by a valuation allowance to the extent management believes it is not more likely than not to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management makes estimates and judgments about future taxable income based on assumptions that are consistent with our plans and estimates.

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Results of Operations

 

Comparisons for the Three and Six Months Ended September 30, 2023 and 2022

The following table sets forth our unaudited condensed consolidated statements of operations for the three months ended September 30, 2023 and 2022, respectively, and for the six months ended September 30, 2023 and 2022, respectively, and the dollar and percentage change between the two periods:

		Three Months Ended September 30,																Six Months Ended September 30,
		2023				2022				$ Change				% Change				2023				2022				$ Change				% Change
		(in thousands, except percentages)																(in thousands, except percentages)
Revenue		$	49,999			$	75,659			$	(25,660	)			(34	%)		$	110,863			$	140,172			$	(29,309	)			(21	%)
Cost of revenue (1)			28,270				37,386				(9,116	)			(24	%)			58,453				76,409				(17,956	)			(23	%)
Gross profit			21,729				38,273				(16,544	)			(43	%)			52,410				63,763				(11,353	)			(18	%)
Operating expenses:
Research and development (1)			54,588				52,598				1,990				4	%			116,917				104,607				12,310				12	%
Sales and marketing (1)			18,328				24,835				(6,507	)			(26	%)			40,986				58,269				(17,283	)			(30	%)
General and administrative (1)			25,290				28,881				(3,591	)			(12	%)			76,030				58,524				17,506				30	%
Restructuring and other charges (1)			2,654				—				2,654				100	%			6,871				—				6,871				100	%
Total operating expenses			100,860				106,314				(5,454	)			(5	%)			240,804				221,400				19,404				9	%
Loss from operations			(79,131	)			(68,041	)			(11,090	)			16	%			(188,394	)			(157,637	)			(30,757	)			20	%
Other income (expense):
Interest income, net			3,752				1,392				2,360				170	%			8,059				1,637				6,422				392	%
Other income (expense), net			145				(687	)			832				(121	%)			477				(1,122	)			1,599				(143	%)
Loss before income taxes			(75,234	)			(67,336	)			(7,898	)			12	%			(179,858	)			(157,122	)			(22,736	)			14	%
Provision for (benefit from) income taxes			36				(1,271	)			1,307				(103	%)			36				(1,525	)			1,561				(102	%)
Net loss		$	(75,270	)		$	(66,065	)		$	(9,205	)			14	%		$	(179,894	)		$	(155,597	)		$	(24,297	)			16	%

 

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		Three Months Ended September 30,																Six Months Ended September 30,
		2023				2022				$ Change				% Change				2023				2022				$ Change				% Change
		(in thousands, except percentages)																(in thousands, except percentages)
Cost of revenue		$	1,497			$	2,413			$	(916	)			(38	%)		$	3,969			$	5,740			$	(1,771	)			(31	%)
Research and development			10,938				12,003				(1,065	)			(9	%)			22,630				24,079				(1,449	)			(6	%)
Sales and marketing			2,016				2,003				13				1	%			3,734				4,892				(1,158	)			(24	%)
General and administrative (a)			9,290				12,548				(3,258	)			(26	%)			43,866				24,719				19,147				77	%
Restructuring and other charges			—				—				—				—				641				—				641				100	%
Total stock-based compensation expense		$	23,741			$	28,967			$	(5,226	)			(18	%)		$	74,840			$	59,430			$	15,410				26	%

The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue for the three and six months ended September 30, 2023:

		Three Months Ended September 30,								Six Months Ended September 30,
		2023				2022				2023				2022
Revenue			100	%			100	%			100	%			100	%
Cost of revenue			57	%			49	%			53	%			55	%
Gross profit			43	%			51	%			47	%			45	%
Operating expenses:
Research and development			109	%			70	%			105	%			74	%
Sales and marketing			37	%			33	%			37	%			41	%
General and administrative			51	%			38	%			69	%			42	%
Restructuring and other charges			5	%			0	%			6	%			0	%
Total operating expenses			202	%			141	%			217	%			157	%
Loss from operations			(159	%)			(90	%)			(170	%)			(112	%)
Other income (expense):
Interest income, net			8	%			2	%			7	%			1	%
Other expense, net			0	%			(1	%)			1	%			(1	%)
Loss before income taxes			(151	%)			(89	%)			(162	%)			(112	%)
Provision for (benefit from) income taxes			0	%			(2	%)			0	%			(1	%)
Net loss			(151	%)			(87	%)			(162	%)			(111	%)

Revenue

Total revenue decreased by $25.7 million, or 34%, for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. The decrease in total revenue was due to a $17.8 million decrease in Research Services revenue, primarily attributable to a decrease of $13.8 million in GSK collaboration revenue as the GSK Agreement’s exclusive target discovery term concluded in July 2023, providing only one month of GSK collaboration revenue in the quarter, while the prior year period included three months of GSK collaboration revenue. Similarly, revenue under research contracts with third parties decreased by $4.0 million against the prior year quarter, in which we experienced unusually high revenue under research contracts with third parties, as certain non-recurring specified milestones were achieved in the prior year quarter. The decrease in total revenue was also driven by a $7.9 million decrease in Consumer Services revenue, which included a (i) decrease of $6.5 million from PGS kit revenue driven mainly by lower PGS kit sales volume and a (ii) $2.6 million decrease in telehealth services revenue, both of which were primarily driven by reductions in certain marketing campaigns, lower advertising channel spend, and less price discounting during the period, resulting in higher average selling prices on PGS kit sales and greater marketing spend efficiency within telehealth services. The foregoing decreases to Consumer Services revenue were partially offset by a $1.3 million increase in subscription services revenue.

