Filed Pursuant to Rule 424(b)(3)
Registration No. 333-258467
PROSPECTUS SUPPLEMENT NO. 6
(to Prospectus dated March 28, 2022)
Sema4 Holdings Corp.
229,657,978 Shares of Common Stock
7,236,667 Warrants to Purchase Shares of Common Stock
21,994,972 Shares of Common Stock Underlying Warrants
This prospectus supplement supplements the prospectus dated March 28, 2022 (the “Prospectus”), which forms a part of our registration statement on Form S-1 (No. 333-258467). This prospectus supplement is being filed to update and supplement the information in the Prospectus with the information contained in our quarterly report on Form 10-Q, filed with the Securities and Exchange Commission (the “SEC”) on August 15, 2022. Accordingly, we have attached the quarterly report on Form 10-Q to this prospectus supplement.
The Prospectus and this prospectus supplement relate to the offer and sale from time to time by the selling securityholders named in this prospectus (the “Selling Securityholders”) of (A) up to 229,657,978 shares of our Class A common stock, par value $0.0001 per share (“Class A common stock” or “common stock”), consisting of (i) up to 29,125,620 shares of our Class A common stock (the “Prior PIPE Shares”) issued in a private placement pursuant to subscription agreements each entered into on February 9, 2021 (the “Prior PIPE Investment”); (ii) up to 11,068,750 shares of our Class A common stock (the “Founder Shares”) issued in connection with the consummation of the Business Combination (as defined below), in exchange for shares of our Class B common stock originally issued in a private placement to CMLS Holdings LLC (the “Former Sponsor”); (iii) up to 182,917,984 shares of our Class A common stock issued or issuable to certain former stockholders and equity award holders of Sema4 (the “Sema4 equity holders”) in connection with or as a result of the consummation of the Business Combination, consisting of (a) up to 149,856,840 shares of our Class A common stock; (b) up to 14,039,568 shares of our Class A common stock issuable upon the exercise or vesting of certain equity awards; and (c) up to 19,021,576 shares of Class A common stock (the “Earn-Out Shares”) that certain Sema4 equity holders have the contingent right to receive upon the achievement of certain vesting conditions; and (iv) up to 7,236,667 shares of our Class A common stock issuable upon the exercise of the private placement warrants (as defined below); and (B) up to 7,236,667 warrants (the “private placement warrants”) originally issued in a private placement to the Former Sponsor and certain of the other Initial Stockholders (as defined in the Prospectus).
In addition, the Prospectus and this prospectus supplement relate to the offer and sale of: (i) up to 14,758,305 shares of our Class A common stock that are issuable by us upon the exercise of 14,758,305 warrants (the “public warrants”) originally issued in our initial public offering (the “IPO”); and (ii) up to 7,236,667 shares of our Class A common stock that are issuable by us upon the exercise of the private placement warrants following the public resale of the private placement warrants by the Selling Securityholders pursuant to the Prospectus and this prospectus supplement.
Our common stock and public warrants are listed on the Nasdaq Global Select Market (the “Nasdaq”) under the symbol “SMFR” and “SMFRW”, respectively. On August 11, 2022, the last reported sales price of our common stock was $2.17 per share and the last reported sales price of our public warrants was $0.42 per warrant.
This prospectus supplement updates and supplements the information in the Prospectus and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus, including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectus and if there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement.
We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, and, as such, have elected to comply with certain reduced disclosure and regulatory requirements.
Investing in our securities involves risks. See the section entitled “Risk Factors” beginning on page 9 of the Prospectus to read about factors you should consider before buying our securities.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus supplement is August 15, 2022
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended June 30, 2022
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 001-39482
Sema4 Holdings Corp.
(Exact name of registrant as specified in its charter)
| Delaware | 85-1966622 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
333 Ludlow Street, North Tower, 8th Floor Stamford, Connecticut | 06902 | ||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||
(800) 298-6470
Registrant's telephone number, including area code
(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, par value $0.0001 per share | SMFR | The Nasdaq Global Select Market | ||||||
| Warrants to purchase one share of Class A common stock, each at an exercise price of $11.50 per share | SMFRW | 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 x No o
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. (Check one):
| Large accelerated filer | o | Accelerated filer | o | ||||||||
| Non-accelerated filer | x | Smaller reporting company | x | ||||||||
| Emerging growth company | x | ||||||||||
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The registrant had outstanding 380,641,510 shares of Class A common stock as of August 9, 2022.
Table of Contents
| Page | ||||||||
Cautionary Note Regarding Forward Looking Statements | ||||||||
EXPLANATORY NOTE
Unless otherwise stated in this report or the context otherwise requires, references to:
•the “Company,” “Sema4” and “we,” “us” and “our” refer to (i) Mount Sinai Genomics, Inc. d/b/a as Sema4, or Legacy Sema4, prior to the consummation of our business combination with CM Life Sciences, Inc., or CMLS, on July 22, 2021 and (ii) Sema4 Holdings Corp. and its consolidated subsidiaries following the consummation of our business combination.
•“GeneDx” refer to GeneDx, LLC, a Delaware limited liability company (formerly, GeneDx, Inc., a New Jersey corporation), which we acquired on April 29, 2022.
4
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. The words “anticipate,” “believe,” “estimate,” “may,” “expect” and similar expressions are generally intended to identify forward-looking statements. Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, as well as other factors which may be identified from time to time in our other filings with the Securities and Exchange Commission, or the SEC, or in the documents where such forward-looking statements appear. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Such forward-looking statements include, but are not limited to, statements about:
•our estimates of the sufficiency of our existing capital resources combined with future anticipated cash flows to finance our operating requirements
•our expected losses;
•our expectations for incurring capital expenditures
•unforeseen circumstances or other disruptions to normal business operations, including supply chain interruptions and manufacturing constraints, arising from or related to the ongoing COVID-19 pandemic;
•our ability to realize the benefits expected from our April 2022 acquisition of GeneDx;
•our expectations regarding our plans to exit our somatic tumor testing business and the associated cost savings and impact on our gross margins;
•our expectations for generating revenue or becoming profitable on a sustained basis;
•our expectations or ability to enter into service, collaboration and other partnership agreements;
•our expectations or ability to build our own commercial infrastructure to scale market and sell our products;
•actions or authorizations by the U.S. Food and Drug Administration, or the FDA, or other regulatory authorities;
•risks related to governmental regulation and other legal obligations, including privacy, data protection, information security, consumer protection, and anti-corruption and anti-bribery;
•our ability to obtain and maintain intellectual property protection for our product candidates;
•our ability to compete against existing and emerging technologies;
•our stock price and its volatility;
•our ability to attract and retain key personnel;
•third-party payor reimbursement and coverage decisions, negotiations and settlements;
•our reliance on third-party laboratories and service providers for our test volume in connection with our diagnostic solutions and data programs;
•our ability to satisfy Nasdaq listing rules;
•our expectations for future capital requirements;
•our accounting estimates, including the adequacy of our reserves for third party payor claims and our estimates of the fair value of the milestone payments related to the GeneDx acquisition; and
•our ability to successfully implement our business strategy.
The forward-looking statements contained in this report reflect our views and assumptions only as of the date that this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.
We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
5
Part I - Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
6
Sema4 Holdings Corp.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
| June 30, 2022 (unaudited) | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 284,647 | $ | 400,569 | |||||||
| Accounts receivable, net | 45,803 | 26,509 | |||||||||
| Due from related parties | 1,110 | 54 | |||||||||
| Inventory, net | 41,601 | 33,456 | |||||||||
| Prepaid expenses | 21,547 | 19,154 | |||||||||
| Other current assets | 7,993 | 3,802 | |||||||||
| Total current assets | $ | 402,701 | $ | 483,544 | |||||||
| Operating lease right-of-use assets | 44,038 | — | |||||||||
| Property and equipment, net | 89,455 | 62,719 | |||||||||
| Intangible assets, net | 193,663 | — | |||||||||
| Goodwill | 181,184 | — | |||||||||
| Restricted cash | 14,370 | 900 | |||||||||
| Other assets | 7,869 | 6,930 | |||||||||
| Total assets | $ | 933,280 | $ | 554,093 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | 115,878 | $ | 64,801 | |||||||
| Due to related parties | 2,354 | 2,623 | |||||||||
| Contract liabilities | — | 473 | |||||||||
| Short-term lease liabilities | 4,755 | — | |||||||||
| Other current liabilities | 81,619 | 33,387 | |||||||||
| Total current liabilities | $ | 204,606 | $ | 101,284 | |||||||
| Long-term debt, net of current portion | 11,000 | 11,000 | |||||||||
| Long-term lease liabilities | 62,806 | — | |||||||||
| Other liabilities | 500 | 21,907 | |||||||||
| Deferred taxes | 2,668 | — | |||||||||
| Warrant liability | 7,258 | 21,555 | |||||||||
| Earn-out contingent liabilities | 7,168 | 10,244 | |||||||||
| Total liabilities | $ | 296,006 | $ | 165,990 | |||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred Stock, $0.0001 par value: 1,000,000 and 0 shares authorized at June 30, 2022 and December 31, 2021, respectively; 0 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | — | — | |||||||||
Class A common stock, $0.0001 par value, 1,000,000,000 shares authorized, 379,896,799 shares issued and outstanding at June 30, 2022 and $0.0001 par value: 380,000,000 shares authorized, 242,647,604 shares issued and outstanding at December 31, 2021 | 38 | 24 | |||||||||
Additional paid-in capital | 1,375,315 | $ | 963,520 | ||||||||
Accumulated deficit | (738,079) | (575,441) | |||||||||
Total stockholders’ equity | 637,274 | 388,103 | |||||||||
Total liabilities and stockholders’ equity | $ | 933,280 | $ | 554,093 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Sema4 Holdings Corp.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
(unaudited)
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 (1) | 2022 | 2021 (1) | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
Diagnostic test revenue (including related party revenue of $413 and $37 for the three months ended and $583 and $70 for the six months ended June 30, 2022 and 2021, respectively) | $ | 34,004 | $ | 44,803 | $ | 86,499 | $ | 107,563 | |||||||||||||||
Other revenue (including related party revenue of $73 and $62 for the three months and $147 and $89 for the six months ended June 30, 2022 and 2021, respectively) | 2,165 | 2,212 | 3,611 | 3,653 | |||||||||||||||||||
Total revenue | 36,169 | 47,015 | 90,110 | 111,216 | |||||||||||||||||||
Cost of services (including related party expenses of $1,348 and $1,008 for the three months ended and $2,404 and $1,286 for the six months ended June 30, 2022 and 2021, respectively) | 65,767 | 48,179 | 114,083 | 116,703 | |||||||||||||||||||
Gross profit (loss) | (29,598) | (1,164) | (23,973) | (5,487) | |||||||||||||||||||
Research and development | 27,168 | 11,952 | 48,483 | 65,085 | |||||||||||||||||||
Selling and marketing | 36,118 | 18,574 | 65,665 | 53,940 | |||||||||||||||||||
General and administrative | 68,034 | 12,870 | 110,818 | 114,908 | |||||||||||||||||||
Related party expenses | 1,731 | 888 | 3,015 | 2,685 | |||||||||||||||||||
Loss from operations | (162,649) | (45,448) | (251,954) | (242,105) | |||||||||||||||||||
Other income (expense), net: | |||||||||||||||||||||||
| Change in fair market value of warrant and earn-out contingent liabilities | 28,182 | — | 41,372 | — | |||||||||||||||||||
Interest income | 382 | 9 | 409 | 30 | |||||||||||||||||||
Interest expense | (790) | (722) | (1,598) | (1,445) | |||||||||||||||||||
Other income | 56 | — | 56 | 5,584 | |||||||||||||||||||
Total other income (expense), net | 27,830 | (713) | 40,239 | 4,169 | |||||||||||||||||||
Loss before income taxes | $ | (134,819) | $ | (46,161) | $ | (211,715) | $ | (237,936) | |||||||||||||||
Income tax benefit | 49,077 | — | 49,077 | — | |||||||||||||||||||
Net loss and comprehensive loss | $ | (85,742) | $ | (46,161) | $ | (162,638) | $ | (237,936) | |||||||||||||||
Weighted average shares outstanding of Class A common stock | 337,752,029 | 1,100,734 | 291,318,351 | 826,778 | |||||||||||||||||||
Basic and diluted net loss per share, Class A common stock | $ | (0.25) | $ | (41.94) | $ | (0.56) | $ | (287.79) | |||||||||||||||
(1) As previously disclosed in Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, certain adjustments were made to reclassify certain expenses between cost of services and operating expenses. The adjustments are reflected as disclosed.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
Sema4 Holdings Corp.
Condensed Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
(in thousands, except share amounts)
(unaudited)
| Three months ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Class A Common Stock | Additional paid-in capital | Accumulated deficit | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Par value | Shares | Par value | |||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2022 | $ | — | 245,154,475 | $ | 24 | $ | 981,757 | $ | (652,337) | $ | 329,444 | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (85,742) | (85,742) | |||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | 4,216,674 | 1 | 1,191 | 1,192 | ||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | 22,721 | 22,721 | ||||||||||||||||||||||||||||||||||||||
| Shares issued for PIPE, net of issuance costs | — | — | 50,000,000 | 5 | 197,654 | — | 197,659 | |||||||||||||||||||||||||||||||||||||
| Shares issued for acquisition (1) | — | — | 80,000,000 | 8 | 171,992 | — | 172,000 | |||||||||||||||||||||||||||||||||||||
| Vested restricted stock units converted to common stock | — | — | 525,650 | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balances at June 30, 2022 | — | $ | — | 379,896,799 | $ | 38 | $ | 1,375,315 | $ | (738,079) | $ | 637,274 | ||||||||||||||||||||||||||||||||
| Six months ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Redeemable Convertible Preferred Stock | Class A Common Stock | Additional paid-in capital | Accumulated deficit | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Par value | |||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | $ | — | 242,647,604 | $ | 24 | $ | 963,520 | $ | (575,441) | $ | 388,103 | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | $ | (162,638) | (162,638) | ||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | 6,325,176 | 1 | 1,869 | — | 1,870 | |||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | 40,280 | — | 40,280 | |||||||||||||||||||||||||||||||||||||
| Shares issued for PIPE, net of issuance costs | — | — | 50,000,000 | 5 | 197,654 | — | 197,659 | |||||||||||||||||||||||||||||||||||||
| Shares issued for acquisition (1) | — | — | 80,000,000 | 8 | 171,992 | — | 172,000 | |||||||||||||||||||||||||||||||||||||
| Vested restricted stock units converted to common stock | — | — | 924,019 | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Balances at June 30, 2022 | — | $ | — | 379,896,799 | $ | 38 | $ | 1,375,315 | $ | (738,079) | $ | 637,274 | ||||||||||||||||||||||||||||||||
(1) Of the 80 million shares issued for acquisition, 8.3 million shares are held by an escrow agent for a one year escrow period During this period, the seller retains all rights with respect to the escrow shares, including voting rights and rights to receive dividends and other distributions on such escrow shares.
9
Sema4 Holdings Corp.
Condensed Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
(in thousands, except share amounts)
(unaudited)
Three months ended June 30, 2021 (1)
| Redeemable Convertible Preferred Stock | Class A Common Stock | Class B Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Par value | Shares | Par Value | Additional paid-in capital | Accumulated deficit (1) | Total stockholders' deficit | ||||||||||||||||||||||||||||||||||||||||||||||||
Balances at March 31, 2021 | 171,535,213 | $ | 334,439 | 124 | $ | — | 748,761 | $ | — | $ | — | $ | (521,826) | $ | (521,826) | |||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | — | — | (46,161) | (46,161) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | 4,334 | — | 634,975 | — | 1,483 | — | 1,483 | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 171,535,213 | $ | 334,439 | 4,458 | $ | — | 1,383,736 | $ | — | $ | 1,483 | $ | (567,987) | $ | (566,504) | |||||||||||||||||||||||||||||||||||||||||
Six months ended June 30, 2021 (1)
| Redeemable Convertible Preferred Stock | Class A Common Stock | Class B Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Par value | Shares | Par Value | Additional paid-in capital | Accumulated deficit (1) | Total stockholders' deficit | ||||||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2020 | 171,535,213 | $ | 334,439 | 124 | $ | — | 130,557 | $ | — | $ | — | $ | (330,051) | $ | (330,051) | |||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | — | — | (237,936) | (237,936) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | 4,334 | — | 1,253,179 | — | 1,483 | — | 1,483 | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 171,535,213 | $ | 334,439 | 4,458 | $ | — | 1,383,736 | $ | — | $ | 1,483 | $ | (567,987) | $ | (566,504) | |||||||||||||||||||||||||||||||||||||||||
(1) As previously disclosed in Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, certain adjustments were made which impacted previously reported net loss for the second quarter of 2021 and the adjusted net loss is reflected as disclosed.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
Sema4 Holdings Corp.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Six months ended June 30, | |||||||||||
| 2022 | 2021 (1) | ||||||||||
| Operating activities | |||||||||||
Net loss | $ | (162,638) | $ | (237,936) | |||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
Depreciation and amortization expense | 14,767 | 10,521 | |||||||||
Stock-based compensation expense | 40,280 | 164,443 | |||||||||
Change in fair value of warrant and earn-out contingent liabilities | (41,372) | — | |||||||||
| Income tax benefit | (49,077) | — | |||||||||
Provision for excess and obsolete inventory | 347 | 2,466 | |||||||||
Non-cash lease expense | 331 | 383 | |||||||||
| Amortization of deferred debt issuance costs | 257 | — | |||||||||
Change in operating assets and liabilities, net of effects from purchase of business: | |||||||||||
Accounts receivable | 2,357 | 7,476 | |||||||||
Inventory | (2,282) | (6,632) | |||||||||
Prepaid expenses and other current assets | 2,910 | (9,697) | |||||||||
Due to/from related parties | (1,325) | (295) | |||||||||
Other assets | (1,126) | — | |||||||||
Accounts payable and accrued expenses | 35,712 | 10,028 | |||||||||
Contract liabilities | (473) | (442) | |||||||||
Other current liabilities | (4,807) | (7,824) | |||||||||
Net cash used in operating activities | (166,139) | (67,509) | |||||||||
Investing activities | |||||||||||
| Purchase of business, net of cash acquired | (127,004) | — | |||||||||
Purchases of property and equipment | (2,748) | (3,320) | |||||||||
Development of internal-use software assets | (4,458) | (6,155) | |||||||||
Net cash used in investing activities | (134,210) | (9,475) | |||||||||
Financing activities | |||||||||||
| Proceeds from PIPE issuance, net of issuance costs | 197,712 | — | |||||||||
| Payment of deferred transaction costs | — | (2,779) | |||||||||
| Finance lease principal payments | (1,634) | (1,994) | |||||||||
| Long-term debt principal payments | — | (848) | |||||||||
| Exercise of stock options | 1,819 | 974 | |||||||||
Net cash provided by (used) in financing activities | 197,897 | (4,647) | |||||||||
Net decrease in cash, cash equivalents and restricted cash | (102,452) | (81,631) | |||||||||
Cash, cash equivalents and restricted cash, at beginning of period | 401,469 | 118,960 | |||||||||
Cash, cash equivalents and restricted cash, at end of period | $ | 299,017 | $ | 37,329 | |||||||
Supplemental disclosures of cash flow information | |||||||||||
Cash paid for interest | $ | 1,193 | $ | 1,445 | |||||||
Cash paid for taxes | $ | 365 | $ | — | |||||||
| Stock consideration paid for purchase of business | $ | 172,000 | $ | — | |||||||
Purchases of property and equipment in accounts payable and accrued expenses | $ | 3,243 | $ | 87 | |||||||
Software development costs in accounts payable and accrued expenses | $ | 1,118 | $ | 1,225 | |||||||
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Sema4 Holdings Corp.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Unpaid deferred transaction costs included in accounts payable and accrued expenses | $ | 53 | $ | 5,799 | |||||||
| Non-cash impact of shares reclass into APIC | $ | — | $ | 1,483 | |||||||
(1) As previously disclosed in Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, certain adjustments were made to certain liability accounts previously reported in the condensed balance sheets as of June 30, 2021. The adjustments are reflected accordingly as disclosed.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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1. Organization and Description of Business
Sema4 Holdings Corp. (“Sema4 Holdings”) through its subsidiaries Sema4 OpCo, Inc., formerly Mount Sinai Genomics Inc., a Delaware corporation (“Legacy Sema4”), and GeneDx Holding 2, LLC, provides genomics-related diagnostic and information services and pursues genomics medical research. Legacy Sema4 utilizes an integrated portfolio of laboratory processes, software tools and informatics capabilities to process DNA-containing samples, analyze information about patient-specific genetic variation and generate test reports for clinicians and their patients. Legacy Sema4 provides a variety of genetic diagnostic tests and information with a focus on reproductive health, including pediatric, oncology and other conditions. Legacy Sema4 primarily serves healthcare professionals who work with their patients and bills third-party payors across the United States, with a substantial portion of its diagnostic testing volume occurring in New York, California, Florida, Connecticut and New Jersey.
On July 22, 2021 (the “Closing Date”), CM Life Sciences, Inc. (“CMLS”) completed the acquisition of Legacy Sema4, pursuant to that certain Agreement and Plan of Merger (as amended, the “Business Combination Merger Agreement”), dated February 9, 2021. On the Closing Date, S-IV Sub, Inc. merged with and into the Legacy Sema4, with Legacy Sema4 surviving the merger as a wholly-owned subsidiary of CMLS (the “Business Combination Merger” and, together with the other transactions contemplated by the Business Combination Merger Agreement, the “Business Combination”). In connection with the consummation of the Business Combination, CMLS changed its name to “Sema4 Holdings Corp.” and Legacy Sema4 changed its name to “Sema4 OpCo, Inc.” All equity securities of Legacy Sema4 were converted into the right to receive the applicable portion of the merger consideration.
The Business Combination Merger was accounted for as a reverse recapitalization with Legacy Sema4 as the accounting acquirer and CMLS as the acquired company for accounting purposes. The shares and net loss per common share, prior to the Business Combination Merger, have been retroactively restated as shares reflecting the exchange ratio established in the Business Combination Merger (1 share of Legacy Sema4 Class A common stock for 123.8339 shares of Sema4 Holdings Class A common stock (the “Class A common stock”) (the “Conversion Ratio”).
Prior to the Business Combination Merger, shares of CMLS Class A common stock, CMLS’s public warrants, and CMLS’s public units were traded on the Nasdaq Capital Market under the ticker symbols “CMLF”, “CMFLW”, and “CMLFU” respectively. On July 23, 2021, shares of Sema4 Holdings Class A common stock and Sema4 Holdings’ public warrants began trading on the Nasdaq Global Select Market (the “Nasdaq”) under the ticker symbols “SMFR” and “SMFRW,” respectively.
In addition, on April 29, 2022, the Company consummated the transactions contemplated by that certain Agreement and Plan of Merger, dated as of January 14, 2022 (as amended, the “ Acquisition Merger Agreement”), by and among the Company and GeneDx, Inc. (“GeneDx”), a New Jersey corporation and wholly-owned subsidiary of OPKO Health, Inc. (“OPKO”), GeneDx Holding 2, Inc., which held 100% of GeneDx (“Holdco2”), at the Effective Time (as defined in the Acquisition Merger Agreement) and OPKO, which provided for, among other things, the acquisition of GeneDx from OPKO. After giving effect to the mergers and the other transactions contemplated by the Acquisition Merger Agreement (the “Acquisition”), GeneDx was converted into a Delaware limited liability company and became the Company’s wholly-owned indirect subsidiary.
See Note 3, “Business Combination,” for additional details regarding the Business Combination and Acquisition.
Unless otherwise stated herein or unless the context otherwise requires, references in these notes to the “Company,” or “Sema4” refer to (i) Legacy Sema4 prior to the consummation of the Business Combination; and (ii) Sema4 Holdings and its subsidiaries following the consummation of the Business Combination.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the accounting disclosure rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
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As such, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto as of and for the years ended December 31, 2021, 2020 and 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 21, 2021 filed on March 14, 2022 (the “Annual Report”).
The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to state fairly the results for the interim periods presented. Interim results are not necessarily indicative of the results of operations or cash flows for a full year or any subsequent interim period.
The Company’s historical financial information includes costs of certain services historically provided by Icahn School of Medicine at Mount Sinai (“ISMMS”) pursuant to a Transition Services Agreement ("TSA") and service agreements. See Note 7, “Related Party Transactions”.
As discussed in the Company’s Annual Report, the Company identified the misclassification of certain expenses and out of period adjustments generally related to the recognition of cost of services. The impact of these adjustments were disclosed in the Company’s Annual Report and are reflected in the condensed consolidated statements of operations and comprehensive loss, condensed consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit) and condensed consolidated statements of cash flows for the period ended June 30, 2021.
Although the Company has incurred recurring losses in each year since inception, the Company expects its cash and cash equivalents will be sufficient to fund operations for at least the next twelve months from the date of filing of this Form 10-Q.
Segment Information
The Company operates and manages its business as one reportable operating segment based on how the Chief Executive Officer, who is the Company’s chief operating decision maker (“CODM”), assesses performance and allocates resources across the business.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the unaudited condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. The Company bases these estimates on current facts, historical and anticipated results, trends and various other assumptions that it believes are reasonable in the circumstances, including assumptions as to future events. These estimates include, but are not limited to, the transaction price for certain contracts with customers, potential or actual claims for recoupment from third-party payors, the capitalization of software costs and the valuation of stock-based awards, inventory, earn-out contingent liabilities and earn-out Restricted Stock Units (“RSUs”). Actual results could differ materially from those estimates, judgments and assumptions.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.
The Company’s cash and cash equivalents are deposited with high-quality financial institutions. The Company has balances in financial institutions that exceed federal depository insurance limits. Management believes these financial institutions are financially sound and, accordingly, that minimal credit risk exists. The Company has not experienced any losses on its deposits of cash and cash equivalents.
The Company assesses both the self-pay patient and, if applicable, the third-party payor that reimburses the Company on the patient’s behalf when evaluating the concentration of credit risk. Significant customers and payors are those that represent more than 10% of the Company’s total revenues for the period or accounts receivable balance at each respective balance sheet date. The significant concentrations of accounts receivable as of June 30, 2022 and December 31, 2021 were primarily from large managed care insurance companies and a reference laboratory. There was no individual patient that
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accounted for 10% or more of the Company’s revenue or accounts receivable for any of the periods presented. The Company does not require collateral as a means to mitigate customer credit risk.
For each significant payor, revenue as a percentage of total revenues and accounts receivable as a percentage of total accounts receivable are as follows:
| Revenue | Accounts Receivable | ||||||||||||||||||||||||||||||||||
| Three months ended June 30, | Six months ended June 30, | As of June 30, | As of December 31, | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||
| Payor A (**) | * | 21% | * | 17% | 22% | 15% | |||||||||||||||||||||||||||||
Payor B | * | * | * | * | * | 15% | |||||||||||||||||||||||||||||
Payor C | 12% | 13% | 10% | 13% | * | * | |||||||||||||||||||||||||||||
Payor D | 10% | * | 10% | 10% | * | * | |||||||||||||||||||||||||||||
Payor E | 19% | * | * | * | * | * | |||||||||||||||||||||||||||||
** This payor represented less than 10% of the Company’s total revenues during the second quarter of 2022 due to a reversal of revenue recorded for this payor in the quarter due to this payor’s allegation regarding certain overpayments the Company allegedly received from this payor for services alleged to be uncovered by, or were not otherwise properly billed to, this payor. Refer to Note 4, “Revenue Recognition.”
The Company is subject to a concentration of risk from a limited number of suppliers for certain reagents and laboratory supplies. One supplier accounted for approximately 13% and 10% for the three months ended June 30, 2022 and 2021, respectively and 13% and 11% for the six months ended June 30, 2022 and 2021, respectively. This risk is managed by maintaining a target quantity of surplus stock.
Impact of COVID-19
Beginning in April 2020, the Company’s diagnostic test volumes decreased significantly as compared to the prior year as a result of the initial outbreak of the COVID-19 pandemic and the related limitations and priorities across the healthcare system. In response, beginning in May 2020, the Company entered into several service agreements with state governments and healthcare institutions to provide testing for the presence of COVID-19 variants. While test volumes have since improved, the Company continues to experience changes in the mix of tests due to the impact of the COVID-19 pandemic. COVID-19 could continue to have a material impact on the Company’s results of operations, cash flows and financial condition for the foreseeable future.
In March 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law which was a stimulus bill that, among other things, provided assistance to qualifying businesses and individuals and included funding for the healthcare system. During 2020, as part of the stimulus provided by the CARES Act, the Company received $5.4 million, comprised of $2.6 million received under the Provider Relief Fund (“PRF”) distribution and $2.8 million received under the Employee Retention Credit (“ERC”) distribution which was recorded in other current liabilities and reflected in this balance as of June 30, 2022 and December 31, 2021.
During the three months ended March 31, 2021, the Company received an additional $5.6 million under the PRF distribution, which was recognized in other income in the condensed consolidated statements of operations and comprehensive loss.
Additionally, under the CARES Act, the Company deferred payment of U.S. social security taxes in 2020. As a result, $3.8 million of employer payroll tax payments were initially deferred as of December 31, 2020 with $1.9 million paid in December 2021 and the remaining $1.9 million payment will be made in December 2022. As of June 30, 2022, the remaining payable is recorded in other current liabilities.
Following the Company’s announcement that it would discontinue COVID-19 testing services by March 31, 2022, the Company no longer provides COVID-19 testing services. During the six months ended June 30, 2022, the Company wrote off an accounts receivable balance of $0.5 million related to COVID-19 testing services.
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Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist of amounts invested in money market funds. Carrying values of cash equivalents approximate fair value due to the short-term nature of these instruments.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the condensed consolidated balance sheets that sum to the total of the same amounts shown on the condensed consolidated statements of cash flows (in thousands):
As of June 30, 2022 | As of December 31, 2021 | ||||||||||
| Cash and cash equivalents | $ | 284,647 | $ | 400,569 | |||||||
| Restricted cash | 14,370 | 900 | |||||||||
| Total | $ | 299,017 | $ | 401,469 | |||||||
Restricted cash as of June 30, 2022 includes $13.5 million escrow fund as restricted cash related to the closing of the GeneDx Acquisition. The escrow amount is to be held for a period of 12 months following the closing date of the Acquisition as a fund for OPKO’s indemnification obligations pursuant to the Acquisition Merger Agreement. In addition, restricted cash as of June 30, 2022 consists of money market deposit accounts that secure an irrevocable standby letter of credit that serves as collateral for security deposit operating leases (see Note 9, “Leases”).
Business Combinations
The Company accounts for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. The tangible and identifiable intangible assets acquired and liabilities assumed in a business combination are recorded based on their estimated fair values as of the business combination date, including identifiable intangible assets which either arise from a contractual or legal right or are separable from goodwill. The Company bases the estimated fair value of identifiable intangible assets acquired in a business combination on third-party valuations that use information and assumptions provided by the Company’s management, which consider estimates of inputs and assumptions that a market participant would use. Any excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities assumed is recorded to goodwill. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, estimated cost savings, cash flows, discount rates, estimated useful lives and probabilities surrounding the achievement of contingent milestones could result in different purchase price allocations and amortization expense in current and future periods.