 

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Total revenue decreased by $29.3 million, or 21%, for the six months ended September 30, 2023, as compared to the six months ended September 30, 2022. The decrease in total revenue was due to a $16.4 million decrease in Consumer Services revenue, which included a decrease of (i) $15.2 million in PGS kit revenue driven mainly by lower PGS kit sales volume and a (ii) $4.0 million decrease in telehealth services revenue, both of which were primarily driven by reductions in certain marketing campaigns, lower advertising channel spend and less price discounting during the period, resulting in higher average selling prices on PGS kit sales and greater marketing spend efficiency within telehealth services. The foregoing decreases to Consumer Services revenue were partially offset by a $2.8 million increase in subscription services revenue. The decrease in total revenue was also driven by a $12.9 million decrease in Research Services revenue, primarily attributable to a $11.4 million decrease in GSK collaboration revenue as the GSK Agreement’s exclusive target discovery term concluded in July 2023, providing only four months of GSK collaboration revenue in the period, while the prior year included six months of GSK collaboration revenue. Additionally, revenue under research contracts with third parties decreased by $1.5 million, as certain non-recurring specified milestones were achieved in the prior year period.

Cost of Revenue, Gross Profit and Gross Margin

Total cost of revenue decreased by $9.1 million, or 24%, for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. Cost of revenue for Consumer Services decreased by $7.1 million, driven by a $3.6 million reduction in telehealth services cost of revenue primarily from lower personnel-related expenses and its share of related overhead allocations following the disposition of Lemonaid Health Limited during the three months ended September 30, 2023, as well as lower pharmaceutical supplies costs, shipping and consulting expenses due to lower order volume. Additionally, cost of revenue for Consumer Services decreased by $3.5 million primarily due to lower lab processing, shipping, supplies, software, and depreciation costs related to lower PGS kit sales volume. Cost of revenue for Research Services decreased by $2.0 million primarily due to lower project hours incurred in the GSK collaboration as the GSK Agreement’s exclusive target discovery term concluded in July 2023, as discussed above.

Total cost of revenue decreased by $18.0 million, or 23%, for the six months ended September 30, 2023, as compared to the six months ended September 30, 2022. Cost of revenue for Consumer Services decreased by $14.2 million, due to a $10.3 million decrease related to lower PGS kit sales volume, primarily from lower lab processing, shipping, supplies, software, and depreciation costs. Consumer Services cost of revenue also decreased due to a $3.9 million reduction in telehealth services cost of revenue primarily from lower personnel-related expenses and its share of related overhead allocations following the disposition of Lemonaid Health Limited during the six months ended September 30, 2023, as well as lower pharmaceutical supplies costs, shipping and consulting expenses due to lower order volume. Cost of revenue for Research Services decreased by $3.7 million primarily due to lower project hours incurred in the GSK collaboration as the GSK Agreement’s exclusive target discovery term concluded in July 2023, as discussed above.

Our gross profit decreased by $16.5 million, or 43%, to $21.7 million for the three months ended September 30, 2023, from $38.3 million for the three months ended September 30, 2022. The decrease in year-over-year gross profit was primarily due to the decrease in Research Services revenue and Consumer Services revenue, as discussed above.

Our gross profit decreased by $11.4 million, or 18%, to $52.4 million for the six months ended September 30, 2023, from $63.8 million for the six months ended September 30, 2022. The decrease in year-over-year gross profit was primarily due to the decrease in Consumer Services and Research Services revenue, as discussed above.

Our gross margin declined year over year from 51% for the three months ended September 30, 2022 to 43% for the three months ended September 30, 2023. The decrease in gross margin was primarily due to the decrease in GSK collaboration revenue, as discussed above. Gross margin has historically been higher for activities associated with research services than PGS kit sales or telehealth services. These gross margin decreases were partially offset by continued growth in our subscription services, increased average selling prices on PGS kit sales, and improved telehealth services gross margin following the June 2023 reduction in force.

Our gross margin improved year over year from 45% for the six months ended September 30, 2022 to 47% for the six months ended September 30, 2023. While we experienced decreases in Consumer Services revenue and Research Services revenue in the current period, the impact of these decreases to gross margin were primarily offset by continued improvement in average selling prices on PGS kit sales, growth in subscription services and the benefit of four months of GSK collaboration revenue at a higher gross margin than in the prior year due to the economic terms of the final year of the exclusive target discovery term under the GSK Agreement.