Intangible Assets
Amortizable intangible assets include trade names and trademarks, developed technology and customer relationships acquired as part of business combinations. Intangible assets acquired through our business combinations in the second quarter of 2022 are amortized on a straight line basis. All intangible assets subject to amortization are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment.
Goodwill
In accordance with ASC 350, Intangibles-Goodwill and Other, the Company’s goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Under ASC 350, the Company will perform annual impairment reviews of goodwill during the fourth fiscal quarter or more frequently if business factors indicate. The Company did not incur any goodwill impairment losses during the second quarter ended June 30, 2022.
Warrant Liability
As of the consummation of the Business Combination Merger in July 2021, there were 21,995,000 warrants to purchase shares of Class A common stock outstanding, including 14,758,333 public warrants and 7,236,667 private placement warrants. As of December 31, 2021, there were 21,994,972 warrants to purchase shares of Class A common
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stock outstanding, including 14,758,305 public warrants and 7,236,667 private placement warrants outstanding. Each warrant expires five years after the Business Combination or earlier upon redemption or liquidation, and entitles the holder to purchase one share of Class A common stock at an exercise price of $11.50 per share, subject to adjustment, at any time commencing on September 4, 2021.
The Company may redeem the outstanding public warrants if the price per share of the Class A common stock equals or exceeds $18.00 as described below:
•in whole and not in part;
•at a price of $0.01 per public warrant;
•upon not less than 30 days’ prior written notice of redemption to each warrant holder; and
•if, and only if, the closing price of the Class A common stock equals or exceeds $18.00 per share (as adjusted) for any 20 trading days within a 30-trading day period ending three trading days before sending the notice of redemption to warrant holders.
The Company may redeem the outstanding public warrants if the price per share of the common stock equals or exceeds $10.00 as described below:
•in whole and not in part;
•at $0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive that number of shares based on the redemption date and the fair market value of the common stock;
•if, and only if, the closing price of the Class A common stock equals or exceeds $10.00 per share (as adjusted) for any 20 trading days within the 30-trading day period ending three trading days before the Company sends the notice of redemption to the warrant holders; and
•if the closing price of the common stock for any 20 trading days within a 30-trading day period ending three trading days before the Company sends notice of redemption to the warrant holders is less than $18.00 per share (as adjusted), the private placement warrants must also be concurrently called for redemption on the same terms as the outstanding public warrants, as described above.
The private placement warrants were issued to CMLS Holdings, LLC, Mr. Munib Islam, Dr. Emily Leproust and Mr. Nat Turner, and are identical to the public warrants underlying the units sold in the initial public offering, except that (1) the private placement warrants and the common stock issuable upon the exercise of the private placement warrants would not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions, (2) the private placement warrants are exercisable on a cashless basis, (3) the private placement warrants are non-redeemable (except as described above, upon a redemption of warrants when the price per share of Class A common stock equals or exceeds $10.00) so long as they are held by the initial purchasers or their permitted transferees, and (4) the holders of the private placement warrants and the common stock issuable upon the exercise of the private placement warrants have certain registration rights. If the private placement warrants are held by someone other than the initial purchasers or their permitted transferees, the private placement warrants will be redeemable by the Company and exercisable by such holders on the same basis as the public warrants.
The Company accounts for warrants as liability-classified instruments based on an assessment of the warrant terms and applicable authoritative guidance in accordance with ASC 480-Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815-Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, whether the warrants meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
Contingent consideration (GeneDx)
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In connection with the Acquisition of GeneDx, up to $150 million of contingent payments will be payable to OPKO in cash and/or shares of Company’s Class A common stock with such mix to be determined in the Company’s sole discretion,based upon achievement of 2022 and 2023 revenue milestones, pursuant to the Acquisition Merger Agreement (the “Milestone Payments”). If the Company elects to pay in shares of Class A common stock, the Acquisition Merger Agreement provides that the shares issues are to be valued at $4.86 per share.
Subject to the terms and conditions of the Acquisition Merger Agreement, (a) the first Milestone Payment of $112.5 million will become due and payable if the revenue of the GeneDx group for the fiscal year 2022 equals or exceeds $163 million and (b) the second Milestone Payment of $37.5 million will become due and payable if the revenue of the GeneDx group for the fiscal year 2023 equals or exceeds $219 million (each of clauses (a) and (b), a “Milestone Event”); provided that 80% of the Milestone Payment for the first milestone period or the second milestone period, as applicable, will become payable in respect of such period if the GeneDx group achieves 90% of the applicable Milestone Event revenue target for such period, which amount will scale on a linear basis up to 100% of the applicable Milestone Payment at 100% of the applicable revenue target. The fair value of the Milestone Payment which was determined to be $35 million as of June 30, 2022 is estimated using a Monte Carlo simulation valuation model.
Earn-out contingent liability
In connection with the Business Combination Merger, all Legacy Sema4 stockholders and option holders at that time became entitled to a pro rata share of 19,021,576 earn-out shares and earn-out RSUs. Based on an assessment of the earn-out shares for the Legacy Sema4 stockholders, the Company considered ASC 480 and ASC 815 and accounted for the earn-out shares as a liability. The Company subsequently measures the fair value of the liability at each reporting period and reports the changes in fair value recorded as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss.
The Company determined the fair value of the earn-out shares issued to the Legacy Sema4 stockholders as of June 30, 2022 was $0.2 million. The estimated fair value of the earn-out is determined using a Monte Carlo valuation analysis.
As for the earn-out RSUs for the Legacy Sema4 option holders, a total of 2.7 million RSUs were granted on December 9, 2021. The vesting of such arrangement is conditioned on the satisfaction of both a service requirement and on the satisfaction of a market-based requirement. The market-based requirement would be achieved if the Company’s stock price is greater than or equal to $13 (Triggering Event I), $15 (Triggering Event II) and $18 (Triggering Event III) during the applicable performance period, based on the volume-weighted average price for a period of at least 20 days out of 30 consecutive trading days. Therefore, the Company accounts for this arrangement in accordance with ASC 718- Compensation — Stock Compensation (“ASC 718”) and stock-based compensation expense is recognized over the longer of the expected achievement period for the market-based requirement and the service requirement. The Company recorded $0.9 million of stock-based compensation expense in relation to the earn-out RSUs for the six months ended June 30, 2022. In the event that any earn-out RSUs that are forfeited as a result of a failure to achieve the service requirement, the underlying shares will be reallocated on an annual basis to the Legacy Sema4 stockholders and to the Legacy Sema4 option holders who remain employed as of the date of such reallocation. The Company accounts for the re-allocations to Legacy Sema4 option holders as new grants.
Capitalized Internal-Use Software Costs
The Company capitalizes certain costs incurred related to the development of its software applications for internal use during the application development state. If a project constitutes an enhancement to existing software, the Company assesses whether the enhancement creates additional functionality to the software, thus qualifying the work incurred for capitalization. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred. Once the project is available for general release, capitalization ceases and the Company estimates the useful life of the asset and begins amortization.
Emerging Growth Company
The Company is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. As such, the Company is eligible for exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including reduced reporting and extended transition periods to comply with new or revised accounting standards for public business entities. The Company has elected to avail itself of this exemption and,
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therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (“Topic 842”), which requires lessees to recognize right-of-use assets and lease liabilities for most leases on their balance sheets. Expense recognition for lessees under ASC 842 is similar to current lease accounting. ASC 842 requires enhanced disclosures to help the financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted ASC 842 as of January 1, 2022, utilizing the modified retrospective adoption approach. In transition to the ASC 842, the Company elected to use the package of practical expedients permitted under the transition guidance that allowed us to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases. Additionally, the Company did not elect the hindsight practical expedient which would have permitted the use of hindsight in determining the lease term and assessing impairment. The Company elected to combine lease and non-lease components that are fixed and also elected not to recognize right-of-use assets and lease liabilities for leases with terms of 12 months or less (“short-term leases”). The adoption of the ASC 842 as of January 1, 2022, resulted in the recognition of operating lease right-of-use assets and operating lease liabilities of $39.2 million and $42.2 million, respectively. The adoption did not have material impact on finance leases. The adoption did not have material impact on the condensed consolidated statements of operations and comprehensive loss. Refer to “Note 9 Leases” for a discussion of the Company’s lease accounting following the adoption of ASC 842.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The Company adopted ASU 2021-10 effective January 1, 2022. The Company did not receive any such grants during the six months ended June 30, 2022.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The new credit losses standard changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, contract assets recognized as a result of applying ASC 606, loans and certain other instruments, entities will be required to use a new forward looking “expected loss” model that generally will result in earlier recognition of credit losses than under today’s incurred loss model. As an emerging growth company, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, with early adoption permitted. Application of the amendments is through a cumulative-effect adjustment to the opening retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.
3. Business Combinations
CMLS Business Combination
On July 22, 2021, the Company consummated the Business Combination and received net cash proceeds of $510.0 million.
Pursuant to the Business Combination, the following occurred:
•Holders of 10,188 shares of CMLS’s Class A common stock sold in its initial public offering (the “public shares”) exercised their right to have such shares redeemed for a full pro rata portion of the trust account holding the proceeds from CMLS’s initial public offering (the “IPO”), which was approximately $10.00 per share, or $101,880 in aggregate.
•Each share of CMLS’s Class B common stock was automatically converted into common stock of the Company.
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•Each share of the Legacy Sema4 Class B common stock was converted into 1/100th of a share of Legacy Sema4 Class A common stock and each share of Legacy Sema4 common stock and preferred stock was canceled and received a portion of the merger consideration, resulting in certain Legacy Sema4 stockholders receiving
•$230,665,220 of cash and the Legacy Sema4 stockholders receiving an aggregate of 178,336,298 shares of common stock of the Company.
•Pursuant to subscription agreements entered into on February 9, 2021, certain investors agreed to subscribe for an aggregate of 35,000,000 newly-issued shares of common stock at a purchase price of $10.00 per share for an aggregate purchase price of $350,000,000 (the “Business Combination PIPE Investment”). Concurrently with the closing of the Business Combination, the Company consummated the Business Combination PIPE Investment.
•After giving effect to the Business Combination Merger, the redemption of public shares and the conversion of the CMLS Class B common stock as described above, and the consummation of the Business Combination PIPE Investment, there were 240,190,402 shares of the Company’s common stock issued and outstanding.
In 2021, the Company recorded $51.8 million of transaction costs which consisted of direct, incremental legal, professional, accounting, and other third-party fees that were directly related to the execution of the Business Combination Merger in additional paid-in capital. Upon consummation of the Business Combination Merger, $9.0 million of the transaction costs relates to costs incurred by Legacy Sema4 and reclassed to offset against equity from prepaid expense and other current assets.
GeneDx Acquisition
As discussed in Note 1, on April 29, 2022, the Company completed the Acquisition of GeneDx. At the closing of the Acquisition, the Company paid OPKO gross cash consideration of $150 million (before deduction of transaction expenses and other customary purchase price adjustments) and issued to OPKO 80 million shares of the Company’s Class A common stock ($172 million based on the closing date share price of $2.15 per share). A portion of this cash ($13.4 million) and share consideration (8.3 million shares) will be held in escrow for 12 months following the closing date of the Acquisition. In addition, up to $150 million is payable following the closing of the Acquisition, if certain revenue-based milestones are achieved for each of the fiscal years ending December 31, 2022 and December 31, 2023. These milestone payments, if and to the extent earned under the terms of the Acquisition Merger Agreement, will be satisfied through the payment and/or issuance of a combination of cash and shares of the Company’s Class A common stock (valued at $4.86 per share, subject to adjustment for stock splits and similar changes), with such mix to be determined in the Company’s sole discretion. Concurrently with the closing of the Acquisition, the Company also issued and sold in private placement 50,000,000 shares of the Company’s Class A common stock to certain institutional investors for aggregate gross proceeds of $200 million (the “Acquisition PIPE Investment”).
The following table summarizes the net book values of the assets acquired and liabilities assumed as of the Acquisition closing date. The initial accounting for the Acquisition is incomplete. All amounts below could change, potentially materially, as there is significant additional information that the Company has to obtain to finalize the valuations of the assets acquired and liabilities assumed, and to establish the value of the potential intangible assets, primarily because of the proximity of the Acquisition closing date to the balance sheet date of June 30, 2022.
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| Cash and cash equivalents | $ | — | |||
| Accounts receivables | 21,651 | ||||
| Inventory | 6,210 | ||||
| Prepaid expenses | 4,671 | ||||
| Other current assets | 320 | ||||
| Property and equipment | 29,509 | ||||
| Other non-current assets | 6,464 | ||||
| Trade names and trademarks | 50,000 | ||||
| Developed technology | 48,000 | ||||
| Customer relationships | 98,000 | ||||
| Accounts payable and accrued expenses | (12,862) | ||||
| Other current liabilities | (15,781) | ||||
| Deferred tax liabilities | (51,779) | ||||
| Long-term lease liabilities | (5,798) | ||||
| Fair value of net assets acquired | 178,605 | ||||
| Goodwill (1) | 185,871 | ||||
| Aggregate purchase price | $ | 364,476 | |||
(1) Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The Acquisition of GeneDx resulted in the recognition of $181.2 million in goodwill as of June 30, 2022, which represents the excess of consideration transferred over the net assets recognized and represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized, such as assembled workforce. $0.2 million of the acquired goodwill is expected to be deductible for tax purposes.
For six months ended June 30, 2022, $12.1 million of GeneDx acquisition-related costs are reflected within General and administrative expenses in the Company’s condensed consolidated statements of operations and comprehensive loss. These costs include third-party professional firms’ services related to due diligence, advisory and legal services. The Company’s results for the three and six months ended June 30, 2022 include $26.1 million of revenue and $9.0 million of pretax loss from GeneDx.
The following table reflects the fair values and useful lives of the acquired intangible assets identified based on the Company’s preliminary purchase accounting assessments:
| April 29, 2022 | June 30, 2022 | Life (in Years) | |||||||||||||||
| Trade names and trademarks | $ | 50,000 | $ | 49,479 | 16 | ||||||||||||
| Developed technology | 48,000 | 47,000 | 8 | ||||||||||||||
| Customer relationships | 98,000 | 97,184 | 20 | ||||||||||||||
| $ | 196,000 | $ | 193,663 | ||||||||||||||
Amortization expense for trade names and trademarks and developed technology of $1.5 million was recorded in general and administrative for the three months ended June 30, 2022 within the condensed consolidated statements of operations and comprehensive loss. Amortization expense for customer relationships of $0.8 million was recorded in selling and marketing for the three months ended June 30, 2022 within the condensed consolidated statements of operations and comprehensive loss.
The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of June 30, 2022 (in thousands):
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| 2022 (remainder of the year) | $ | 7,012 | ||||||
| 2023 | 14,025 | |||||||
| 2024 | 14,025 | |||||||
| 2025 | 14,025 | |||||||
| 2026 | 14,025 | |||||||
| Thereafter | 130,551 | |||||||
| Total estimated future amortization expense | $ | 193,663 | ||||||
Pro forma financial information
The pro forma information below gives effect to the GeneDx Acquisition as if it had been completed on January 1, 2021 (“the pro forma acquisition date”). The pro forma information is not necessarily indicative of the Company’s revenue results had the Acquisition been completed on the pro forma acquisition date, nor is it necessarily indicative of the Company’s future results. The pro forma revenue information reflects GeneDx’s historic revenue and does not include any additional revenue opportunities following the Acquisition. The purchase price allocations for the assets acquired and liabilities assumed are based on preliminary valuations and are subject to change as the Company obtains additional information during the acquisition measurement period. Increases or decreases in the estimated fair values of the net assets acquired may impact the Company’s consolidated statements of operations and comprehensive loss in future periods. The Company expects that the values assigned to the assets acquired and liabilities assumed will be finalized during the one-year measurement period following the Acquisition closing date. The pro forma revenues and net loss include the following adjustments based on the Company’s preliminary analysis and are subject to change as additional analysis is performed:
•revised amortization expense resulting from the acquired intangible assets,
•historical intercompany revenue recognized by GeneDx with OPKO or other related parties,
•income tax benefits resulting from the deferred tax liabilities acquired, and
•revised stock based compensation reflecting the inducement awards issued to the GeneDx employees.