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Research and Development Expenses

The following table sets forth our research and development expenses for the three and six months ended September 30, 2023 and 2022, and the dollar and percentage change between the two periods:

 

		Three Months Ended September 30,																Six Months Ended September 30,
		2023				2022				$ Change				% Change				2023				2022				$ Change				% Change
		(in thousands, except percentages)																(in thousands, except percentages)
Personnel-related expenses		$	28,737			$	30,422			$	(1,685	)			(6	%)		$	61,618			$	61,162			$	456				1	%
Lab-related research services			11,886				7,941				3,945				50	%			28,808				15,511				13,297				86	%
Facilities, other overhead allocation, and other			12,338				11,761				577				5	%			24,088				23,346				742				3	%
Depreciation, equipment and supplies			1,627				2,474				(847	)			(34	%)			2,403				4,588				(2,185	)			(48	%)
Total research and development expenses		$	54,588			$	52,598			$	1,990				4	%		$	116,917			$	104,607			$	12,310				12	%

 

Research and development expenses for the three months ended September 30, 2023 increased to $54.6 million, as compared to $52.6 million for the three months ended September 30, 2022. The $2.0 million, or 4%, increase was primarily attributable to a $3.9 million increase in lab-related research services from advancing our proprietary and collaboration programs, partially offset by a $1.7 million decrease in personnel-related expenses primarily due to the June and August 2023 reductions in force. See Note 9 —“Restructuring” to our condensed consolidated financial statements for details.

Research and development expenses for the six months ended September 30, 2023 increased to $116.9 million, as compared to $104.6 million for the six months ended September 30, 2022. The $12.3 million, or 12%, increase was primarily attributable to a $13.3 million increase in lab-related research services from advancing our proprietary and collaboration programs. The foregoing increase was partially offset by a $2.2 million decrease in depreciation, equipment and supplies primarily due to increased capitalization of internal-use software from a greater number of project hours in development during the six months ended September 30, 2023.

For the three months ended September 30, 2023 and 2022, 48% and 54% of total research and development expenses were attributable to the Consumer and Research Services business, respectively, and 52% and 46% were attributable to our Therapeutics business, respectively. For the six months ended September 30, 2023 and 2022, 44% and 54% of total research and development expenses were attributable to the Consumer and Research Services business, respectively, and 56% and 46% were attributable to our Therapeutics business, respectively.

Sales and Marketing Expenses

 

The following table sets forth our sales and marketing expenses for the three and six months ended September 30, 2023 and 2022, and the dollar and percentage change between the two periods:

 

		Three Months Ended September 30,																Six Months Ended September 30,
		2023				2022				$ Change				% Change				2023				2022				$ Change				% Change
		(in thousands, except percentages)																(in thousands, except percentages)
Advertising and brand		$	7,748			$	12,380			$	(4,632	)			(37	%)		$	19,689			$	32,915			$	(13,226	)			(40	%)
Personnel-related expenses			4,656				5,297				(641	)			(12	%)			9,358				11,417				(2,059	)			(18	%)
Depreciation, amortization and impairment			2,638				3,266				(628	)			(19	%)			5,275				6,581				(1,306	)			(20	%)
Outside services, equipment and supplies			1,433				1,773				(340	)			(19	%)			3,157				3,196				(39	)			(1	%)
Facilities and other overhead allocation			1,853				2,119				(266	)			(13	%)			3,507				4,160				(653	)			(16	%)
Total sales and marketing expenses		$	18,328			$	24,835			$	(6,507	)			(26	%)		$	40,986			$	58,269			$	(17,283	)			(30	%)

Sales and marketing expenses for the three months ended September 30, 2023 amounted to $18.3 million, as compared to $24.8 million for the three months ended September 30, 2022, representing a decrease of $6.5 million, or 26%. This decrease was primarily driven by a $4.6 million decrease in advertising and brand-related expenses due to fewer marketing campaigns and lower advertising channel spend during the three months ended September 30, 2023.

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Sales and marketing expenses for the six months ended September 30, 2023 amounted to $41.0 million, as compared to $58.3 million for the six months ended September 30, 2022, representing a decrease of $17.3 million, or 30%. The decrease was primarily driven by a $13.2 million decrease in advertising and brand-related expenses due to fewer marketing campaigns and lower advertising channel spend, a $2.1 million decrease in personnel-related expenses primarily due to a reduction in headcount from the disposition of Lemonaid Health Limited and the June 2023 reduction in force, and a $1.3 million decrease in depreciation, amortization and impairment expenses mainly due to the impairment of intangible asset acquired from the Lemonaid Acquisition during fiscal 2023.

General and Administrative Expenses

Total general and administrative expenses decreased by $3.6 million, or 12%, from $28.9 million for the three months ended September 30, 2022 to $25.3 million for the three months ended September 30, 2023. The decrease in general and administrative expenses was primarily due to a $3.0 million decrease in personnel-related expenses, which was primarily driven by the decrease in stock-based compensation expense as a result of the departure of a Former Lemonaid Officer in the first quarter of fiscal 2024. See Note 13 — “Equity Incentive Plans and Stock-Based Compensation” to our condensed consolidated financial statements for details.

Total general and administrative expenses increased by $17.5 million, or 30%, from $58.5 million for the six months ended September 30, 2022 to $76.0 million for the six months ended September 30, 2023. The increase in general and administrative expenses was primarily due to a $20.2 million increase in personnel-related expenses, which was primarily driven by the increase in stock compensation expense as a result of the departure of a Former Lemonaid Officer in the first quarter of fiscal 2024. The foregoing increase was partially offset by a $1.0 million decrease in facilities and other overhead allocation expenses.