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Pro forma revenues | $ | 48,293 | $ | 76,653 | $ | 138,370 | $ | 163,665 | |||||||||||||||
| Pro forma net loss | $ | (147,732) | $ | (54,346) | $ | (243,636) | $ | (308,703) | |||||||||||||||
4. Revenue Recognition
Diagnostic Revenue
The Company’s diagnostic test revenue contracts typically consist of a single performance obligation to deliver diagnostic testing services to the ordering facility or patient and therefore allocation of the contract transaction price is generally not applicable. Revenue from diagnostic testing services is recorded at the estimated transaction price, subject to the constraint for variable consideration, upon transfer of control of the service. Control over diagnostic testing services is generally transferred at a point in time when the customer obtains control of the promised service which is upon delivery of the test.
Other Revenue
The Company enters into both short-term and long-term project-based collaboration and service agreements with third parties, whereby the Company provides diagnostic testing, research and related data aggregation reporting services.
The consideration to which the Company is entitled pursuant to its collaboration and service agreements includes non-refundable upfront payments, fixed and variable payments based upon the achievement of certain milestones during the
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contract term. Non-refundable upfront payments are generally received in advance of performing the services and, therefore, are recorded as a contract liability upon receipt. Fixed and variable milestone payments are included in the transaction price only when it is probable that doing so will not result in a significant reversal of cumulative revenue recognized when the uncertainty associated with the milestone is subsequently resolved. Revenue for such collaboration and service agreements is recognized over time using an input measure based on costs incurred to satisfy the performance obligation.
Disaggregated revenue
The following table summarizes the Company’s disaggregated revenue by payor category (in thousands):
| Three months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Diagnostic test revenue | |||||||||||
Patients with third-party insurance | $ | 21,398 | $ | 40,210 | |||||||
Institutional customers | 11,120 | 3,755 | |||||||||
Self-pay patients | 1,486 | 838 | |||||||||
Total diagnostic test revenue | 34,004 | 44,803 | |||||||||
Other revenue | 2,165 | 2,212 | |||||||||
Total | $ | 36,169 | $ | 47,015 | |||||||
| Six months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Diagnostic test revenue | |||||||||||
Patients with third-party insurance | $ | 68,860 | $ | 86,409 | |||||||
Institutional customers | 15,151 | 19,419 | |||||||||
Self-pay patients | 2,488 | 1,735 | |||||||||
Total diagnostic test revenue | 86,499 | 107,563 | |||||||||
Other revenue | 3,611 | 3,653 | |||||||||
Total | $ | 90,110 | $ | 111,216 | |||||||
Reassessment of variable consideration
Subsequent changes to the estimate of the transaction price, determined on a portfolio basis when applicable, are generally recorded as adjustments to revenue in the period of the change. The Company updates estimated variable consideration quarterly.
For the three months ended June 30, 2022, the quarterly change in estimate resulted in a net $30.1 million decrease to revenue for tests in which the performance obligation of delivering the test results was met in prior periods. $24.2 million of this decrease is related to the years December 31, 2021 and prior. The change in estimate is a result of changes in the estimated transaction price due to contractual adjustments, obtaining updated information from payors and patients that was unknown at the time the performance obligation was met and potential and actual settlements with third party payors. As described in more detail below, third-party payors may decide to deny payment or seek to recoup payments for tests performed by the Company for a number of reasons and, as a result, the Company may be required to refund payments already received, and the Company’s revenues may be subject to retroactive adjustment as a result. The Company processes requests for recoupment from third-party payors in the ordinary course of its business and reflects in the Company’s transaction price estimations. See “—Certain payor matters” below for further details regarding an ongoing matter related to certain overpayments the Company allegedly received from a third-party payor; the Company has established certain liabilities and reversed certain of its previously recorded revenue as a result of this matter and other potential settlements with payors.
Certain payor matters
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As noted above, third-party payors, including government programs, may decide to deny payment or seek to recoup payments for tests performed by the Company that they contend were improperly billed, not medically necessary or against their coverage determinations, or for which they believe they have otherwise overpaid, including as a result of their own error. As a result, the Company may be required to refund payments already received, and the Company’s revenues may be subject to retroactive adjustment as a result of these factors among others, including without limitation, differing interpretations of billing and coding guidance, and changes by government agencies and payors in interpretations, requirements, policies and/or “conditions of participation” in various programs. The Company processes requests for recoupment from third-party payors in the ordinary course of its business, and it is likely that the Company will continue to do so in the future. If a third-party payor denies payment for testing or recoups money from the Company in a later period, reimbursement and the associated recognition of revenue for the Company’s testing services could decline.
As an integral part of the Company’s billing compliance program, the Company has and will periodically assess its billing and coding practices, respond to payor audits and overpayment claims, and investigate reported failures or suspected failures to comply with federal and state healthcare reimbursement requirements, which may arise without fault on the part of the Company. From time to time, the Company may have an obligation to reimburse Medicare, Medicaid, and third-party payors for overpayments regardless of fault. Settlements with third-party payors for retroactive adjustments due to audits, reviews, or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing services. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor, the Company’s historical settlement activity (if any), and the Company’s assessment of the probability a significant reversal of cumulative revenue recognized will occur when the uncertainty is subsequently resolved. Estimated settlements are adjusted in future periods as such adjustments become known (that is, if new information becomes available), or as years are settled or are no longer subject to such audits, reviews, and investigations.
The Company is currently engaged in discussions with one of the Company’s third-party payors regarding certain overpayments the Company allegedly received from the payor for services that the payor alleges are not covered by, or were not otherwise properly billed to, the payor. This payor has asserted in informal discussions that it will seek recovery or recoupment in relation to the alleged overpayments if the matter cannot be settled. While the Company believes it has defenses to the payor’s allegations, it is currently engaged in discussions seeking to resolve the matter and any claim that may arise in connection therewith in a mutually satisfactory manner.
As a result of this matter, and in connection with a review of certain billing policies and procedures undertaken by management following the acquisition of GeneDx, the Company considered the need to establish reserves for potential recoupments of payments previously made by third-party payors. As of June 30, 2022, the Company has established liabilities of $39.2 million as a result of this matter and other potential settlements with payors based on the current facts and an evaluation of anticipated results that the Company believes reasonable for all potential recoupments for all third-party payors combined. This amount is included in Accounts payable and accrued expenses. See Note 15, “Supplemental Financial Information”. The Company uses estimates, judgments, and assumptions to assess whether it is probable that a significant reversal in the amount of cumulative revenue may occur in future periods, based upon information presently available. These estimates are subject to change. In addition, as discussed above, the Company has made certain adjustments to its estimated variable consideration as result of this matter and other potential settlements with payors.
Remaining performance obligations
For certain long-term collaboration service agreements with original expected durations of more than one year, the Company’s obligations pursuant to such agreement represents partially unsatisfied performance obligations as of June 30, 2022. The revenues under the agreements are estimated to be approximately $9.0 million. The Company expects to recognize the majority of this revenue over the next 3 years.
Contract assets and liabilities
Contract assets consist of the Company’s right to consideration that is conditional upon its future performance. Contract assets arise in collaboration and service agreements for which revenue is recognized over time but the Company’s right to bill the customer is contingent upon the achievement of contractually-defined milestones.
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Contract liabilities consist of customer payments in excess of revenues recognized. For collaboration and service agreements, the Company assesses the performance obligations and recognizes contract liabilities as current or non-current based upon forecasted performance.
A reconciliation of the beginning and ending balances of contract assets and contract liabilities is shown in the table below (in thousands):
Contract Assets | Contract Liabilities | ||||||||||
December 31, 2021 | $ | 3,296 | $ | 3,769 | |||||||
Contract asset additions | 1,067 | — | |||||||||
Customer prepayments | — | 350 | |||||||||
Revenue recognized | — | (945) | |||||||||
June 30, 2022 | $ | 4,363 | $ | 3,174 | |||||||
The Company presents contract assets and contract liabilities with respect to customer contracts on a net basis on its condensed consolidated balance sheets. As of June 30, 2022, there were no current contract liabilities recorded and $0.5 million recorded as of December 31, 2021.
Revenues recognized that were included in the contract liability balance at the beginning of each period were $0.2 million and $1.5 million for the three months ended June 30, 2022 and June 30, 2021, respectively and $0.7 million and $2.2 million for the six months ended June 30, 2022 and June 30, 2021, respectively.
Costs to fulfill contracts
Costs associated with fulfilling the Company’s performance obligations pursuant to its collaboration service agreements include costs for services that are subcontracted to ISMMS. Amounts prepaid are expensed in line with the pattern of revenue recognition. Prepayment of amounts prior to the costs being incurred are recognized on the condensed consolidated balance sheets as current or non-current based upon forecasted performance.
As of June 30, 2022 and December 31, 2021, the Company had outstanding deferred costs to fulfill contracts of $0.8 million and $1.8 million, respectively. As of June 30, 2022 and December 31, 2021, all outstanding deferred costs were recorded as other current assets.
Amortization of deferred costs was $0.7 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively and $1.0 million and $0.5 million for the six months ended June 30, 2022 and 2021, respectively. The amortization of these costs is recorded in the cost of services on the condensed consolidated statements of operations and comprehensive loss.
5. Fair Value Measurements
Financial assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. The following hierarchy lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2: Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active or model-derived valuations whose significant inputs are observable.
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Level 3: Unobservable inputs that are significant to the measurement of fair value but are supported by little to no market data.
The Company’s financial assets and liabilities consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, finance leases, warrant liability, earn-out contingent liability and long-term debt. The Company’s cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the relatively short-term nature of these accounts.
The Company’s finance leases are classified within Level 1 of the fair value hierarchy because such finance lease agreements bear interest at rates for instruments with similar characteristics; accordingly, the carrying value of these liabilities approximate their fair values.
The Company’s loan from the Connecticut Department of Economic and Community Development is classified within Level 2 of the fair value hierarchy. As of June 30, 2022, the long-term debt was recorded at its carrying value of $11.0 million in the condensed consolidated balance sheet. The fair value was $8.9 million, which is estimated based on discounted cash flows using the yields of similar debt instruments of other companies with similar credit profiles.
The following tables set forth the fair value of financial instruments that were measured at fair value on a recurring basis (in thousands):
As of June 30, 2022 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||
Money market funds | $ | 54,407 | $ | 54,407 | $ | — | $ | — | |||||||||||||||
Total financial assets | $ | 54,407 | $ | 54,407 | $ | — | $ | — | |||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||
Public warrant liability | $ | 4,870 | $ | 4,870 | $ | — | $ | — | |||||||||||||||
Private warrant liability | 2,388 | — | 2,388 | — | |||||||||||||||||||
| Earn-out contingent liability | 168 | — | — | 168 | |||||||||||||||||||
| Contingent consideration based on milestone achievement | 35,000 | — | — | 35,000 | |||||||||||||||||||
Total financial liabilities | $ | 42,426 | $ | 4,870 | $ | 2,388 | $ | 35,168 | |||||||||||||||
As of December 31, 2021 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||
Money market funds | $ | 385,370 | $ | 385,370 | $ | — | $ | — | |||||||||||||||
Total financial assets | $ | 385,370 | $ | 385,370 | $ | — | $ | — | |||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||
Public warrant liability | $ | 14,463 | $ | 14,463 | $ | — | $ | — | |||||||||||||||
Private warrant liability | 7,092 | — | 7,092 | — | |||||||||||||||||||
| Earn-out contingent liability | 10,244 | — | — | 10,244 | |||||||||||||||||||
Total financial liabilities | $ | 31,799 | $ | 14,463 | $ | 7,092 | $ | 10,244 | |||||||||||||||
Of the $284.6 million cash and cash equivalents presented on the condensed consolidated balance sheets as of June 30, 2022, $54.4 million was in money market funds and was classified within Level 1 of the fair value hierarchy as the fair value was based on quoted prices in active markets.
The Company’s outstanding warrants include publicly-traded warrants (the “Public Warrants”) which were originally issued in the IPO and warrants sold in a private placement to CMLS Holdings LLC (the “Private Warrants”). The Company evaluated its warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, and concluded that they do not meet the criteria to be classified in stockholders’ equity. Since the Public Warrants and Private
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Warrants meet the definition of a derivative under ASC 815, the Company recorded these warrants as non-current liabilities on the balance sheet at fair value upon the closing of the Business Combination, with subsequent changes in their respective fair values recognized in other income (expense), net on the condensed consolidated statements of operations and comprehensive loss at each reporting date. As of June 30, 2022, the Public Warrants are classified within Level 1 of the fair value hierarchy as they are traded in active markets. The Private Warrants are classified within Level 2 of the fair value hierarchy as management determined the fair value of each Private Warrant is the same as that of a Public Warrant because the terms are substantially the same.
The earn-out contingent liabilities include the Company’s contingent obligation to issue earn-out shares for Legacy Sema4 stockholders (“Earn-out Shares”) as well as the Company’s contingent obligation to make additional Milestone Payments of up to $150 million to OPKO if certain revenue-based milestones are achieved for each of the fiscal years ended December 31, 2022 and December 31, 2023.
The Earn-out Shares are accounted for as a liability and required remeasurement at each reporting date. The estimated fair value of the total Earn-out Shares as of June 30, 2022 is determined based on a Monte Carlo simulation valuation model. The fair value of the earn-out contingent liability is sensitive to expected volatility estimated based on selected guideline public companies’ stock prices, the Company’s implied volatility and Company’s Class A common stock price which is sensitive to changes in the forecasts of earnings and/or the relevant operating metrics. The key assumptions utilized in determining the Earn-out Shares valuation as of June 30, 2022 and March 31, 2022 were as follows:
| June 30, 2022 | March 31, 2022 | ||||||||||
| Stock price | $1.26 | $3.07 | |||||||||
| Expected volatility | 87.5% | 72.5% | |||||||||
| Expected term (in years) | 1 | 1.3 | |||||||||
| Risk-free interest rate | 2.81% | 1.83% | |||||||||
The fair value determined and recorded as of March 31, 2022 and December 31, 2021 was $3.4 million and $10.2 million, respectively. During the three and six months ended June 30, 2022 a gain of $3.3 million and $10.1 million was recorded, respectively, in the change in fair market value of warrant and earn-out contingent liability in the condensed consolidated statements of operations and comprehensive loss based on re-measurement performed as of the period end date.
The Milestone Payments contingent liability represents additional acquisition consideration to pay up to $150 million based on the achievement of GeneDx revenue-based milestones in fiscal years 2022 and 2023. Subject to the terms and conditions of the Acquisition Merger Agreement, (a) the first Milestone Payment of $112.5 million will become due and payable if the revenue of the GeneDx group for the fiscal year 2022 equals or exceeds $163 million and (b) the second Milestone Payment of $37.5 million will become due and payable if the revenue of the GeneDx group for the fiscal year 2023 equals or exceeds $219 million; provided that 80% of the Milestone Payment for the first milestone period or the second milestone period, as applicable, will become payable in respect of such period if the GeneDx group achieves 90% of the applicable Milestone Event revenue target for such period, which amount will scale on a linear basis up to 100% of the applicable Milestone Payment at 100% of the applicable revenue target. Each Milestone Payment will be satisfied through the payment and/or issuance of a combination of cash and shares of the Company’s Class A common stock (valued at $4.86 per share), with such mix to be determined at the Company’s sole discretion.