Restructuring and Other Charges

Restructuring and other charges for the three months ended September 30, 2023 were $2.7 million, which consisted of employee severance and termination benefits related to the August 2023 reduction in force.

Restructuring and other charges for the six months ended September 30, 2023 were $6.9 million, which consisted primarily of employee severance and termination benefits related to the June 2023 and August 2023 reductions in force of $6.3 million, of which $0.6 million was non-cash stock-based compensation expense. See Note 9 — “Restructuring” to our condensed consolidated financial statements for details.

There were no restructuring and other charges incurred during the three and six months ended September 30, 2022.

Interest Income, net

Interest income, net increased by $2.4 million from $1.4 million for the three months ended September 30, 2022 to $3.8 million for the three months ended September 30, 2023 primarily due to interest yields earned on cash equivalents held in money market funds.

Interest income, net increased by $6.4 million from $1.6 million for the six months ended September 30, 2022 to $8.0 million for the six months ended September 30, 2023 primarily due to interest yields earned on cash equivalents held in money market funds.

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Adjusted EBITDA

We evaluate the performance of each segment based on Adjusted EBITDA, which is a non-GAAP financial measure that we define as net income (loss) before net interest income (expense), net other income (expense), income tax expenses (benefit), depreciation and amortization, impairment charges, stock-based compensation expense, and other items that are considered unusual or not representative of underlying trends of our business, including but not limited to: changes in fair value of warrant liabilities and litigation settlements, gains or losses on dispositions of subsidiaries, and transaction-related costs if applicable for the periods presented. Adjusted EBITDA is a key measure used by our management and our Board of Directors to understand and evaluate our operating performance and trends, to prepare and approve our annual budget, and to develop short- and long-term operating plans. In particular, we believe that the exclusion of the items eliminated in calculating Adjusted EBITDA provides useful measures for period-to-period comparisons of our business. Accordingly, we believe that Adjusted EBITDA provides useful information in understanding and evaluating our operating results in the same manner as our management and our Board of Directors. Adjusted EBITDA should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. Other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of Adjusted EBITDA as a tool for comparison. There are a number of limitations related to the use of these non-GAAP financial measures rather than net loss, which is the most directly comparable financial measure calculated in accordance with GAAP.

Some of the limitations of Adjusted EBITDA include (i) Adjusted EBITDA does not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.

The following tables reconcile net loss to Adjusted EBITDA for the three and six months ended September 30, 2023 and 2022 on a Company-wide basis and for each of our segments:

 

		Three Months Ended September 30,								Six Months Ended September 30,
		2023				2022				2023				2022
		(in thousands)								(in thousands)
Segment Revenue: (1)
Consumer and Research Services		$	49,999			$	75,659			$	110,863			$	140,172
Total revenue		$	49,999			$	75,659			$	110,863			$	140,172
Segment Adjusted EBITDA:
Consumer and Research Services Adjusted EBITDA		$	(6,673	)		$	2,324			$	(12,275	)		$	(14,673	)
Therapeutics Adjusted EBITDA			(26,224	)			(18,663	)			(57,363	)			(37,128	)
Unallocated Corporate (2)			(12,156	)			(13,316	)			(25,215	)			(27,568	)
Total Adjusted EBITDA		$	(45,053	)		$	(29,655	)		$	(94,853	)		$	(79,369	)
Reconciliation of net loss to Adjusted EBITDA:
Net loss		$	(75,270	)		$	(66,065	)		$	(179,894	)		$	(155,597	)
Adjustments:
Interest income, net			(3,752	)			(1,392	)			(8,059	)			(1,637	)
Other (income) expense, net			(145	)			687				(477	)			1,122
Provision for (benefit from) income taxes			36				(1,271	)			36				(1,525	)
Depreciation and amortization			4,474				5,152				8,951				10,256
Amortization of acquired intangible assets			3,638				4,267				7,277				8,582
Stock-based compensation expense			23,741				28,967				74,840				59,430
Loss on disposition of Lemonaid Health Limited and transaction-related costs (3)			2,127				—				2,375				—
Litigation settlement cost			98				—				98				—
Total Adjusted EBITDA		$	(45,053	)		$	(29,655	)		$	(94,853	)		$	(79,369	)

 

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Consumer and Research Services

Consumer and Research Services Adjusted EBITDA declined by $9.0 million for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, primarily due to a decrease in total revenue of $25.7 million. The decrease in total revenue was due to a $17.8 million decrease in Research Services revenue, primarily attributable to a $13.8 million decrease in GSK collaboration revenue as the GSK Agreement’s exclusive target discovery term concluded in July 2023, providing one month of GSK collaboration revenue in the quarter while the prior year period included a full quarter of GSK collaboration revenue. Similarly, revenue under research contracts with third parties decreased by $4.0 million against a high comparison period as certain non-recurring specified milestones were achieved in the prior year quarter. The decrease in total revenue was also driven by a decrease in Consumer Services revenue of $7.9 million, attributable to a (i) decrease of $6.5 million from PGS kit revenue driven mainly by lower PGS kit sales volume and a (ii) $2.6 million decrease in telehealth services revenue, both of which were primarily due to reductions in certain marketing campaigns, lower advertising channel spend and less price discounting during the three months ended September 30, 2023, resulting in higher average selling prices on kit sales and greater marketing spend efficiency within telehealth services. The foregoing decreases to Consumer Services revenue were partially offset by a $1.3 million increase in subscription services revenue.

Additionally, advertising and brand-related spend decreased by $4.6 million due to reductions in certain marketing campaigns and advertising channel spend between the comparative periods, and cost of revenue decreased by $4.7 million primarily due to lower lab processing, equipment, consulting, shipping and supplies related to lower PGS kit sales volume. Personnel-related expenses also decreased by $4.6 million as a result of lower headcount compared to the same period last year following a reduction in force in the quarter ended June 30, 2023. Other operating expenses also decreased by $3.0 million driven by consulting services, increased capitalization of internal use software, decreased business insurance premiums and credit card fees.

Consumer and Research Services Adjusted EBITDA improved by $2.4 million for the six months ended September 30, 2023, as compared to the six months ended September 30, 2022, primarily due to decreased advertising and brand-related spend by $13.2 million due to reductions in certain marketing campaigns and advertising channel spend between the comparative periods, and a decrease of $10.2 million in cost of revenue-related lab processing, equipment, consulting, shipping and supplies mainly as a result of lower PGS kit sales volume. The improvement was also attributable to $3.3 million lower personnel-related expenses as headcount decreased compared to the same period last year following a reduction in force in the quarter ended June 30, 2023, as well as higher capitalization of internal use software by $2.5 million. Consulting services, business insurance premiums, equipment and supplies and other operating expenses also decreased by $2.4 million.

The foregoing improvements to Consumer and Research Services Adjusted EBITDA were partially offset by a decrease in Consumer Services revenue of $29.3 million. The decrease in total revenue was due to a $16.4 million decrease in Consumer Services revenue, attributable to a (i) decrease of $15.2 million in PGS kit revenue driven mainly by lower PGS kit sales volume and a (ii) $4.0 million decrease in telehealth services revenue, both of which were primarily driven by reductions in certain marketing campaigns, lower advertising channel spend and less price discounting during the period, resulting in higher average selling prices on kit sales and greater marketing spend efficiency within telehealth services. These decreases to Consumer Services revenue were partially offset by a $2.8 million increase in subscription services revenue. The decrease in total revenue was also driven by a $13.0 million decrease in Research Services revenue, primarily attributable to a $11.4 million decrease in GSK collaboration revenue as the GSK Agreement’s exclusive target discovery term concluded in July 2023, providing four months of GSK collaboration revenue in the period while the prior year included six months of GSK collaboration revenue. Additionally, revenue under research contracts with third parties decreased by $1.5 million as certain non-recurring specified milestones were achieved in the prior year period.

Therapeutics

Therapeutics’ Adjusted EBITDA declined by $7.6 million for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, primarily due to a $4.5 million increase in lab-related supplies and consultant spend and a $1.7 million increase in personnel-related expenses, primarily related to employee severance and termination benefits related to a reduction in force during the three months ended September 30, 2023. Additionally, Therapeutics’ expenses that are allocated to cost of revenue for Research Services decreased by $1.2 million as the GSK Agreement’s exclusive target discovery term concluded in July 2023.

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Therapeutics’ Adjusted EBITDA declined by $20.2 million for the six months ended September 30, 2023, as compared to the six months ended September 30, 2022, primarily due to a $14.4 million increase in lab-related supplies and consultant spend and a $3.0 million increase in personnel-related expenses, primarily related to employee severance and termination benefits related to a reduction in force during the three months ended September 30, 2023. Additionally, Therapeutics’ expenses that are allocated to cost of revenue for Research Services decreased by $2.0 million as the GSK Agreement’s exclusive target discovery term concluded in July 2023.

Liquidity and Capital Resources

We have financed our operations primarily through sales of equity securities and revenue from sales of PGS, telehealth, and research services. During fiscal 2022, we received gross proceeds of $309.7 million from the Merger and $250.0 million from the PIPE investment consummated in connection with the Merger. Our primary requirements for liquidity and capital are to fund operating needs and finance working capital, capital expenditures, and general corporate purposes.

As of September 30, 2023, our principal source of liquidity was our cash and cash equivalents balance of $256.4 million, which is held for working capital purposes. We have incurred significant operating losses as reflected in our accumulated deficit and negative cash flows from operations. We had an accumulated deficit of $1,686.3 million as of September 30, 2023. Based on our current cash resources and the previously-disclosed reductions in force undertaken in June and August 2023, we believe that our cash as of September 30, 2023 will be sufficient to fund estimated operating expenses and capital expenditure requirements for at least 12 months from the date of the filing of the unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this Form 10-Q.