The Company recorded the fair value of the Milestone Payments for $35 million as of June 30, 2022, of which $28 million is presented as current liabilities in the condensed consolidated balance sheets. A gain of $17 million was recorded in the change in fair market value of warrant and earn-out contingent liabilities in the condensed consolidated statements of operations and comprehensive loss based on re-measurement performed as of the period end date. The fair value was determined based on a Monte Carlo simulation valuation model and the key assumptions include revenue projections, revenue volatility of 17.5%, and share price of $1.26 per share.
The earn-out contingent liabilities are categorized as Level 3 of the fair value hierarchy as the Company utilizes unobservable inputs in estimating the fair value. There were no transfers between Level 1, Level 2 and Level 3 during the periods presented.
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6. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
As of June 30, 2022 | As of December 31, 2021 | ||||||||||
| Laboratory equipment | $ | 38,809 | $ | 28,552 | |||||||
Equipment under finance leases | 21,266 | 21,384 | |||||||||
Leasehold improvements | 35,525 | 21,905 | |||||||||
Capitalized software | 30,120 | 25,693 | |||||||||
Building under finance lease | 6,276 | 6,276 | |||||||||
Construction in-progress | 8,681 | 940 | |||||||||
Computer equipment | 9,342 | 6,634 | |||||||||
Furniture, fixtures and other equipment | 3,772 | 3,241 | |||||||||
Total property and equipment | 153,791 | 114,625 | |||||||||
Less: accumulated depreciation and amortization | (64,336) | (51,906) | |||||||||
Property and equipment, net | $ | 89,455 | $ | 62,719 | |||||||
For the three months ended June 30, 2022 and 2021, depreciation and amortization expense was $6.6 million and $5.6 million. For the six months ended June 30, 2022 and 2021, depreciation and amortization expense was $12.4 million and $10.5 million, respectively. This included software amortization expense of $1.7 million and $1.4 million for the three months ended June 30, 2022 and 2021, respectively and $3.3 million and $2.6 million for the six months ended June 30, 2022 and 2021, respectively. Depreciation and amortization expense is included within the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):
| Three months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cost of services | $ | 3,316 | $ | 4,087 | |||||||
Research and development | 1,989 | 1,446 | |||||||||
Selling and marketing | 1 | 1 | |||||||||
General and administrative | 1,321 | 85 | |||||||||
Total depreciation and amortization expenses | $ | 6,627 | $ | 5,619 | |||||||
| Six months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cost of services | $ | 6,132 | $ | 7,145 | |||||||
Research and development | 3,838 | 2,697 | |||||||||
Selling and marketing | 2 | 1 | |||||||||
General and administrative | 2,458 | 678 | |||||||||
Total depreciation and amortization expenses | $ | 12,430 | $ | 10,521 | |||||||
7. Related Party Transactions
For three months ended June 30, 2022 and 2021, the Company incurred certain related party costs. There were no expenses recognized under the Transition Services Agreement with ISMMS (the “ISMMS TSA”) for the three months ended June 30, 2022 and 2021. There were no expenses recognized under the ISMMS TSA for the six months ended June 30, 2022 and $1.4 million for the six months ended June 30, 2021 which is presented within related party expenses in the condensed consolidated statements of operations and comprehensive loss. The Company had no ISMMS TSA payables due to ISMMS as of June 30, 2022 and December 31, 2021. The ISMMS TSA expired on March 28, 2021.
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Expenses recognized pursuant to other service arrangements with ISMMS, including certain sub-lease arrangements the Company has through ISMMS, totaled $2.3 million and $1.9 million for the three months ended June 30, 2022 and 2021, respectively and $4.2 million and $2.6 million for the six months ended June 30, 2022 and 2021, respectively. These amounts include certain lease expenses the Company incurs and pay to ISMMS for certain sub-lease arrangements. They are included in either cost of services or related party expenses on the condensed consolidated statements of operations and comprehensive loss depending on the particular activity to which the costs relate. Payables due to ISMMS for the other service arrangements were $1.9 million $2.6 million as of June 30, 2022 and December 31, 2021, respectively. These amounts include unpaid lease payments the Company accrued for the payments to be made to ISMMS and are included within due to related parties on the Company’s condensed consolidated balance sheets.
Additionally, in the six months ended June 30, 2022, the Company has purchased $1.0 million of diagnostic testing kits and materials and $0.9 million was recorded in cost of services from an affiliate of a member of the Board of Directors who has served in the role since July 2021. The prices paid represent market rates. Payables due were $0.1 million and $0.1 million as of June 30, 2022 and December 31, 2021, respectively.
GeneDx and OPKO entered into a Transition Services Agreement dated as of April 29, 2022 (the “OPKO TSA”) pursuant to which OPKO has agreed to provide, at cost, certain services in support of the Acquisition of the GeneDx business through December 31, 2022, subject to certain limited exceptions, in order to facilitate the transactions contemplated by the Acquisition Merger Agreement, including human resources, information technology support, and finance and accounting. The Company recognized $0.3 million in costs for the three months ended June 30, 2022. This amount was unpaid and presented in due to related parties in condensed consolidated balance sheets as of June 30, 2022.
The Company also recorded $4.5 million of receivables from OPKO related to the Acquisition closing working capital adjustment. This amount is presented as other current assets in condensed consolidated balance sheets as of June 30, 2022.
Total related party costs are included within cost of services and related party expenses in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):
| Three months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cost of services | $ | 1,348 | $ | 1,008 | |||||||
Related party expenses | 1,731 | 888 | |||||||||
Total related party costs | $ | 3,079 | $ | 1,896 | |||||||
| Six months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cost of services | $ | 2,404 | $ | 1,286 | |||||||
Related party expenses | 3,015 | 2,685 | |||||||||
Total related party costs | $ | 5,419 | $ | 3,971 | |||||||
8. Long-Term Debt
Loan and Security Agreement (the “SVB Agreement”)
On November 15, 2021, the Company and Sema4 OpCo, Inc. (together, the “Borrower”) entered into a Loan and Security Agreement (the “SVB Agreement”) with Silicon Valley Bank (“SVB”). The SVB Agreement provides for a revolving credit facility (the “Revolver”) up to an aggregate principal amount of $125.0 million, including a sublimit of $20.0 million for Letters of Credit (as such terms are defined in the SVB Agreement). The outstanding principal amount of any Advance (as such term is defined in the SVB Agreement) will bear interest at a floating rate per annum equal to the greater of (1) 4.00% and (2) the Prime Rate plus the Prime Rate Margin. The Revolver will mature on November 15, 2024. In connection with entering into the SVB agreement, the Company paid $0.5 million in debt issuance costs during 2021. The Company will pay an additional $0.5 million in fees to SVB at each anniversary of the SVB Agreement date for a total of $1.0 million and these fees are recorded in other current liabilities and other liabilities in the condensed consolidated balance sheets as of June 30, 2022. These costs are capitalized and amortized on a straight-line basis over the contractual term. Any unused fees charged on the Revolver is expensed as incurred.
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The obligations under the SVB Agreement are secured by a first priority perfected security interest in substantially all of the Borrower’s assets except for (i) Governmental Collection Accounts (as defined in the SVB Agreement), (ii) more than 65% of the presently existing and thereafter arising issued and outstanding shares of capital stock owned by Borrowers in a Foreign Subsidiary (as such term is defined in the SVB Agreement) and (iii) intellectual property pursuant to the terms of the SVB Agreement.
The SVB Agreement contains affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, and dividends and other distributions.
The SVB Agreement requires the Borrower to comply with certain financial covenants if Liquidity (as such term is defined in the SVB Agreement) falls below $135.0 million. These financial covenants include (i) a minimum Adjusted Quick Ratio (as such term is defined in the SVB Agreement) and (ii) the achievement of certain minimum revenue targets. On a monthly basis, the Borrowers would be required to maintain a minimum Adjusted Quick Ratio of greater than or equal to 1.25 to 1.0. The Borrower must also maintain certain trailing six-month minimum revenue targets through maturity if outstanding borrowings under the Revolver exceed $50.0 million.
The SVB Agreement also includes customary events of default, including failure to pay principal, interest or certain other amounts when due, material inaccuracy of representations and warranties, violation of covenants, certain bankruptcy and insolvency events, certain undischarged judgments, material invalidity of guarantees or grant of security interest, material adverse change, and involuntary delisting from the Nasdaq Stock Market, in certain cases subject to certain thresholds and grace periods. If one or more events of default occurs and continues beyond any applicable cure period, SVB may, without notice or demand to the Borrower, terminate its commitment to make further loans and declare all of the obligations of the Borrowers under the SVB Agreement to be immediately due and payable. The Company was in compliance with all covenants as of June 30, 2022.
No amounts have been drawn under the SVB Agreement as of June 30, 2022.
2016 Funding Commitment
In June 2017, ISMMS assigned a loan funding commitment from the Connecticut Department of Economic and Community Development (“DECD”) to the Company (as amended, the “DECD Loan Agreement”). The DECD Loan Agreement, provides for a total loan commitment of $15.5 million at a fixed annual interest rate of 2.0% for a term of 10 years. The Company is required to make interest-only payments through July 2023 and principal and interest payments commencing in August 2023. The final payment of principal and interest is due in July 2028. However, under the terms of the DECD Loan Agreement, the DECD may grant partial principal loan forgiveness of up to $12.3 million in the aggregate. Such forgiveness is contingent upon the Company achieving job creation and retention milestones and $4.5 million has been forgiven as of June 30, 2022. This commitment is collateralized by providing a security interest in certain machinery and equipment the Company acquired from ISMMS, as defined in a separate security agreement.
The outstanding loan balance from the DECD Loan Agreement was $11.0 million as of June 30, 2022 and December 31, 2021.
Maturities of Long-Term Debt
As of June 30, 2022, long-term debt matures as follows (in thousands):
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2022 (remainder of year) | $ | — | |||
| 2023 | 875 | ||||
| 2024 | 2,131 | ||||
| 2025 | 2,174 | ||||
| 2026 | 2,218 | ||||
| Thereafter | 3,602 | ||||
Total maturities of long-term debt | 11,000 | ||||
Less: current portion of long-term debt | — | ||||
Total long-term debt, net of current maturities | $ | 11,000 | |||
2020 Master Loan Agreement
In August 2020, the Company entered into a loan and security agreement with a bank (the “Master Loan Agreement”), in which the Company received a loan of $6.3 million and deposited the proceeds into a deposit account held by the bank. The Company was required to make sixty consecutive monthly payments of principal and interest at a fixed monthly amount of $0.1 million beginning in November 2020. Interest payments were fixed at an annual interest rate of 4.75%.
In July 2021, the Company terminated the Master Loan Agreement by paying off the full amount, including $5.4 million principal and interest and $0.1 million in early payment penalties assessed pursuant to the terms of the agreement.
2020 Master Lease Agreement
In December 2020, the Company entered into a lease agreement with a lender whereby the Company agreed to sell certain equipment and immediately lease back the equipment, resulting in proceeds of $3.6 million. Per the terms of the agreement, a financial institution issued an irrevocable standby letter of credit to the lender for $3.6 million. The Company was required to make sixty consecutive monthly payments of principal and interest at a fixed monthly amount of $0.1 million beginning in February 2021. Interest payments were fixed at an annual interest rate of 3.54%.
The Company was required to maintain an aggregate amount on deposit equal to at least 105% of the value of any outstanding letters of credit issued by the financial institution on the Company’s behalf. The letter of credit was required to be in place until all obligations had been paid in full. Further, the Company was required to furnish annual audited financial statements and other financial information to the lender on a regular basis.
In July 2021, the Company terminated the Master Lease Agreement by paying off the full amount, including $3.3 million principal and interest and early payment penalties of $0.2 million assessed pursuant to the terms of the agreement.
9. Leases
Lease Accounting
The Company enters into contracts in the normal course of business and assesses whether any such contracts contain a lease. The Company determines if an arrangement is a lease at inception if it conveys the right to control the identified asset for a period of time in exchange for consideration. The Company classifies leases as operating or financing in nature. All lease liabilities are measured at the present value of the associated payments, discounted using the Company’s incremental borrowing rate determined based on the rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments for similar term and in a similar economic environment on a collateralized basis, unless there is a rate implicit in the lease that is readily determinable.
Operating Leases
The Company's operating lease arrangements are principally for office space and laboratory facilities. The Company’s headquarter lease was initially entered into via sub-lease agreements with ISMMS and a third party and they will expire in 2034. The agreements include escalating rent and rent-free period provisions. Pursuant to the terms of the lease agreement,
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the Company was required to have issued an irrevocable standby letter of credit to the lessor for $0.9 million, which was included in restricted cash on the condensed consolidated balance sheets as of June 30, 2022 and consolidated balance sheets as of December 31, 2021.
In April 2019, the Company entered into a sublease agreement to rent a building to be used for office and laboratory facility (the “Stamford Lease”) for a base term of 325 months, expiring in October 2046. The Company has the option to renew the lease at the end of the initial base term for either one period of 10 years, or two periods of 5 years. There is also an early termination option in which the Company may cancel the lease after the 196th month with cancellation fees. At inception of the Stamford Lease, the value of the land was determined to be more than 25% of the total value and therefore the building is accounted for as a finance lease and the land as an operating lease.
In January 2020, the Company entered into a lease agreement which expanded the Company’s existing laboratory facility in Branford, Connecticut. The lease commenced in February 2020 with a 10 year term. The lease includes escalating rent fees over the lease term.
In April 2022, the Company acquired an operating lease for office space and laboratory operations in connection with the GeneDx acquisition. The lease includes a base term of 9 years remaining from the date of acquisition and an escalating rent provision.
Finance Leases
The Company enters into various finance lease agreements to obtain laboratory equipment that contain bargain purchase commitments at the end of the lease term. The leases are secured by the underlying equipment. As discussed above, the Company also leases a building used for office and laboratory space in which the building is accounted for as a finance lease and the land is as an operating lease. The interest rate used for the Stamford Lease is 13.1%, which is used to measure the operating and finance lease liability. As of December 31, 2021, the finance lease obligations of $3.4 million and $18.4 million were included in other current liabilities and other liabilities, respectively, on the consolidated balance sheets.
The tables below present financial information associated with the Company’s leases. This information is only presented as of, and for the three and six months ended, June 30, 2022 because, the Company adopted the ASC 842 using a transition method that does not require application to periods prior to adoption (in thousands).
| Classification | June 30, 2022 | |||||||||||||
| Assets | ||||||||||||||
| Operating lease assets | Operating lease right-of-use assets | $ | 44,038 | |||||||||||
| Finance lease assets | Property and Equipment, net | 12,160 | ||||||||||||
| Total lease assets | $ | 56,198 | ||||||||||||
| Liabilities | ||||||||||||||
| Current | ||||||||||||||
| Operating | Due to related parties | $ | 566 | |||||||||||
| Short-term lease liabilities | 1,815 | |||||||||||||
| Finance | Due to related parties | 304 | ||||||||||||
| Short-term lease liabilities | 2,940 | |||||||||||||
| Non-current | ||||||||||||||
| Operating | Long-term lease liabilities | 45,484 | ||||||||||||
| Finance | Long-term lease liabilities | 17,322 | ||||||||||||
| Total lease liabilities | $ | 68,431 | ||||||||||||
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| Lease cost | Three months ended June 30, 2022 | Six months ended June 30, 2022 | ||||||||||||
| Operating lease cost | ||||||||||||||
| Operating lease cost | $ | 1,582 | $ | 2,962 | ||||||||||
| Short-term lease cost | 137 | 306 | ||||||||||||
| Variable lease cost | 152 | 279 | ||||||||||||
| Total operating lease cost | $ | 1,871 | $ | 3,547 | ||||||||||
| Finance lease cost | ||||||||||||||
| Depreciation and amortization of leased assets | $ | 912 | $ | 1,824 | ||||||||||
| Interest on lease liabilities | 531 | 1,083 | ||||||||||||
| Total finance lease cost | $ | 1,443 | $ | 2,907 | ||||||||||
| Total lease cost | $ | 3,314 | $ | 6,454 | ||||||||||
Future minimum lease payments under non-cancellable leases as of June 30, 2022 are as follows:
| Maturity of lease liabilities | Operating leases | Finance leases | Total | |||||||||||||||||
| 2022 (remainder of the year) | $ | 2,684 | $ | 2,532 | $ | 5,216 | ||||||||||||||
| 2023 | 3,994 | 3,584 | 7,578 | |||||||||||||||||
| 2024 | 5,504 | 2,763 | 8,267 | |||||||||||||||||
| 2025 | 5,925 | 2,451 | 8,376 | |||||||||||||||||
| 2026 | 6,066 | 2,003 | 8,069 | |||||||||||||||||
| Thereafter | 57,511 | 49,884 | 107,395 | |||||||||||||||||
| Total | $ | 81,684 | $ | 63,217 | $ | 144,901 | ||||||||||||||
| Less: imputed interest | $ | (33,819) | $ | (42,651) | $ | (76,470) | ||||||||||||||
| Present value of lease liabilities | $ | 47,865 | $ | 20,566 | $ | 68,431 | ||||||||||||||
Other information related to leases as of and for six months ended June 30, 2022 are as follows:
| June 30, 2022 | ||||||||
| Weighted-average remaining lease term (years) | ||||||||
| Operating leases | 12.7 | |||||||
| Finance leases | 18.2 | |||||||
| Weighted-average discount rate | ||||||||
| Operating leases | 6.8% | |||||||
| Finance leases | 10.7% | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows from operating leases | $2,644 | |||||||
| Operating cash flows from finance leases | $1,083 | |||||||
| Financing cash flows from finance lease | $1,634 | |||||||
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10. Commitments and Contingencies
Purchase Obligations
In the normal course of business, the Company enters into various purchase commitments primarily related to material and service agreements, laboratory supplies and software. At June 30, 2022, the Company’s total future payments under noncancellable unconditional purchase commitments having a remaining term of over one year were $28.4 million.
Contingencies
The Company is a party to various actions and claims arising in the normal course of business. The Company does not believe that the outcome of these matters will have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows. However, no assurance can be given that the final outcome of such proceedings will not materially impact the Company’s condensed consolidated financial condition or results of operations.
The Company was not a party to any material legal proceedings as of June 30, 2022, nor is it a party to any material legal proceedings as of the date of issuance of these unaudited condensed consolidated financial statements.
11. Stock-Based Compensation
Stock Incentive Plans
The Company’s 2017 Equity Incentive Plan (the “2017 Plan”), as amended in February 2018, allowed the grant of options, restricted stock awards, stock appreciation rights and restricted stock units. No options granted under the 2017 Plan are exercisable after 10 years from the date of grant, and option awards generally vest over a four-year period.
The 2017 Plan was terminated in connection with the adoption of the Company's 2021 Equity Incentive Plan (the "2021 Plan"). Any awards granted under the 2017 Plan that remained outstanding as of the Closing Date and were converted into awards with respect to the Company’s Class A common stock in connection with the consummation of the Business Combination continue to be subject to the terms of the 2017 Plan and applicable award agreements, except for a modification of the repurchase provision, which is discussed further below.
On July 22, 2021, in connection with the Business Combination, the 2021 Plan became effective and 32,734,983 authorized shares of Class A common stock were reserved for issuance thereunder. The 2021 Plan will be administered by the Compensation Committee of the Company’s Board of Directors, including determination of the vesting, exercisability and payment of the awards to be granted under the 2021 Plan. No awards granted under the 2021 Plan are exercisable after
10 years from the date of grant, and the awards granted under the 2021 Plan generally vest over a four-year period on a graded vesting basis.
Additionally, on May 2, 2022, the compensation committee of the Company’s board of directors granted newly-hired employees inducement stock options to purchase an aggregate of 4,932,132 shares of the Company’s Class A common stock and 4,285,208 RSUs as inducements material to each employee entering into employment with the Company. The stock options have an exercise price of $2.20 per share, which was equal to the closing price of the Company’s Class A common stock on the grant date. The stock options and RSUs granted to the newly-hired employees other than the Company’s CEO, Chief Commercial Officer, and SVP Operations will vest with respect to 25% of the underlying shares on April 29, 2023, and will vest with respect to the remaining underlying shares in equal quarterly installments thereafter through April 29, 2026, in each case subject to the new employee’s continued service with the company. The stock options and RSUs granted to the Company’s CEO, Chief Commercial Officer, and SVP Operations will vest with respect to 25% of the underlying shares on April 29, 2023 and 25% of the underlying shares on April 29, 2024, and will vest with respect to the remaining underlying shares in equal quarterly installments thereafter through April 29, 2026, in each case subject to his or her continued service with the company. Each stock option has a 10-year term. The stock options and RSUs are subject to the terms and conditions identical to those of the 2021 Plan and a stock option agreement or restricted stock unit agreement, as applicable, covering the grant.
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Employee Stock Purchase Plan
The 2021 Employee Stock Purchase Plan (the “2021 ESPP”) became effective in connection with the Business Combination. The 2021 ESPP authorizes the issuance of shares of Class A common stock pursuant to purchase rights granted to employees. On each January 1 of each of 2022 through 2031, the aggregate number of shares of Class A common stock reserved for issuance under the 2021 Plan may be increased automatically by the number of shares equal to one percent (1%) of the total number of shares of all classes of common stock issued and outstanding immediately preceding December 31. The Company did not make any grants of purchase rights under the 2021 ESPP during the quarter ended June 30, 2022. A total of 7,229,799 shares of Class A common stock have been reserved for future issuance under the 2021 ESPP.
Stock Option Activity
Under the 2017 Plan, the Company had a call option to repurchase awards for cash from the plan participants upon termination of the participant’s employment or consulting agreement (the “2017 Plan Call Option”). The options granted under the 2017 plan were accounted for as liability awards due to the 2017 Plan Call Option. The Company had a history of repurchase practice and the intention to repurchase the vested options. Therefore, the fair value of the liability awards was remeasured at each reporting period until the stockholder bears the risks and rewards of equity ownership for a reasonable period of time, which the Company concludes is at least six months.
Upon consummation of the Business Combination, the Company’s Board of Directors waived the Company’s right under the 2017 Plan Call Option to repurchase awards for cash from the plan participants upon termination of the participant’s employment or consulting agreement. As such, the Company modified the liability awards to equity awards and reclassified the modification date fair value of the awards to stockholders’ equity in the condensed consolidated financial statements as of July 22, 2021.
All stock options granted under the 2021 Plan are accounted for as equity awards.
The following summarizes the stock option activity, which reflects the conversion of the options granted under the 2017 Plan into awards with respect to the Company Class A common stock in connection with the consummation of the Business Combination (in thousands, except share and per share amounts):
Stock Options Outstanding | Weighted Average Exercise Price | |||||||||||||
| Balance at December 31, 2021 | 30,905,543 | $ | 1.24 | |||||||||||
| Options granted | 10,362,635 | 2.61 | ||||||||||||
| Options exercised | (6,325,176) | 0.29 | ||||||||||||
| Options forfeited or canceled | (1,495,899) | 3.91 | ||||||||||||
| Balance at June 30, 2022 | 33,447,103 | $ | 1.73 | |||||||||||
Options exercisable at June 30, 2022 | 18,327,732 | $ | 0.74 | |||||||||||
As of June 30, 2022, unrecognized stock-based compensation cost related to the unvested portion of the Company’s stock options was $28.2 million, which is expected to be recognized on a graded-vesting basis over a weighted-average period of 1.74 years.
The fair value of the stock option awards for the period ended June 30, 2022 and June 30, 2021 were estimated using the Black-Scholes option pricing model with the following assumptions:
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| Six Months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Expected volatility | 65.20% - 75.00% | 46.60%- 71.60% | |||||||||
| Expected term (in years) | 5.48-6.07 | 0.17- 1.50 | |||||||||
| Risk-free interest rate | 1.65%-3.03% | 0.05%- 0.25% | |||||||||
| Dividend yield | — | — | |||||||||
| Fair value of Class A common stock | $2.20-$3.45 | $5.00- $12.06 | |||||||||
The Company estimated a volatility factor for the Company’s options based on analysis of historical share prices of a peer group of public companies. The Company did not rely on the volatility of the Company’s Class A common stock because its limited trading history. The Company estimated the expected term of options granted using the “simplified method,” which is the mid-point between the vesting date and the ending date of the contractual term. The Company did not rely on the historical holding periods of the Company’s options due to the limited availability of exercise data. The Company used a risk-free interest rate based on the U.S. Treasury yield curve in effect for bonds with maturities consistent with the expected term of the option.
Restricted Stock Units (RSUs)
The Company issued time-based RSUs to employees under the 2021 Plan. The RSUs automatically convert to shares of Class A common stock on a one-for-one basis as the awards vest. The Company measures the value of RSUs at fair value based on the closing price of the underlying Class A common stock on the grant date. The RSUs granted generally vest over a four year vesting period from the grant date, however, certain grants include vesting term that begins vesting 12 months from the grant date. The following table summarizes the activity related to the Company's time-based RSUs:
| Restricted Stock Units Outstanding | Weighted Average Grant Date Fair Value Per Unit | ||||||||||
| Balance at December 31, 2021 | 12,589,558 | $ | 7.64 | ||||||||
| Restricted Stock Units granted | 14,455,696 | 2.80 | |||||||||
| Restricted Stock Units vested | (924,019) | 7.41 | |||||||||
| Restricted Stock Units forfeited | (2,723,870) | 6.33 | |||||||||
| Balance at June 30, 2022 | 23,397,365 | $ | 4.81 | ||||||||
Additionally, the Company issued 126,980 RSUs subject to both service and performance based vesting conditions to the Executive Chairman of the Company. The grant date was established during the second quarter period and vesting of the RSUs will be based on the achievement of performance goals established for calendar year 2022.
As of June 30, 2022, unrecognized stock-based compensation cost related to the unvested portion of the Company’s RSUs was $70.6 million, which is expected to be recognized on a graded-vesting basis over a weighted-average period of 1.80 years.
Earn-out RSUs
The grant date fair value determined for Triggering Event I, II and III was $1.82, $1.39 and $0.94 per unit, respectively. Any re-allocated RSUs due to the Sema4 Legacy option holders’ forfeiture activities during the three months ended June 30, 2022 were accounted for as new grants and the fair value determined for Triggering Event I, II and III was $0.01, $0.01 and $0.01 per unit, respectively. Based on the grant date fair value, the Company expects to record total expense related to the earn-out RSU awards of $2.1 million without considering the impact of the Sema4 Legacy option holders’ forfeiture activities. The Company expects to recognize the stock-compensation cost over the longer of the derived service period or service period.
Stock Appreciation Rights (SAR) Activity
The Company historically granted SAR to one employee and one consultant with exercise condition of a liquidation event. As a result of the Business Combination, settlement of the outstanding vested SARs in exchange for a cash payment
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and to cancel the outstanding unvested SARs was agreed upon and an expense of $3.8 million related to the vested SAR was recognized by the Company. There were no outstanding SARs as of June 30, 2022.
During the three and six months ended June 30, 2022, the Company recorded a reversal of stock-based compensation of $4.5 million and $9.7 million, respectively due to forfeiture activities upon employee terminations. Stock-based compensation expense for all awards granted and outstanding is included within the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):
| Three months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cost of services | $ | 1,810 | $ | (306) | |||||||
Research and development | 6,515 | (370) | |||||||||
Selling and marketing | 1,485 | 1,065 | |||||||||
General and administrative | 12,911 | (908) | |||||||||
Total stock-based compensation expense | $ | 22,721 | $ | (519) | |||||||
| Six months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cost of services | $ | 3,191 | $ | 18,169 | |||||||
Research and development | 10,856 | 37,817 | |||||||||
Selling and marketing | 4,310 | 19,753 | |||||||||
General and administrative | 21,923 | 88,704 | |||||||||
Total stock-based compensation expense | $ | 40,280 | $ | 164,443 | |||||||
12. Income Taxes
Income tax benefit for the six months ended June 30, 2021 and 2022 was zero and $49.1 million, respectively. Income taxes for these periods are recorded at the Company’s estimated annual effective income tax rate, subject to adjustments for discrete events should they occur. The Company’s estimated annual effective tax rate was —% and 0.27% for the three and six months ended June 30, 2022, respectively.
The difference between the Company’s effective tax rates in 2022 and 2021 compared to the U.S. statutory tax rate of 21% is primarily due to changes in valuation allowances associated with the Company’s assessment of the likelihood of the recoverability of deferred tax assets. The Company currently has valuation allowances against a significant portion of its deferred tax assets primary related to its net operating loss carryforwards and tax credit carryforwards.
In connection with the Company’s acquisition of GeneDx, the Company recorded a deferred tax liability of $51.8 million in purchase accounting. This deferred tax liability serves as a source of future taxable income to support a release of valuation allowance of $48.6 million, which resulted in a deferred tax benefit recorded discretely in the three months ended June 30, 2022.
13. Net Loss per Share
Basic and diluted loss per share attributable to common stockholders was calculated as follows (amounts in thousands, except for share and per share amounts):
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| Three months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Numerator: | |||||||||||
Net loss attributable to common stockholders | $ | (85,742) | $ | (46,161) | |||||||
Denominator: | |||||||||||
Denominator for basic and diluted earnings per share-weighted-average common shares | 337,752,029 | 1,100,734 | |||||||||
| Basic and diluted loss per share | $ | (0.25) | $ | (41.94) | |||||||
| Six months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Numerator: | |||||||||||
Net loss attributable to common stockholders | $ | (162,638) | $ | (237,936) | |||||||
Denominator: | |||||||||||
Denominator for basic and diluted earnings per share-weighted-average common shares | 291,318,351 | 826,778 | |||||||||
| Basic and diluted loss per share | $ | (0.56) | $ | (287.79) | |||||||
As a result of the Business Combination Merger, the Company has retroactively adjusted the weighted-average number of shares of common stock outstanding prior to the Business Combination Merger by multiplying them by the conversion ratio of 123.8339 used to determine the number of shares of common stock into which they converted. The common stock issued as a result of the redeemable convertible preferred stock conversion upon closing of the Business Combination Merger was included in the basic and diluted earnings/(loss) per share calculation on a prospective basis.
Prior to the consummation of the Business Combination Merger, the Company applied the two-class method to calculate its basic and diluted net loss per share of common stock, as there were outstanding Class B common stock and redeemable convertible preferred stock that were participating securities. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. As the securities were all converted into Sema4 Holdings Class A common stock upon consummation of the Business Combination Merger, all outstanding Legacy Sema4 Class B common stock has been retroactively converted to the Sema4 Holdings Class A common stock.