On February 6, 2023, we entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (the “Agent”), pursuant to which we may sell, from time to time, at our option, up to $150 million in aggregate principal amount of an indeterminate amount of shares of our Class A common stock, $0.0001 par value per share (the “ATM Shares”), through the Agent, as the Company’s sales agent. Subject to the terms of the Sales Agreement, the Agent will use reasonable efforts to sell the ATM Shares from time to time, based upon the Company’s instructions (including any price, time, or size limits or other customary parameters or conditions we may impose), by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended and pursuant to, and only upon the effectiveness of, the Shelf Registration Statement. We will pay the Agent a commission of 3.0% of the gross proceeds from the sales of the ATM Shares, if any. We have also agreed to provide the Agent with customary indemnification and contribution rights. The offering of the ATM Shares will terminate upon the earliest of (a) the sale of the maximum number or amount of the ATM Shares permitted to be sold under the Sales Agreement and (b) the termination of the Sales Agreement by the parties thereto. While we cannot provide any assurances that we will sell any ATM Shares pursuant to the Sales Agreement, we expect to use the net proceeds from the sale of securities under the Sales Agreement, if any, for general corporate purposes, including working capital requirements and operating expenses; we, however, have not allocated the net proceeds for specific purposes. As of the date of this Form 10-Q, we had not made any sales under the Sales Agreement.

We expect to continue to incur operating losses and negative cash flows from operations for the foreseeable future due to the investments we intend to continue making in research and development, along with associated general and administrative and sales and marketing expenses to capitalize on market opportunities and drive our long-term growth. Cash from operations could also be affected from our customers and other risks set forth in Part I, Item 1A., “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 filed with the SEC on May 25, 2023. We expect to continue to maintain financing flexibility in the current market conditions. As a result, we may require additional capital resources to execute strategic initiatives to grow our business.

Our future capital requirements will depend on many factors including our revenue growth rate, the timing and extent of spending to support further sales and marketing activities, and research and development efforts. We may continue to enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may, as a result of those arrangements or the general expansion of our business, be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. Our ability to obtain additional financing depends on a number of factors, including, but not limited to, the market price of our Class A common stock, the availability and cost of additional equity capital, our ability to retain the listing of our Class A common stock on The Nasdaq Stock Market, and the general economic and industry conditions affecting the availability and cost of capital. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be materially and adversely affected.

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For the six months ended September 30, 2023, there were no material changes outside of the ordinary course of business in our commitments and contractual obligations disclosed in the Fiscal 2023 Form 10-K. See Note 11, “Commitments and Contingencies,” to our condensed consolidated financial statements included elsewhere in this Form 10-Q for additional details.

Cash Flows

The following table summarizes our cash flows for the periods presented:

 

		Six Months Ended September 30,
		2023				2022
		(in thousands)
Net cash used in operating activities		$	(126,474	)		$	(145,974	)
Net cash used in investing activities		$	(5,468	)		$	(4,951	)
Net cash provided by financing activities		$	1,479			$	7,182

 

Cash Flows from Operating Activities

Net cash used in operating activities of $126.5 million for the six months ended September 30, 2023 was primarily related to a net loss of $179.9 million, partially offset by non-cash charges for stock-based compensation of $74.8 million, depreciation and amortization of $13.7 million, amortization and impairment of internal-use software of $2.5 million, and loss on the disposition of Lemonaid Health Limited of $2.0 million. The net changes in operating assets and liabilities of $39.2 million were primarily related to a decrease in deferred revenue of $22.2 million as a result of a decrease in research services deferred revenue related to the GSK collaboration, a decrease in operating lease liabilities of $4.2 million primarily due to lease payments, a decrease in accounts payable of $4.0 million primarily due to the timing of payments, a decrease in accrued and other current liabilities of $5.7 million primarily due to timing of vendor invoice receipts, and a decrease in operating right-of-use assets of $3.5 million primarily due to right-of-use assets amortization. These decreases were partially offset by an increase in inventories of $4.7 million primarily driven by a buildup of kit inventory in preparation for the holiday season and an increase in prepaid expenses and other current assets of $2.4 million primarily due to an increase in prepaid insurance.

Net cash used in operating activities of $146.0 million for the six months ended September 30, 2022 was primarily related to a net loss of $155.6 million, partially offset by non-cash charges for stock-based compensation of $59.4 million, depreciation and amortization of $16.7 million and amortization and impairment of internal-use software of $2.1 million. The net changes in operating assets and liabilities of $68.6 million were primarily related to an increase in accounts receivable of $49.5 million mainly attributable to the $50.0 million receivable related to the GSK Agreement, a decrease in accounts payable of $27.0 million primarily due to timing of vendor payments, a decrease in accrued and other current liabilities of $10.4 million due to timing of vendor invoice receipts, a decrease in operating lease liabilities of $4.4 million primarily due to lease payments, and an increase in inventories of $3.0 million due to increased purchases in preparation for holiday season sales. These decreases were partially offset by an increase in deferred revenue of $19.0 million as a result of increased deferred revenue related to the GSK collaboration, which was partially offset by decreases in PGS deferred revenue, a decrease in prepaid expenses and other current assets of $4.9 million primarily due to the receipt of insurance claim payments, and a decrease in operating right-of-use assets of $3.7 million primarily due to right-of-use assets amortization.

Cash Flows from Investing Activities

Net cash used in investing activities was $5.5 million for the six months ended September 30, 2023, which consisted of capitalization of internal-use software costs of $4.8 million and purchases of property and equipment of $0.7 million.

Net cash used in investing activities was $5.0 million for the six months ended September 30, 2022, which consisted of purchases of property and equipment of $3.0 million and capitalization of internal-use software costs of $1.9 million.

Cash Flows from Financing Activities

Net cash provided by financing activities was $1.5 million for the six months ended September 30, 2023, which consisted of $0.5 million in proceeds from the exercise of stock options and $1.4 million in proceeds from the issuance of Class A common stock under the ESPP, partially offset by $0.1 million in payments for taxes related to net share settlement of equity award and $0.3 million in payments of deferred offering costs.

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Net cash provided by financing activities was $7.2 million for the six months ended September 30, 2022, which consisted of $3.9 million in proceeds from the exercise of stock options and $3.2 million in proceeds from the issuance of Class A common stock under the ESPP.

Contractual Obligations and Commitments

Our lease portfolio includes leased offices, dedicated lab facility and storage space, and dedicated data center facility space, with remaining contractual periods ranging from 2.3 years to 7.8 years. Refer to Note 10, “Leases,” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for a summary of our future minimum lease obligations.

In the normal course of business, we enter into non-cancelable purchase commitments with various parties for purchases. Refer to Note 11, “Commitments and Contingencies,” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for a summary of our commitments as of September 30, 2023.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. We believe that the following are the critical accounting policies used in the preparation of our condensed consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included in this Form 10-Q.

Our significant accounting policies are described in Note 2 to the consolidated financial statements included in our Fiscal 2023 Form 10-K. These are the policies that we believe are the most critical to aid in fully understanding and evaluating our condensed consolidated financial condition and results of operations.

Revenue Recognition

We generate revenue from our Consumer and Research Services segment, which includes revenue from PGS, telehealth, and research services, and our Therapeutics segment. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that we expect to receive in exchange for these goods or services.

We sell through multiple channels, including direct-to-consumer via our website and through online retailers. If the customer does not return the Kit, services cannot be completed by us, potentially resulting in unexercised rights (“breakage”) revenue. To estimate breakage, we apply the practical expedient available under ASC 606 to assess our customer contracts on a portfolio basis as opposed to individual customer contracts, due to the similarity of customer characteristics, at the sales channel level. We recognize the breakage amounts as revenue, proportionate to the pattern of revenue recognition of the returning kits in these respective sales channel portfolios. We estimate breakage for the portion of Kits not expected to be returned using an analysis of historical data and consider other factors that could influence customer Kit return behavior. We update our breakage rate estimate periodically and, if necessary, adjust the deferred revenue balance accordingly. If actual return patterns vary from the estimate, actual breakage revenue may differ from the amounts recorded. We recognized breakage revenue from unreturned Kits of $4.3 million and $6.0 million for the three months ended September 30, 2023 and 2022, respectively, and $8.9 million and $11.0 million for the six months ended September 30, 2023 and 2022, respectively.

We generate telehealth revenues from patient fees, pharmacy fees, and membership fees.

In providing telehealth services that include professional medical consultations, we maintain relationships with various affiliated PMCs, which are professional entities owned by licensed physicians and that engage licensed healthcare professionals (each, a “Provider” and collectively, the “Providers”) to provide consultation services. We account for service revenue as a principal in the arrangement with our patients.

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Additionally, with respect to our telehealth services involving the sale of prescription products, we maintain relationships with affiliated pharmacies (collectively, the “Affiliated Pharmacies”) to fill prescriptions that are ordered by our patients. We account for prescription product revenue as a principal in the arrangement with our patients.

Business Combinations

We account for our business combinations using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill. The results of businesses acquired in a business combination are included in our condensed consolidated financial statements from the date of acquisition. Acquisition costs, such as legal and consulting fees, are expensed as incurred.

Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and selection of comparable companies. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including market conditions, technological developments, economic conditions, and competition. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the condensed consolidated statements of operations and comprehensive loss.

When we issue stock-based or cash awards to an acquired company’s stockholders, we evaluate whether the awards are consideration or compensation for post-acquisition services. The evaluation includes, among other things, whether the vesting of the awards is contingent on the continued employment of the acquired company’s stockholders beyond the acquisition date. If continued employment is required for vesting, the awards are treated as compensation for post-acquisition services and recognized as expense over the requisite service period.

Goodwill

Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets. We test goodwill each fiscal year on January 1st for impairment at the Consumer and Research Services reporting unit level. Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Performance of the qualitative impairment assessment requires judgment in identifying and considering the significance of relevant events and circumstances, including external factors such as macroeconomic and industry conditions and the legal and regulatory environment, as well as entity-specific factors, such as actual and planned financial performance or sustained market declines, that could impact the fair value of our Consumer and Research Services reporting unit. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, we will proceed to perform the quantitative impairment test in which the fair value of the reporting unit is compared with its carrying amount, and an impairment charge will be recorded for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any.

Our annual assessment for goodwill impairment was performed as of January 1, 2023 and 2022 for fiscal 2023 and fiscal 2022, respectively. The assessment indicated that it was more likely than not that the fair value of the Consumer and Research Services reporting unit exceeded its carrying amount for both fiscal 2023 and fiscal 2022. Therefore, no goodwill impairment charges were recorded as a result of our fiscal 2023 and fiscal 2022 impairment analyses. In the period following January 1, 2023 there has been a decline in the Company’s market capitalization, based on the Company’s publicly quoted share price. As of September 30, 2023, we have not identified events or circumstances that are more likely than not to reduce the fair value of the Consumer and Research Services reporting unit below its carrying value. However, if the decline in our share price is sustained, it would require further testing of our goodwill and may result in an impairment of our goodwill.