The following tables summarize the outstanding shares of potentially dilutive securities that were excluded from the computation of diluted net loss per share attributable to common stockholders for the period presented because including them would have been anti-dilutive:
| Three months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Outstanding options and RSUs to purchase Class A common stock | 56,844,468 | 28,903,180 | |||||||||
Outstanding warrants | 21,994,972 | — | |||||||||
Outstanding earn-out shares | 2,239,220 | — | |||||||||
| Outstanding earn-out RSUs | 16,782,356 | — | |||||||||
| Redeemable convertible preferred stock (on an if-converted basis) | — | 171,535,213 | |||||||||
Total | 97,861,016 | 200,438,393 | |||||||||
14. Restructuring Costs
During the six months ended June 30, 2022, the Compensation Committee of the Company’s Board of Directors approved by written consents, dated February 17, 2022 and May 2, 2022 a restructuring plan that was executed by management and restructuring charges were incurred and recorded in connection therewith. These costs include severance packages offered to the employees impacted by the plan and third party consulting costs. Additionally, the Board of Directors approved additional headcount reductions in an effort to streamline operations, and the Company recognized
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additional expenses during the second quarter of 2022. The table below provides certain information concerning restructuring activity during the six months:
| Reserve Balance at December 31, 2021 | Charged to Costs and Expenses | Payments and Other | Reserve Balance at June 30, 2022 | ||||||||||||||||||||
| Severance | $ | — | $ | 5,235 | $ | (4,757) | $ | 478 | |||||||||||||||
| Others | — | 4,326 | (1,600) | 2,726 | |||||||||||||||||||
| Total | $ | — | $ | 9,561 | $ | (6,357) | $ | 3,204 | |||||||||||||||
The Company may incur additional expenses not currently contemplated due to events associated with the reduction in force. The charges that the Company expects to incur in connection with the reduction in force are estimates and subject to a number of assumptions, and actual results may differ materially. In addition, see Note 16, “Subsequent Events” for a discussion of additional exit activities subsequent to June 30, 2022.
15. Supplemental Financial Information
Accounts payable and accrued expenses consisted of the following (in thousands):
| As of June 30, 2022 | As of December 31, 2021 | ||||||||||
| Accounts payable | $ | 53,302 | $ | 44,693 | |||||||
| Accrued purchases | 23,007 | 19,758 | |||||||||
| Reserves for refunds to insurance carriers | 39,194 | — | |||||||||
| Other | 375 | 350 | |||||||||
Total | $ | 115,878 | $ | 64,801 | |||||||
Other current liabilities consisted of the following (in thousands):
| As of June 30, 2022 | As of December 31, 2021 | ||||||||||
| Accrued bonus | $ | 12,353 | $ | 13,561 | |||||||
Accrued payroll | 10,883 | 7,013 | |||||||||
Accrued benefits | 3,106 | 1,057 | |||||||||
| Accrued commissions | 2,881 | 2,826 | |||||||||
| Indemnification liabilities | 13,470 | — | |||||||||
| Current portion of the contingent consideration liabilities | 28,000 | — | |||||||||
| Other | 10,926 | 8,930 | |||||||||
Total | $ | 81,619 | $ | 33,387 | |||||||
16. Subsequent Events
During the third quarter of 2022, the Board of Directors approved a restructuring plan that contemplates exiting the Company’s somatic tumor testing business and closing the Company’s laboratory in Branford, CT, by December 31, 2022. In connection with the plan, the Company is also eliminating approximately 250 positions, representing about 13% of its workforce, which, combined with the Company’s prior reductions in force during 2022, will result in the elimination of approximately 30% of the roles from the Legacy Sema4 business. As a result of this decision, the Company currently estimates the impact of these actions to result in between $8.5 million and $11.5 million of cash charges primarily related to severance packages offered to the employees impacted by the plan to be incurred primarily during the second half of the year. The amount of this expected charge is an estimate, and the amount and timing of actual charges may vary due to a variety of factors. The Company also expects to incur non-cash charges, which are currently not able to be estimated.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and our audited financial statements for the year ended December 31, 2021 and the related notes in our Annual Report on Form 10-K for the year ended December 31, 2021. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from the results described in or implied by the forward-looking statements. You should carefully read the section entitled “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from these forward-looking statements.
Overview
We are a leading health intelligence company—one that can unlock insights from data, leading to healthier lives and a healthier society. We are focused on delivering a portfolio of genomic and data solutions to guide patients through their family health journey. That includes family planning, delivery, pediatrics, hereditary cancer screening, and rare disorders for children and adults.
On June 1, 2017, we signed a contribution and funding agreement and other agreements with Icahn School of Medicine at Mount Sinai, or ISMMS, whereby ISMMS contributed certain assets and liabilities related to our operations, provided certain services to us, and also committed to funding us up to $55.0 million in future capital contributions in exchange for equity in Legacy Sema4, of which $55.0 million was drawn as of December 31, 2019. Following the transaction, we commenced operations as a commercial entity that could effectively engage diverse patient populations and health care institutions at scale.
We have since established a market leading health intelligence platform, accelerating the use of genomics and leveraging large-scale clinical data to enhance the standard of care through extensive precision medicine solutions. Our business was further strengthened in April 2022 by the acquisition of GeneDx, a leader in genomic testing and analysis for rare disorders. We believe the transaction positions Sema4 as one of the largest and most advanced providers of genomic testing in the U.S. and further strengthens our health information database to transform patient care and improve therapeutic development. We now maintain a database that includes patient data available for research on approximately 12 million patients from a number of public and proprietary sources. More than five million patients are available with clinical data through our partnership health systems and genomic testing solutions that may include structured and unstructured data available for deeper curation to construct more comprehensive natural histories of patients.
Currently, we derive the majority of our revenue from our diagnostic test solutions. Our diagnostic business generates revenue and engages with healthcare professionals working with patients primarily through our Reproductive Health/Women’s Health and Pediatrics/NICU solutions.
Our Reproductive Health/Women’s Health solutions sequence and analyze an industry-leading number of genes and use interpretive information tools to translate raw sequencing and clinical data efficiently and accurately into digestible clinical reports that guide decision-making by patients and physicians. These solutions also include Sema4 Signal Hereditary Cancer, which determines if a patient carries an inherited genetic change that increases the risk of cancer or informs on cancer treatment.
Our Pediatrics/NICU offerings include testing solutions for children, both inpatient in the neonatal intensive care unit (NICU) and pediatric intensive care unit (PICU) and outpatient for developmental delay and neurodevelopmental delay as well as rare disease for children and adults. We have the industry-leading exome, which includes comprehensive CNV (copy number variation) analysis and have an extensive database of over 375,000 clinically sequenced exomes and more than two million structured phenotypes.
We will be discontinuing our somatic tumor profiling business by December 31, 2022. This business represents less than 1% of our revenue and approximately $35 million of our annual expenses. We expect that exiting this business will result in significant cost savings during the second half of 2022 and 2023, and will positively impact our gross margins. Additionally, beginning in May of 2020 through March 31, 2022, we provided diagnostic testing services to identify the presence of COVID-19.
We have expanded beyond diagnostic testing to enter into service agreements with third parties to provide diagnostic testing, research, and related data aggregation reporting services. We have established and continue to seek strategic relationships with pharmaceutical and biotech, or Biopharma, companies to enable innovation across the entire drug
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lifecycle, from next-generation drug discovery and development, to post-market efficacy surveillance, to informing on bioavailability, toxicity, tolerability, and other features critical to drug development.
Factors Affecting Our Performance
We believe several important factors have impacted, and will continue to impact, our performance and results of operations. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must address. See the section titled “Item 1A. Risk Factors” for more information.
Number of resulted tests
A test is resulted once the appropriate workflow is completed and details are provided to the ordered patients or healthcare professional for reviews, which corresponds to the timing of our revenue recognition. We believe the number of resulted tests in any period is important and useful to our investors because it directly correlates with long-term patient relationships and the size of our genomic database.
Success obtaining and maintaining reimbursement
Our ability to increase the number of billable tests and our revenue therefrom will depend on our success in achieving reimbursement for our tests from third-party payors. Reimbursement by a payor may depend on several factors, including a payor’s determination that a test is appropriate, medically necessary, cost-effective, and has received prior authorization. Since each payor makes its own decision as to whether to establish a policy or enter into a contract to provide coverage for our tests, as well as the amount it will reimburse us for a test, seeking these approvals is a time-consuming and costly process.
In cases where we or our partners have established reimbursement rates with third-party payors, we face additional challenges in complying with their procedural requirements for reimbursement. These requirements often vary from payor to payor and are reassessed by third-party payors regularly. As a result, in the past we have needed additional time and resources to comply with the requirements.
Third-party payors may decide to deny payment or seek to recoup payments for tests performed by us that they contend were improperly billed, not medically necessary or against their coverage determinations, or for which they believe they have otherwise overpaid. As a result, we may be required to refund payments already received, and our revenues may be subject to retroactive adjustment as a result of these factors among others. In particular, we are currently engaged in discussions with one of our third-party payors regarding certain overpayments we allegedly received from the payor for services that the payor alleges are not covered by, or were not otherwise properly billed to, the payor. As a result of this matter and other potential settlements with payors, we have established certain liabilities and reversed certain of our previously recorded revenue. We intend to seek to resolve this matter and any other recovery or recoupment claims in a mutually satisfactory manner, although it is possible that any such settlement may also result in lowered contracted reimbursement rates for our tests. For more information regarding this matter, see Note 4, “Revenue Recognition” to our unaudited condensed consolidated financial statements included within this Quarterly Report.
We expect to continue to focus our resources on increasing the adoption of, and expanding coverage and reimbursement for, our current and any future tests we may develop or acquire. If we fail to expand and maintain broad adoption of, and coverage and reimbursement for, our tests, our ability to generate revenue and our future business prospects may be adversely affected.
Ability to lower the costs associated with performing our tests
Reducing the costs associated with performing our diagnostic tests is both our focus and a strategic objective. We source, and will continue to source, components of our diagnostic testing workflows from third parties. We also rely upon third-party service providers for data storage and workflow management.
Increasing adoption of our services by existing and new customers
Our performance depends on our ability to retain and broaden the adoption of our services with existing customers as well as our ability to attract new customers. Our success in retaining and gaining new customers is dependent on the market’s confidence in our services and the willingness of customers to continue to seek more comprehensive and integrated genomic and clinical data insights.
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Investment in platform innovation to support commercial growth
We are seeking to leverage and deploy our platforms to develop a pipeline of future disease-specific research and diagnostic and therapeutic products and services. We have limited experience in the development or commercialization of clinical or research products in connection with our database and platform.
We operate in a rapidly evolving and highly competitive industry. Our business faces changing technologies, shifting provider and patient needs, and frequent introductions of rival products and services. To compete successfully, we must accurately anticipate technology developments and deliver innovative, relevant, and useful products, services, and technologies on time. As our business evolves, the competitive pressure to innovate will encompass a wider range of products and services. We must continue to invest significant resources in research and development, including investments through acquisitions and partnerships. These investments are critical to the enhancement of our current diagnostics and health information and data science technologies from which existing and new service offerings are derived.
We expect to incur significant expenses to advance these development efforts, but they may not be successful. New potential services may fail at any stage of development and, if we determine that any of our current or future services are unlikely to succeed, we may abandon them without any return on our investment. If we are unsuccessful in developing additional services, our growth potential may be impaired.
Key Performance Indicators
We use the following key financial and operating metrics to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions. These key financial and operating metrics should be read in conjunction with the following discussion of our results of operations and financial condition together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report.
The principal focus of our commercial operations is to offer our diagnostic tests through both our direct sales force and laboratory distribution partners. Test volume correlates with genomic database size and long-term patient relationships. Thus, test volumes drive database diversity and enable potential identification of variants of unknown significance and population-specific insights. The number of tests resulted is a key indicator that we use to assess the operational efficiency of our business. Once the appropriate workflow is completed, the test is resulted and details are provided to ordered patients or healthcare professionals for reviews.
During the six months ended June 30, 2022, we resulted 276,171 tests in our laboratories, 73,408 tests of which were for COVID-19, compared to the six months ended June 30, 2021, in which we resulted 357,785 tests in our laboratories, 218,757 of which were for COVID-19. This 46% increase in resulted volumes, excluding COVID-19 tests volumes, was as a result of the inclusion of volumes from GeneDx’s laboratories following the closing of the GeneDx acquisition.
COVID-19 Impact
COVID-19 has had, and continues to have, an extensive impact on the global health and economic environments since the initial outbreak in March 2020.
While test volumes have since improved, we continue to experience changes in the mix of tests due to the impact of COVID-19. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat it and the economic impact on local, regional, national and international markets and supply chains. Therefore, COVID-19 could continue to have a material impact on our results of operations, cash flows, and financial condition for the foreseeable future.
In March 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), was signed into law which was a stimulus bill that, among other things, provided assistance to qualifying businesses and individuals and included funding for the healthcare system. We received $5.4 million in 2020 as part of the stimulus, comprised of $2.6 million received under the Provider Relief Fund (the “PRF”), and $2.8 million received under the Employee Retention Credit (the “ERC”). In 2021, we received an additional $5.6 million under the PRF.
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Funds provided under the PRF to healthcare providers are not loans and will not be required to be repaid; however, as a condition to receiving these payments, providers must agree to certain terms and conditions and submit sufficient documentation demonstrating that the funds are being used for healthcare-related expenses or lost revenue attributable to the COVID-19 pandemic. We have concluded it is probable that all terms and conditions associated with the funds received under the PRF distribution have been met. As a result, we recorded the funds received under the PRF in other income in the statements of operations and comprehensive loss during the periods in which we received the funds.
Funds provided under the ERC are refundable tax credits for 50% of qualified wages paid to employees during the pandemic. A company is eligible for the ERC if it has not received a Paycheck Protection Program loan under the CARES Act and (1) its operations have been fully or partially suspended because of COVID-19 or (2) its gross receipts in a calendar quarter in 2020 declined by more than 50% from the same period in 2019. At the time of applying for the ERC, we concluded that it was reasonably possible the eligibility requirements would be met; however, due to a change in circumstances, we are re-evaluating our position. As such, we deferred the recognition of the funds received under the ERC and recorded the proceeds in other liabilities on the condensed consolidated balance sheets.
At this time, we are not certain of the availability, extent or impact of any future relief provided under the CARES Act or other stimulus initiatives.
Acquisition of GeneDx
In January 2022, we and our wholly-owned subsidiaries, Orion Merger Sub I, Inc., or Merger Sub I, and Orion Merger Sub II, LLC, or Merger Sub II, entered into an Agreement and Plan of Merger and Reorganization (which we refer to, as amended, as the “Acquisition Merger Agreement”), with GeneDx, Inc., a New Jersey corporation, or GeneDx, and a wholly-owned subsidiary of OPKO Health, Inc., or OPKO, GeneDx Holding 2, Inc., or Holdco, and OPKO to acquire 100% of GeneDx (which we refer to as the “Acquisition”). Subject to the terms and conditions of the Acquisition Merger Agreement, we agreed to pay consideration to OPKO for the Acquisition of (i) $150 million in cash at the closing of the Acquisition, subject to certain adjustments as provided in the Acquisition Merger Agreement, (ii) 80 million shares of our Class A common stock to be issued at the closing of the Acquisition and (iii) up to $150 million payable following the closing of the Acquisition, if certain revenue-based milestones were achieved for each of the fiscal years ending December 31, 2022 and December 31, 2023. These milestone payments, if and to the extent earned under the terms of the Acquisition Merger Agreement, will be satisfied through the payment and/or issuance of a combination of cash and shares of our Class A common stock (valued at $4.86 per share, subject to adjustment for stock splits and similar changes), with such mix to be determined in our sole discretion.
The Acquisition closed on April 29, 2022. Our net loss for the three and six months ended June 30, 2022 includes the results of operations of GeneDx from the date of acquisition. We expect to leverage the combined health information database of Sema4 and GeneDx to partner with additional health systems and biopharma companies to transform patient care and therapeutic development and enable precision medicine for all.