There have been no material changes to our critical accounting policies and estimates as compared to those described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Fiscal 2023 Form 10-K.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have operations primarily within the United States and we are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. We do not believe that inflation has had a material effect on our business, results of operations or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations or financial conditions.

 

Interest Rate Risk

As of September 30, 2023, we had $256.4 million in cash and cash equivalents. Our cash equivalents are comprised primarily of money market accounts held at banks. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income and cash flows. A hypothetical 10% change in interest rates during the three and six months ended September 30, 2023 and 2022 would not have had a material impact on our historical condensed consolidated financial statements.

 

Foreign Currency Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Currently, substantially all our revenue and expenses are denominated in U.S. dollars. Revenue and expenses are remeasured each day at the exchange rate in effect on the day the transaction occurred. Our results of operations and cash flows in the future may be adversely affected due to an expansion of non-U.S. dollar denominated contracts and changes in foreign exchange rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our historical condensed consolidated financial statements for the three and six months ended September 30, 2023 and 2022. To date, we have not engaged in any hedging strategies. As our international activities grow, we will continue to reassess our approach to manage the risk relating to fluctuations in currency rates.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of September 30, 2023, as required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at the reasonable assurance level as of such date and that the condensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations, and cash flows for the periods disclosed in accordance with GAAP.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth in Note 11, “Commitments and Contingencies,” of the Condensed Consolidated Financial Statements of this Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

Except as set forth below, there have been no material changes to the risk factors set forth in Part I, Item 1A., “Risk Factors,” of the Fiscal 2023 Form 10-K.

We have experienced a criminal cyberattack and could in the future experience other security breaches, disruption to our business, or reputational harm.

We have been subject to, and may in the future be subject to, cyberattacks and threats to our business from bad actors. Cyberattacks have increased in frequency and potential harm over time, and the methods used to gain unauthorized access constantly evolve, making it increasingly difficult to anticipate, prevent, and/or detect incidents successfully in every instance. They are perpetrated by a variety of groups and persons, including state-sponsored parties, malicious actors, employees, contractors, or other unrelated third parties. Some of these persons reside in jurisdictions where law enforcement measures to address such attacks are ineffective or unavailable.

As previously disclosed, in October 2023, we reported that certain user profile information, which a user creates and chooses to share with their genetic relatives in the DNA Relatives feature, was accessed from individual 23andMe.com accounts without the account users’ authorization (the “incident”). While our investigation is ongoing, it appears an unauthorized third party downloaded a file that included the data points of various users’ DNA Relatives profiles, and then created posts on other websites with links containing such information where other third parties could download this information. As of the filing date of this Quarterly Report on Form 10-Q, it is unclear who and how many third parties may have downloaded this information from such posts. Based on our investigation as of the filing date of this Quarterly Report on Form 10-Q, we do not have any indication that there has been a data security incident within our systems, or that we were the source of the account credentials used in these attacks.

As of the filing date of this Quarterly Report on Form 10-Q, as a result of this incident, multiple class action claims have been filed against us in federal and state court in California, as well as in British Columbia, which we are defending. These cases are at an early stage, and we cannot predict the outcome. We are also assessing our response to notices filed by consumers under the California Consumer Privacy Act and to inquiries from various governmental officials and agencies.

We have incurred, and expect to continue to incur, certain expenses in connection with the incident and the related litigation, including, without limitation, expenses to investigate, respond to, and remediate the incident. The full scope of the costs and related impacts of the incident, including the extent to which these costs will be offset by our cybersecurity insurance, has not yet been determined. Such costs and impacts may have a material adverse effect on our business, reputation, financial condition, cash flows, and operating results.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None of the Company’s directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company’s fiscal quarter ended September 30, 2023.

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Item 6. Exhibits

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q (unless otherwise indicated, the file number with respect to each filed document is 001-39587):

Exhibit Index

 

10.1+			23andMe Holding Co. Amended and Restated 2021 Incentive Equity Plan (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 (File No. 333-274534), filed with the SEC on September 15, 2023).
10.2*			Third Amendment to Collaboration Agreement, dated as of October 27, 2023, by and between 23andMe, Inc. and GlaxoSmithKline Intellectual Property (No. 3) Limited.
10.3*+			Offer Letter, dated February 20, 2020, by and between 23andMe, Inc. and William Richards.
31.1*			Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2*			Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1**			Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350
32.2**			Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350
101.INS			Inline XBRL Instance Document
101.SCH			Inline XBRL Taxonomy Extension Schema
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase
104			Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit)
*	Filed herewith
**	Furnished herewith
+	Indicates management contract or compensatory plan or arrangement

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

				23ANDME HOLDING CO.
Date:	November 8, 2023		By:	/s/ Anne Wojcicki
				Name: Anne Wojcicki
				Chief Executive Officer and President
				(Principal Executive Officer)
Date:	November 8, 2023		By:	/s/ Joseph Selsavage
				Name: Joseph Selsavage
				Interim Chief Financial and Accounting Officer
				(Principal Financial and Accounting Officer)

 

 

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