Concurrently with the execution of the Acquisition Merger Agreement, we entered into subscription agreements with certain institutional investors, pursuant to, and on the terms and subject to the conditions of which, these investors collectively subscribed for 50 million shares of our Class A common stock for an aggregate purchase price equal to $200 million (which we refer to as the “Acquisition PIPE Investment”). The Acquisition PIPE Investment was consummated substantially concurrently with the closing of the Acquisition.
Components of Results of Operations
Revenue
We derive the majority of our revenue from diagnostic testing services, which primarily relate to Reproductive Health/Women’s Health, Pediatrics/NICU and COVID-19. We also recognize revenue from collaboration service agreements with Biopharma companies and other third parties pursuant to which we provide diagnostic testing and related data aggregation reporting services. As discussed above, we discontinued COVID-19 testing services as of March 31, 2022 and no longer provide such testing services. We also intend to discontinue our somatic tumor profiling business by December 31, 2022.
We recognize revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration which we expect to be entitled to in exchange for those goods or services.
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Diagnostic Test Revenue
We primarily generate revenue from performing diagnostic testing services for three groups of customers: healthcare professionals working with patients with third-party insurance coverage or without third-party insurance coverage or those who elect to self-pay; and institutional clients, such as hospitals, clinics, state governments and reference laboratories. Customers are billed upon delivery of test results. The amount of revenue recognized for diagnostic testing services depends on a number of factors, such as contracted rates with our customers and third-party insurance providers, insurance reimbursement policies, payor mix, historical collection experience, price concessions and other business and economic conditions and trends. To date, the majority of our diagnostic test revenue has been earned from orders received for patients with third-party insurance coverage.
Our ability to increase our diagnostic test revenue will depend on our ability to increase our market penetration, obtain contracted reimbursement coverage from third-party payors, enter into contracts with institutions, and increase our reimbursement rate for tests performed.
Other Revenue
We generate revenue from providing diagnostic testing and related data aggregation reporting services under both short-term and long-term project-based collaboration and service agreements with third parties. The terms of these contracts generally include non-refundable upfront payments, which we record as contract liabilities, and variable payments based upon the achievement of certain milestones during the contract term.
With respect to existing collaboration and service agreements, our revenue may fluctuate period to period due to the pattern in which we may deliver our services, our ability to achieve milestones, the timing of costs incurred, changes in estimates of total anticipated costs that we expect to incur during the contract period, and other events that may not be within our control. Our ability to increase our revenue will depend on our ability to enter into contracts with third-party partners.
Cost of Services
The cost of services reflect the aggregate costs incurred in performing services. These costs include expenses for reagents and laboratory supplies, personnel-related expenses (comprising salaries and benefits) and stock-based compensation for employees directly involved in revenue generating activities, shipping and handling fees, costs of third-party reference lab testing and phlebotomy services and allocated genetic counseling, facility and IT costs associated with delivery services. Allocated costs include depreciation of laboratory equipment, facility occupancy, and information technology costs. The cost of services are recorded as the services are performed.
We expect the cost of services to generally increase in line with the anticipated growth in diagnostic testing volume and services we provide under our collaboration service agreements. However, we expect the cost per test to decrease over the long term due to the efficiencies we may gain from improved utilization of our laboratory capacity, automation, and other value engineering initiatives. These expected reductions may be offset by new tests which often have a higher cost per test during the introductory phases before we can gain efficiencies. The cost per test may fluctuate from period to period.
Research and Development Expenses
Research and development expenses represent costs incurred to develop our technology and future test offerings. These costs are principally associated with our efforts to develop the software we use to analyze data and process customer orders. These costs primarily consist of personnel-related expenses (comprising salaries and benefits), stock-based compensation for employees performing research and development, innovation and product development activities, costs of reagents and laboratory supplies, costs of consultants and third-party services, equipment and related depreciation expenses, non-capitalizable software development costs, research funding to our research partners as part of research and development agreements and allocated facility and information technology costs associated with genomics medical research. Research and development costs are generally expensed as incurred and certain non-refundable advanced payments provided to our research partners are expensed as the related activities are performed.
We generally expect our research and development expenses to continue to increase as we innovate and expand the application of our platforms. However, we expect research and development expenses to decrease as a percentage of revenue in the long term, although the percentage may fluctuate from period to period due to the timing and extent of our development and commercialization efforts and fluctuations in our compensation-related charges.
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Selling and Marketing Expenses
Selling and marketing expenses primarily consist of personnel-related expenses (comprising salaries, and benefits) and stock-based compensation for employees performing commercial sales, account management, marketing, and allocation of genetic counseling services related to medical education. Selling and marketing costs are expensed as incurred.
We generally expect our selling and marketing expenses will continue to increase in absolute dollars as we expand our commercial sales and marketing and counseling teams and increase marketing activities. However, we expect selling and marketing expenses to decrease as a percentage of revenue in the long term, subject to fluctuations from period to period due to the timing and magnitude of these expenses.
General and Administrative Expenses
General and administrative expenses primarily consist of personnel-related expenses (comprising salaries and benefits) and stock-based compensation for employees in executive leadership, legal, finance and accounting, human resources, information technology, strategy and other administrative functions. In addition, these expenses include office occupancy and information technology costs. General and administrative costs are expensed as incurred.
We generally expect our general and administrative expenses to continue to increase in absolute dollars as we increase headcount and incur costs associated with operating as a public company, including expenses related to legal, accounting, and regulatory matters; maintaining compliance with requirements of Nasdaq and of the SEC; director and officer insurance premiums and investor relations. We expect these expenses to decrease as a percentage of revenue in the long term as revenue increases, although the percentage may fluctuate from period to period due to fluctuations in our compensation-related charges.
Related Party Expenses
Related party expenses consist of amounts due to ISMMS for expenses under our Transition Services Agreement with ISMMS, or the ISMMS TSA, which expired at the end of the first quarter of 2021, and other service agreements. In addition, GeneDx and OPKO entered into a Transition Services Agreement dated as of April 29, 2022, or the OPKO TSA, pursuant to which OPKO has agreed to provide, at cost, certain services in support of the Acquisition of the GeneDx business through December 31, 2022, subject to certain limited exceptions, in order to facilitate the transactions contemplated by the Acquisition Merger Agreement. Additional information can be found in the audited financial statements in Note 7, “Related Party Transactions” included within our Annual Report on Form 10-K for the year ended December 31, 2021, and our unaudited condensed consolidated financial statements in Note 7, “Related Party Transactions” included within this Quarterly Report.
We generally expect related party expenses to decrease as we establish our own internal and external resources to fulfill the administrative and other services we have historically procured from ISMMS and following the expiration of the OPKO TSA.
Interest Income
Interest income consists of interest earned on money market funds.
Interest Expense
Interest expense consists of interest costs related to our finance leases and our long-term debt arrangements, including unused line fee and the amortization of deferred transaction costs related to the loan and security agreement entered into with Silicon Valley Bank to provide a $125 million revolving credit facility described elsewhere in this report. No amounts have been drawn under the revolving credit facility as of June 30, 2022.
Other Income
Other income consists of funding received under the CARES Act. We recognized $5.6 million of additional funding received under the CARES Act during the first quarter of 2021 and the amount is included in other income for the six months ended June 30, 2021.
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Comparison of the three months ended June 30, 2022 and 2021
The following table sets forth our results of operations for the periods presented:
| Three months ended June 30, | |||||||||||
| 2022 | 2021 (1) | ||||||||||
| (in thousands) | |||||||||||
| Revenue | |||||||||||
Diagnostic test revenue | $ | 34,004 | $ | 44,803 | |||||||
Other revenue | 2,165 | 2,212 | |||||||||
Total revenue | 36,169 | 47,015 | |||||||||
| Cost of services | 65,767 | 48,179 | |||||||||
Gross profit (loss) | (29,598) | (1,164) | |||||||||
| Research and development | 27,168 | 11,952 | |||||||||
| Selling and marketing | 36,118 | 18,574 | |||||||||
| General and administrative | 68,034 | 12,870 | |||||||||
| Related party expenses | 1,731 | 888 | |||||||||
Loss from operations | (162,649) | (45,448) | |||||||||
| Other income (expense), net: | |||||||||||
| Change in fair market value of warrant and earn-out contingent liabilities | 28,182 | — | |||||||||
Interest income | 382 | 9 | |||||||||
Interest expense | (790) | (722) | |||||||||
Other income | 56 | — | |||||||||
Total other income (expense), net | 27,830 | (713) | |||||||||
| Loss before income taxes | $ | (134,819) | $ | (46,161) | |||||||
| Income tax provision | 49,077 | — | |||||||||
Net loss and comprehensive loss | $ | (85,742) | $ | (46,161) | |||||||
Revenue
| Change | |||||||||||||||||||||||
| Three months ended June 30, | 2021 to 2022 | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Diagnostic test revenue | $ | 34,004 | $ | 44,803 | $ | (10,799) | (24) | % | |||||||||||||||
| Other revenue | 2,165 | 2,212 | (47) | (2) | % | ||||||||||||||||||
| Total revenue | $ | 36,169 | $ | 47,015 | $ | (10,846) | (23) | % | |||||||||||||||
Total revenue decreased by $10.8 million, or 23%, to $36.2 million for the three months ended June 30, 2022, from $47.0 million for the three months ended June 30, 2021.
Diagnostic test revenue period over period overall decreased by $10.8 million, or 24%, to $34.0 million for the three months ended June 30, 2022, from $44.8 million for the three months ended June 30, 2021. The decrease was primarily attributable to a reversal of revenue recorded in the second quarter of 2022 related to a third party-payor’s allegation regarding certain overpayments we allegedly received from the payor for services alleged to be uncovered by, or were not otherwise properly billed to, the payor. This revenue reversal relates both to this matter and other potential settlements with payors, and the vast majority of this revenue reversal was related to periods prior to the second quarter of 2022. For more information regarding this matter, see Note 4, “Revenue Recognition” to our unaudited condensed consolidated financial statements included within this Quarterly Report. This decrease was offset by an increase of $26.1 million in revenue due to the GeneDx acquisition and its revenue generated for May and June 2022.
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Other revenue decreased by a nominal amount for the three months ended June 30, 2022, from the three months ended June 30, 2021.
Cost of Services
| Change | |||||||||||||||||||||||
| Three months ended June 30, | 2021 to 2022 | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Cost of services | $ | 65,767 | $ | 48,179 | $ | 17,588 | 37 | % | |||||||||||||||
Cost of services increased by $17.6 million, or 37%, to $65.8 million for the three months ended June 30, 2022, from $48.2 million for the three months ended June 30, 2021. The increase was primarily driven by the following components: a $5.4 million increase in overall personnel-related expenses driven by increase in headcount; and a $13.8 million increase in lab reagents, supplies and kits driven by increased sales volume. This increase was offset by a $1.6 million decrease in outside labor costs as the need for temporary hires contracted to perform COVID-19 testing activities was no longer required.
Research and Development
| Change | |||||||||||||||||||||||
| Three months ended June 30, | 2021 to 2022 | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 27,168 | $ | 11,952 | $ | 15,216 | 127 | % | |||||||||||||||
Research and development expense increased by $15.2 million, or 127%, to $27.2 million for the three months ended June 30, 2022, from $12.0 million for the three months ended June 30, 2021. The increase was primarily attributable to a $6.9 million increase in stock-based compensation expense; a $6.1 million increase in other personnel-related expenses driven by increase in headcount; an increase of $1.7 million in consultant services for product development related activities; and an increase of $0.4 million in depreciation and amortization expense.
Selling and Marketing
| Change | |||||||||||||||||||||||
| Three months ended June 30, | 2021 to 2022 | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Selling and marketing | $ | 36,118 | $ | 18,574 | $ | 17,544 | 94 | % | |||||||||||||||
Selling and marketing expense increased by $17.5 million, or 94%, to $36.1 million for the three months ended June 30, 2022, from $18.6 million for the three months ended June 30, 2021. The increase was primarily attributable to a $12.8 million increase in personnel-related costs driven by increase in headcount; a $1.0 million increase in other lab services for genetic counseling related to medical education; a $1.0 million increase in information technology-related expenses; a $1.3 million increase in business travel and business expenses due to the lifting of COVID-19 travel restrictions. Additionally, there was an increase of $0.8 million in amortization expense related to acquisition intangible assets.
General and Administrative
| Change | |||||||||||||||||||||||
| Three months ended June 30, | 2021 to 2022 | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| General and administrative | $ | 68,034 | $ | 12,870 | $ | 55,164 | 429 | % | |||||||||||||||
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General and administrative expense increased by $55.2 million, or 429%, to $68.0 million for the three months ended June 30, 2022, from $12.9 million for the three months ended June 30, 2021. The decrease was primarily attributable to $13.9 million and $11.9 million increases in stock-based compensation expense and other personnel-related costs driven by increase in headcount; a $18.2 million increase in professional services incurred in connection with the Acquisition related to due diligence, advisory, legal and business integration services; a $3.9 million increase in information technology related expenses due to increased cloud storage requirements; a $2.0 million increase in insurance expenses driven by the commencement of director’s insurance policy; a $3.1 million increase in depreciation and amortization expense driven by computer equipment and acquisition intangibles; a $1.0 million increase in tax expenses; and a $1.0 million increase due to reallocation of certain costs between departments during the fourth quarter of 2021 as a result of a change in estimate.
Related Party Expenses
| Change | |||||||||||||||||||||||
| Three months ended June 30, | 2021 to 2022 | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Related party expenses | $ | 1,731 | $ | 888 | $ | 843 | 95 | % | |||||||||||||||
Related party expenses increased by $0.8 million, or 95%, to $1.7 million for the three months ended June 30, 2022, from $0.9 million for the three months ended June 30, 2021. The increase was primarily attributable to fees related to support certain services pursuant to the OPKO TSA as a result of the acquisition of GeneDx and an increase in information technology related services provided by ISMMS.
Interest Income
| Change | |||||||||||||||||||||||
| Three months ended June 30, | 2021 to 2022 | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Interest income | $ | 382 | $ | 9 | $ | 373 | 4144 | % | |||||||||||||||
Interest income increased by $0.4 million, or 4144%, to $0.4 million for the three months ended June 30, 2022, from a nominal amount for the three months ended June 30, 2021. The increase was due to increases in the average cash balances held in interest-bearing and money market deposit accounts.
Interest Expense
| Change | |||||||||||||||||||||||
| Three months ended June 30, | 2021 to 2022 | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Interest expense | $ | (790) | $ | (722) | $ | (68) | 9 | % | |||||||||||||||
Interest expense increased by a nominal amount for the three months ended June 30, 2022, from the three months ended June 30, 2021.
Other Income
| Change | |||||||||||||||||||||||
| Three months ended June 30, | 2021 to 2022 | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
Other income | $ | 56 | $ | — | $ | 56 | 100 | % | |||||||||||||||
Other income increased by a nominal amount for the three months ended June 30, 2022, from the three months ended June 30, 2021.
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Comparison of the six months ended June 30, 2022 and 2021
The following table sets forth our results of operations for the periods presented:
| Six months ended June 30, | |||||||||||
| 2022 | 2021 (1) | ||||||||||
| (in thousands) | |||||||||||
| Revenue | |||||||||||
Diagnostic test revenue | $ | 86,499 | $ | 107,563 | |||||||
Other revenue | 3,611 | 3,653 | |||||||||
Total revenue | 90,110 | 111,216 | |||||||||
| Cost of services | 114,083 | 116,703 | |||||||||
Gross profit (loss) | (23,973) | (5,487) | |||||||||
| Research and development | 48,483 | 65,085 | |||||||||
| Selling and marketing | 65,665 | 53,940 | |||||||||